<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 29, 1997
REGISTRATION NO. 333-18183
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE MENDIK COMPANY, INC.
(Exact name of registrant as specified in its governing instrument)
330 MADISON AVENUE
NEW YORK, NY 10017
(Address of principal executive offices)
------------------------
DAVID R. GREENBAUM
PRESIDENT AND CHIEF OPERATING OFFICER
330 MADISON AVENUE
NEW YORK, NY 10017
(Name and address of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
J. WARREN GORRELL, JR. DOUGLAS A. SGARRO
DAVID W. BONSER BROWN & WOOD LLP
HOGAN & HARTSON L.L.P. ONE WORLD TRADE CENTER
555 THIRTEENTH STREET, N.W. NEW YORK, NEW YORK 10048-0557
WASHINGTON, D.C. 20004-1109 (212) 839-5300
(202) 637-5600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
OF SECURITIES BEING REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per
share................................. 11,500,000 $22.00 $253,000,000 $76,667 (3)
</TABLE>
(1) Includes 1,500,000 shares that are issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION OR HEADING IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of Registration Statement and Outside Front Forepart of Registration Statement and Outside Front
Cover Page of Prospectus Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus Prospectus
3. Summary Information, Risk Factors and Ratio of Prospectus Summary; The Company; Risk Factors
Earnings to Fixed Charges
4. Determination of Offering Price Outside Front Cover Page; Underwriting
5. Dilution Dilution
6. Selling Security Holders Not applicable
7. Plan of Distribution Outside Front Cover Page; Underwriting
8. Use of Proceeds Use of Proceeds; Structure and Formation of the
Company
9. Selected Financial Data Selected Financial Information
10. Management's Discussion and Analysis of Financial Management's Discussion and Analysis of Financial
Condition and Results of Operations Condition and Results of Operations
11. General Information as to Registrant Outside Front Cover Page; Prospectus Summary; The
Company; Management; Structure and Formation of the
Company; Capital Stock
12. Policy with Respect to Certain Activities Prospectus Summary; The Company; Policies with
Respect to Certain Activities; Partnership Agreement;
Capital Stock; Additional Information
13. Investment Policies of Registrant Prospectus Summary; The Company; Business and Growth
Strategies; Policies with Respect to Certain
Activities
14. Description of Real Estate Prospectus Summary; The Properties
15. Operating Data The Company; The Properties; Financial Statements
16. Tax Treatment of Registrant and Its Security Holders Prospectus Summary; Federal Income Tax Considerations
17. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters Risk Factors; Distributions; The Company; Structure
and Formation of the Company
18. Description of Registrant's Securities Capital Stock
19. Legal Proceedings The Properties
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION OR HEADING IN PROSPECTUS
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<C> <S> <C>
20. Security Ownership of Certain Beneficial Owners and
Management Principal Stockholders
21. Directors and Executive Officers Management
22. Executive Compensation Management
23. Certain Relationships and Related Transactions The Company; Management; Structure and Formation of
the Company; Certain Relationships and Transactions
24. Selection, Management and Custody of Registrant's Outside Front Cover Page; Prospectus Summary; The
Investments Company; The Properties
25. Policies with Respect to Certain Transactions Policies with Respect to Certain Activities
26. Limitations of Liability The Company; Capital Stock; Management
27. Financial Statements and Information Prospectus Summary; Selected Financial Information;
Financial Statements
28. Interests of Named Experts and Counsel Experts; Legal Matters
29. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities Management
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains a Prospectus relating to a public
offering in the United States and Canada (the "U.S. Offering") of an aggregate
of 7,777,500 shares of common stock (the "Common Stock") of The Mendik Company,
Inc., a Maryland corporation, together with separate Prospectus pages relating
to a concurrent offering outside the United States and Canada of an aggregate of
1,372,500 shares of Common Stock (the "International Offering"). The complete
Prospectus for the U.S. Offering follows immediately. After such Prospectus are
the following alternate pages for the International Offering: a front cover
page; an "Underwriting" section; and a back cover page. All other pages of the
Prospectus for the U.S. Offering are to be used for both the U.S. Offering and
the International Offering.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 29, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[LOGO]
9,150,000 SHARES
THE MENDIK COMPANY, INC.
COMMON STOCK
------------------
The Mendik Company, Inc. (together with its subsidiaries, the "Company") has
been newly formed to continue and expand the operations of Mendik Realty
Company, Inc. and its affiliates, which for 40 years have been engaged in
owning, managing, leasing, acquiring, renovating and redeveloping office
properties in New York City. Upon completion of this offering (the "Offering"),
the Company will own interests in seven office properties located in midtown
Manhattan which contain approximately 5.5 million rentable square feet. The
Company will operate as a fully integrated, self-administered and self-managed
real estate company and will be a real estate investment trust (a "REIT") for
Federal income tax purposes. Upon completion of the Offering, the Company will
be one of the largest owners and operators of Manhattan office properties and
expects to be the first publicly traded REIT formed primarily to own, operate
and acquire Manhattan office properties.
All of the shares of Common Stock, par value $.01 per share, of the Company
("Common Stock") offered hereby are being sold by the Company. Of the 9,150,000
shares of Common Stock offered hereby, 7,777,500 shares are being offered
initially in the United States and Canada and 1,372,500 shares are being offered
initially outside the United States and Canada. In addition, a total of
1,804,545 shares of restricted Common Stock (representing a total investment of
approximately $39.7 million) will be sold by the Company in concurrent private
placements at the initial public offering price. Upon completion of the
Offering, approximately % of the equity in the Company will be beneficially
owned by officers and directors of the Company and certain other affiliated
parties.
Prior to the Offering, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price per share
will be in the range of $21.25 to $22.75. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The Common Stock has been approved for listing, subject to official notice of
issuance, on the New York Stock Exchange.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING:
- Concentration of all of the Company's properties in midtown Manhattan, and
the dependence of such properties on the conditions of the New York
economy and the Manhattan office market.
- Inability to control certain property-level transactions at four of the
Company's properties.
- Absence of arm's length negotiations with respect to the properties and
other assets contributed to the Company in connection with its formation,
resulting in the risk that the consideration given by the Company for such
assets may exceed the fair market value of such assets and other potential
conflicts of interest.
- Limitations on the Company's ability to sell, or reduce the amount of
mortgage indebtedness on, three of the Company's properties.
- Substantial vacant space at one of the Company's properties as a result of
the expiration of a lease with a single tenant.
- Limitations on the stockholders' ability to change control of the Company,
including restrictions on ownership of more than 8.6% of the outstanding
shares of Common Stock.
- Immediate and substantial dilution of $17.63 in the net tangible book
value per share of the shares of Common Stock purchased in the Offering.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................................ $ $ $
Total(3)................................................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the U.S. Underwriters a 30-day option to purchase up
to an additional 1,166,625 shares of Common Stock, and has granted the
International Managers a 30-day option to purchase up to an additional
205,875 shares of Common Stock, on the same terms and conditions as set
forth above, solely to cover over-allotments, if any. If such options are
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel to the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the shares of
Common Stock offered hereby will be made in New York, New York, on or about
February , 1997.
------------------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
DEAN WITTER REYNOLDS INC.
LEHMAN BROTHERS
PAINEWEBBER INCORPORATED
LEGG MASON WOOD WALKER
INCORPORATED
UBS SECURITIES
------------------------------
The date of this Prospectus is February , 1997.
<PAGE>
[INSERT MAP, CHARTS AND/OR PICTURES]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY............................. 1
The Company................................ 1
Risk Factors............................... 2
Business and Growth Strategies............. 4
The Properties............................. 5
Structure and Formation of the Company..... 7
The Offering............................... 10
Distributions.............................. 10
Tax Status of the Company.................. 11
Summary Selected Financial Information..... 11
RISK FACTORS................................... 13
Geographic Concentration in Midtown 13
Manhattan................................
Inability to Control Property-Level 13
Transactions at Partial Interest
Properties...............................
No Assurance of Fair Price for Company's 13
Assets...................................
Conflicts of Interest in the Formation 14
Transactions and the Business of the
Company..................................
Inability to Sell or Reduce the Mortgage 15
Indebtedness on Certain Properties.......
Substantial Vacant Space at Two Penn 16
Plaza....................................
Reliance on Major Tenants.................. 17
Acquisition Risks.......................... 17
Competition................................ 17
Risks of Property Management Business...... 18
Real Estate Investment Risks............... 18
Possible Environmental Liabilities......... 20
Limits on Changes in Control............... 21
Immediate and Substantial Dilution......... 22
Tax Risks.................................. 22
Other Risks of Ownership of Common Stock... 24
Dependence on Key Personnel................ 25
Uninsured Loss............................. 26
THE COMPANY.................................... 27
BUSINESS AND GROWTH STRATEGIES................. 29
Business Strategy.......................... 29
Operating Strategy......................... 29
Acquisition Strategy....................... 30
USE OF PROCEEDS................................ 32
DISTRIBUTIONS.................................. 34
CAPITALIZATION................................. 39
DILUTION....................................... 40
SELECTED FINANCIAL INFORMATION................. 42
MANAGEMENT'S DISCUSSION AND ANALYSIS OF 45
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................
Overview................................... 45
Results of Operations...................... 45
Pro Forma Operating Results................ 48
Liquidity and Capital Resources............ 49
Cash Flows................................. 51
Reconciliation of Net Income and Funds from 52
Operations...............................
Inflation.................................. 52
NEW YORK ECONOMY AND MANHATTAN OFFICE MARKET... 53
New York Economy........................... 53
Midtown Manhattan Office Market............ 54
Submarkets................................. 59
General Terms of Leases in the Manhattan 62
Office Market............................
THE PROPERTIES................................. 64
<CAPTION>
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<S> <C>
The Portfolio.............................. 64
Two Penn Plaza............................. 72
1740 Broadway (The MONY Building).......... 75
866 United Nations Plaza................... 77
Eleven Penn Plaza (49.9% interest)......... 79
Two Park Avenue (40% interest)............. 81
330 Madison Avenue (24.8% interest)........ 84
570 Lexington Avenue (5.6% interest)....... 87
Mortgage Indebtedness...................... 88
Line of Credit............................. 89
Property Management and Leasing............ 89
Employees.................................. 90
Transfer of Properties..................... 90
Assets Not Being Transferred to the 91
Company..................................
Competition................................ 93
Regulation................................. 93
Legal Proceedings.......................... 94
MANAGEMENT..................................... 96
Directors, Director Nominees and Executive 96
Officers.................................
Committees of the Board of Directors....... 100
Compensation of Directors.................. 100
Executive Compensation..................... 101
Employment and Severance Agreements........ 102
Noncompetition Agreements.................. 102
Stock Option Plan.......................... 102
Incentive Compensation Plan................ 103
401(k) Plan................................ 103
Limitation of Liability and 103
Indemnification..........................
STRUCTURE AND FORMATION OF THE COMPANY......... 105
The Operating Entities of the Company...... 105
Formation Transactions..................... 106
Consequences of the Offering and the 107
Formation Transactions...................
Benefits to Related Parties................ 107
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES.... 108
Investment Policies........................ 108
Disposition Policies....................... 110
Financing Policies......................... 110
Conflict of Interest Policies.............. 111
Interested Director and Officer 111
Transactions.............................
Business Opportunities; Noncompetition 112
Arrangements.............................
Policies with Respect to Other 112
Activities...............................
CERTAIN RELATIONSHIPS AND TRANSACTIONS......... 113
Formation Transactions..................... 113
Management and Leasing Services............ 113
Cleaning Services.......................... 113
Engineering and Preventive Maintenance 113
Services.................................
Security Services.......................... 114
PARTNERSHIP AGREEMENT.......................... 114
Operational Matters........................ 114
Liability and Indemnification.............. 117
Transfers of Interests..................... 118
PRINCIPAL STOCKHOLDERS......................... 120
CAPITAL STOCK.................................. 121
General.................................... 121
Common Stock............................... 121
Preferred Stock............................ 122
</TABLE>
i
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PAGE
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Transfer Agent and Registrar............... 122
Restrictions on Transfer................... 122
CERTAIN PROVISIONS OF MARYLAND LAW AND THE 124
COMPANY'S CHARTER
AND BYLAWS.................................
Classification and Removal of Board of 124
Directors; Other Provisions..............
Business Combination Statute............... 125
Control Share Acquisition Statute.......... 125
Amendments to the Charter.................. 126
Advance Notice of Director Nominations and 126
New Business.............................
Anti-takeover Effect of Certain Provisions 126
of Maryland Law and of the Charter
and Bylaws...............................
Rights to Purchase Securities and Other 126
Property.................................
SHARES AVAILABLE FOR FUTURE SALE............... 127
General.................................... 127
Registration Rights........................ 128
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FEDERAL INCOME TAX CONSEQUENCES................ 129
General.................................... 129
Taxation of the Company.................... 129
Taxation of Stockholders................... 134
Other Tax Considerations................... 138
Importance of Obtaining Professional Tax 139
Assistance...............................
ERISA CONSIDERATIONS........................... 140
Employment Benefit Plans, Tax-Qualified 140
Pension, Profit Sharing or Stock Bonus
Plans and IRAs...........................
Status of the Company and the Operating 141
Partnership under ERISA..................
UNDERWRITING................................... 143
EXPERTS........................................ 145
LEGAL MATTERS.................................. 146
ADDITIONAL INFORMATION......................... 146
GLOSSARY OF SELECTED TERMS..................... 147
INDEX TO FINANCIAL STATEMENTS.................. F-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED,
THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT (I) THE INITIAL PUBLIC
OFFERING PRICE IS $22.00 PER SHARE (THE MID-POINT OF THE RANGE OF PUBLIC
OFFERING PRICES SET FORTH ON THE COVER PAGE OF THIS PROSPECTUS), (II) THE
TRANSACTIONS DESCRIBED UNDER "STRUCTURE AND FORMATION OF THE COMPANY" ARE
CONSUMMATED, AND (III) THE UNDERWRITERS' OVERALLOTMENT OPTION IS NOT EXERCISED.
AS USED HEREIN, THE "COMPANY" MEANS THE MENDIK COMPANY, INC., A MARYLAND
CORPORATION, AND ONE OR MORE OF ITS SUBSIDIARIES (INCLUDING THE MENDIK COMPANY,
L.P.), AND THE PREDECESSORS THEREOF OR, AS THE CONTEXT MAY REQUIRE, THE MENDIK
COMPANY, INC. ONLY OR THE MENDIK COMPANY, L.P. ONLY. AS USED HEREIN, THE "MENDIK
GROUP" MEANS MENDIK REALTY COMPANY, INC., A NEW YORK CORPORATION ("MENDIK
REALTY"), BERNARD H. MENDIK AND DAVID R. GREENBAUM, AND THE ENTITIES AFFILIATED
WITH MENDIK REALTY, INCLUDING THE PROPERTY-OWNING ENTITIES BUT EXCLUDING
MENDIK/FW LLC (AS DEFINED BELOW). SEE "GLOSSARY OF SELECTED TERMS" FOR THE
DEFINITIONS OF CERTAIN TERMS USED IN THIS PROSPECTUS.
THE COMPANY
The Company has been newly formed to continue and expand the real estate
business of the Mendik Group, which is engaged in owning, managing, leasing,
acquiring, renovating and redeveloping office properties in New York City. Upon
the completion of this offering of shares of Common Stock (the "Offering"), the
Company will own interests in seven Class A office properties located in midtown
Manhattan which contain approximately 5.5 million rentable square feet (the
"Properties") and will manage 16 properties (including the Properties) located
in the New York metropolitan area which contain approximately 10.0 million
rentable square feet. The Company will be a fully integrated, self-administered
and self-managed real estate company and will be a real estate investment trust
(a "REIT") for Federal income tax purposes. Upon the completion of the Offering,
the Company will be one of the largest owners and operators of office properties
in Manhattan, which is the largest office market in the United States and
contains more rentable square feet than the next six largest U.S. central
business district office markets combined. In addition, the Company expects to
be the first publicly traded REIT formed primarily to own, operate and acquire
Manhattan office properties.
The Company believes that current supply/demand fundamentals in the
Manhattan office market provide an attractive environment for owning, operating
and acquiring Class A office properties. The Company believes that demand for
Class A office space in the midtown Manhattan office market has increased
recently because of consistent net private sector job growth, a strengthening
New York metropolitan economy and an improving business environment and quality
of life offered by New York City. At the same time, the supply of Class A office
space in midtown Manhattan has remained virtually unchanged since 1992, and the
Company believes that supply is unlikely to increase substantially over the near
term primarily because there are relatively few sites available for
construction, the lead time required for construction typically exceeds three
years and new construction generally is not economically feasible given current
market rental rates. As a result of increasing demand for Class A office space
in midtown Manhattan, and limited new supply of such space, vacancy rates in
midtown Manhattan have declined in each of the last five years and the Company
believes that effective rental rates (i.e., rental rates after taking into
account tenant improvement costs and leasing concessions) for office properties
in midtown Manhattan have increased. See "New York Economy and Manhattan Office
Market."
The Company intends to achieve growth through acquisitions and focused
operating strategies, including proactive leasing efforts. The Company believes
that opportunities exist to acquire interests in office properties in Manhattan
on attractive terms, including at prices significantly below replacement cost.
Notwithstanding the current favorable supply/demand fundamentals in the
Manhattan office market, the Company believes that, in order to justify new
construction in this market, asking base rents generally would have to increase
at least 40% over current asking rents for Class A office space in midtown
Manhattan (as estimated by Cushman & Wakefield), not taking into account any tax
benefits which may
1
<PAGE>
apply. The Company believes that its experienced management team and its access
to capital, as well as its ability to engage in transactions that offer sellers
favorable tax treatment, will provide it with significant advantages in pursuing
acquisitions of office properties. See "Business and Growth Strategies."
In addition, the Company will market aggressively for re-lease a significant
block of space (approximately 430,000 square feet) which recently has become
available at a Property following the expiration of a lease with a single
tenant. In that regard, the Company recently has leased approximately 89,000
square feet of this space and has entered into a non-binding letter of intent
with a single prospective tenant with respect to an additional approximately
180,000 square feet of this space, although there can be no assurance that this
letter of intent will result in an executed lease. See "The Properties -- Two
Penn Plaza." By re-leasing this block of space, the Company expects to increase
the percent leased at the Properties from 89% as of December 31, 1996 (excluding
one Property acquired by the Mendik Group in late 1994 in which the Company
initially will own a 5.6% interest and which currently is being leased following
an extensive redevelopment) to a level more comparable to the historical percent
leased at the Properties, which has averaged in excess of 94% over the past five
calendar years (excluding the Property in which the Company initially will own a
5.6% interest).
Bernard H. Mendik, the Chairman and Chief Executive Officer of the Company,
has been involved in the real estate business for 40 years. Mr. Mendik, David R.
Greenbaum, the President and Chief Operating Officer of the Company, and the
other five executive officers of the Company have been actively involved in the
Manhattan commercial office business for an average of over 20 years, including
an average of over 17 years with the Mendik Group. The extensive experience of
the Company's management provides the Company with a substantial base of
information concerning Manhattan real estate dynamics, including submarket rent
levels, operating, renovation and redevelopment costs, regulatory processes and
other factors relevant to the acquisition, ownership and operation of Manhattan
office properties. Upon the completion of the Offering, approximately % of the
equity in the Company will be beneficially owned by officers and directors of
the Company and certain other affiliated parties.
RISK FACTORS
An investment in the Common Stock involves various risks, and prospective
investors should carefully consider the matters discussed under "Risk Factors"
prior to making an investment in the Company. Such risks include, among others:
- concentration of all of the Properties in midtown Manhattan, and the
dependence of the Properties on the conditions of the New York
metropolitan economy and the midtown Manhattan office market, which
increases the risk of the Company's being adversely affected by a downturn
in the New York metropolitan economy or the Manhattan office market;
- risks associated with the non-controlling interests that the Company will
own in the partnerships that own Eleven Penn Plaza, Two Park Avenue, 330
Madison Avenue and 570 Lexington Avenue, including (i) the inability to
effect certain actions with respect to these Properties (including actions
regarding management, sale, refinancing and the timing and amount of
distributions), other than approval rights with respect to significant
actions affecting these Properties, and (ii) "buy-sell" rights, rights of
first refusal and/or forced sale rights that exist with respect to each of
these Properties;
- absence of arm's length negotiations with respect to the Company's
interests in the Properties and the other assets to be contributed to the
Company in its formation, resulting in the risks that the consideration to
be paid by the Company for such assets may exceed the fair market value of
such assets and that the market value of the Common Stock may exceed the
stockholders' proportionate share of the aggregate fair market value of
such assets;
2
<PAGE>
- conflicts of interest in connection with the Formation Transactions (as
defined below), including the fact that officers, directors and affiliates
of the Company will receive equity interests in the Company with a value
of approximately $ million, based on the assumed initial public offering
price;
- conflicts of interest involving officers and directors of the Company in
business decisions regarding the Company, including conflicts associated
with the provision of cleaning and related services and security services
with respect to the Company's properties by entities controlled by certain
of the officers and directors of the Company and the continued ownership
by certain officers and directors of managing general partner interests in
three of the Properties in which the Company will own less than a 100%
interest;
- limitations on the ability of the Company to sell, or reduce the amount of
mortgage indebtedness on, three of the Properties (Two Penn Plaza, 866
United Nations Plaza and Eleven Penn Plaza) for up to 15 years following
the completion of the Offering (the "Lock-out Period"), except in certain
circumstances (the "Lock-out Provisions"), even if any such sale or
reduction in mortgage indebtedness would be in the best interests of the
Company's stockholders, and the likelihood that future property
acquisitions in which the Company uses partnership interests as
consideration will include comparable limitations;
- substantial vacant space remaining at Two Penn Plaza following the
expiration of a lease with a single tenant, which remaining vacant space
constitutes approximately 23% of Two Penn Plaza's total rentable square
feet, and which, if not re-leased on a timely basis and on favorable
terms, could adversely affect the Company's ability to make expected
distributions to the Company's stockholders in the future;
- the anti-takeover effect of limiting actual or constructive ownership of
Common Stock to 8.6% of the number of such outstanding shares, subject to
certain exceptions, and of certain other provisions contained in the
organizational documents of the Company and the Operating Partnership (as
defined below), which could have the effect of delaying, deferring or
preventing a transaction or change in control of the Company that might
involve a premium price for the Common Stock or otherwise would be in the
best interests of the Company's stockholders;
- immediate and substantial dilution of $17.63 in the net tangible book
value per share of the shares of Common Stock purchased in the Offering;
- risks associated with real estate investments, such as the need to renew
leases or re-lease space upon lease expirations (including two significant
blocks of space in the Company's portfolio which recently have become
available) and to pay renovation and re-leasing costs in connection
therewith, the effect of economic and other conditions on office property
cash flows and values, the ability of tenants to make lease payments, the
ability of a property to generate revenue sufficient to meet operating
expenses (including future debt service), the illiquidity of real estate
investments and the possibility that acquired properties fail to perform
as expected;
- taxation of the Company as a corporation if it fails to qualify as a REIT
for Federal income tax purposes, and the Company's liability for certain
Federal, state and local income taxes in such event and the resulting
decrease in cash available for distribution; and
- risks associated with borrowing, such as the inability to refinance
outstanding indebtedness upon maturity or refinance such indebtedness on
favorable terms.
3
<PAGE>
BUSINESS AND GROWTH STRATEGIES
The Company's primary business objective is to maximize stockholder value by
enhancing the value of the Company's assets, maximizing cash flow from
operations and growing the Company's asset base. More specifically, the Company
intends to (i) continue to provide tenants at its properties with a high quality
office environment in terms of building systems, public spaces and tenant
services and, in so doing, to retain existing tenants, attract new tenants and
increase rental revenues, while achieving operating cost efficiencies
attributable to the size and geographic concentration of its portfolio, and (ii)
acquire interests in additional office properties, primarily in midtown
Manhattan, at attractive equity returns, thereby taking advantage of the
favorable supply/demand fundamentals that currently exist in the midtown
Manhattan office Market. See "New York Economy and Manhattan Office
Market--Midtown Manhattan Office Market." In addition, the Company will market
aggressively for re-lease a significant block of space in its portfolio which
recently has become available following the expiration of a lease with a single
tenant. See "The Properties--Two Penn Plaza."
OPERATING STRATEGY
The Company believes that the Mendik Group's commitment to and reputation
for providing a high-quality office environment in terms of building systems,
public spaces and tenant services have encouraged tenants to renew their leases,
attracted new tenants to its properties and supported competitive rent levels.
The Company intends to provide a high-quality office environment to its tenants
by continuing the following operating strategies:
- MARKETING AND LEASING. The Company intends to utilize its market position
and relationships with a broad array of brokers and tenants to continue
its proactive marketing and leasing programs. Where appropriate, the
Company intends to continue to renew leases early and otherwise
aggressively manage the tenant base of its properties by seeking, for
example, to buy out or take back existing leases at opportune times,
relocate tenants to create large blocks of space and otherwise coordinate
and plan appropriate timing of lease expirations.
- RENOVATION AND REDEVELOPMENT. The Mendik Group has committed considerable
resources to maintaining and upgrading the appearance, operations and
mechanical systems of its properties. As a result of a recently completed
$79 million renovation program, the Company believes that the Properties
have state-of-the-art infrastructure and are well positioned to compete
with other Class A office properties in their respective submarkets, and
relatively few capital projects remain to be undertaken at the Properties
at this time. The Company similarly will commit resources to any newly
acquired properties if appropriate to reposition such properties as first
class buildings.
- TENANT RELATIONSHIPS. The Company will continue the Mendik Group's
approach to identifying and responding quickly to tenant requirements. The
Company will maintain personal contacts with its tenants and continue a
program of regular tenant visits. In addition, the Company will continue
the Mendik Group's approach of rotating its building managers through each
of its properties in order to encourage a critical review of each
property's facilities and tenant services.
- IN-HOUSE PROPERTY SERVICES CAPABILITIES. The Company will provide a
high-quality office environment to tenants and, as a result of the size
and geographic concentration of its portfolio, expects to achieve
operating cost efficiencies through its ability to maintain substantial
in-house expertise. The Company's experienced staff has extensive property
management experience and specific knowledge of a wide variety of
Manhattan leasing and marketing practices, office building systems and
equipment, and financing, accounting and computer systems.
4
<PAGE>
ACQUISITION STRATEGY
The Company intends to expand its portfolio of properties by acquiring
interests in additional office properties, primarily in midtown Manhattan. The
Company's experienced management team will utilize its extensive knowledge of
the Manhattan office market to identify and evaluate acquisition opportunities
in light of effective rental rates (I.E., rental rates after taking into account
tenant improvement costs and leasing commissions) in the applicable submarket,
operating, renovation and redevelopment costs, regulatory processes and other
factors relevant to the acquisition of Manhattan office properties.
In pursuing acquisition opportunities, the Company believes that it will
have certain competitive advantages, including the following:
- EXPERIENCED MANAGEMENT TEAM WITH EXTENSIVE LOCAL MARKET KNOWLEDGE. Messrs.
Mendik and Greenbaum and the other five executive officers of the Company
have been actively involved in owning, managing, leasing, acquiring,
renovating and redeveloping Manhattan real estate for an average of over
20 years, including an average of over 17 years with the Mendik Group.
- ABILITY TO EFFECT UNIT TRANSACTIONS. The Company believes that its status
as a publicly traded REIT conducting business through a partnership (an
"UPREIT") will enhance its ability to acquire office properties by
providing the Company with the ability to structure transactions using
partnership interests in the Operating Partnership ("Units") as
consideration in order to provide sellers with increased liquidity and
diversification, while affording sellers deferral of income taxes that
otherwise might be due as a result of a cash sale.
- ACCESS TO CAPITAL MARKETS. The Company believes that, as a result of its
size and status as a public company, it should have better access to
capital in the global capital markets than generally is available to
private real estate companies. Access to substantial capital on attractive
terms is important to completing acquisitions in the midtown Manhattan
office market because properties in this market typically are larger and
property values (on an absolute basis) are higher than in other U.S.
office markets. To the extent that the Company relies on consideration
other than Units to acquire additional properties in the future, access to
capital generally will be necessary for the Company to complete such
acquisitions because, in order to qualify as a REIT, the Company generally
is required each year to distribute at least 95% of its net taxable
income. See "Federal Income Tax Considerations--Taxation of the
Company--Annual Distribution Requirements."
THE PROPERTIES
Upon the completion of the Offering, the Company will own interests in seven
office properties located in midtown Manhattan which contain approximately 5.5
million rentable square feet. Cushman & Wakefield has classified each of the
Properties as Class A, which it defines as buildings which meet three or more of
the following criteria: centrally located; professionally managed and
maintained; attract high-quality tenants and command upper-tier rental rates;
and are modern structures or have been modernized to successfully compete with
newer buildings. Each of the Properties currently is owned by a partnership (or
limited liability company) in which the Mendik Group serves as managing general
partner (or managing member). In connection with the formation of the Company,
the Company will acquire ownership interests in each of these existing entities
in exchange for Units in the Operating Partnership or cash. See "Structure and
Formation of the Company--Formation Transactions."
5
<PAGE>
The following table sets forth certain information with respect to the
Properties as of December 31, 1996:
<TABLE>
<CAPTION>
ANNUAL
THE COMPANY'S ESCALATED
OWNERSHIP TOTAL RENT PER
INTEREST RENTABLE LEASED
AFTER THE SQUARE PERCENT SQUARE
PROPERTY OFFERING FEET (1) LEASED (1) FOOT (1) SIGNIFICANT TENANTS (2)
- -------------------------------------------- ------------- --------- --------------- ----------- -------------------------
<S> <C> <C> <C> <C> <C>
Two Penn Plaza.............................. 100.0% 1,474,526 69.0%(3) $ 27.99(3) Digital Equipment (12%)
1740 Broadway (The MONY Building)........... 100.0 551,301 100.0 32.85 Mutual of New York (48%);
William Douglas McAdams
(11%)
866 United Nations Plaza.................... 100.0 384,815 97.3 31.29 Bear Stearns (17%)
Eleven Penn Plaza (4)....................... 49.9 956,280 95.5 27.64 Times Mirror (24%);
General Mills (16%)
Two Park Avenue (4)......................... 40.0 946,697 97.8 23.59 Times Mirror (30%);
Smith Barney (11%)
330 Madison Avenue (4)...................... 24.8 770,828 96.5 34.77 BDO Seidman (15%)
570 Lexington Avenue........................ 5.6 433,342 33.5(5) 29.38(5) --
--------- ------ -----------
TOTAL PORTFOLIO/WEIGHTED AVERAGE............ 5,517,789 89.0%(6) $ 29.00(6)
--------- ------ -----------
--------- ------ -----------
</TABLE>
- ------------------------
(1) Includes, in the aggregate, 158,123 square feet of retail space and 151,839
square feet of basement and storage space. Also includes 42,674 square feet
of underground parking garage space at 866 United Nations Plaza.
(2) Each percentage shown represents the significant tenant's percentage of
square footage leased at the Property. For a discussion of the material
terms of the leases with these tenants, see "The Properties."
(3) A lease with respect to approximately 430,000 square feet at Two Penn Plaza
expired on October 31, 1996. The Company has entered into letters of intent
and leases with respect to approximately 265,000 square feet (approximately
62%) of this space. See "The Properties--Two Penn Plaza."
(4) Messrs. Mendik and Greenbaum and entities that they control will retain
certain ownership interests with respect to these properties. See "The
Properties--Assets Not Being Transferred to the Company."
(5) 570 Lexington Avenue was acquired in 1994 with substantially all of the
building unoccupied at that time. The building has been substantially
redeveloped and currently is being leased.
(6) Excludes 570 Lexington Avenue.
Of the seven Properties, three were constructed in the 1960s, one was
constructed in the 1950s, one was constructed in the 1930s and two were
constructed in the 1920s. In 1988, the Mendik Group initiated an extensive
renovation program in order to retain tenants and assure the continued
competitiveness of its properties. Approximately $79 million was expended at the
Properties (excluding the redevelopment costs associated with 570 Lexington
Avenue) for building improvements and equipment upgrades (excluding the costs of
tenant improvements). As a result of this recently completed renovation program,
the Company believes that the Properties have state-of-the-art infrastructure
and are well positioned to compete with other Class A office properties in their
respective submarkets. For each of 1997 and 1998, the Company's pro rata share
(based on its ownership interest) of the projected cost of building improvements
and equipment upgrades at the Properties (excluding the costs of tenant
improvements) is approximately $690,000 (or $0.20 per square foot, based on the
Company's pro rata share of the rentable square footage at the Properties).
6
<PAGE>
STRUCTURE AND FORMATION OF THE COMPANY
STRUCTURE OF THE COMPANY
The Company will be the sole general partner of The Mendik Company, L.P., a
Delaware limited partnership (the "Operating Partnership"). The Company will
conduct substantially all of its business, and will hold all of its interests in
the Properties, through the Operating Partnership. As the sole general partner
of the Operating Partnership, the Company will have exclusive power to manage
and conduct the business of the Operating Partnership, subject to certain
exceptions (including the Lock-out Provisions). See "Partnership Agreement."
The following diagram depicts the ownership structure of the Company and the
Operating Partnership upon completion of the Offering and the Formation
Transactions (as defined below):
[FLOW CHART]
7
<PAGE>
FORMATION TRANSACTIONS
Certain transactions have been consummated or will be consummated
concurrently with the completion of the Offering. These transactions (the
"Formation Transactions") include the following:
- The Company was formed with Mendik/FW LLC (as defined below) as the sole
stockholder, and the Operating Partnership was formed with Mendik/FW LLC
and the Company as the only partners.
- Certain partners in (or members of) certain Property-owning entities
(including the Mendik Group) have agreed to contribute direct or indirect
ownership interests in such Property-owning entities to the Company in
exchange for Units and shares of Common Stock.
- Certain partners in certain Property-owning entities (not including the
Mendik Group) have agreed to sell to the Company the remaining direct or
indirect ownership interests in such Property-owning entities in exchange
for cash.
- Mendik/FW LLC will transfer the management and leasing business of the
Mendik Group with respect to Properties in which the Company will have a
100% ownership interest to a limited liability company in which the
Company will own substantially all of the economic interest (the
"Management LLC").
- The Mendik Group will transfer the management and leasing business of the
Mendik Group with respect to properties in which the Company will have a
partial ownership interest or no ownership interest to a newly formed
corporation in which the Company will own substantially all of the
economic interest (the "Management Corporation").
- FWM II, L.P., an affiliate of RMB Realty, Inc. ("RMB Realty"), in which
two directors of the Company (Thomas R. Delatour, Jr. and William S.
Janes) have a financial interest, has agreed to purchase 954,545 shares of
Common Stock (representing an investment of approximately $21.0 million,
based on the assumed initial public offering price) in a concurrent
private placement at the initial public offering price (the "FWM
Placement").
- ("QIB") will purchase 850,000 shares of Common
Stock (representing an investment of approximately $18.7 million, based on
the assumed initial public offering price) in a concurrent private
placement at the initial public offering price (the "QIB Placement," and
together with the FWM Placement, the "Concurrent Placements").
- The Company will use approximately $91 million of the net proceeds of the
Offering and the Concurrent Placements to repay certain mortgage
indebtedness secured by two of the Properties.
- The Company will refinance with its existing lenders approximately $113
million of indebtedness secured by Two Penn Plaza and 866 United Nations
Plaza.
- The Company expects to establish an initial reserve of approximately $38
million for tenant improvement costs and leasing commissions expected to
be incurred in connection with the re-leasing of space at the Properties,
as well as for interest and operating costs relating to vacant space at
the Properties and for general working capital needs.
8
<PAGE>
BENEFITS TO RELATED PARTIES
The Mendik Group and FW/Mendik REIT, L.L.C., a Delaware limited liability
company in which Messrs. Mendik, Greenbaum, Delatour and Janes have an indirect
financial interest ("Mendik/FW LLC"), will realize certain material benefits in
connection with the Formation Transactions and the Offering, including the
following:
- The Mendik Group will receive Units in consideration for its interests in
the Properties with a total value of approximately $15.0 million, based on
the assumed initial public offering price (representing approximately %
of the equity of the Company on a fully-diluted basis). The net book value
of such assets is approximately $( ) million (or $ million less than
the value to be received by the Mendik Group with respect to such assets).
- Mendik/FW LLC will receive shares of Common Stock in consideration for the
Mendik Group's management and leasing business with a total value of
approximately $5.2 million, based on the assumed initial public offering
price, as well as approximately $2.2 million in cash, which cash
corresponds to the Mendik Group's income tax obligations associated with
such transfer. The net book value of such assets is approximately $791,000
(or approximately $6.6 million less than the value to be received by
Mendik/FW LLC with respect to such assets).
- Mendik/FW LLC owns an interest in the Operating Partnership that initially
will have a value of approximately $ million, based on the assumed
initial public offering price.
- Messrs. Mendik and Greenbaum will enter into employment agreements with
the Company, and the other five executive officers will enter into
employment-related agreements with the Company. See
"Management--Employment and Severance Agreements." In addition, the
Company will grant to Messrs. Mendik and Greenbaum and the other five
executive officers of the Company options to purchase an aggregate of
700,000 shares of Common Stock at the initial public offering price under
the Company's stock option plan, subject to certain vesting requirements.
See "Management."
- Pursuant to the Lock-out Provisions, the Company will be restricted in its
ability to sell, or reduce the amount of mortgage indebtedness on, three
of the Properties (Two Penn Plaza, 866 United Nations Plaza and Eleven
Penn Plaza) for up to 15 years following the completion of the Offering,
which could enable certain participants in the Formation Transactions
(including the Mendik Group) to defer certain tax consequences associated
with the Formation Transactions.
Additional information concerning benefits to related parties is set forth
under "Structure and Formation of the Company--Benefits to Related Parties."
9
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.......... 9,150,000 shares
U.S. Offering.............................. 7,777,500 shares
International Offering..................... 1,372,500 shares
Common Stock Outstanding
After the Offering......................... 11,194,318 shares (1)
Common Stock and Units Outstanding
After the Offering......................... 18,000,000 shares and Units (1)(2)
Use of Proceeds (3).......................... Prepayment of mortgage indebtedness and
expenses related thereto ($96.4 million);
acquisition of interests in certain of the
Properties and other assets to be acquired by
the Company ($91.3 million); funding a
portion of an initial reserve for leasing
costs, capital expenditures and working
capital needs ($ million); and payment of
expenses incurred in connection with the
Offering and the Formation Transactions ($
million).
Proposed NYSE Symbol......................... "MDK"
</TABLE>
- ------------------------
(1) Includes 1,804,545 shares to be purchased in the Concurrent Placements and
239,773 shares to be issued in connection with the Formation Transactions.
(2) Includes 6,805,682 Units expected to be issued in connection with the
Formation Transactions that may be exchanged for cash or, at the option of
the Company, shares of Common Stock on a one-for-one basis generally
commencing two years after completion of the Offering. Excludes 1,372,500
shares that are issuable upon exercise of the Underwriters' over-allotment
option and 935,000 shares reserved for issuance upon the exercise of stock
options to be granted concurrently with the Offering.
(3) Includes the use of net proceeds from the Offering and the Concurrent
Placements.
DISTRIBUTIONS
The Company intends to make regular quarterly distributions to holders of
its Common Stock. The initial distribution, covering a partial quarter
commencing on the date of the closing of the Offering and ending on March 31,
1997, is expected to be $ per share, which represents a pro rata distribution
based upon a full quarterly distribution of $ per share and an annual
distribution of $ per share (or an annual distribution rate of approximately
%, based on an assumed initial public offering price of $22.00). See
"Distributions."
The Company intends initially to distribute annually approximately % of
estimated cash available for distribution. The Company's estimate of the cash
available for distribution for the twelve months ending September 30, 1997 is
based upon pro forma Funds from Operations (as defined below) for the 12 months
ended September 30, 1996, with certain adjustments as described in
"Distributions." The Company anticipates that approximately 55% (or $0.92 per
share) of the distributions intended to be paid by the Company for the 12-month
period following the completion of Offering will represent a return of capital
for Federal income tax purposes and in such event will not be subject to Federal
income tax under current law to the extent such distributions do not exceed a
stockholder's basis in his Common Stock. The Company intends to maintain its
initial distribution rate for the 12-month period following the completion of
the Offering unless actual results of operations, economic conditions or other
factors differ materially from the assumptions used in its estimate.
Distributions by the Company will be determined by the Board of Directors and
will be dependent upon a number of factors, including revenue received from the
Company's properties, the operating expenses of the Company, interest expense,
the ability of tenants at
10
<PAGE>
the Company's properties to meet their financial obligations and unanticipated
capital expenditures. The Company believes that its estimate of cash available
for distribution is reasonable; however, no assurance can be given that the
estimate will prove accurate, and actual distributions may therefore be
significantly different from expected distributions. See "Distributions." The
Company does not intend to reduce the expected distribution per share if the
Underwriters' overallotment option is exercised.
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856
through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ending December 31, 1997, and believes its
organization and proposed method of operation will enable it to meet the
requirements for qualification as a REIT. To maintain REIT status, an entity
must meet a number of organizational and operational requirements. In addition,
in order to maintain its qualification as a REIT under the Code, the Company
generally will be required each year to distribute at least 95% of its net
taxable income. As a REIT, the Company generally will not be subject to Federal
income tax on net income it distributes currently to its stockholders. If the
Company fails to qualify as a REIT in any taxable year, it will be subject to
Federal income tax at regular corporate rates. See "Federal Income Tax
Consequences-- Taxation of the Company--Failure to Qualify" and "Risk
Factors--Tax Risks--Failure to Qualify as a REIT." Even if the Company qualifies
for taxation as a REIT, the Company may be subject to certain Federal, state and
local taxes on its income and property.
SUMMARY SELECTED FINANCIAL INFORMATION
The following table sets forth summary selected financial and operating
information on a pro forma basis for the Company, and on a historical combined
basis for the Mendik Predecessors (as defined below), and should be read in
conjunction with all of the financial statements and notes thereto included in
this Prospectus. The combined historical balance sheet information as of
December 31, 1995 and 1994 and statements of income for the years ended December
31, 1995 and 1994 of the Mendik Predecessors (as defined below) have been
derived from the historical combined financial statements audited by Ernst &
Young LLP, independent auditors, whose report with respect thereto is included
elsewhere in this Prospectus. The combined historical balance sheet information
as of September 30, 1996 and statements of income for the nine months ended
September 30, 1996 and 1995 have been derived from the unaudited combined
financial statements of the Mendik Predecessors. In the opinion of the
management of the Mendik Predecessors, all adjustments considered necessary for
a fair presentation of the results of the interim periods have been included,
and all adjustments are of a normal and recurring nature. The results of
operations for the interim periods ended September 30, 1996 and 1995 are not
necessarily indicative of the results to be obtained for the full fiscal year.
The "Mendik Predecessors" consists of 100% of the net assets and results of
operations of three Properties (Two Penn Plaza, 1740 Broadway and 866 United
Nations Plaza), equity interests in four other Properties (Eleven Penn Plaza,
Two Park Avenue, 330 Madison Avenue and 570 Lexington Avenue), which interests
are accounted for under the equity method, and 100% of the net assets and
results of operations of the affiliated entities which conduct the management
and leasing business of the Mendik Group.
The unaudited pro forma financial and operating information for the Company
as of and for the nine months ended September 30, 1996 and for the year ended
December 31, 1995 assumes completion of the Offering and the Formation
Transactions as of the beginning of the periods presented for the operating data
and as of the stated date for the balance sheet data.
11
<PAGE>
THE COMPANY (PRO FORMA) AND THE MENDIK PREDECESSORS (HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL HISTORICAL
-------------------- --------------------
1996 1995 1995 1994
--------- --------- --------- ---------
PRO FORMA PRO FORMA
----------- -----------
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
OPERATING DATA:
Revenues
Rental revenue........................................ $ 52,820 $ 51,706 $ 48,859 $ 66,004 $ 65,050 $ 65,176
Escalation and reimbursement revenues................. 8,252 8,252 8,688 11,668 11,668 11,331
Management revenues................................... -- 3,013 3,968 -- 5,671 5,061
Other................................................. 4,990 3,870 3,821 9,640 7,192 4,789
----------- --------- --------- ----------- --------- ---------
Total revenues...................................... 66,062 66,841 65,336 87,312 89,581 86,357
----------- --------- --------- ----------- --------- ---------
EXPENSES
Operating expenses.................................... 27,519 27,452 27,609 36,563 36,462 36,280
Interest.............................................. 6,145 11,782 12,167 8,193 16,247 16,121
Depreciation and amortization......................... 5,919 8,356 8,418 7,992 11,305 10,788
Marketing, general and administrative................. 1,152 4,209 4,665 2,093 6,485 6,350
----------- --------- --------- ----------- --------- ---------
Total expenses...................................... 40,735 51,799 52,859 54,841 70,499 69,539
----------- --------- --------- ----------- --------- ---------
Income before minority interest......................... $ 25,327 $ 15,042 $ 12,477 $ 32,471 $ 19,082 $ 16,818
----------- --------- --------- ----------- --------- ---------
----------- --------- --------- ----------- --------- ---------
Minority interest....................................... 9,576 12,277
----------- -----------
Income after minority interest.......................... $ 15,751 $ 20,194
----------- -----------
----------- -----------
Net income per share.................................... $ 1.41 -- -- $ 1.80 -- --
BALANCE SHEET DATA:
Real estate, before accumulated depreciation............ $ 226,589 $ 265,443 -- -- $ 261,515 $ 253,678
Real estate, after accumulated depreciation............. 129,291 150,976 -- -- 153,026 153,301
Total assets............................................ 224,783 280,794 -- -- 263,708 266,152
Mortgages payable....................................... 113,000 208,879 -- -- 208,829 208,891
Minority interest....................................... 32,367 N/A N/A -- N/A N/A
Owners' equity.......................................... 53,237 45,054 -- -- 34,618 32,201
OTHER DATA:
Funds from Operations (1)............................... $ 35,607 $ 27,225 $ 24,964 $ 46,899 $ 36,187 $ 32,555
Net cash provided by operating activities............... -- 8,914 16,671 -- 24,296 23,600
Net cash provided by (used in) financing activities..... -- (4,395) (6,731) -- (17,700) (15,161)
Net cash provided by (used in) investing activities..... -- (2,237) (18,818) -- (9,017) (7,781)
</TABLE>
- ------------------------
(1) The Company generally considers Funds from Operations an appropriate measure
of liquidity of an equity REIT because industry analysts have accepted it as
a performance measure of equity REITs. "Funds from Operations" as defined by
the National Association of Real Estate Investment Trusts ("NAREIT") means
net income (computed in accordance with generally accepted accounting
principles ("GAAP")) excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization on real estate assets,
and after adjustments for unconsolidated partnerships and joint ventures.
The Company's Funds from Operations are not comparable to Funds from
Operations reported by other REITs that do not define the term using the
current NAREIT definition or that interpret the current NAREIT definition
differently than does the Company. The Company believes that in order to
facilitate a clear understanding of the combined historical operating
results of the Mendik Predecessors and the Company, Funds from Operations
should be examined in conjunction with net income as presented in the
audited combined financial statements and information included elsewhere in
this Prospectus. Funds from Operations does not represent cash generated
from operating activities in accordance with GAAP and should not be
considered as an alternative to net income as an indication of the Company's
performance or to cash flows as a measure of liquidity or ability to make
distributions. For a reconciliation of net income and Funds from Operations,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Reconciliation of Net Income and Funds from Operations."
12
<PAGE>
RISK FACTORS
An investment in the Common Stock involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus before making a decision
to purchase Common Stock in the Offering.
GEOGRAPHIC CONCENTRATION IN MIDTOWN MANHATTAN
All of the Properties are located in midtown Manhattan. In addition, the
Company initially intends to concentrate its future acquisitions primarily in
the midtown Manhattan office market. Like other office markets, the Manhattan
office market has experienced economic downturns in the past, including most
recently in the late 1980s and early 1990s, and future declines in the New York
metropolitan economy or the Manhattan office market could adversely affect the
Company's financial performance. The Company's financial performance and its
ability to make distributions to stockholders are therefore dependent on
conditions in the New York metropolitan economy and the Manhattan office market.
The Company's revenue and the value of its properties may be affected by a
number of factors, including the economic climate in metropolitan New York
(which may be adversely affected by business layoffs or downsizing, industry
slowdowns, relocations of businesses, changing demographics, increased
telecommuting, infrastructure quality, New York State and New York City
budgetary constraints and priorities and other factors) and conditions in the
Manhattan office market (such as oversupply of or reduced demand for office
space). There can be no assurance as to the continued growth of the New York
metropolitan economy, the continued strength of the Manhattan office market or
the future growth rate of the Company.
INABILITY TO CONTROL PROPERTY-LEVEL TRANSACTIONS AT PARTIAL INTEREST PROPERTIES
The Company expects that it will, immediately after the completion of the
Formation Transactions, have less than a majority of the ownership interests in
the partnerships that own Eleven Penn Plaza, Two Park Avenue, 330 Madison Avenue
and 570 Lexington Avenue. The Company will not have the ability to effect
certain actions with respect to these Properties (including decisions regarding
management, sale, refinancing and the timing and amount of distributions), other
than approval rights with respect to significant actions affecting these
Properties. In addition, the Company will be subject to certain "buy-sell"
rights, rights of first refusal, consent rights and/or forced sale rights
contained in the partnership agreement of each of these Property-owning
partnerships, as well as contractual provisions of any financing or other
agreements. See "The Properties--Eleven Penn Plaza," "--Two Park Avenue," "--330
Madison Avenue" and "--570 Lexington Avenue." If the Company acquires minority
interests in office properties in the future, it is likely that such ownership
interests will be subject to similar restrictions.
NO ASSURANCE OF FAIR PRICE FOR COMPANY'S ASSETS
The amount of consideration in the Company received by the Mendik Group and
certain related parties in the Formation Transactions was not determined as a
result of arm's length negotiations with such persons or with purchasers in the
Offering. The amount of consideration to be paid by the Company to acquire
interests in the Properties was determined by the Mendik Group, and the Mendik
Group will receive substantial economic benefits as a result of the consummation
of the Formation Transactions and the Offering. See "Structure and Formation of
the Company--Benefits to Related Parties." No independent valuations or
appraisals with respect to four of the Company's Properties were obtained in
connection with the acquisition of property interests in the Formation
Transactions, and the estimates of value of three Properties and the
participants' interests therein that were obtained were limited in scope. The
Mendik Group owns certain of such interests and, accordingly, there can be no
assurance that the consideration to be paid by the Company for these interests
represents the fair market value thereof or that such consideration does not
exceed the estimates of value. See "--Conflicts of Interest in the Formation
Transactions and the Business of the Company--Substantial Benefits to Related
Parties" below.
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The valuation of the Company has not been determined by a valuation of its
assets, but instead has been determined by the Mendik Group and the Underwriters
based upon a capitalization of the Company's pro forma adjusted Funds from
Operations, estimated cash available for distribution and potential for growth,
and the other factors discussed under "Underwriting." In determining the
estimated initial public offering price, certain assumptions were made
concerning the estimate of revenue to be derived from the Properties. See
"Distributions." This methodology has been used because management believes that
it is appropriate to value the Company as an ongoing business, rather than with
a view to values that could be obtained from a liquidation of the Company or of
individual assets owned by the Company. There can be no assurance that the price
paid by the Company for its interests in the Properties and for its other assets
will not exceed the fair market value of such assets, and it is possible that
the market value of the Common Stock may exceed stockholders' proportionate
share of the aggregate fair market value of such assets.
CONFLICTS OF INTEREST IN THE FORMATION TRANSACTIONS AND THE BUSINESS OF THE
COMPANY
SUBSTANTIAL BENEFITS TO RELATED PARTIES. The Mendik Group (including
Messrs. Mendik and Greenbaum, who are owners of Mendik Realty and senior
executive officers of the Company) and Mendik/FW LLC (of which the Mendik Group
is a member) will receive material benefits from the Formation Transactions that
generally will not be received by other participants in the Formation
Transactions. Because these persons were involved in structuring the Formation
Transactions, they had the ability to determine the type and level of benefits
they received. As such, these persons may have interests that conflict with the
interests of other participants in the Formation Transactions and with the
interests of persons acquiring Common Stock in the Offering. The type and level
of benefits to be received by the Mendik Group might have been different if the
Mendik Group had not participated in structuring the Formation Transactions.
These benefits include, but are not limited to, the following: (i) receipt of
Units and shares of Common Stock (with a value of approximately $ million,
based on the assumed initial public offering price); (ii) receipt by the
executive officers of the Company of options to purchase an aggregate of 700,000
shares of Common Stock under the Company's stock option plan at the initial
public offering price, subject to certain vesting requirements; (iii) deferral
of certain tax consequences to members of the Mendik Group from the conveyances
of their interests in the Properties to the Company and from the Lock-out
Provisions (see "--Inability to Sell or Reduce the Mortgage Indebtedness on
Certain Properties" below); and (iv) entry by Messrs. Mendik and Greenbaum into
employment agreements with the Company, and entry by the other five executive
officers into employment-related agreements with the Company. See "Structure and
Formation of the Company--Benefits to Related Parties" and "Management."
FUTURE DEALINGS WITH AFFILIATES OF THE COMPANY. After the completion of the
Offering and the Formation Transactions, the Mendik Group and an entity
affiliated with two other directors of the Company will own an entity which will
provide cleaning and related services to office properties, including the
Company's properties. In addition, the Mendik Group will provide security
services to office properties, including the Company's properties. Although the
Company believes that the terms and conditions of the contracts pursuant to
which these services will be provided, taken as a whole, will not be less
favorable to the Company than those which could have been obtained from a third
party providing comparable services, such contracts will not be the result of
arm's length negotiations and, therefore, there can be no assurance to this
effect. The Company has adopted certain policies relating to conflicts of
interest. These policies include a resolution adopted by the Company's Board of
Directors which requires all transactions in which executive officers or
directors have a material conflicting interest to that of the Company to be
approved by a majority of the disinterested directors or by the holders of a
majority of the shares of Common Stock held by disinterested stockholders;
however, the Board of Directors may elect to alter this resolution in the
future. There can be no assurance, however, that the Company's policies will be
successful in eliminating the influence of such conflicts, and if they are not
successful, decisions could be made that
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might fail to reflect fully the interests of all stockholders. See "Policies
with Respect to Certain Activities-- Conflict of Interest Policies."
OUTSIDE INTERESTS OF OFFICERS AND DIRECTORS. Messrs. Mendik and Greenbaum
will continue to own direct and indirect managing general partner interests in
three of the Properties (Eleven Penn Plaza, Two Park Avenue and 330 Madison
Avenue). In addition, certain officers and directors of the Company will
continue to own direct and indirect interests in office properties and other
real estate assets, and certain property services businesses, including
businesses which provide cleaning and related services, security services and
facilities management services, which interests may give rise to certain
conflicts of interest concerning the fulfillment of their responsibilities as
officers and directors of the Company. See "The Properties--Assets Not Being
Transferred to the Company." For a discussion of the role of the Company's
disinterested directors and the Company's policies and agreements designed to
minimize any adverse effects from these conflicts of interest, see "Policies
with Respect to Certain Activities--Conflict of Interest Policies."
LEASING SERVICES PROVIDED TO OTHER PROPERTIES. After the completion of the
Offering and the Formation Transactions, the Management Corporation (which will
be controlled by the Mendik Group and not by the Company) will provide
management and leasing services to properties in which the Company owns less
than a 100% interest as well as to other office properties (including several
properties in which the Mendik Group has an interest but in which the Company
will not acquire an interest in the Formation Transactions). Certain conflicts
of interest may result from the Management Corporation's providing leasing
services both to properties in which the Company has an interest and other
properties in which the Mendik Group has an interest.
TAX CONSEQUENCES UPON THE SALE, REDUCTION IN MORTGAGE INDEBTEDNESS ON OR
ACQUISITION OF PROPERTIES. Certain holders of Units may experience different and
more adverse tax consequences compared to those experienced by holders of shares
of Common Stock or other holders of Units upon the sale of, or reduction of
mortgage indebtedness on, any of the Company's properties, or upon the
acquisition by the Company of any additional properties. Therefore, such
holders, including the Mendik Group and the Company, may have different
objectives regarding the appropriate pricing and timing of any sale of, or
reduction of mortgage indebtedness on, the Company's properties, and regarding
the appropriate characteristics of additional properties to be considered for
acquisition. Certain members of the Board of Directors of the Company initially
will be holders of Units, and their status as holders of Units may influence the
Company not to sell particular properties, or not to pay down mortgage
indebtedness on particular properties, even though such sales or debt paydowns
might otherwise be financially advantageous to the Company and its stockholders.
Such status also may influence the Company not to acquire properties which do
not have significant mortgage indebtedness (which may affect the type of
potential acquisition properties that the Company pursues and may affect the
level of the Company's leverage). See "--Inability to Sell or Reduce the
Mortgage Indebtedness on Certain Properties" below.
RISK OF LESS VIGOROUS ENFORCEMENT OF TERMS OF CONTRIBUTION AND OTHER
AGREEMENTS. The Mendik Group has ownership interests in the Properties and in
the other assets to be acquired by the Company. Following the completion of the
Offering and the Formation Transactions, the Company, under the agreements
relating to the contribution of such interests, will be entitled to
indemnification and damages in the event of breaches of representations or
warranties made by Mendik/FW LLC. In addition, Messrs. Mendik and Greenbaum will
enter into employment and noncompetition agreements with the Company pursuant to
which they will agree, among other things, not to engage in certain business
activities in competition with the Company. See "Management--Employment and
Severance Agreements." To the extent that the Company chooses to enforce its
rights under any of these contribution, employment and noncompetition
agreements, it may determine to pursue available remedies, such as actions for
damages or injunctive relief, less vigorously than it otherwise might because of
its desire to maintain its ongoing relationship with the individual involved.
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INABILITY TO SELL OR REDUCE THE MORTGAGE INDEBTEDNESS ON CERTAIN PROPERTIES
In connection with the solicitation of approval of partners or members in
the various Property-owning entities to transfer their interests to the Company,
the Company agreed to certain restrictions relating to future capital
transactions involving three of the Properties. Pursuant to the Lock-out
Provisions, the Company may not sell (except in certain events, including
certain transactions that would not result in the recognition of any gain for
tax purposes) or, earlier than one year prior to its maturity, reduce the
mortgage indebtedness on, Two Penn Plaza, 866 United Nations Plaza or Eleven
Penn Plaza during the Lock-out Period without, in the case of each such
Property, the consent of holders of 75% of the Units originally issued to
limited partners in the Operating Partnership who immediately prior to
completion of the Formation Transactions owned direct or indirect interests in
such Property that remain outstanding at the time of such vote (other than Units
held by the Company). (This vote requirement does not apply to a sale of all or
substantially all of the assets of the Operating Partnership, but such a
transaction during the Lock-out Period generally would require the approval of
the holders, as a group, of 75% of the aggregate Units originally issued with
respect to Two Penn Plaza, 866 United Nations Plaza and Eleven Penn Plaza that
remain outstanding (excluding Units held by the Company) unless the transaction
would not result in the recognition of any gain for tax purposes with respect to
such Units and certain other conditions are satisfied.) In addition, during the
Lock-out Period, the Company is obligated to use commercially reasonable
efforts, commencing one year prior to the stated maturity, to refinance at
maturity (on a basis that is nonrecourse to the Operating Partnership and the
Company, with the least amount of principal amortization as is available on
commercially reasonable terms) the mortgage indebtedness secured by each of
these three Properties at not less than the principal amount outstanding on the
maturity date. Finally, during the Lock-out Period, the Company may not incur
debt secured by any of these three Properties if the amount of the new debt
would exceed the greater of 75% of the value of the Property securing the debt
or the amount of existing debt being refinanced (plus costs associated
therewith). Thus, the Lock-out Provisions materially restrict the Company from
selling or otherwise disposing of or refinancing Two Penn Plaza, 866 United
Nations Plaza and Eleven Penn Plaza without obtaining such consents. The
Lock-out Provisions apply even if it would otherwise be in the best interest of
the stockholders for the Company to sell one or more of these three Properties,
reduce the outstanding indebtedness with respect to any of these Properties or
not refinance such indebtedness on a nonrecourse basis at maturity, or increase
the amount of indebtedness with respect to these three Properties.
The Lock-out Provisions may impair the ability of the Company to take
actions during the Lock-out Period that would otherwise be in the best interests
of the Company's stockholders and, therefore, may have an adverse impact on the
value of the Common Stock (relative to the value that would result if the
Lock-out Provisions did not exist). In particular, the Lock-out Provisions could
preclude the Operating Partnership (and thus the Company) from participating in
certain major transactions that could result in a disposition of the Operating
Partnership's assets or a change in control of the Company even though such
disposition or change in control might be in the best interests of the
stockholders.
The Company anticipates that, in connection with future acquisitions of
interests in properties in which the Company uses Units as consideration, the
Company may agree to limitations on its ability to sell, or reduce the amount of
mortgage indebtedness on, such acquired properties, which may increase the
Company's leverage. Such limitations may impair the Company's ability to take
actions that would otherwise be in the best interests of its stockholders and,
therefore, may have an adverse impact on the value of the Common Stock (relative
to the value that would result if such limitations did not exist). Such possible
future limitations, together with the Lock-out Provisions, may restrict the
ability of the Company to sell substantially all of its assets, even if such a
sale would be in the best interests of its stockholders.
SUBSTANTIAL VACANT SPACE AT TWO PENN PLAZA
Following the expiration of the lease for approximately 430,000 square feet
of space at Two Penn Plaza with The Equitable Life Assurance Society of the
United States ("Equitable") on October 31, 1996, Equitable relocated the
operations that it had conducted at Two Penn Plaza to a building closer to its
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Manhattan headquarters. The Company has entered into leases with respect to
approximately 89,000 square feet of this space. The remaining available space
constitutes approximately 23% of Two Penn Plaza's total rentable square feet and
approximately 10% of the Company's pro rata share of total rentable square feet
of the Properties. The annualized base rent with respect to such remaining
available space in effect under the Equitable lease immediately prior to the
expiration of such lease would be approximately $11.3 million, although the
Company anticipates that annualized base rent with respect to such space will in
the future be lower. The Company anticipates that substantial expenditures for
tenant improvement costs and leasing commissions may be required in connection
with any leasing of a significant portion of this space, as well as
approximately 104,000 square feet of space occupied by Digital Equipment
Corporation ("Digital") under a lease which expires on January 31, 1998. See
"The Properties--Two Penn Plaza." The Company expects to establish an initial
reserve of approximately $38 million for, among other things, tenant improvement
costs and leasing commissions expected to be incurred in connection with the re-
leasing of space at the Properties, approximately $30 million of which will be
allocated to cover these expenses at Two Penn Plaza (although these expenses
could exceed the amount of such reserve). If the Company is unable to re-lease
this space on a timely basis and on favorable terms, the Company's ability to
make expected distributions to the Company's stockholders in the future could be
adversely affected.
RELIANCE ON MAJOR TENANTS
Two tenants (Mutual of New York and The Times Mirror Company) each accounted
for more than 5% of the Company's pro rata share of Annual Escalated Rent Per
Leased Square Foot (as defined below), and 20 tenants collectively accounted for
approximately 55% of the Company's pro rata share of Annual Escalated Rent Per
Leased Square Foot. See "The Properties--The Portfolio--Tenant Diversification."
The Company would be adversely affected in the event of a bankruptcy or
insolvency of, or a downturn in the business of, any major tenant which resulted
in a failure or delay in such tenant's rent payments.
ACQUISITION RISKS
In the future, the Company expects to acquire additional office properties,
although the Company currently is not a party to any agreement or understanding
relating to the acquisition of any additional properties. Acquisitions entail
the risk that investments will fail to perform in accordance with expectations,
including operating and leasing expectations. The Company anticipates that
certain of its acquisitions will be financed using the proceeds of periodic
equity or debt offerings, lines of credit or other forms of secured or unsecured
financing that will result in a risk that permanent financing for newly acquired
projects might not be available or would be available only on disadvantageous
terms. If permanent debt or equity financing is not available on acceptable
terms to refinance acquisitions undertaken without permanent financing, further
acquisitions may be curtailed or cash available for distribution may be
adversely affected. In addition, it is anticipated that acquisition risks may be
heightened for acquisitions of Manhattan office properties due to the large size
of many Manhattan office properties and the complexity of acquisition
transactions in the Manhattan office market. See "--Other Risks of Ownership of
Common Stock--Dependence on External Sources of Capital" below.
COMPETITION
All of the Properties are located in highly developed areas of midtown
Manhattan that include a large number of other office properties. Manhattan is
by far the largest office market in the United States. The number of competitive
office properties in Manhattan could have a material adverse effect on the
Company's ability to lease office space at its properties, and on the effective
rents the Company is able to charge. These competing properties may be newer or
better located. In addition, the Company may compete with other property owners
that have greater resources than the Company. In particular, although currently
no other publicly traded REITs have been formed primarily to own, operate and
acquire Manhattan office properties, the Company may in the future compete with
such other REITs. In addition, the Company may face competition from other real
estate companies (including other REITs that
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currently invest in markets other than Manhattan) that have greater financial
resources than the Company or that are willing to acquire properties in
transactions which are more highly leveraged than the Company is willing to
undertake. The Company also will face competition from other real estate
companies that provide management, leasing and other services similar to those
to be provided by the Management Corporation.
RISKS OF PROPERTY MANAGEMENT BUSINESS
On a pro forma basis for each of the year ended December 31, 1995 and the
nine months ended September 30, 1996, approximately 2.4% of the Company's income
before minority interest was provided by the management and leasing business
that will be conducted by the Management Corporation. (See "Structure and
Formation of the Company--The Operating Entities of the Company--The Management
Corporation" for a description of the Company's management and leasing
business.) Accordingly, the Company will be subject to the risks associated with
this business. These risks include the risk that management and leasing
contracts with third party property owners will not be renewed upon expiration
(or will be canceled pursuant to cancellation options) or will not be renewed on
terms at least as favorable to the Company as current terms, that the rental
revenues upon which management and leasing fees are based will decline as a
result of general real estate market conditions or specific market factors
affecting properties serviced by the Company, and that leasing activity
generally will decline. Each of these developments could adversely affect the
revenues of the Management Corporation and could adversely affect the ability of
the Company to make expected distributions to its stockholders.
In order to maintain its qualification as a REIT, the Company will not have
voting control over the Management Corporation. It currently is anticipated that
the Mendik Group will own 100% of the voting common stock of the Management
Corporation. As a result, the Company will not have the ability to elect or
remove any members of the board of directors of the Management Corporation, and,
therefore, its ability to influence the day-to-day decisions of the Management
Corporation will be limited. As a result, the board of directors or management
of the Management Corporation may implement business policies or decisions that
might not have been implemented by persons elected by the Company and that are
adverse to the interests of the Company or that lead to adverse financial
results, which could adversely affect the ability of the Company to make
expected distributions to the Company's stockholders.
REAL ESTATE INVESTMENT RISKS
REAL ESTATE OWNERSHIP RISKS. Real estate investments are subject to varying
degrees of risk. The yields available from equity investments in real estate and
the Company's ability to service debt depend in large part on the amount of
income generated, expenses incurred and capital expenditures required. The
Company's income and ability to make distributions to its stockholders is
dependent upon the ability of its property to generate income in excess of its
requirements to meet operating expenses, including debt service and capital
expenditures. The Company's income from office properties and the value of its
properties may be significantly adversely affected by a number of factors,
including national, state and local economic climates and real estate conditions
(such as an oversupply of or a reduction in demand for office space in the area;
the perceptions of tenants and prospective tenants of the safety, convenience
and attractiveness of the Company's properties; the Company's ability to provide
adequate management, maintenance and insurance; the quality, philosophy and
performance of the Company's management; competition from comparable properties;
the occupancy rate of the Company's properties; the ability to collect on a
timely basis all rent from tenants; the effects of any bankruptcies or
insolvencies of major tenants; the expense of periodically renovating, repairing
and re-leasing space (including, without limitation, substantial tenant
improvement costs and leasing costs of re-leasing office space); and increasing
operating costs (including increased real estate taxes) which may not be passed
through fully to tenants). In addition, income from properties and real estate
values also are affected by such factors as the cost of compliance with laws,
including zoning and tax laws, the potential for liability under applicable
laws, interest rate levels and the availability of financing. Certain
significant expenditures associated with equity investments in real estate (such
as mortgage payments, real estate taxes, insurance and maintenance costs) also
may not be reduced if circumstances cause a reduction in income from a property.
If any of the above occurred, the Company's ability to make expected
distributions to its stockholders could be adversely affected.
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TENANT DEFAULTS AND BANKRUPTCY. Substantially all of the Company's income
will be derived from rental income from its properties and, consequently, the
Company's distributable cash flow and ability to make expected distributions to
stockholders would be adversely affected if a significant number of tenants at
its properties failed to meet their lease obligations. If a tenant at a property
in which the Company has an interest seeks the protection of the bankruptcy
laws, such an action could result in delays in rental payments or in the
rejection and termination of such tenant's lease, thereby causing a reduction in
the Company's cash flow and, possibly, the amounts available for distribution to
stockholders. No assurance can be given that tenants will not file for
bankruptcy protection in the future or, if any tenants file, that they will
affirm their leases and continue to make rental payments in a timely manner. In
addition, a tenant from time to time may experience a downturn in its business
which may weaken its financial condition and result in the failure to make
rental payments when due. If tenant leases are not affirmed following bankruptcy
or if a tenant's financial condition weakens, the Company's cash flow and
ability to make expected distributions to its stockholders could be adversely
affected.
RISKS OF LEASE RENEWAL AND RE-LEASING OF SPACE. The Company will be subject
to the risk that upon expiration of leases for space located in the Properties,
the leases may not be renewed, the space may not be re-leased or the terms of
renewal or re-leasing (including the cost of required renovations) may be less
favorable than current lease terms. A significant block of space in the
Company's portfolio recently became available as the result of the expiration of
the lease with Equitable at Two Penn Plaza. See "-- Substantial Vacant Space at
Two Penn Plaza" above and "The Properties--Two Penn Plaza." Although the Company
has established an initial reserve for re-leasing expenses with respect to space
at the Properties which takes into consideration the Company's views of both the
current and expected business conditions in the appropriate markets, no
assurance can be given that this reserve will be sufficient to cover such
expenses or that the Company will have sufficient resources to cover the cost of
re-leasing space at the Properties. In addition, leases on a total of
approximately 6.3% and 9.5% of the total net rentable square feet in the
Properties will expire in 1997 and in 1998, respectively.
If the Company were unable promptly to re-lease or renew the leases for all
or a substantial portion of this space, if the rental rates upon such renewal or
re-leasing were significantly lower than anticipated or if the Company's reserve
for these purposes proved inadequate, then the Company's cash flow and ability
to make expected distributions to stockholders, and the market value of Two Penn
Plaza, could be adversely affected.
DEBT FINANCING. The Company is subject to the risks normally associated
with debt financing, including the risk that the Company will generate
insufficient funds to meet required payments of principal and interest, the risk
of violating loan covenants, the risk of rising interest rates on the Company's
floating rate debt and the risk that the Company will not be able to repay or
refinance existing indebtedness on its properties at maturity (which generally
will not have been fully amortized at maturity) or that the terms of such
refinancing will not be as favorable as the terms of existing indebtedness.
Because the Company currently anticipates that no significant portion of the
principal of such indebtedness will be amortized prior to maturity and the
Company does not expect to have sufficient funds on hand to repay all of such
indebtedness at maturity, and because the Company is obligated under the
Lock-out Provisions to use its commercially reasonable efforts during the
Lock-out Period to refinance (on a nonrecourse basis) at maturity the mortgage
indebtedness on three of the Properties (Two Penn Plaza, 866 United Nations
Plaza and Eleven Penn Plaza) at not less than the principal amount outstanding,
it likely will be necessary for the Company to refinance such mortgage
indebtedness either through additional debt financings secured by individual
properties or groups of properties or, in the case of debt with respect to
Properties not subject to the Lock-out Provisions, by unsecured private or
public debt offerings or by additional equity offerings. The mortgage
indebtedness to be outstanding after the completion of the Offering with respect
to each Property subject to the Lock-out Provisions matures well before the
expiration of the Lock-out Period. See "The Properties--Mortgage Indebtedness."
If prevailing interest rates or other factors at the time of refinancing of this
(or other) indebtedness result in higher interest rates on refinancings, the
Company's
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interest expense would increase, which would adversely affect the Company's cash
flow from operations and the Company's ability to make expected distributions to
its stockholders. If the Company were unable to secure refinancing of this (or
other) indebtedness on acceptable terms, the Company could, subject to the
Lock-out Provisions, be forced to dispose of properties upon disadvantageous
terms, which could result in losses to the Company and could adversely affect
the cash flow available for distribution to stockholders.
If one or more properties are mortgaged to secure payment of indebtedness
and the Company is unable to generate funds to cover debt service, the mortgage
securing such properties could be foreclosed upon by, or such properties could
otherwise be transferred to, the mortgagee with a consequent loss of income and
asset value to the Company. Although none of the Properties has been subject to
bankruptcy or restructuring proceedings, during the downturn in the real estate
market in the late 1980s and early 1990s, certain real estate assets (including
three office properties in Manhattan) owned or controlled by partnerships
affiliated with the Mendik Group did not generate sufficient cash flow to
service the debt secured by such properties. As a result, the partnerships which
owned or controlled certain of these properties filed with their lenders a
consensual plan for protection under the Federal bankruptcy laws or transferred
their properties to the lenders in satisfaction of the loans.
ILLIQUIDITY OF REAL ESTATE. Real estate investments are relatively illiquid
and, therefore, will tend to limit the ability of the Company to sell and
purchase properties promptly in response to changes in economic or other
conditions. In addition, the Code places limits on the Company's ability to sell
properties held for fewer than four years, and the Lock-out Provisions impose
certain special restrictions with respect to the sale of certain of the
Properties during the Lock-out Period. These considerations could make it
difficult for the Company to sell properties, even if a sale were in the best
interests of the Company's stockholders.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various Federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real estate may be required to
investigate and clean up certain hazardous substances released at a property,
and may be held liable to a governmental entity or to third parties for property
damage or personal injuries and for investigation and clean-up costs incurred by
the parties in connection with any contamination. In addition, some
environmental laws create a lien on a contaminated site in favor of the
government for damages and costs it incurs in connection with the contamination.
Such laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the release of hazardous substances.
The presence of contamination or the failure to remediate contamination may
adversely affect the owner's ability to sell or lease real estate or to borrow
using the real estate as collateral. No assurances can be given that (i) a prior
owner, operator or occupant, such as a tenant, did not create a material
environmental condition not known to the Company or the Mendik Group, (ii) a
material environmental condition with respect to any Property does not exist, or
(iii) future uses or conditions (including, without limitation, changes in
applicable environmental laws and regulations) will not result in the imposition
of environmental liability.
The Company engaged an independent consulting firm, Law Engineering and
Environmental Services, P.C. ("Law Engineering"), to perform Phase I
environmental assessments on the Properties (with the exception of 570 Lexington
Avenue, due to the Company's relatively small expected ownership interest
therein and the structure of the acquisition of such interest) in order to
assess existing environmental conditions. Under American Society of Testing of
Materials Standards, a Phase I assessment consists of a site visit, a historical
record review, interviews and a report, with the purpose of identifying
potential environmental conditions associated with real estate. These
assessments also include an evaluation of asbestos, polychlorinated biphenyls
("PCBs"), lead paint and lead in drinking water. These environmental assessments
did not reveal any known environmental liability that the Company believes will
have a material adverse effect on the Company's financial condition or results
of operations or would represent a material environmental cost.
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The following summarizes certain environmental issues described in Law
Engineering's reports. The description is, however, a summary only and does not
include all information in the reports. Six Properties have asbestos containing
materials ("ACMs") in ceiling, roofing, caulking, and/or floor tile or other
materials. Law Engineering has advised the Company that, except in limited
circumstances, removal of ACMs from these Properties is not necessary or
advisable. The Company has programs in place to monitor ACMs at the Properties
and to abate any localized areas as necessary. In addition, although there are
no standards for lead in drinking water in commercial office buildings, Law
Engineering also tested the water supply at each building and found lead levels
in three of the buildings (Eleven Penn Plaza, Two Park Avenue and 330 Madison
Avenue) in excess of the standards for residential properties recommended by the
U.S. Environmental Protection Agency. The Company will continue to monitor and,
if appropriate, address the conditions raised in Law Engineering's reports but
does not believe that such conditions will have a material adverse effect on the
financial condition of the Company.
LIMITS ON CHANGES IN CONTROL
POTENTIAL EFFECTS OF OWNERSHIP LIMITATION. For the Company to maintain its
qualification as a REIT under the Code, not more than 50% in value of the
outstanding shares of capital stock of the Company may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of the Company's taxable year
(other than the first taxable year for which the election to be treated as a
REIT has been made).
To ensure that the Company will not fail to qualify as a REIT under this and
other tests under the Code, the Company's Articles of Incorporation, as
supplemented or amended (the "Charter"), subject to certain exceptions,
authorizes the directors to take such actions as are necessary and desirable to
preserve its qualification as a REIT and limits any person to direct or indirect
ownership of no more than (i) 8.6% (the "Ownership Limit") in number or value of
the outstanding shares of Common Stock, except for Mr. Mendik and FWM, L.P.,
each of which may own initially no more than 15% of the number of such
outstanding shares, or (ii) 9.8% in number or value of outstanding shares of
preferred stock of the Company, par value $.01 per share ("Preferred Stock") of
any series of Preferred Stock. The Company's Board of Directors will have the
authority to increase the Ownership Limit from time to time, but will not have
the authority to do so to the extent that, after giving effect to such increase,
five beneficial owners of shares of Common Stock could beneficially own in the
aggregate more than 49.5% of the outstanding shares of Common Stock. The
Company's Board of Directors, upon receipt of a ruling from the IRS, an opinion
of counsel or other evidence satisfactory to the Board and upon such other
conditions as the Board may establish, may exempt a proposed transferee from the
Ownership Limit. However, the Board may not grant an exemption from the
Ownership Limit to any proposed transferee whose ownership, direct or indirect,
of shares or beneficial interest of the Company in excess of the Ownership Limit
would result in the termination of the Company's status as a REIT. See "Capital
Stock--Restrictions on Transfer." The foregoing restrictions on transferability
and ownership will continue to apply until (i) the Company's Board of Directors
determines that it is no longer in the best interests of the Company to attempt
to qualify, or to continue to qualify, as a REIT, and (ii) there is an
affirmative vote of a majority of the votes entitled to be cast on such matter
at a regular or special meeting of the stockholders of the Company.
The Ownership Limit may have the effect of delaying, deferring or preventing
a transaction or a change in control of the Company that might involve a premium
price for the Common Stock or otherwise be in the best interests of the
stockholders. See "Capital Stock--Restrictions on Transfer."
POTENTIAL EFFECTS OF STAGGERED BOARD. The Company's Board of Directors will
be divided into three classes. The initial terms of the first, second and third
classes will expire in 1997, 1998 and 1999, respectively. Beginning in 1997,
directors of each class will be chosen for three-year terms upon the expiration
of their current terms and each year one class of directors will be elected by
the stockholders. The staggered terms for directors may reduce the possibility
of a tender offer or an attempt to effect a
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change in control of the Company, even if a tender offer or a change in control
would be in the best interests of the stockholders.
POTENTIAL EFFECTS OF ISSUANCE OF ADDITIONAL SHARES. The Company's Charter
authorizes the Board of Directors to issue up to 100,000,000 shares of capital
stock and to establish the preferences and rights of any capital stock issued.
90,000,000 of those shares will be classified as Common Stock and the remaining
10,000,000 shares will be classified as Preferred Stock. See "Capital Stock."
Although the Board of Directors has no such intention to do so at the present
time, it could establish a class or series of shares of stock that could,
depending on the terms of such class or series, delay, defer or prevent a
transaction or a change in control of the Company that might involve a premium
price for the Common Stock or otherwise be in the best interests of the
stockholders.
LIMITATIONS ON ACQUISITION OF AND CHANGES IN CONTROL PURSUANT TO MARYLAND
LAW. Certain provisions of the Maryland General Corporation Law (the "MGCL")
may have the effect of inhibiting a third party from making an acquisition
proposal for the Company or of impeding a change in control of the Company under
circumstances that otherwise could provide the holders of shares of Common Stock
with the opportunity to realize a premium over the then-prevailing market price
of such shares. In particular, the MGCL provides that, unless exempted by action
of the Board of Directors, certain "business combinations" between a Maryland
corporation, such as the Company, and a stockholder holding 10% or more of the
corporation's voting securities (an "Interested Stockholder") may not occur for
a period of five years after such stockholder becomes an Interested Stockholder.
Therefore, a business combination may be impeded or prohibited, even if such a
combination were in the best interests of the Company's stockholders. The MGCL
also provides that so-called "control shares" may be voted only upon the
approval of two-thirds of the outstanding stock of the corporation exclusive of
the control shares. Control shares are shares which, if aggregated with all
other shares previously acquired by the acquiror, would entitle the acquiror to
vote certain statutorily determined percentages of outstanding shares. Under
certain circumstances, a Maryland corporation also may redeem the control shares
and, in the event the control shares are permitted to vote, the other
stockholders of the corporation are entitled to appraisal rights. Therefore, a
control share acquisition could be impeded and the attempt of any such
transaction could be discouraged, even if it were in the best interests of the
Company's stockholders. The Company has opted out of the business combination
and control share provisions of the MGCL, but the Board of Directors may elect
to adopt these provisions of the MGCL in the future.
IMMEDIATE AND SUBSTANTIAL DILUTION
As set forth more fully under "Dilution," the pro forma net tangible book
value per share of the assets of the Company after the Offering will be
substantially less than the estimated initial public offering price per share in
the Offering. Accordingly, purchasers of the Common Stock offered hereby will
experience immediate and substantial dilution of $17.63 in the net tangible book
value of the Common Stock from the estimated initial public offering price. See
"Dilution."
TAX RISKS
FAILURE TO QUALIFY AS A REIT. The Company intends to operate so as to
qualify as a REIT for Federal income tax purposes. The Company expects to
qualify initially as a REIT, but no assurance can be given that it will so
qualify or be able to remain so qualified. Although the Company has only
requested a ruling from the Internal Revenue Service (the "IRS") with regard to
certain limited REIT qualification issues, the Company expects to qualify
initially as a REIT and it has received an opinion of its tax counsel, Roberts &
Holland LLP, that, based on certain assumptions and representations, the Company
is organized in conformity with the requirements for qualification as a REIT
under the Code, and that the Company's proposed method of operation will enable
it to meet the requirements for qualification and taxation as a REIT. Investors
should be aware, however, that opinions of counsel are not binding on the
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IRS or any court. The REIT qualification opinion only represents the view of
counsel to the Company based on counsel's review and analysis of existing law,
which includes no controlling precedent. Furthermore, both the validity of the
opinion and the qualification of the Company as a REIT will depend on the
Company's continuing ability to meet various requirements concerning, among
other things, the ownership of its outstanding stock, the nature of its assets,
the sources of its income and the amount of its distributions to its
stockholders. Because the Company has no history of operating so as to qualify
as a REIT, there can be no assurance that the Company will do so successfully.
See "Federal Income Tax Considerations--Taxation of the Company--Failure to
Qualify."
If the Company were to fail to qualify as a REIT for any taxable year, the
Company would not be allowed a deduction for distributions to its stockholders
in computing its taxable income and would be subject to Federal income tax
(including any applicable minimum tax) on its taxable income at regular
corporate rates. Unless entitled to relief under certain Code provisions, the
Company also would be disqualified from treatment as a REIT for the four taxable
years following the year during which qualification was lost. As a result, cash
available for distribution would be reduced for each of the years involved. No
assurance can be given, however, that new legislation, Treasury Regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to the Company's qualification as a REIT or the
Federal income tax consequences of such qualification. In addition, although the
Company intends to operate in a manner designed to qualify as a REIT, it is
possible that future economic, market, legal, tax or other considerations may
cause the Board of Directors, with the consent of stockholders holding at least
a majority of all of the outstanding shares of Common Stock, to revoke the REIT
election. See "Federal Income Tax Considerations."
REIT MINIMUM DISTRIBUTION REQUIREMENTS; POSSIBLE INCURRENCE OF ADDITIONAL
DEBT. In order to qualify as a REIT, the Company generally will be required
each year to distribute to its stockholders at least 95% of its net taxable
income (excluding any net capital gain). In addition, the Company may be subject
to a nondeductible excise tax if the Company does not meet certain distribution
requirements. See "Federal Income Tax Considerations--Taxation of the
Company--Annual Distribution Requirements."
The Company intends to make distributions to its stockholders to comply with
the 95% distribution requirement and to avoid the nondeductible excise tax. The
Company's income will consist primarily of its share of the income of the
Operating Partnership, and the cash available for distribution by the Company to
its stockholders will consist of its share of cash distributions from the
Operating Partnership. Differences in timing between (i) the actual receipt of
income and actual payment of deductible expenses, and (ii) the inclusion of such
income and deduction of such expenses in arriving at taxable income of the
Company, could require the Company, through the Operating Partnership, to borrow
funds on a short-term basis to meet the 95% distribution requirement and to
avoid the nondeductible excise tax. The requirement to distribute a substantial
portion of the Company's net taxable income could cause the Company to
distribute amounts that otherwise would be spent on future acquisitions,
unanticipated capital expenditures or repayment of debt, which could require the
Company to borrow funds or to sell assets to fund the costs of such items.
CLASSIFICATION OF THE OPERATING PARTNERSHIP OR PROPERTY-OWNING ENTITIES AS
ASSOCIATIONS TAXABLE AS CORPORATIONS FOR FEDERAL INCOME TAX PURPOSES; NEGATIVE
IMPACT ON REIT STATUS. Although the Company has not requested, and does not
expect to request, a ruling from the IRS regarding classification of the
Operating Partnership and the Property-owning entities for Federal income tax
purposes, the Company will receive an opinion of its tax counsel, Roberts &
Holland LLP, stating that the Operating Partnership and the Property-owning
entities will not be classified as corporations or associations taxable as
corporations, for Federal income tax purposes. If the IRS were to challenge
successfully the tax status of the Operating Partnership (or a Property-owning
entity), such entity would be taxable as a corporation. In such event, the
Company would cease to qualify as a REIT for a variety of reasons. Furthermore,
the imposition of a corporate income tax on the Operating Partnership (or a
Property-owning entity) would reduce significantly the amount of cash available
for distribution from the Operating Partnership to the Company
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and the Company's stockholders. See "Federal Income Tax Considerations--Other
Tax Considerations-- Effect of Tax Status of Operating Partnership and
Property-owning Entities on REIT Qualification."
OTHER TAX LIABILITIES. Even if the Company qualifies as a REIT, it will be
subject to certain Federal, state and local taxes on its income and property. In
particular, the Company will derive a portion of its operating cash flow from
the activities of the Management Corporation, which will be subject to Federal,
state and local income tax. See "Federal Income Tax Considerations--Other Tax
Considerations-- Management Corporation."
OTHER RISKS OF OWNERSHIP OF COMMON STOCK
INFLUENCE OF OFFICERS, DIRECTORS AND SIGNIFICANT STOCKHOLDERS. Upon the
completion of the Offering, Mendik/FW LLC, the executive officers of the Company
and two directors affiliated with FWM, L.P. collectively will beneficially own
approximately % of the issued and outstanding shares of Common Stock and Units
(which will be exchangeable by the holders for cash or, at the election of the
Company, shares of Common Stock on a one-for-one basis after up to two years).
See "Principal Stockholders." Messrs. Mendik, Greenbaum, Delatour and Janes, all
of whom have indirect interests in Mendik/FW LLC, will serve on the initial
board of directors of the Company. In addition, Mr. Mendik will be Chairman of
the Board and Chief Executive Officer and Mr. Greenbaum will be President and
Chief Operating Officer of the Company. Accordingly, such persons will have
substantial influence on the Company, which influence may not be consistent with
the interests of other stockholders, and may in the future have a substantial
influence on the outcome of any matters submitted to the Company's stockholders
for approval if all or a significant number of their Units are exchanged for
shares of Common Stock. In addition, although there is no current agreement,
understanding or arrangement for these stockholders to act together on any
matter, these stockholders would be in a position to exercise significant
influence over the affairs of the Company if they were to act together in the
future.
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK. Prior to the completion of
the Offering, there has been no public market for the Common Stock and there can
be no assurance that an active trading market will develop or be sustained or
that shares of Common Stock will be resold at or above the assumed initial
public offering price. The initial public offering price of the Common Stock
will be determined by agreement among the Company and the underwriters and may
not be indicative of the market price for the Common Stock after the completion
of the Offering. See "Underwriting."
EFFECT ON COMMON STOCK PRICE OF SHARES AVAILABLE FOR FUTURE SALE. Sales of
a substantial number of shares of Common Stock, or the perception that such
sales could occur, could adversely affect prevailing market prices of the Common
Stock. Beginning two years after the completion of the Offering (or less in
certain circumstances), holders of Units may be able to sell shares of Common
Stock received upon exercise of their redemption right in the public market
pursuant to registration or available exemptions from registration. In addition,
FWM II, L.P. and QIB may be able to sell the shares of Common Stock they are
purchasing in the Concurrent Placements in the public market pursuant to
registration or available exemptions from registration beginning one year and
six months, respectively, after the completion of the Offering. Finally, a
substantial number of shares of Common Stock will, pursuant to employee benefit
plans, be issued or reserved for issuance from time to time, including shares of
Common Stock reserved for issuance pursuant to options issued concurrently with
the completion of the Offering, and these shares of Common Stock will be
available for sale in the public market from time to time pursuant to exemptions
from registration or upon registration. No prediction can be made about the
effect that future sales of shares of Common Stock will have on the market price
of the Common Stock.
EFFECT ON COMMON STOCK PRICE OF MARKET CONDITIONS. As with other publicly
traded equity securities, the value of the Common Stock will depend upon various
market conditions, which may change from time to time. Among the market
conditions that may affect the value of the Common Stock are the following:
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the extent to which a secondary market develops for the Common Stock following
the completion of the Offering; the extent of institutional investor interest in
the Company; the general reputation of REITs and the attractiveness of their
equity securities in comparison to other equity securities (including securities
issued by other real estate-based companies); the Company's financial
performance; and general stock and bond market conditions. Although the offering
price of the Common Stock will be determined by the Company in consultation with
the underwriters, there can be no assurance that the Common Stock will not trade
below the offering price following the completion of the offering.
EFFECT ON COMMON STOCK PRICE OF EARNINGS AND CASH DISTRIBUTIONS. It is
generally believed that the market value of the equity securities of a REIT is
based primarily upon the market's perception of the REIT's growth potential and
its current and potential future cash distributions, whether from operations,
sales or refinancings, and is secondarily based upon the value of the underlying
assets. For that reason, shares of Common Stock may trade at prices that are
higher or lower than the net asset value per share of Common Stock or per Unit.
To the extent the Company retains operating cash flow for investment purposes,
working capital reserves or other purposes, these retained funds, while
increasing the value of the Company's underlying assets, may not correspondingly
increase the market price of the Common Stock. The failure of the Company to
meet the market's expectation with regard to future earnings and cash
distributions likely would adversely affect the market price of the Common
Stock. If the market price of the Common Stock declined significantly, the
Company might breach certain covenants with respect to future debt obligations,
which breach might adversely affect the Company's liquidity and the Company's
ability to make future acquisitions.
EFFECT ON COMMON STOCK PRICE OF MARKET INTEREST RATES. One of the factors
that will influence the price of the Common Stock will be the dividend yield on
the Common Stock (as a percentage of the price of the Common Stock) relative to
market interest rates. Thus, an increase in market interest rates may lead
prospective purchasers of Common Stock to expect a higher dividend yield, which
would adversely affect the market price of the Common Stock.
EFFECT ON COMMON STOCK PRICE OF UNRELATED EVENTS. As with other publicly
traded equity securities, the value of the Common Stock will depend upon various
market conditions, including conditions unrelated to the New York metropolitan
economy, the Manhattan office market or real estate investments generally. Thus,
events which depress equity market prices may not have any effect on real estate
market values, and shares of Common Stock may trade at prices below the
Company's net asset value.
DEPENDENCE ON EXTERNAL SOURCES OF CAPITAL. In order to qualify as a REIT
under the Code, the Company generally is required each year to distribute at
least 95% of its net taxable income (excluding any net capital gain). See
"Federal Income Tax Considerations--Taxation of the Company-- Annual
Distribution Requirements." Because of these distribution requirements, it is
unlikely that the Company will be able to fund all future capital needs,
including capital needs in connection with acquisitions, from cash retained from
operations. As a result, to fund future capital needs, the Company likely will
have to rely on third-party sources of capital, which may or may not be
available on favorable terms or at all. (No proceeds of the Offering are
expected to be used to acquire interests in additional properties in the future.
See "Use of Proceeds.") The Company's access to third-party sources of capital
will depend upon a number of factors, including the market's perception of the
Company's growth potential and its current and potential future earnings and
cash distributions and the market price of the Common Stock. Moreover,
additional equity offerings may result in substantial dilution of stockholders'
interests in the Company, and additional debt financing may substantially
increase the Company's leverage. See "Policies with Respect to Certain
Activities--Financing Policies."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers,
particularly Messrs. Mendik and Greenbaum. The loss of their services could have
a material adverse effect on the operations of the
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Company. Prior to the completion of the Offering, each of Messrs. Mendik and
Greenbaum will enter into an employment agreement with the Company. See
"Management--Employment and Severance Agreements."
UNINSURED LOSS
The Company initially will carry comprehensive liability, fire, flood,
extended coverage and rental loss (for rental losses extending up to 12 months)
with respect to its properties with policy specifications and insured limits
customarily carried for similar properties. Certain types of losses (such as
from wars, environmental hazards and employee discrimination claims), however,
may be either uninsurable or not economically insurable. Should an uninsured
loss or a loss in excess of insured limits occur, the Company could lose both
its capital invested in, and anticipated profits from, one or more of its
properties, and may continue to be obligated on the mortgage indebtedness or
other obligations related to the property. Any such loss may adversely affect
the business of the Company and its financial condition and results of
operations.
It is anticipated that new owner's title insurance policies will not be
obtained for any of the Properties in connection with the Formation
Transactions. Each of the Properties (other than possibly Eleven Penn Plaza) is
covered by existing title insurance policies insuring the interests of the
Property-owning entities. (It is unclear whether an existing title insurance
policy purchased with respect to Eleven Penn Plaza will afford coverage to the
Company.) Further, each title insurance policy covering a Property (other than
1740 Broadway and Two Park Avenue) is for an amount which is less than the
current value of the Property. In the event of a loss with respect to a Property
relating to a title defect that is in excess of the amount of such title
insurance policy, the Company could lose both its capital invested in and
anticipated profits from such property.
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THE COMPANY
The Company has been newly formed to continue and expand the real estate
business of the Mendik Group, which is engaged in owning, managing, leasing,
acquiring, renovating and redeveloping Manhattan office properties. Upon the
completion of the Offering, the Company will own interests in seven Class A
office Properties located in midtown Manhattan which contain approximately 5.5
million rentable square feet and will manage 16 properties (including the
Properties) located in the New York metropolitan area which contain
approximately 10.0 million rentable square feet. The Company will be a
fully-integrated, self-administered and self-managed real estate company and
will be a REIT for Federal income tax purposes.
Manhattan is the largest office market in the United States, and contains
more rentable square feet than the next six largest U.S. central business
district office markets combined. In addition, Manhattan is the headquarters to
many of the leading corporations and service firms in the U.S., including more
Fortune 500 companies (47) than any other U.S. city, three of the four largest
U.S. commercial banks (over 325 international banks have offices in New York
City, according to the Conference of State Banking Seminars), and 23 of the 25
largest U.S. securities firms. Upon completion of the Offering, the Company will
be one of the largest owners and operators of Manhattan office properties and
expects to be the first publicly traded REIT formed primarily to own, operate
and acquire Manhattan office properties.
The Company intends to achieve growth through acquisitions and focused
operating strategies, including proactive leasing efforts. The Company believes
that opportunities exist to acquire interests in office properties in Manhattan
on attractive terms, including at prices significantly below replacement cost.
Notwithstanding the current favorable supply/demand fundamentals in the
Manhattan office market, the Company believes that, in order to justify new
construction in this market, asking base rents generally would have to increase
at least 40% over current asking rents for Class A office space in midtown
Manhattan (as estimated by Cushman & Wakefield), not taking into account any tax
benefits that may apply. The Company believes that its experienced management
team and its access to capital, as well as its ability to engage in transactions
that offer sellers deferral of income taxes that otherwise would be due as a
result of a cash sale, will provide it with significant advantages in pursuing
acquisitions of office properties.
In addition, the Company will market aggressively for re-lease a significant
block of space (approximately 430,000 square feet) which recently has become
available at Two Penn Plaza following the expiration of a lease with a single
tenant. In that regard, the Company recently has leased approximately 89,000
square feet of this space and has entered into a non-binding letter of intent
with a single prospective tenant with respect to an additional approximately
180,000 square feet of this space, although there can be no assurance that this
letter of intent will result in an executed lease. See "The Properties--Two Penn
Plaza." By re-leasing this block of space, the Company expects to increase the
percent leased at the Properties from 89% as of December 31, 1996 (excluding 570
Lexington Avenue, which was acquired by the Company in late 1994 and in which
the Company will own a 5.6% interest and which currently is being leased
following an extensive redevelopment) to a level more comparable to the
historical percent leased at the Properties, which has averaged in excess of 94%
over the past five calendar years (excluding 570 Lexington Avenue).
Bernard H. Mendik, the Chairman and Chief Executive Officer of the Company,
has been involved in the real estate business for 40 years. Messrs. Mendik,
Greenbaum, the President and Chief Operating Officer of the Company, and the
other five executive officers of the Company have been actively involved in the
Manhattan commercial office business for an average of over 20 years, including
an average of over 17 years with the Mendik Group. The extensive experience of
the Company's management provides the Company with a substantial base of
information concerning Manhattan real estate dynamics, including submarket rent
levels, operating, renovation and redevelopment costs, regulatory processes and
other
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factors relevant to the acquisition, ownership and operation of Manhattan office
properties. Upon the completion of the Offering, approximately % of the equity
of the Company will be beneficially owned by officers and directors of the
Company and certain other affiliated parties.
The Company initially intends to employ approximately 50 persons. Of such 50
employees, approximately 40 will be "home office" executive and administrative
personnel and approximately 10 will be on-site management and administrative
personnel. Immediately following the Offering and the Formation Transactions,
the Company currently expects that none of its employees will be represented by
a labor union.
The Company is a Maryland corporation whose predecessor was incorporated in
December 1995. The Company's executive offices are located at 330 Madison
Avenue, New York, New York 10017 and its telephone number is (212) 557-1100.
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BUSINESS AND GROWTH STRATEGIES
BUSINESS STRATEGY
The Company's primary business objective is to maximize stockholder value by
enhancing the value of the Company's assets, maximizing cash flow from
operations and growing the Company's asset base. The Company intends to achieve
this objective primarily by pursuing the following strategies:
- PROVIDING A HIGH-QUALITY OFFICE ENVIRONMENT. The Company intends to
continue to provide tenants at its properties (including any newly
acquired properties) with a high quality office environment in terms of
building systems, public spaces and tenant services and, in so doing, to
retain existing tenants, attract new tenants and increase rental revenues,
while achieving operating cost efficiencies attributable to the size and
geographic concentration of its portfolio.
- ACQUIRING INTERESTS IN ADDITIONAL OFFICE PROPERTIES. The Company intends
to acquire direct or indirect interests in additional office properties,
primarily in midtown Manhattan, at attractive equity returns, thereby
taking advantage of the favorable supply/demand fundamentals that
currently exist in the midtown Manhattan office market.
OPERATING STRATEGY
The Company believes that the Mendik Group's commitment to and reputation
for providing a high-quality office environment in terms of building systems,
public spaces and tenant services have encouraged tenants to renew their leases,
attracted new tenants to its properties and supported competitive rent levels.
The Company intends to provide a high-quality office environment to its tenants
by continuing the following operating strategies:
MARKETING AND LEASING. The Company intends to utilize its market position
and relationships with a broad array of brokers and tenants to continue its
proactive marketing and leasing programs in order to maintain the historically
high rate of occupancy achieved by the Properties. Where appropriate, the
Company intends to continue to renew leases early and otherwise aggressively
manage the tenant base of its properties by seeking, for example, to buy out or
take back existing leases at opportune times, relocate tenants to create large
blocks of space and otherwise coordinate and plan appropriate timing of lease
expirations. Including leases renewed prior to expiration, the Mendik Group has
re-leased approximately 58% of the space at the Properties since January 1993,
with an average lease term of approximately 11 years. The Company believes that,
in light of the relatively long-term nature of leases in the Manhattan office
market, this level of leasing activity is above average as compared to that
achieved by other owners of Manhattan office properties during such period. As a
result of the Mendik Group's re-leasing efforts, leases covering approximately
29% of the leased space at the Properties (excluding 570 Lexington Avenue, in
which the Company will own a 5.6% interest) expire after 2007, and in no single
year are leases covering more than 10% of the leased space at the Properties
(excluding 570 Lexington Avenue) scheduled to expire (in each case, assuming no
tenants exercise renewal or cancellation options and no tenant bankruptcies or
other tenant defaults).
RENOVATION AND REDEVELOPMENT. The Mendik Group has committed considerable
resources to maintaining and upgrading the appearance, operations and mechanical
systems of its properties. The Company believes that the commitment of such
resources generally has increased the income, long-term value and market appeal
of the Properties.
Pursuant to a recently completed renovation program which began in 1988,
approximately $79 million was expended at the Properties for building
improvements and equipment upgrades (excluding the costs of tenant improvements
and the redevelopment costs associated with 570 Lexington Avenue), including
installation of state-of-the-art steam absorbers to provide air conditioning,
elevator computerization and refurbishment, lobby and facade renovation,
security systems upgrades, sprinkler system installation, asbestos removal,
window replacement and mechanical and electrical systems upgrades. As a result
of this
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recently completed renovation program, the Company believes that the Properties
have state-of-the-art infrastructure and are well positioned to compete with
other Class A office properties in their respective submarkets, and relatively
few capital projects remain to be undertaken at the Properties at this time. For
each of 1997 and 1998, the Company's pro rata share (based on its ownership
interest) of the projected cost of building improvements and equipment upgrades
(excluding the costs of tenant improvements) at the Properties is approximately
$690,000 (or approximately $0.20 per square foot). The Company expects such cost
to be paid from existing cash reserves or net cash provided by operations. The
Company similarly will commit resources to any newly acquired properties if
appropriate to reposition such properties as first class buildings.
TENANT RELATIONSHIPS. The Company will continue the Mendik Group's approach
to identifying and responding quickly to tenant requirements. The Company will
maintain personal contacts with its tenants and continue a program of regular
tenant visits. In addition, the Company will continue the Mendik Group's
approach of rotating its building managers through each of its properties in
order to encourage a critical review of each property's facilities and tenant
services. The Company also will continue the Mendik Group's approach of
encouraging each of its employees to make suggestions relating to the
enhancement of a building's appearance or its efficiency.
IN-HOUSE PROPERTY SERVICES CAPABILITIES. The Company will provide a
high-quality office environment to tenants and, as a result of the size and
geographic concentration of its portfolio, expects to achieve operating cost
efficiencies through its ability to maintain substantial in-house expertise. The
Company's experienced staff has extensive property management experience and
specific knowledge of a wide variety of Manhattan leasing and marketing
practices, office building systems and equipment, and financing, accounting and
computer systems. The Company's in-house property services capabilities, coupled
with the cleaning (and related) services and security services to be provided by
an entity affiliated with the Mendik Group with respect to the Properties, will
encompass many facets of physical care and upkeep of the Company's properties.
ACQUISITION STRATEGY
The Company will continue the Mendik Group's strategy of pursuing growth by
owning, operating and acquiring office properties. The Company's experienced
management team will utilize its extensive knowledge of the Manhattan office
market to identify and evaluate acquisition opportunities. Upon completion of
the Offering, the Company will be one of the largest owners and operators of
Manhattan office properties and expects to be the first publicly traded REIT
formed primarily to own, operate and acquire Manhattan office properties.
The Company believes that current supply/demand fundamentals in the
Manhattan office market provide an attractive environment for owning, operating
and acquiring Class A office properties. The Company believes that demand for
Class A office space in the midtown Manhattan office market has increased
recently because of consistent net private sector job growth, a strengthening
New York metropolitan economy and an improving business environment and quality
of life offered by New York City. At the same time, the supply of Class A office
space in midtown Manhattan has remained virtually unchanged since 1992, and the
Company believes that supply is unlikely to increase substantially over the near
term primarily because there are relatively few sites available for
construction, the lead time required for construction typically exceeds three
years and new construction generally is not economically feasible given current
market rental rates. As a result of increasing demand for Class A office space
in midtown Manhattan and limited new supply of such space, vacancy rates in
midtown Manhattan have declined in each of the last five years for office
properties in midtown Manhattan have increased. See "New York Economy and
Manhattan Office Market."
The Company believes that opportunities exist to acquire interests in
Manhattan office properties on attractive terms, including at prices
significantly below replacement cost. The Company believes that its
30
<PAGE>
experienced management team and its access to capital, as well as its ability to
use Units as consideration for acquisitions designed to afford sellers continued
deferral of income taxes that otherwise would be due as a result of a cash sale,
will provide it with significant advantages in pursuing acquisitions of office
properties. In addition, the Company may, under certain circumstances, be able
to structure acquisitions in a manner that qualifies for reduced rates under the
New York State and New York City transfer tax laws, which reduced rates
currently are applicable only to certain REIT transactions through October 1999.
The Company intends to expand its portfolio of properties by acquiring
interests in additional office properties, primarily in midtown Manhattan,
although the Company currently is not a party to any agreement or understanding
relating to the acquisition of any additional properties. In evaluating
acquisitions of existing buildings, the Company will consider the building's
location, the quality and condition of the building's structure, design,
materials and construction, the building's market potential, operating and
maintenance costs, occupancy rate, lease expirations, capital structure and cash
flow, and other relevant factors. The Company will seek properties for
acquisition that it believes are under-performing under current ownership and
management (or that are over-leveraged), and that may permit the Company to
realize improved performance through application of its management, renovation
and redevelopment capabilities and its access to capital. There can, however, be
no assurance that the Company will acquire any additional office properties. See
"Risk Factors--Acquisition Risks" and "--Other Risks of Ownership of Common
Stock--Dependence on External Sources of Capital."
In pursuing acquisition opportunities, the Company believes that it will
have certain competitive advantages, including the following:
EXPERIENCED MANAGEMENT TEAM WITH EXTENSIVE LOCAL MARKET KNOWLEDGE. Messrs.
Mendik and Greenbaum and the other five executive officers of the Company have
been actively involved in owning, managing, leasing, acquiring, renovating and
redeveloping Manhattan real estate for an average of over 20 years, including an
average of over 17 years with the Mendik Group. The Company intends to continue
to rely on its experienced personnel to identify and evaluate acquisition
opportunities.
The Company has extensive knowledge of the Manhattan office market as a
result of its experience in acquiring, owning and operating major office
properties primarily in Manhattan (and, to a lesser extent, in certain other
parts of the New York metropolitan area) for 40 years, which experience provides
the Company with a substantial base of information concerning submarket rent
levels, operating, renovation and redevelopment costs, regulatory processes and
other factors relevant to the acquisition of Manhattan office properties. This
experience also should be beneficial in pursuing acquisition transactions
involving Manhattan office properties, which the Company believes can be more
complicated in light of the large size of Manhattan office properties and other
factors unique to the Manhattan office market.
ABILITY TO EFFECT UNIT TRANSACTIONS. The Company believes that its status
as a publicly traded UPREIT will enhance its ability to acquire office
properties by providing the Company with the ability to structure transactions
using Units as consideration in order to provide sellers with increased
liquidity and diversification, while affording sellers substantial deferral of
income taxes that otherwise would be due as a result of a cash sale.
Accordingly, the Company's ability to offer Units to sellers may create
acquisition opportunities not otherwise available and may provide the Company
with an advantage over potential competitors that are unable to offer
tax-efficient consideration.
In addition, the Mendik Group has a reputation for acquiring Manhattan
office properties and repositioning them as attractive, well-managed and
competitive properties characterized by a high level of tenant satisfaction. The
Company believes that this reputation may enhance its ability to acquire
additional properties in exchange for a continuing equity interest in the
Company (through ownership of Units).
ACCESS TO CAPITAL MARKETS. The Company believes that, as a result of its
size and status as a public company, it should have better access to capital in
the global capital markets than generally is available to private real estate
companies. Access to substantial capital on attractive terms is important to
completing
31
<PAGE>
acquisitions in the midtown Manhattan office market because properties in this
market typically are larger and, as a result, property values (on an absolute
basis) are higher than in other U.S. office markets. To the extent that the
Company relies on consideration other than Units to acquire additional
properties in the future, access to capital generally will be necessary for the
Company to complete such acquisitions because, in order to qualify as a REIT,
the Company generally is required each year to distribute at least 95% of its
net taxable income. See "Federal Income Tax Considerations--Taxation of the
Company--Annual Distribution Requirements." The Company intends to deploy
substantial capital by pursuing attractive acquisition opportunities.
Because of the large size of typical acquisitions in the Manhattan office
market, the Company expects to finance cash acquisitions through single-asset
financing and, to a lesser extent, a revolving line of credit (the "Line of
Credit") that the Company expects to obtain shortly after completion of the
Offering. There can be no assurance that such financings will be obtained. The
1740 Broadway Property will be unencumbered by indebtedness after the completion
of the Offering and the Formation Transactions and, therefore, the Company
expects that this Property will be mortgaged as security in connection with the
Line of Credit, although there can be no assurance that the Line of Credit will
be obtained.
FAVORABLE TRANSFER TAX TREATMENT. The Company may, under certain
circumstances, be able to structure acquisitions in a manner that qualifies for
reduced rates under recent amendments to the New York State and New York City
transfer tax laws, which reduced rates are applicable only to certain REIT
transactions through October 1999. Under these amendments, the rates were
reduced 50% from 3.025% to 1.5125%, in the aggregate.
FIRST PUBLICLY TRADED REIT FORMED PRIMARILY TO FOCUS ON MANHATTAN OFFICE
MARKET. Upon completion of the Offering, the Company will be one of the largest
owners and operators of Manhattan office properties and expects to be the first
publicly traded REIT formed primarily to own, operate and acquire Manhattan
office properties. The Company believes that this status initially will be a
significant competitive advantage in pursuing acquisitions using Units as
consideration.
USE OF PROCEEDS
The net cash proceeds to the Company from the Offering, after deducting the
estimated underwriting discount and estimated Offering expenses of $ , are
estimated to be approximately $ million (approximately $ million if the
Underwriters' overallotment option is exercised in full), based on an assumed
initial public offering price of $22.00 per share. The net cash proceeds to the
Company from the Concurrent Placements are expected to be approximately $39.2
million, based on an assumed initial public offering price of $22.00 per share.
In addition, the Company expects to acquire approximately $ million of cash
reserves from the Property-owning entities in connection with the Formation
Transactions.
The net cash proceeds of the Offering and the Concurrent Placements will be
used by the Company as follows: (i) approximately $97.5 million for prepayment
of certain mortgage indebtedness secured by the Properties, including
approximately $6.6 million in interest rate swap agreement termination costs and
other financing fees and expenses; (ii) approximately $91.3 million for payments
to certain participants in the Formation Transactions for their direct or
indirect interests in the Properties; (iii) approximately $ million to fund a
portion of a $38 million initial reserve for tenant improvement costs and
leasing commissions expected to be incurred in connection with the re-leasing of
space at the Properties, as well as for interest and operating costs relating to
vacant space at the Properties and for general working capital needs; (iv)
approximately $ million to pay certain expenses incurred in connection with
the Formation Transactions; and (v) approximately $2.2 million for payment to
Mendik/FW LLC as partial consideration for the acquisition of the Mendik Group's
management and leasing business, which cash corresponds to the Mendik Group's
income tax obligations associated with such transfer. The remaining $ million
of the Company's initial cash reserve will be funded from approximately $16.8
million of cash the Company expects to acquire from the Property-owning entities
in connection with the Formation Transactions.
32
<PAGE>
If the Underwriters' overallotment option to purchase 1,372,500 shares of
Common Stock is exercised in full, the Company expects to use the additional net
cash proceeds (which will be approximately $28.1 million, based on the assumed
initial public offering price) to acquire interests in additional office
properties and for general corporate purposes. Currently, the Company is not a
party to any agreement or understanding relating to the acquisition of any
additional properties.
Pending application of the net proceeds of the Offering, the Company will
invest such portion of the net proceeds in interest-bearing accounts and/or
short-term, interest-bearing securities which are consistent with the Company's
intention to qualify for taxation as a REIT.
Upon the completion of the Offering, third-party mortgage indebtedness
secured by two of the Properties will be repaid. Approximately $74.1 million of
the net proceeds of the Offering and the Concurrent Placements will be used to
repay mortgage indebtedness secured by Two Penn Plaza. This indebtedness is
scheduled to mature on May 10, 2000 and, as of December 31, 1996, its weighted
average interest rate was 7.41%. In addition, approximately $16.8 million of the
net proceeds of the Offering and the Concurrent Placements will be used to repay
mortgage indebtedness secured by 866 United Nations Plaza. This indebtedness is
scheduled to mature on December 31, 1998 (although the borrower has the right to
extend the maturity date until December 31, 2000 if certain conditions are met)
and, as of December 31, 1996, its weighted average interest rate was 7.60%.
33
<PAGE>
DISTRIBUTIONS
Subsequent to the completion of the Offering, the Company intends to make
regular quarterly distributions to the holders of its Common Stock. The initial
distribution, covering a partial quarter commencing on the date of completion of
the Offering and ending on March 31, 1997, is expected to be $ per share,
which represents a pro rata distribution based on a full quarterly distribution
of $ per share and an annual distribution of $ per share (or an annual
distribution rate of approximately %, based on an assumed initial public
offering price of $22.00). The Company does not intend to reduce the expected
distribution per share if the Underwriters' overallotment option is exercised.
The following discussion and the information set forth in the table and
footnotes below should be read in conjunction with the financial statements and
notes thereto, the pro forma financial information and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" included elsewhere in this
Prospectus.
The Company intends initially to distribute annually approximately % of
estimated Cash Available for Distribution. The estimate of Cash Available for
Distribution for the 12 months ending September 30, 1997 is based upon pro forma
Funds from Operations for the 12 months ended September 30, 1996, adjusted (i)
for certain known events and/or contractual commitments that either have
occurred or will occur subsequent to September 30, 1996 or during the 12 months
ended September 30, 1996, but were not effective for the full 12 months, and
(ii) for certain non-GAAP adjustments consisting of (A) revisions to historical
rent estimates from a GAAP basis to amounts currently being paid or due from
tenants, (B) pro forma amortization of financing costs, and (C) an estimate of
amounts anticipated for recurring tenant improvements, leasing commissions and
capital expenditures. No effect was given to any changes in working capital
resulting from changes in current assets and current liabilities (which changes
are not anticipated to be material) or the amount of cash estimated to be used
for (i) investing activities for acquisition and other activities (other than a
reserve for capital expenditures, tenant improvements for renewing space and
working capital) and (ii) financing activities. The estimate of Cash Available
for Distribution is being made solely for the purpose of setting the initial
distribution and is not intended to be a projection or forecast of the Company's
results of operations or its liquidity, nor is the methodology upon which such
adjustments were made necessarily intended to be a basis for determining future
distributions. Future distributions by the Company will be at the discretion of
the Board of Directors. There can be no assurance that any distributions will be
made or that the estimated level of distributions will be maintained by the
Company.
The Company anticipates that its distributions will exceed earnings and
profits for Federal income tax reporting purposes due to non-cash expenses,
primarily depreciation and amortization, to be incurred by the Company.
Therefore, approximately 55% (or $0.92 per share) of the distributions
anticipated to be paid by the Company for the 12-month period following the
completion of the Offering will represent a return of capital for Federal income
tax purposes and in such event will not be subject to Federal income tax under
current law to the extent such distributions do not exceed a stockholder's basis
in his Common Stock. The nontaxable distributions will reduce the stockholder's
tax basis in the Common Stock and, therefore, the gain (or loss) recognized on
the sale of such Common Stock or upon liquidation of the Company will be
increased (or decreased) accordingly. The percentage of stockholder
distributions that represents a nontaxable return of capital may vary
substantially from year to year.
The Code generally requires that a REIT distribute annually at least 95% of
its net taxable income. See "Federal Income Tax Consequences--Taxation of the
Company." The amount of distributions on an annual basis necessary to maintain
the Company's REIT status based on pro forma taxable income of the Company for
the 12 months ended September 30, 1996, as adjusted for certain items in the
following table, would have been approximately $30.7 million. The estimated Cash
Available for Distribution is anticipated to be in excess of the annual
distribution requirements applicable to REITs under the Code. Under certain
circumstances, the Company may be required to make distributions in excess of
Cash Available for Distribution in order to meet such distribution requirements.
For a discussion of the tax treatment of
34
<PAGE>
distributions to holders of Common Stock, see "Federal Income Tax
Consequences--Taxation of Shareholders."
The Company believes that its estimate of Cash Available for Distribution
constitutes a reasonable basis for setting the initial distribution, and the
Company intends to maintain its initial distribution rate for the 12-month
period following the completion of the Offering unless actual results of
operations, economic conditions or other factors differ materially from the
assumptions used in its estimate. The Company's actual results of operations
will be affected by a number of factors, including the revenue received from its
properties, the operating expenses of the Company, interest expense, the ability
of tenants of the Company's properties to meet their financial obligations and
unanticipated capital expenditures. Variations in the net proceeds from the
Offering and the Concurrent Placements as a result of a change in the initial
public offering price or the exercise of the Underwriters' overallotment option
may affect Cash Available for Distribution, the payout ratio based on Cash
Available for Distribution and available reserves. No assurance can be given
that the Company's estimate will prove accurate. Actual results may vary
substantially from the estimate.
The following table describes the calculation of pro forma Funds from
Operations for the 12 months ended September 30, 1996 and the adjustments to pro
forma Funds from Operations for the 12 months ended September 30, 1996 in
estimating initial Cash Available for Distribution for the 12 months ending
September 30, 1997:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
-----------
<S> <C> <C>
Pro forma net income before minority interest for the year ended December 31, 1995.................... $ 32,471
Pro forma net income before minority interest for the nine months ended
September 30, 1995.................................................................................. (22,736)
Pro forma net income before minority interest for the nine months ended
September 30, 1996.................................................................................. 25,327
-----------
Pro forma net income before minority interest for the 12 months ended September 30, 1996.............. 35,062
Plus: Pro forma real estate depreciation for the 12 months ended September 30, 1996 (1)............. 12,106
Plus: Pro forma amortization (excluding financing costs) for the 12 months ended
September 30, 1996 (2)............................................................................ 2,024
-----------
Pro forma Funds from Operations for the 12 months ended September 30, 1996 (3)........................ 49,192
Adjustments:
Net increases in contractual rental income (4)...................................................... 4,767
Provision for lease expirations, assuming no renewals (5)........................................... (16,063)
Net effect of tenant relocation (6)................................................................. 187
-----------
Estimated adjusted pro forma Funds from Operations for the 12 months ending
September 30, 1997.................................................................................. 38,083
-----------
Net effect of straight-line rents (7)............................................................... (1,787)
Pro forma amortization of financing costs for the 12 months ended
September 30, 1996 (8)............................................................................ 330
Estimated recurring capitalized tenant improvements and leasing commissions (9)..................... (5,212)
Estimated recurring capital expenditures (10)....................................................... (693)
-----------
Estimated Cash Available for Distribution for the 12 months ending
September 30, 1997....................................................................... $ 30,721
-----------
-----------
The Company's share of estimated Cash Available for Distribution (11).................... $
---------
---------
Minority interest's share of estimated Cash Available for Distribution................... $
---------
---------
Total estimated initial annual cash distributions.......................................... $
-----------
-----------
Estimated initial annual distribution per share (12)..................................... $
-----------
-----------
Payout ratio based on estimated Cash Available for Distribution (13)..................... %
-----------
-----------
</TABLE>
35
<PAGE>
- ------------------------
(1) Pro forma real estate depreciation for the year ended December 31, 1995 of
$12,398 minus pro forma real estate depreciation for the nine months ended
September 30, 1995 of $9,066 plus pro forma real estate depreciation for the
nine months ended September 30, 1996 of $8,774.
(2) Pro forma amortization (excluding financing costs) for the year ended
December 31, 1995 of $2,032 minus pro forma amortization (excluding
financing costs) for the nine months ended September 30, 1995 of $1,517 plus
pro forma amortization (excluding financing costs) for the nine months ended
September 30, 1996 of $1,509.
(3) The Company generally considers Funds from Operations an appropriate measure
of liquidity of an equity REIT because industry analysts have accepted it as
a performance measure of equity REITs. "Funds from Operations" as defined by
NAREIT means net income (computed in accordance with GAAP) excluding gains
(or losses) from debt restructuring and sales of property, plus depreciation
and amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. The Company's Funds from
Operations are not comparable to Funds from Operations reported by other
REITs that do not define the term using the current NAREIT definition or
that interpret the current NAREIT definition differently than does the
Company. The Company believes that in order to facilitate a clear
understanding of the combined historical operating results of the Mendik
Predecessors and the Company, Funds from Operations should be examined in
conjunction with net income as presented in the combined financial
statements and information included elsewhere in this Prospectus. Funds from
Operations does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income as an indication of the Company's performance or to cash flows as a
measure of liquidity or ability to make distributions.
(4) Represents the net increases in contractual rental income from (i) new
leases and renewals that were not in effect for the entire 12-month period
ended September 30, 1996 of $1,893 and (ii) new leases and renewals that
went into effect between October 1, 1996 and January 31, 1997 of $2,874.
(5) Assumes no lease renewals or new leases (other than month-to-month leases)
for leases expiring after September 30, 1996 unless a new or renewal lease
has been entered into by January 31, 1997. Of the total decrease of $16,063,
a reduction of $11,893 is the result of a $13,062 decrease in contractual
rent from one tenant that has vacated space at Two Penn Plaza, net of
expense reductions of $1,169. The remaining $4,170 decrease represents the
loss in net rental income assuming all leases of space expiring between
October 1, 1996 and September 30, 1997 for which no renewals or new leases
have been entered into by January 31, 1997 expire in accordance with their
terms and space covered by such expiring leases is not re-leased; the
decrease is partially offset by a net increase of $176 of rental income from
tenants on month-to-month leases which are assumed to continue throughout
the period.
(6) As described in "The Properties--Eleven Penn Plaza," one tenant at Eleven
Penn Plaza consolidated its operations by relocating to another Property as
part of a corporate reorganization. The tenant is required to make certain
payments to the Company through the remainder of the original lease term
expiring in June 2001, including monthly rental payments. Under GAAP, the
Company is required to record the present value of future rental payments as
rental income at the time occupancy is surrendered rather than recording
rental income as the rental payments are required to be made. Accordingly,
pro forma Funds from Operations for the 12 months ended September 30, 1996
includes income from monthly rental payments and the present value of future
rental payments for one floor surrendered in October 1995 totaling $4,752.
The surrender of the remaining three floors in January 1997 will result in
rental and interest income of $8,170 for the 12 months ending September 30,
1997 in accordance with GAAP, or an increase of $3,418 over the prior 12
months' income. During this same period, the Company will receive rental
payments of only $4,939, consisting of aggregate
36
<PAGE>
monthly rental payments of $3,091 and a lump sum payment of $1,848. In order
to reflect the effect of this differential, pro forma Funds from Operations
for the 12 months ending September 30, 1997 has been reduced by $3,231. This
results in a net adjustment for tenant relocation of $187. From 1998 through
June 2001, the Company will receive aggregate monthly rental payments of
$3,240 on an annual basis, the present value of which already has been
included in rental income for the 12-month period ended September 30, 1996
(or will be included in rental income for the 12 months ending September 30,
1997) in accordance with GAAP and has been adjusted out of Funds from
Operations for such years as described above. Accordingly, in reporting its
Funds from Operations in 1998 through 2001, the Company will make an
adjustment of $3,240 each year ($1,619 for 2001).
(7) Represents the effect of adjusting straight-line rental revenue included in
pro forma net income from the straight-line accrual basis to amounts
currently being paid or due from tenants.
(8) Pro forma amortization of financing costs for the year ended December 31,
1995 of $353 minus pro forma amortization of financing costs for the nine
months ended September 30, 1995 of $265 plus pro forma amortization of
financing costs for the nine months ended September 30, 1996 of $242.
(Financing costs for these periods is $199,106, which is comprised of
$113,000 of mortgage indebtedness secured by the Properties in which the
Company will have a 100% interest and $86,106 which represents the Company's
pro rata share of mortgage indebtedness secured by the Properties in which
the Company will own a partial interest. See "The Properties--Mortgage
Indebtedness."
(9) Reflects recurring tenant improvements and leasing commissions anticipated
for the 12 months ending September 30, 1997 based on the weighted average
tenant improvements and leasing commissions expenditures for renewed and
retenanted space at the Properties incurred during 1993, 1994, 1995 and the
nine months ended September 30, 1996, multiplied by the average annual
square feet of leased space for which leases expire during the years ending
December 31, 1997 through December 31, 2001. The weighted average annual per
square foot cost of tenant improvements and leasing commissions expenditures
is presented below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ------------- WEIGHTED
1993 1994 1995 1996 AVERAGE
--------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Tenant improvements per square foot........... $ 8.22 $ 25.13 $ 14.46 $ 19.90 $15.97
Leasing commissions per square foot........... 3.72 5.54 4.64 8.25 5.49
--------- --------- --------- ------ -----------
Total tenant improvements and leasing
commissions................................. $ 11.94 $ 30.67 $ 19.10 $ 28.15 $21.46
--------- --------- --------- ------ -----------
--------- --------- --------- ------ -----------
Average annual square feet for which leases expire during the years ending December 31, 1997
through December 31, 2001................................................................... x 242,891(a)
-----------
Total estimated annual recurring capitalized tenant improvements and leasing commissions......
$5,212
-----------
-----------
</TABLE>
----------------------------
(a) The average annual square footage for which leases expire during the
years ending December 31, 1997 through December 31, 2001 includes 42,674
square feet of underground parking garage space at 866 United Nations
Plaza which is 100% leased to a single tenant under a lease which expires
in December 2001.
Excludes tenant improvement and leasing commission costs relating to
approximately 401,000 feet of vacant space resulting from the expiration on
October 31, 1996 of a lease for approximately 430,000 square feet with a
single tenant at Two Penn Plaza, and the re-leasing of approximately 60,000
square feet at Two Penn Plaza on an "as is" basis. See "The Properties--Two
Penn Plaza." The Company expects to establish an initial reserve of
approximately $38 million for tenant improvement costs and
37
<PAGE>
leasing commissions expected to be incurred in connection with the
re-leasing of space at the Properties, as well as for interest and operating
costs relating to vacant space and for general working capital needs.
Approximately $30 million of this reserve will be escrowed with the lender
at Two Penn Plaza to provide for the funding of these expenses at Two Penn
Plaza.
(10) As a result of a recently completed renovation program which began in 1988,
the Company has relatively few capital projects remaining to be undertaken
at this time. For the 12 months ending September 30, 1997, the estimated
cost of recurring building improvements and equipment upgrades and
replacements (excluding costs of tenant improvements) at the Properties is
approximately $693 and is based upon an annual estimated cost of $0.20 per
square foot (based on the Company's pro rata share of the total rentable
square feet at the Properties).
(11) The Company's share of estimated Cash Available for Distribution and
estimated initial annual cash distributions to stockholders of the Company
is based on its approximate % aggregate partnership interest in the
Operating Partnership.
(12) Based on a total of 11,194,318 shares of Common Stock to be outstanding
after the Offering (9,150,000 shares to be sold in the Offering, assuming no
exercise of the Underwriters' over-allotment option, 1,804,545 shares to be
sold in the Concurrent Placements and 239,773 additional shares to be issued
in the Formation Transactions).
(13) Calculated as estimated initial annual cash distributions to stockholders
of the Company divided by the Company's share of estimated Cash Available
for Distribution for the 12 months ending September 30, 1997. The payout
ratio based on estimated adjusted pro forma Funds from Operations is %.
The Company expects that neither it nor any Property-owning entity will,
until the completion of the Offering and the Formation Transactions, close
the refinancing transactions with lenders with respect to the refinancing of
mortgage indebtedness secured by any of the Properties or the interest rates
applicable to any such mortgage indebtedness. See "The Properties--Mortgage
Indebtedness" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation-- Liquidity and Capital Resources." The
Company therefore may be adversely affected by increases in market interest
rates prior to the completion of the Offering and the Formation
Transactions. The Company anticipates that every 0.10% increase in the
applicable market interest rate will result in an increase in the Company's
pro rata Share of interest payments of approximately $ on an annualized
basis, and a resulting increase in the payout ratio based on estimated Cash
Available for Distribution of %. After the completion of the Offering and
the Formation Transactions, the Company expects that mortgage indebtedness
secured by Two Park Avenue will have a floating interest rate. If the
Company does not engage in a transaction to fix this rate, the Company
anticipates that every 0.10% increase in the applicable market interest rate
will result in an increase in interest payments of approximately
$ on an annualized basis.
38
<PAGE>
CAPITALIZATION
The following table sets forth the combined historical capitalization of the
Mendik Predecessors as of September 30, 1996 and as adjusted to give effect to
the Formation Transactions, the Offering, the Concurrent Placements and use of
the net proceeds from the Offering and the Concurrent Placements as set forth
under "Use of Proceeds." The information set forth in the table should be read
in conjunction with the financial statements and notes thereto, the pro forma
financial information and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
<S> <C> <C>
COMBINED
HISTORICAL AS ADJUSTED
---------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Mortgage debt (1)........................................................................ $ 208,879 $ 113,000
Minority interests in Operating Partnership.............................................. N/A 32,367
Stockholders' equity:
Preferred Stock, $.01 par value; 10,000,000 shares authorized; none issued and
outstanding.......................................................................... -- --
Common Stock, $.01 par value; 90,000,000 shares authorized; 11,194,318 issued and
outstanding (2)...................................................................... -- 112
Additional paid-in capital............................................................. -- 53,125
Owners' equity......................................................................... 45,054 --
---------- -----------
Total owners'/stockholders' equity................................................... 45,054 53,237
---------- -----------
Total capitalization............................................................... $ 253,933 $ 198,604
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Mortgage debt excludes the Mendik Predecessors' and the Company's pro rata
share of the mortgage debt secured by three Properties in which the Company
will own non-controlling interests (Eleven Penn Plaza, Two Park Avenue and
330 Madison Avenue), which Properties will be accounted for under the equity
method. Including the Company's pro rata share of such indebtedness, the
Company's mortgage debt, as adjusted, would be approximately $198 million as
of September 30, 1996. See "The Properties--Mortgage Indebtedness."
(2) Includes shares of Common Stock to be issued in the Offering and the
Concurrent Placements. Does not include (i) 6,805,682 shares of Common Stock
that may be issued upon the exchange of Units issued in connection with the
Formation Transactions up to two years following the completion of the
Offering, or (ii) 935,000 shares of Common Stock subject to options being
granted concurrently with the Offering under the Company's stock option
plans.
39
<PAGE>
DILUTION
At September 30, 1996, the Company had a deficiency in net tangible book
value attributable to continuing investors of approximately $105 million. After
giving effect to (i) the sale of the shares of Common Stock offered hereby (at
an assumed initial public offering price of $22.00 per share) and the receipt by
the Company of approximately $222 million in net proceeds from the Offering and
the Concurrent Placements, after deducting the Underwriters' discounts and
commissions and other estimated expenses of the Offering and the Concurrent
Placements, (ii) the repayment of approximately $91 million of mortgage
indebtedness secured by certain of the Properties, and (iii) the other Formation
Transactions, the pro forma net tangible book value at September 30, 1996 would
have been approximately $79 million, or $4.37 per share of Common Stock. This
amount represents an immediate increase in net tangible book value of $19.22 per
share to the continuing investors (including Mendik/FW LLC and the Mendik Group)
and an immediate dilution in pro forma net tangible book value of $17.63 per
share of Common Stock to new investors. The following table illustrates this
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................ $ 22.00
Deficiency in net tangible book value per share prior to the Offering and
the Concurrent Placements attributable to continuing investors
(including Mendik/ FW LLC and the Mendik Group) (1).................... $ (14.85)
Increase in net tangible book value per share attributable to the Offering
and the Concurrent Placements (2)........................................ $ 19.22
---------
Pro forma net tangible book value after the Offering and the Concurrent
Placements (3)........................................................... $ 4.37
---------
Dilution in net tangible book value per share of Common Stock to new
investors (4)............................................................ $ 17.63
---------
---------
</TABLE>
- ------------------------
(1) Deficiency in net tangible book value per share prior to the Offering and
the Concurrent Placements attributable to continuing investors (including
the Mendik Group) is determined by dividing net tangible book value of the
Company attributable to continuing investors (based on the September 30,
1996 net book value of the tangible assets (consisting of total assets less
intangible assets consisting of deferred lease fees and loan costs and after
payments for non-continuing partners' interests), net of liabilities to be
assumed) by the sum of the number of shares of Common Stock (i) issued and
outstanding, and (ii) issuable (upon the exchange of all Units to be issued)
to continuing investors in the Formation Transactions.
(2) Based on an assumed initial public offering price of $22.00 per share and
after deducting Underwriters' discounts and commissions and estimated
expenses of the Offering, the Concurrent Placements and the Formation
Transactions.
(3) Based on total pro forma net tangible book value of $79 million divided by
the total number of shares of Common Stock outstanding after the completion
of the Offering (11,294,318 shares), and excluding shares that may be
issuable upon exercise of stock options. There is no impact on dilution
attributable to the issuance of Common Stock in exchange for Units to be
issued to the continuing investors (including Mendik/FW LLC and the Mendik
Group) in the Formation Transactions because such Units would be exchanged
for Common Stock on a one-for-one basis.
(4) Dilution is determined by subtracting net tangible book value per share of
Common Stock after the Offering from an assumed initial public offering
price of $22.00.
The following table summarizes, on a pro forma basis giving effect to the
Offering, the Concurrent Placements and the Formation Transactions, the number
of shares of Common Stock to be sold by the Company in the Offering and the
Concurrent Placements and the number of shares of Common Stock and Units to be
issued to the continuing investors (including Mendik/FW LLC and the Mendik
Group) in the
40
<PAGE>
Formation Transactions, the deficiency in the net tangible book value as of
September 30, 1996 of the assets contributed by the continuing investors
(including Mendik/FW LLC and the Mendik Group) in the Formation Transactions and
the net tangible book value of the average contribution per share based on total
contributions.
<TABLE>
<CAPTION>
COMMON STOCK/ CASH/ PURCHASE PRICE
UNITS ISSUED BOOK VALUE OF BOOK VALUE OF
---------------------- CONTRIBUTIONS AVERAGE
SHARES/ ---------------------- CONTRIBUTION
UNITS PERCENT $ PERCENT PER SHARE/UNIT
--------- ----------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PERCENTAGES)
New investors in the Offering and the Concurrent
Placements........................................ 10,955 60.9% $ 221,807 259.1% $ 22.00(1)
Common Stock issued to continuing investors
(including Mendik/FW LLC and the Mendik Group).... 240 1.3 841 1.0 3.50
Units issued to continuing investors (including
Mendik/FW LLC and the Mendik Group)............... 6,805 37.8 (137,044 (2) (160.1) $ 20.14
--------- ----- ----------- ---------
Total........................................... 18,000 100.0% $ 85,604 100.0%
--------- ----- ----------- ---------
--------- ----- ----------- ---------
</TABLE>
- ------------------------
(1) Before deducting Underwriters' discounts and commissions and other estimated
expenses of the Offering, the Concurrent Placements and the Formation
Transactions.
(2) Based on the September 30, 1996 net book value of the assets, adjusted for
the Formation Transactions.
41
<PAGE>
SELECTED FINANCIAL INFORMATION
The following table sets forth unaudited pro forma financial and other
information for the Company and combined historical financial information for
the Mendik Predecessors. The following selected financial information should be
read in conjunction with the financial statements and notes thereto contained in
this Prospectus.
The combined historical balance sheets as of December 31, 1995 and 1994 and
statement of income for the years ended December 31, 1995, 1994 and 1993 of the
Mendik Predecessors have been derived from the historical combined financial
statements audited by Ernst & Young LLP, independent auditors, whose report with
respect thereto is included elsewhere in this Prospectus. The combined
historical balance sheet as of September 30, 1996 and statements of income for
the nine months ended September 30, 1996 and 1995 have been derived from the
unaudited historical combined financial statements of the Mendik Predecessors.
In the opinion of the management of the Mendik Predecessors, all adjustments
considered necessary for a fair presentation of the results of the interim
periods have been included, and all adjustments are of a normal and recurring
nature. The results of operations for the interim periods ending September 30,
1996 and 1995 are not necessarily indicative of the results to be obtained for
the full fiscal year.
Unaudited pro forma operating information for the year ended December 31,
1995 and the nine months ended September 30, 1996 is presented as if the
completion of the Offering, the Concurrent Placements and the Formation
Transactions occurred at the beginning of such periods and, therefore,
incorporates certain assumptions that are described in the notes to the Pro
Forma Condensed Consolidated Statements of Operations included elsewhere in this
Prospectus. The unaudited pro forma balance sheet data is presented as if the
aforementioned transactions had occurred on September 30, 1996.
The pro forma information does not purport to represent what the Company's
financial position or results of operations would actually have been if these
transactions had, in fact, occurred on such date or at the beginning of the
period indicated, or to project the Company's financial position or results of
operations at any future date or for any future period.
42
<PAGE>
THE COMPANY (PRO FORMA) AND THE MENDIK PREDECESSORS (HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------------------- -----------------------------------------------
HISTORICAL HISTORICAL
------------------------ ----------------------------------
1996 1995 PRO FORMA 1995 1994 1993
---------- ------------ ----------- ---------- ---------- ----------
1995
-----------
PRO FORMA (UNAUDITED)
-----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental revenue................... $ 52,820 $ 51,706 $ 48,859 $ 66,004 $ 65,050 $ 65,176 $ 63,826
Escalation and reimbursement
revenues....................... 8,252 8,252 8,688 11,668 11,668 11,331 13,385
Construction revenues from
affiliates..................... -- 45 134 -- 204 130 107
Management revenues.............. -- 3,013 3,968 -- 5,671 5,061 4,160
Leasing commissions.............. -- 958 588 -- 754 1,995 1,219
Investment income................ 1,768 1,282 1,346 2,698 2,096 1,357 1,263
Dividend from subsidiary
corporation.................... 617 -- -- 790 -- -- --
Equity in net income
of investees................... 2,605 1,585 1,753 6,152 4,138 1,307 751
----------- ---------- ------------ ----------- ---------- ---------- ----------
Total revenues................... 66,062 66,841 65,336 87,312 89,581 86,357 84,711
----------- ---------- ------------ ----------- ---------- ---------- ----------
Expenses:
Operating expenses............... 27,519 27,452 27,609 36,563 36,462 36,280 36,743
Interest......................... 6,145 11,782 12,167 8,193 16,247 16,121 16,749
Depreciation and amortization.... 5,919 8,356 8,418 7,992 11,305 10,788 11,290
Marketing, general and
administrative................. 1,152 4,209 4,665 2,093 6,485 6,350 5,689
----------- ---------- ------------ ----------- ---------- ---------- ----------
Total expenses................... 40,735 51,799 52,859 54,841 70,499 69,539 70,471
----------- ---------- ------------ ----------- ---------- ---------- ----------
Income before minority interest
(2).............................. 25,327 $ 15,042 $ 12,477 32,471 $ 19,082 $ 16,818 $ 14,240
---------- ------------ ---------- ---------- ----------
---------- ------------ ---------- ---------- ----------
Minority Interest................ 9,576 12,277
----------- -----------
Income after minority interest..... $ 15,751 $ 20,194
----------- -----------
----------- -----------
Net income per share............... $ 1.41 -- -- $ 1.80 -- -- --
BALANCE SHEET DATA:
Real estate, before accumulated
depreciation..................... $ 226,589 $ 265,443 -- -- $ 261,515 $ 253,678 $ 248,779
Real estate, after accumulated
depreciation..................... 129,291 150,976 -- -- 153,026 153,301 154,619
Total assets....................... 224,783 280,794 -- -- 263,708 266,152 266,829
Mortgages payable.................. 113,000 208,879 -- -- 208,829 208,891 206,958
Minority interest.................. 32,367 N/A N/A -- N/A N/A N/A
Owners' equity..................... 53,237 45,054 -- -- 34,618 32,201 27,227
OTHER DATA:
Funds from Operations (3).......... $ 35,607 $ 27,225 $ 24,964 $ 46,899 $ 36,187 $ 32,555 $ 30,334
Net cash provided by operating
activities....................... -- 8,914 16,671 -- 24,296 23,600 15,786
Net cash provided by (used in)
financing activities............. -- (4,395) (6,731) -- (17,700) (15,161) (9,805)
Net cash provided by (used in)
investing activities............. -- (2,237) (18,818) -- (9,017) (7,781) (4,949)
<CAPTION>
1992 1991
------------ ----------
<S> <C> <C>
OPERATING DATA:
Revenues:
Rental revenue................... $ 64,573 $ 64,872
Escalation and reimbursement
revenues....................... 14,941 14,604
Construction revenues from
affiliates..................... 254 411
Management revenues.............. 4,310 4,561
Leasing commissions.............. 1,977 2,489
Investment income................ 540 503
Dividend from subsidiary
corporation.................... -- --
Equity in net income
of investees................... 2,385 2,353
------------ ----------
Total revenues................... 88,980 89,793
------------ ----------
Expenses:
Operating expenses............... 64,417(1) 37,217
Interest......................... 20,912 21,385
Depreciation and amortization.... 11,042 9,690
Marketing, general and
administrative................. 5,718 6,320
------------ ----------
Total expenses................... 102,089 74,612
------------ ----------
Income before minority interest
(2).............................. $ (13,109) $ 15,181
------------ ----------
------------ ----------
Minority Interest................
Income after minority interest.....
Net income per share............... -- --
BALANCE SHEET DATA:
Real estate, before accumulated
depreciation..................... $ 245,027 $ 239,129
Real estate, after accumulated
depreciation..................... 159,282 161,858
Total assets....................... 261,151 265,393
Mortgages payable.................. 208,958 199,103
Minority interest.................. N/A N/A
Owners' equity..................... 22,829 9,104
OTHER DATA:
Funds from Operations (3).......... $ 28,428 $ 29,689
Net cash provided by operating
activities....................... 19,872 14,113
Net cash provided by (used in)
financing activities............. 1,296 (4,788)
Net cash provided by (used in)
investing activities............. (14,960) (11,252)
</TABLE>
43
<PAGE>
- ------------------------
(1) At December 31, 1992, Two Park Company, the entity which owns Two Park
Avenue, determined that its investment in Two Park Avenue had declined in
value and deemed such decline to be other than temporary. Accordingly, Two
Park Company wrote down its investment by $25 million in 1992.
(2) Based on 11,194,318 shares of Common Stock outstanding after the Offering.
(3) The Company generally considers Funds from Operations an appropriate measure
of liquidity of an equity REIT because industry analysts have accepted it as
a performance measure of equity REITs. "Funds from Operations" as defined by
NAREIT means net income (computed in accordance with GAAP) excluding gains
(or losses) from debt restructuring and sales of property, plus depreciation
and amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures. The Company's Funds from
Operations are not comparable to Funds from Operations reported by other
REITs that do not define that term using the current NAREIT definition or
that interpret the current NAREIT definition differently than does the
Company. The Company believes that in order to facilitate a clear
understanding of the combined historical operating results of the Mendik
Group and the Company, Funds from Operations should be examined in
conjunction with net income (loss) as presented in the audited combined
financial statements and information included elsewhere in this Prospectus.
Funds from Operations does not represent cash generated from operating
activities in accordance with GAAP and should not be considered as an
alternative to net income as an indication of the Company's performance or
to cash flows as a measure of liquidity or ability to make distributions.
For a reconciliation of net income and Funds from Operations, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Reconciliation of Net Income and Funds from Operations."
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the Selected
Combined Financial Data, the Historical Combined Financial Statements and the
Pro Forma Combined Balance Sheet and Combined Statement of Income of the Company
contained in this Prospectus.
The Combined Financial Statements of the Mendik Predecessors include
financial data for three Property-owning entities and equity interests in four
Property-owning entities and entities which provide management and leasing
services to the Property-owning entities, the other office properties in which
the Mendik Group owns an interest and unaffiliated third parties. Specifically,
the Combined Financial Statements of the Mendik Predecessors include 100% of the
net assets and results of operations of three Properties (Two Penn Plaza, 1740
Broadway and 866 United Nations Plaza), equity interests in four other
properties (Eleven Penn Plaza, Two Park Avenue, 330 Madison Avenue and 570
Lexington Avenue) (which interests are accounted for under the equity method)
and 100% of the net assets and results of operations of the affiliated companies
which provide real estate management and leasing services to the Properties and
to the other office properties in which the Mendik Group owns an interest, as
well as to unaffiliated third parties.
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
Rental revenue increased $2.8 million, or 5.8%, to $51.7 million from $48.9
million for the nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995. The increase was primarily due to increased rents on
new leases replacing expiring and renewal leases that were at lower rents.
Escalation and reimbursement revenues decreased by $436,000, or 5.0%, to
$8.3 million from $8.7 million for the nine months ended September 30, 1996
compared to the nine months ended September 30, 1995. The decrease primarily was
attributable to a decrease in real estate taxes (tenants generally pay their pro
rata share of increases in real estate taxes over a base year; however, with the
decrease in real estate taxes, real estate tax escalation payments by tenants
also decreased). In addition, recent new and renewed leases were signed with
current base years, which generally are higher than base years in old leases
that expired; as a result, real estate tax escalation payments declined.
Management revenues decreased $1.0 million, or 24.1%, to $3.0 million from
$4.0 million for the nine months ended September 30, 1996 compared to the nine
months ended September 30, 1995. The decrease in revenues is attributable to
fees earned for special services and new business from Building Maintenance
Service Corp., an affiliate of the Mendik Group, in 1995.
Leasing commission revenues increased $370,000, or 62.9%, to $958,000 from
$588,000 for the nine months ended September 30, 1996 compared to the nine
months ended September 30, 1995. The increase in leasing commission revenues is
primarily attributable to new leases signed at 570 Lexington Avenue.
Investment income decreased $64,000, or 4.8%, to $1.3 million from $1.4
million for the nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995.
At September 30, 1996 and 1995, the Mendik Predecessors held non-controlling
interests in four entities which have been accounted for under the equity
method. Equity in net income of investees decreased $168,000, or 9.6%, to $1.6
million from $1.8 million for the nine months ended September 30, 1996 compared
to the nine months ended September 30, 1995. The decrease in equity in net
income from the entity which owns Eleven Penn Plaza of $920,000 was partially
offset by the decrease in equity in net loss from the entity which owns Two Park
Avenue of $413,000 and the increase in equity in net income
45
<PAGE>
from the entity which owns 330 Madison Avenue of $392,000 for the period. The
decline in equity in net income from the entity which owns Eleven Penn Plaza was
primarily due to lease cancellation income recorded during the nine months ended
September 30, 1995.
Operating expenses increased $377,000, or 2.4%, to $16.0 million from $15.6
million for the nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995. The increase was due primarily to increased energy
costs caused by the comparatively severe winter in New York City during the
first quarter of 1996.
Real estate taxes decreased $563,000, or 4.9%, to $11.0 million from $11.5
million for the nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995. The decrease was due primarily to a reduction in
property assessments and rates and a refund of real estate taxes previously paid
with respect to prior taxable years.
Interest expense decreased $385,000, or 3.2%, to $11.8 million from $12.2
million for the nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995. The decrease was due primarily to the refinancing of
$9.7 million of debt at 866 United Nations Plaza in January 1996 at a lower
interest rate.
Depreciation and amortization of $8.4 million was substantially unchanged
for the nine months ended September 30, 1996 compared to the nine months ended
September 30, 1995.
Marketing, general and administrative expenses decreased $456,000, or 9.8%,
to $4.2 million from $4.7 million for the nine months ended September 30, 1996
compared to the nine months ended September 30, 1995. The decrease was
principally a result of a reduction in professional fees related to landlord
tenant matters at Two Penn Plaza.
As a result of the foregoing, net income increased $2.5 million, or 20.6%,
to $15.0 million from $12.5 million for the nine months ended September 30, 1996
compared to the nine months ended September 30, 1995.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994
Rental revenue decreased $126,000, or 0.2%, to $65.1 million from $65.2
million for the year ended December 31, 1995 compared to the year ended December
31, 1994.
Escalation and reimbursement revenues increased $337,000, or 3.0%, from
$11.3 million to $11.7 million for the year ended December 31, 1995 compared to
the year ended December 31, 1994.
Management revenues increased $610,000, or 12.1%, to $5.7 million from $5.1
million for the year ended December 31, 1995 compared to the year ended December
31, 1994. The increase was due primarily to the acquisition of new third-party
contracts in early 1995 and the acquisition of 570 Lexington Avenue in October
1994.
Leasing commission revenues decreased $1.2 million, or 62.2%, from $2.0
million to $754,000 for the year ended December 31, 1995 compared to the year
ended December 31, 1994 due to a decrease in leasing activity.
Investment income increased by $739,000, or 54.5%, to $2.1 million from $1.4
million for the year ended December 31, 1995 compared to the year ended December
31, 1994 due to an increase in funds invested and higher rates.
Equity in net income of investees increased $2.8 million, or 216.6%, to $4.1
million from $1.3 million for the year ended December 31, 1995 as compared to
the year ended December 31, 1994. The increase in net income is related to an
increase in equity in net income from the entity which owns Eleven Penn Plaza to
$3.8 million from $699,000, (primarily attributable to an increase in lease
cancellation income, including $2.6 million included in the three months ended
December 31, 1995 from one tenant) and a decrease in
46
<PAGE>
equity in net loss from $690,000 to $349,000 from the entity which owns Two Park
Avenue, which was partially offset by a decrease in equity in net income from
the entity which owns 330 Madison Avenue to $816,000 from $1.3 million.
Operating expenses increased $142,000, or 0.7%, to $20.5 million from $20.4
million for the year ended December 31, 1995 compared to the year ended December
31, 1994. Thus, the composition and amount of operating expenses remained
substantially constant.
Real estate taxes of $15.3 million were substantially identical for the
years ended December 31, 1995 and December 31, 1994.
Interest expense increased $126,000, or 0.8%, to $16.2 million from $16.1
million for the year ended December 31, 1995 compared to the year ended December
31, 1994.
Depreciation and amortization increased $517,000, or 4.8%, to $11.3 million
from $10.8 million for the year ended December 31, 1995 compared to the year
ended December 31, 1994. The increase was due principally to a mortgage of $131
million recorded in 1995 secured by Two Penn Plaza, which resulted in an
increase in amortization of mortgage costs of $650,000.
Marketing, general and administrative expenses increased $135,000, or 2.1%,
to $6.5 million from $6.4 million for the year ended December 31, 1995 compared
to the year ended December 31, 1994.
As a result of the foregoing, net income increased $2.3 million, or 13.4%,
to $19.1 million from $16.8 million for the year ended December 31, 1995
compared to the year ended December 31, 1994.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993
Rental revenue increased by $1.4 million, or 2.1%, to $65.2 million from
$63.8 million for the year ended December 31, 1994 compared to the year ended
December 31, 1993. The increase resulted from an increase in base rentals at
each of the consolidated Properties.
Escalation and reimbursement revenues decreased $2.1 million, or 15.3%, to
$11.3 million from $13.4 million for the year ended December 31, 1994 compared
to the year ended December 31, 1993. The decrease was primarily attributable to
a decrease in real estate taxes (which are passed through to tenants) in 866 UN
Plaza, Two Penn Plaza and 1740 Broadway and leases which have rolled over with
more current base years for expenses.
Management revenues increased $901,000, or 21.7%, to $5.1 million from $4.2
million for the year ended December 31, 1994 as compared to the year ended
December 31, 1993. The increase was primarily attributable to a fee earned for
special services and new business from Building Maintenance Service Corp., an
affiliate of the Mendik Group.
Leasing commissions revenues increased $776,000, or 63.7%, to $2.0 million
from $1.2 million for the year ended December 31, 1994 as compared to the year
ended December 31, 1993 due to an increase in leasing activity in two
properties.
Investment income increased by $94,000, or 7.4%, to $1.4 million from $1.3
million for the year ended December 31, 1994 as compared to the year ended
December 31, 1993.
Equity in net income of investees increased by $556,000, or 74.0%, to $1.3
million from $751,000 for the year ended December 31, 1994 as compared to the
year ended December 31, 1993. The increase was attributable to an increase in
equity in net income in the entity which owns Eleven Penn Plaza of $685,000 and
a decrease in equity in net loss of $192,000 from the entity which owns Two Park
Avenue offset by a decrease in equity in net income in the entity which owns 330
Madison Avenue of $309,000.
Operating expenses decreased $130,000, or 0.6%, to $20.4 million from $20.5
million for the year ended December 31, 1994 compared to the year ended December
31, 1993.
47
<PAGE>
Real estate taxes decreased $322,000, or 2.1%, to $15.3 million from $15.6
million for the year ended December 31, 1994 as compared to the year ended
December 31, 1993. Real estate taxes decreased for each of the entities which
own 866 UN Plaza, Two Penn Plaza and 1740 Broadway.
Interest expense decreased $628,000, or 3.7%, to $16.1 million from $16.7
million for the year ended December 31, 1994 compared to the year ended December
31, 1993. The decrease was due to a small decrease in interest rates related to
variable interest debt at 866 UN Plaza.
Depreciation and amortization decreased $502,000, or 4.4%, to $10.8 million
from $11.3 million for the year ended December 31, 1994 compared to the year
ended December 31, 1993.
Marketing, general and administrative expenses increased $661,000, or 11.6%,
to $6.4 million from $5.7 million for the year ended December 31, 1994 compared
to the year ended December 31, 1993. The increase was due primarily to
additional expenses relating to the Management Company which was affected by
increased management fee revenue and leasing commission revenue.
As a result of the foregoing, net income increased $2.6 million, or 18.1%,
to $16.8 million from $14.2 million for the year ended December 31, 1994
compared to the year ended December 31, 1993.
PRO FORMA OPERATING RESULTS
NINE MONTHS ENDED SEPTEMBER 30, 1996
On a pro forma basis, combined net income for the nine months ended
September 30, 1996 is $709,000 greater than the corresponding amount in the
historical financial statements. The pro forma operating results for the nine
months ended September 30, 1996 includes a minority share of income of $9.6
million whereas there is no minority interest in the corresponding historical
period. On a pro forma basis, combined income (before deduction of minority
interests) would have been $25.3 million for the nine months ended September 30,
1996, compared to historical net income of $15 million for the nine months ended
September 30, 1996. Pro forma net income before minority interests increased by
$10.3 million primarily attributable to a reduction in interest expense of $5.6
million. The balance of the increase of $4.7 million as compared to the
historical income arises from a decrease in depreciation and amortization of
$2.3 million, primarily attributable to the purchase of partners' interests in
1740 Broadway at an amount less than the historical book value of the property,
an increase in equity in net income of investees of $1.0 million attributable to
a decrease in interest expense due to a reduction in interest rate or the
refinancing of debt related to the Company's investments in the entities which
own Two Park Avenue and Eleven Penn Plaza, an increase in rental revenue of $1.1
million principally attributable to the straight-line rental income relating to
the purchase of partners' interests in 1740 Broadway, an increase of $409,000
resulting from the restructuring of the management companies and the eliminating
of certain nonrecurring income and expense items which offset an increase in
cleaning expense of $105,000 due to contract changes and an increase in REIT
marketing, general and administrative of $113,000.
The Company, through the Operating Partnership, will own 95% of the equity
in the Management Corporation and a note issued by the Management Corporation.
The historical financial statements show the management and leasing operations
on a combined basis while the pro forma financial statements show the Management
Corporation on the equity basis. Consequently, the increase in income of
$409,000 resulting from the restructure of the management companies is caused by
the elimination of $703,000 of historical net income offset by an increase in
equity in net income of the Management Corporation of $617,000 and an increase
of $495,000 in interest income from note receivable of the Management
Corporation. The Management Corporation's historical net income of $703,000 was
adjusted for the following pro forma adjustments of (1) an increase in interest
expense of $495,000 (on the Note Payable to the Operating Partnership), (2) an
increase in taxes of $90,000, (3) offset by a reduction of $531,000 in
nonrecurring officers' bonuses. Consequently, the net income available for
dividends of the Management
48
<PAGE>
Corporation on a pro forma basis is $649,000 of which 95% or $617,000 is
attributable to an increase in equity of investee owned by the Operating
Partnership.
YEAR ENDED DECEMBER 31, 1995
On a pro forma basis, combined net income (before deduction of minority
interests) would have been $32.5 million for the year ended December 31, 1995,
compared to historical net income of $19.1 million for the year ended December
31, 1995. Pro forma net income before minority interests increased $13.4 million
primarily attributable to a reduction in interest expense of $8.1 million. The
balance of the increase of $5.3 million as compared to the historical income
arises from a decrease in depreciation and amortization of $3.1 million and an
increase in straight line rental income of $1 million, primarily attributable to
the purchase of partners' interests in 1740 Broadway at an amount less than the
historical book value of the property, an increase in rental revenue of $1
million attributable to the straight-line rental income relating to the purchase
of partners' interests in 1740 Broadway, an increase in equity in net income of
investees of $2.0 million resulting primarily from a decrease in interest
expense due to a reduction in interest rate or the refinancing of debt related
to the Company's investments in the entities which own Two Park Avenue and
Eleven Penn Plaza which offset an increase in cleaning expense of $149,000 due
to contract charges and an increase in REIT marketing, general and
administrative expenses of $150,000 and a decrease of $440,000 resulting from
the restructure of the Management Corporation.
The Company, through the Operating Partnership, will own 95% of the equity
of the Management Corporation and a note issued by the Management Corporation.
The historical financial statements show the management and leasing operations
on a combined basis while the pro forma financial statements show the Management
Corporation on the equity basis. Consequently, the decease of $440,000 resulting
from the restructure of management companies is caused by the elimination of
$1.9 million of historical net income offset by an increase in equity in net
income of the Management Corporation of $790,000 and an increase of $660,000 in
interest income from note receivable of the Management Corporation. The
Management Corporation's historical net income of $1.9 million was adjusted for
the following pro forma adjustments of (1) a reduction of $1.2 million of
nonrecurring management fee income, (2) an increase in interest expense of
$660,000 on the note payable to the Operating Partnership, (3) an increase in
taxes of $46,000, (4) offset by a reduction of $815,000 in nonrecurring
officers' bonuses. Consequently, the net income available for dividends of the
Management Corporation on a pro forma basis is $832,000 of which 95% or $790,000
is attributable to an increase in equity of investee owned by the Operating
Partnership.
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Offering and the Formation Transactions and the
application of the net proceeds therefrom as described in "Use of Proceeds," the
Company expects to have reduced the total mortgage debt secured by the three
Properties that will be consolidated in the financial statements of the Company
from approximately $209 million to approximately $113 million (including
cancellation of certain indebtedness) and the Company's pro rata share of all
mortgage debt secured by the Properties will decrease from $295 million to
approximately $199 million. The $113 million of mortgage debt will be at a
floating interest rate, but the Company expects to enter into interest rate swap
agreements in order to fix its interest costs. Approximately $80 million of such
mortgage debt will mature in May 2005 and approximately $33 million of such
mortgage debt will mature in May 2004. There will be no principal amortization
of this debt prior to maturity. Based on an estimated total market
capitalization of $595 million, the Company's debt (including approximately $86
million of unconsolidated mortgage debt on properties in which the Company will
have a minority interest), would represent approximately 33% of its total market
capitalization (or 22% of its total market capitalization, excluding such
unconsolidated mortgage debt). See "Policies with Respect to Certain Activities
- -- Financing Policies."
After paying down mortgage debt as well as expenses of the Offering, the
Concurrent Placements and the Formation Transactions, the Company expects to
establish an initial reserve of approximately $38
49
<PAGE>
million for tenant improvement costs and leasing commissions expected to be
incurred in connection with the re-leasing of space at the Properties, as well
as for interest and operating costs relating to vacant space at the Properties
and for general working capital needs. Approximately $30 million of this reserve
will be escrowed with the lender at Two Penn Plaza to provide for the funding of
these expenses at Two Penn Plaza. See "The Properties--Two Penn Plaza." The
Company also anticipates that capital may be required (i) in connection with the
re-leasing of certain space at Eleven Penn Plaza, (ii) in connection with the
pay down and refinancing of the existing mortgage loan secured by 330 Madison
Avenue, and (iii) in connection with the ongoing lease-up of 570 Lexington
Avenue, although the actual amount of capital that may be needed for these
transactions is not yet known. The Company will benefit from cash that is being
held by certain of the Property-owning entities in which the Company will have a
minority interest. As of September 30, 1996, the cash balances held by certain
of these Property-owning entities was approximately $15.4 million, of which the
Company's share on a pro forma basis would have been approximately $5.7 million.
As a result of a recently completed renovation program (see "The
Properties--The Portfolio-- Historical Capital Expenditures"), relatively few
capital projects remain to be undertaken at the Properties over the next several
years. For the nine months ended September 30, 1996 and the years ended 1995,
1994 and 1993, the cost of building improvements and equipment upgrades at the
Properties (excluding 570 Lexington Avenue) was approximately $6.6 million, $8.1
million and $3.3 million, respectively. For each of 1997 and 1998, the Company's
pro rata share (based on its ownership interest) of the projected cost of
building improvements and equipment upgrades (excluding the cost of tenant
improvements) at the Properties is approximately $690,000 (or approximately
$0.20 per square foot, based on the Company's pro rata share of the total
rentable square footage at the Properties). The Company expects such cost to be
paid from existing cash reserves or net cash provided by operations.
The Company's receivables have increased from $4.3 million at December 31,
1994 to $5.1 million at December 31, 1995 and to $6.1 million at September 30,
1996. The increase of approximately $0.8 million from December 31, 1994 to
December 31, 1995 is primarily attributable to an increase in the amounts due
from the Residential Towers pursuant to the terms of the reciprocal easement
agreement at 866 U.N. Plaza. The increase of approximately $1.0 million from
December 31, 1995 to September 30, 1996 is primarily due to an electric utility
rebate receivable of $400,000 (collected prior to December 31, 1996) at Two Penn
Plaza and another increase of approximately $900,000 in amounts due under the
reciprocal easement agreements (attributable to shared capital improvements). At
December 31, 1996, the amount due from the Residential Towers at 866 United
Nations Plaza was approximately $130,000, a reduction of approximately $1.6
million from September 30, 1996.
The Company expects to acquire properties in the future. See "Business and
Growth Strategies-- Acquisition Strategy." Such acquisitions may require
substantial capital commitments by the Company, either in the form of purchase
price, pay down of existing debt secured by a target property, assumption of
debt secured by such property or costs associated with the renovation or
re-leasing of such property. The Company expects that a portion of such costs
will be funded from draws under the Line of Credit, which the Company expects to
have in place shortly after the completion of the Offering (although there can
be no assurance that the Line of Credit will be obtained). However, in light of
the substantial costs typically associated with acquisitions of Manhattan office
properties, the Company expects that financings for such acquisitions are also
likely to require single-asset financings secured by the target property.
The Company believes that its initial cash reserves, the Company's share of
reserves held by the Property-owning entities in which the Company has a
non-controlling partial interest and net cash provided by operations will be
sufficient to meet the Company's capital needs in the near term. In the long
term, the Company expects that capital needs will be met through a combination
of net cash provided by operations, borrowings and additional equity issuances.
50
<PAGE>
The Company expects to make distributions from Cash Available for
Distribution, which the Company believes will exceed Cash Available for
Distribution historically available because of the reduction in debt service
expected to result from the repayment of indebtedness in connection with the
Formation Transactions. Amounts accumulated for distribution, as well as the
initial cash received by the Company upon completion of the Offering, will be
invested by the Company primarily in short-term investments that are
collateralized by securities of the United States government or any of its
agencies, high-grade commercial paper and bank deposits, as well as other
permitted investments. See "Distributions."
CASH FLOWS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 TO NINE MONTHS ENDED
SEPTEMBER 30, 1995. Cash and cash equivalents were $14.2 million and $5.4
million at September 30, 1996 and 1995, respectively. Cash and cash equivalents
increased $2.3 million during the nine months ended September 30, 1996, compared
to a decrease of $8.9 million for the corresponding period in the prior year.
The increase is attributable to a $16.6 million decrease in the net cash used in
investing activities, from $18.8 million in 1995 to $2.2 million in 1996, and a
$2.3 million decrease in net cash used in financing activities, from $6.7
million in 1995 to $4.4 million in 1996, offset by a $7.8 million decrease in
net cash provided by operating activities, from $16.7 million in 1995 to $8.9
million in 1996. The decrease in the net cash used in investing activities is
due primarily to an increase of net proceeds from net sales of securities over
net purchases of securities of $14.4 million. The decrease in net cash used in
financing activities is due primarily to a decrease in cash distributions to
owners of $1.8 million. The decrease in cash provided by operating activities
was attributable primarily to $5.9 million of cash transferred to a restricted
cash account for payments of mortgage interest in 1996, an increase in deferred
lease fees paid of $2.7 million and an increase in receivables of $1.3 million
offset by an increase in net income of $2.6 million.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31,
1994. Cash and cash equivalents were $11.9 million and $14.3 million at
December 31, 1995 and 1994, respectively. Cash and cash equivalents decreased
$2.4 million during 1995, compared to an increase of $658,000 during 1994. The
decrease is attributable to a $1.2 million increase in net cash used in
investing activities from $7.8 million in 1994 to $9.0 million in 1995, and a
$2.5 million increase in net cash used in financing activities from $15.2
million in 1994 to $17.7 million in 1995 offset by a $700,000 increase in net
cash provided by operating activities, from $23.6 million in 1994 to $24.3
million in 1995. The increase in the net cash used in investing activities is
due primarily to an increase of net purchases of securities over proceeds from
net sales of securities of $1.3 million. The increase in net cash used in
financing activities is due to an increase in net distribution to owners of $9.5
million offset by a decrease due to the change in fiscal year of $3.7 million
and a decrease in deferred loan costs paid of $3.3 million. The increase in net
cash provided by operating activities is due to an increase in net income of
$2.3 million (due primarily to the increase in income from investees), a
decrease of deferred lease fees paid of $600,000, an increase in accounts
payable of $100,000 in 1995 as compared to a decrease of $1.5 million in 1994,
and an increase of receivables of $500,000 in 1995 as compared to an increase of
$2.4 million in 1994, offset by a decrease in prepaid expenses of $300,000 in
1995 compared to an decrease of $5.5 million in 1994.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31,
1993. Cash and cash equivalents were $14.3 million and $13.7 million at
December 31, 1994 and 1993, respectively. Cash and cash equivalents increased
$658,000 during 1994 compared to a increase of $1.0 million during 1993. The
lower increase in cash and cash equivalents is due to a $7.8 million increase in
net cash provided by operating activities, from $15.8 million in 1993 to $23.7
million in 1994, offset by a $2.8 million increase in net cash used in investing
activities, from $5.0 million in 1993 to $7.8 million in 1994, and a $5.3
million increase in the net cash used in financing activities, from $9.8 million
in 1993 to $15.2 million in 1994. The increase in net cash provided by operating
activities of $7.8 million is due to the increase in net income of $2.6 million,
an increase in prepaid expenses in 1994 of $5.5 million, an increase in deferred
rent of $800,000 in 1994 as compared to an increase of $3.5 million in 1993, and
tenant acquisition costs of $1.7
51
<PAGE>
million in 1993 as compared to $160,000 in 1994, offset by a decrease on
accounts payable of $1.5 million in 1994 as compared to a decrease of $200,000
in 1993 and a decrease of deferred rents payable of $641,000 in 1994 as compared
to an increase in 1993 of $500,000. The increase in cash used in investing
activities of $2.8 million was due to an increase of $4.5 million in 1994 of
building improvements over amounts paid in 1993, offset by the excess of
purchases of securities over proceeds from sales of securities in 1993 of $1.5
million compared to an excess of sales proceeds in 1994 of $198,000. The
increase in net cash used in financing activities of $5.4 million was due to the
effect of the change in fiscal year of $3.7 million in 1994 and to loan costs
placed in escrow of $3.6 million in 1994, offset by a decrease in net cash
distributions of $2.0 million in 1994 as compared to 1993.
RECONCILIATION OF NET INCOME AND FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------ ------------------------
HISTORICAL HISTORICAL
----------- PRO FORMA -----------
-----------
PRO FORMA (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Net income before minority interest.......... $ 25,327 $ 15,042 $ 32,471 $ 19,082
Plus: Depreciation and amortization........ 5,919 8,356 7,992 11,305
Less: Amortization of finance costs
included above........................ (196) (745) (272) (928)
Plus: Share of depreciation and
amortization of equity investees...... 4,613 4,775 6,803 7,092
Less: Share of amortization of finance
costs of equity investees included
above...................................... (56) (203) (95) (364)
----------- ----------- ----------- -----------
Funds from Operations........................ $ 35,607 27,225 46,899 36,187
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
INFLATION
Substantially all of the office leases provide for separate real estate tax
and operating expense escalations over a base amount. In addition, many of the
leases provide for fixed base rent increases or indexed escalations. The Company
believes that inflationary increases may be at least partially offset by the
contractual rent increases described above.
52
<PAGE>
NEW YORK ECONOMY AND MANHATTAN OFFICE MARKET
UNLESS INDICATED OTHERWISE, INFORMATION CONTAINED HEREIN CONCERNING THE NEW
YORK METROPOLITAN ECONOMY AND THE MANHATTAN OFFICE MARKET IS DERIVED FROM A
REPORT COMMISSIONED BY THE COMPANY AND PREPARED BY ROSEN CONSULTING GROUP, A
NATIONALLY KNOWN REAL ESTATE CONSULTING COMPANY, AND IS INCLUDED HEREIN (THE
"ROSEN MARKET STUDY") WITH THE CONSENT OF ROSEN CONSULTING GROUP.
The Company believes that the strength of the New York metropolitan economy
and the current supply/demand fundamentals in the Manhattan office market
provide an attractive environment for acquiring, owning and operating Class A
office properties.
NEW YORK ECONOMY
New York City is a leading international city with a large, dynamic and
diverse economy. According to the U.S. Census Bureau, as of July 1994 the
economy of the New York consolidated metropolitan statistical area was larger
than the economies of the next two largest U.S. metropolitan areas combined (Los
Angeles and Chicago), and larger than the economy of any individual state except
California, based on aggregate personal income (which the Company believes is a
good proxy for overall economic output). New York City's broad economic base and
concentration of businesses create a "critical mass" which encourages companies
and firms in the financial, legal, accounting, advertising, publishing,
entertainment/broadcasting and retail sectors to establish and maintain a
presence in New York City.
After enduring a significant economic downturn in the late 1980s and early
1990s, the New York metropolitan area has experienced consistent economic growth
over the past three years. Between 1994 and 1996, an average of approximately
39,000 net private sector jobs have been added each year, representing an annual
growth rate of 1.2 to 1.4%, although total private sector employment in the New
York metropolitan area remains significantly below its peak in 1988. Net private
sector job creation in the New York metropolitan area is anticipated to continue
at an average rate of 1% per annum, or approximately 30,000 private sector jobs
per annum, through 1998. There can be no assurance however, that this
expectation will be met.
With its unique appeal, New York City is headquarters to many of the leading
corporations and service firms in the U.S., including:
- more Fortune 500 Companies (47) than any other U.S. city;
- three of the four largest U.S. commercial banks (over 325 international
banks have offices in New York City, according to the Conference of State
Banking Seminars);
- twenty-three of the 25 largest U.S. securities firms;
- four of the 10 largest money managers in the U.S.;
- twenty-seven of the 100 largest U.S. law firms (64 of the 100 largest
U.S. law firms have offices in New York City);
- four of the "Big Six" accounting firms;
- four of the largest U.S. entertainment/media conglomerates; and
- fifteen of the 17 largest U.S. advertising firms.
Part of New York City's appeal to employers is a highly educated work
force--over 40% of Manhattan's residents over the age of 25 have received a
college degree and nearly 20% have received a graduate or professional degree.
In addition, with a population of approximately 7.4 million, including 169,000
households that have an annual income in excess of $150,000, New York City
provides a large base of potential customers, which is of particular appeal to
businesses providing goods and services.
The continuing attractiveness of New York City to corporate America is
evidenced by the recent commitments made to New York City by companies such as
General Electric (which owns NBC), Viacom, Morgan Stanley, Credit Suisse First
Boston, Mutual of New York (MONY), Value Line, General Motors
53
<PAGE>
and Travelers, all of which have either purchased office buildings for their own
use or signed long-term leases to occupy office space within the last several
years. New York City also has a strong and growing base of small businesses.
According to the New York City Office of the Comptroller, small businesses
(which are defined as businesses with fewer than 500 employees) comprise
approximately 99.7% of all businesses in New York City and employ approximately
70.7% of the private sector work force. Between 1994 and 1995, small businesses
added nearly 70,000 jobs to the New York City economy.
New York City is an international financial and cultural capital that, in
addition to housing the United Nations and numerous foreign missions, attracts
tourism, is a center for international investment for many multinational
corporations headquartered overseas. Such overseas companies are attracted to
New York City in part because of its low office rental rates relative to other
major cities worldwide. According to Richard Ellis Company's July 1996 survey,
New York City ranks 14th in the world in terms of office rental rates, after
such cities as Tokyo, London, Paris, Hong Kong and Singapore.
New York City is the consummate "24-hour city," featuring a wide variety of
restaurants, entertainment and cultural offerings, such as Broadway theater and
productions at Carnegie Hall and Lincoln Center. In addition, many of the
world's finest museums, including The Metropolitan Museum of Art, The Museum of
Modern Art, The Guggenheim Museum, The Whitney Museum and The Museum of Natural
History, are located in New York City. New York City is also home to major
educational institutions, including Columbia University, New York University and
Rockefeller University.
The quality of life in New York City has improved with the implementation of
various public/private ventures and government initiatives. For example,
Business Improvement Districts ("BIDs"), which are public/private ventures that
provide security, sanitation and other services within their boundaries, operate
in the areas surrounding Grand Central Terminal, Pennsylvania Station ("Penn
Station") and Times Square and in thirty-three additional areas within New York
City. In addition, crime in New York City has declined dramatically in recent
years, including 16% during 1996. Between 1993 and 1996, the seven felony
categories declined a cumulative 39%, a greater decline than that experienced by
any other large U.S. city during that period. In 1996, in terms of crimes
reported per person, New York City ranked 142nd out of the 188 largest U.S.
cities. In this regard, fewer crimes were reported per person in New York City
than in such cities as Atlanta (1), Miami (6), and Detroit (15), as well as
Memphis (37), Omaha (64) and Milwaukee (84).
The New York City government is "reinventing" itself in an effort to
streamline its operations and attract and retain businesses. For example, the
New York Economic Development Council has been actively involved in encouraging
businesses to remain in New York City. New York City also has recently reduced
or eliminated numerous taxes, including the real property transfer tax, the
unincorporated businesses tax, the commercial rent tax and the hotel occupancy
tax. In addition, New York City was influential in eliminating the New York
State real property gains tax. Even with the reduction or elimination of
numerous taxes, the New York City government recently announced an estimated
budget surplus for its current fiscal year in excess of $350 million, as a
result of savings in operating expenses and improvements in the New York City
economy.
MIDTOWN MANHATTAN OFFICE MARKET
OVERVIEW. The Company believes that current supply/demand fundamentals in
the midtown Manhattan office market provide an attractive environment for
acquiring, owning and operating Class A Manhattan office properties.
Specifically, the midtown Manhattan office market has the following favorable
characteristics: (i) the Class A midtown Manhattan office market has experienced
five consecutive years of positive calculated net absorption and declining
vacancy rates; (ii) there have been virtually no new additions to the supply of
office space in midtown Manhattan since 1992; and (iii) significant new office
development is unlikely at the current time because there are relatively few
sites available for construction, the lead time required for construction
typically exceeds three years and new construction generally is not economically
feasible given current market rental rates.
54
<PAGE>
According to Cushman & Wakefield Research Services ("Cushman & Wakefield"),
the midtown Manhattan office market extends from West 30th and East 32nd Streets
on the south to 70th Street on the north, and from the East River on the east to
the Hudson River on the west.
SIZE OF MARKET. The Manhattan office market is the largest office market in
the U.S and contains more rentable square feet than the next six largest U.S.
central business district office markets combined (Chicago, Washington, D.C.,
Boston, San Francisco, Philadelphia and Los Angeles). The following chart sets
forth the size of the Manhattan office market and the size of the next six
largest U.S. central business district office markets, as of September 30, 1996:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL OFFICE INVENTORY
<S> <C> <C> <C> <C> <C> <C> <C>
Central Business Districts
(as of September 30, 1996)
Manhattan Chicago District of Columbia
Boston San Francisco
Philadelphia Los Angeles
Square Feet (Millions) 360 119 78 47 40 39 37
Sources: Cushman & Wakefield;
Barnes, Morris, Pardoe &
Foster;
Rosen Consulting
</TABLE>
DIVERSITY OF TENANT BASE. The midtown Manhattan office market attracts a
diverse base of tenants across a wide range of industries. The following table
sets forth employment by industry group in the United States as a whole and in
midtown Manhattan, as of September 30, 1996:
<TABLE>
<CAPTION>
EMPLOYMENT BY
INDUSTRY GROUP
----------------
TOTAL MIDTOWN
U.S. MANHATTAN
----- ---------
<S> <C> <C>
Services........................................................................ 34.9% 41.9%
Retail Trade.................................................................... 17.1 10.7
Manufacturing................................................................... 16.1 11.4
Transportation and Utilities.................................................... 7.0 6.2
Construction.................................................................... 7.0 1.2
Financial, Insurance and Real Estate............................................ 6.4 18.6
Public Administration........................................................... 4.7 0.4
Wholesale Trade................................................................. 3.9 9.1
Agriculture..................................................................... 2.9 0.5
----- ---------
100.0% 100.0%
</TABLE>
Source: New York State Department of Labor
55
<PAGE>
HISTORICAL PERSPECTIVE. The midtown Manhattan office market experienced
rapid growth both in demand for, and supply of, office space during the 1980s. A
wave of new construction peaked in the late 1980s and, between 1985 and 1990,
approximately 20 million square feet of space was delivered. However, as shown
in the following chart, there has been very little new construction in the
midtown Manhattan office market since 1992, and very little new construction is
expected through 1998:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
NEW CONSTRUCTION OF OFFICE SPACE
MIDTOWN MANHATTAN (INCLUDES MIDTOWN SOUTH)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1980 1981 1982 1983 1984 1985 1986 1987
Square Feet (Millions) 250,000 1,649,300 4,158,000 1,076,000 1,930,000 2,755,000 2,555,000 1,072,000
Sources: Real Estate Board of New York
(historical); Rosen Consulting Group
(estimates and projections)
<CAPTION>
NEW CONSTRUCTION OF OFFICE SPACE
MIDTOWN MANHATTAN (INCLUDES MIDTOWN SOUTH)
<S> <C> <C> <C>
1988 1989 1990 1991 1992 1993 1994 1995
Square Feet (Millions) 1,925,000 4,532,000 4,804,000 110,000 2,188,755 0 170,000 0
Sources: Real Estate Board of New York
(historical); Rosen Consulting Group
(estimates and projections)
<CAPTION>
NEW CONSTRUCTION OF OFFICE SPACE
MIDTOWN MANHATTAN (INCLUDES MIDTOWN SOUTH)
1996 est. 1997 proj. 1998 proj.
Square Feet (Millions) 0 103,000 112,000
Sources: Real Estate Board of New York
(historical); Rosen Consulting Group
(estimates and projections)
</TABLE>
In the late 1980s and early 1990s, as much of the new supply of office space
was being delivered, the demand for space in the midtown Manhattan office market
fell off abruptly as a result of the general downturn in the economy and
subsequent corporate downsizings. As a result of the increase in inventory and
the significant decrease in employment in Manhattan, Class A office vacancy
rates in midtown Manhattan increased into the double digits, peaking at 17.6% in
1990.
Over the last several years, however, conditions have begun to improve in
the midtown Manhattan office market, as a result of the following factors: new
jobs were created as the national and New York metropolitan economies recovered
from their downturns; existing midtown Manhattan businesses experienced an
increased need for office space; and some traditional downtown Manhattan
tenants, such as banks and securities firms, moved to midtown in search of
greater amenities and improved access to transportation.
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<PAGE>
INCREASING DEMAND FOR MIDTOWN OFFICE SPACE. As of December 31, 1996, the
Class A office vacancy rate in midtown Manhattan (direct and sublease) had
fallen to 10.0% from a peak of 17.6% in 1990, as shown in the following chart:
SUMMARY OF TRENDS IN VACANCY RATES
AND NET ABSORPTION FOR CLASS A OFFICE SPACE
MIDTOWN MANHATTAN
<TABLE>
<CAPTION>
CUMULATIVE
CALCULATED/FORECASTED
PEAK VACANCY NET ABSORPTION
-------------------- PERCENTAGE PERCENTAGE 1991-1996
YEAR RATE 1996 POINT DECREASE DECREASE SF(000S)
--------- --------- --------- ----------------- ----------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Direct and Sublease (1)............ 1990 17.6% 10.0% 7.6 43.2% 14,231
Direct (2)......................... 1990 13.3% 8.1% 5.2 39.1% 10,946
</TABLE>
- ------------------------
(1) Includes vacant space available for direct lease and for sublease.
(2) Includes vacant space available for direct lease only.
Sources: Cushman & Wakefield; Rosen Consulting Group (calculations and
forecasts).
Tenants generating strong demand for midtown office space include those in
the advertising, printing and publishing, financial services, legal services and
communications industries. As a result of the demand generated by these and
other tenants, combined with a lack of projected new construction through 1998
(see below), Rosen Consulting Group projects that the Class A midtown Manhattan
vacancy rate (direct and sublease) will continue to fall to 7.9% in 1998, and
the Direct Asking Rental Rate (which represents the weighted average of asking
rental rates for direct Class A office space) in midtown Manhattan will exceed
$40 for the first time since 1990, as shown in the following chart:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
OFFICE VACANCY RATES AND DIRECT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Asking Rental Rates for Class A Office
Space
Midtown Manhattan
1991 1992 1993 1994 1995 1996 est. 1997 proj. 1998 proj.
Direct Vacancy Rate 13.0% 12.8% 13.1% 10.5% 9.5% 8.5% 7.3% 6.3%
Direct and Sublease Vacancy Rate 4.3% 4.0% 2.9% 2.3% 2.6% 2.3% 1.9% 1.6%
Direct Asking Rental Rate $38.94 $35.82 $34.28 $34.84 $34.90 $36.16 $37.89 $40.28
17.3% 16.8% 16.0% 12.8% 12.1% 10.8% 9.2% 7.9%
Sources: Real Estate Board of New York
(historical); Rosen Consulting Group
(estimates and projections)
</TABLE>
Since 1991, the midtown Manhattan office market has experienced significant
growth in gross leasing activity. (Gross leasing activity equates to all of the
leases signed in the market, including renewals of
57
<PAGE>
existing leases and moves within the market. Rosen Consulting Group believes
that gross leasing activity is a good measure of the overall health of the
market for office space.) As shown in the following chart, gross leasing
activity has exceeded 14 million square feet each year since 1991 and exceeded
18 million square feet in 1996:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
GROSS OFFICE LEASING ACTIVITY
<S> <C> <C> <C> <C> <C> <C>
Midtown Manhattan (includes Midtown South)
1991 1992 1993 1994 1995 1996 est.
Square Feet (Millions) 11.8 14.6 15.7 17.4 16.8 17.5
Source: Rosen Consulting Group
</TABLE>
In addition, calculated net absorption of direct Class A office space in
midtown Manhattan has been positive since 1991 (except in 1993) and surged in
1994, reaching 4.6 million square feet. Net absorption in 1996 is estimated to
reach 1.7 million square feet and projected to remain relatively steady through
1998, as shown in the following chart:
58
<PAGE>
[CHART]
LIMITED SUPPLY OF NEW OFFICE SPACE. The Company expects the supply of Class
A office space in the midtown Manhattan market to remain relatively stable for
the foreseeable future because there are relatively few sites available for
construction, the lead time required for construction typically exceeds three
years and new construction generally is not economically feasible at current
market rental rates. Virtually no new construction of office space in midtown
Manhattan is anticipated in the near term, with the exception of one development
containing approximately 1.6 million square feet, scheduled to be delivered in
1999, which has substantial grandfathered tax benefits. (The Company does not
believe that this property will have a material impact on the market because it
represents less than 1% of the total Class A midtown office space in midtown
Manhattan. In the absence of tax incentives, the Company believes that rents
generally would have to increase significantly to justify the cost of new
construction. Assuming development costs of $300-$350 per square foot (as
estimated by Cushman & Wakefield), a market base rent of at least $50 per square
foot would be needed to make construction economically viable. This suggests
that, in order to justify new construction, market base rents (not taking into
account any tax benefits that may apply) generally would have to increase to at
least 40% more than current asking rents for Class A office space in midtown
Manhattan (as estimated by Cushman & Wakefield).
POSITIVE OUTLOOK FOR EFFECTIVE RENTAL RATES. As discussed above, the
Company anticipates continued growth in the demand for Class A office space in
the midtown Manhattan office market and relatively little new supply of such
space being delivered over the next several years. Accordingly, the Company
believes that vacancy rates among Class A properties in the midtown Manhattan
office market should continue to decrease, which the Company believes should
result in increased rental rates and decreased re-leasing costs in well-managed,
well-located Class A office properties, such as the Properties. However, there
can be no assurance that any of these expectations will be met.
SUBMARKETS
Cushman & Wakefield broadly divides the midtown Manhattan office market into
three submarkets: Midtown West; Grand Central; and Plaza. Three Properties (Two
Penn Plaza, 1740 Broadway and Eleven Penn Plaza) are located in the Midtown West
submarket; two Properties (Two Park Avenue and 330 Madison Avenue) are located
in the Grand Central submarket; and two Properties (866 United Nations Plaza and
570 Lexington Avenue) are located in the Plaza submarket.
59
<PAGE>
MIDTOWN WEST SUBMARKET. Cushman & Wakefield considers the Midtown West
submarket to be the area from 30th Street to 47th Street, west of Fifth Avenue,
and the area from 47th Street to 70th Street, west of Seventh Avenue. The
Midtown West submarket contains approximately 42.4 million square feet of Class
A office space. Located within the Midtown West submarket is Penn Station, the
busiest train station in the United States, and Port Authority Bus Terminal, the
main bus terminal in Manhattan. Also located within the Midtown West submarket
is Times Square (the theater district), which currently is undergoing a major
redevelopment, and the Garment District (the center for fashion design and
clothing manufacturing in New York City).
Conditions in the Midtown West submarket have improved dramatically since
1991. The vacancy rate for Class A office space has fallen from 20.1% in 1991 to
9.9% as of September 30, 1996, as shown in the following chart:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
OFFICE VACANCY RATES AND DIRECT ASKING RENTAL RATES FOR CLASS A OFFICE
SPACE
<S> <C> <C> <C> <C> <C>
Midtown West Submarket
1991 1992 1993 1994 1995
Direct Vacancy Rate 16.3% 14.1% 11.7% 9.2% 8.9%
Direct and Sublease Vacancy Rate 3.8% 2.0% 1.7% 1.7% 2.7%
Direct Asking Rental Rate $37.94 $34.26 $31.00 $30.21 $31.25
20.1% 16.1% 13.4% 10.9% 11.6%
Source: Cushman & Wakefield
<CAPTION>
OFFICE VACANCY RATES AND DIRECT ASKING RENTAL RATES FOR CLASS A OFFICE
SPACE
<S> <C>
Midtown West Submarket
3Q96
Direct Vacancy Rate 8.3%
Direct and Sublease Vacancy Rate 1.6%
Direct Asking Rental Rate $31.42
9.9%
Source: Cushman & Wakefield
</TABLE>
Following the Formation Transactions and the Offering, the Company expects
to have a presence in the Midtown West submarket through a 100% interest in each
of Two Penn Plaza and 1740 Broadway and a 49.9% interest in Eleven Penn Plaza.
For more information regarding Two Penn Plaza, 1740 Broadway and Eleven Penn
Plaza, see "The Properties--Two Penn Plaza," "--1740 Broadway" and "--Eleven
Penn Plaza," respectively.
GRAND CENTRAL SUBMARKET. Cushman & Wakefield considers the Grand Central
submarket to be the area from 32nd Street to 47th Street, from Fifth Avenue to
the East River. The Grand Central submarket contains approximately 43.3 million
square feet of Class A office space. Located within the Grand Central submarket
is Grand Central Terminal, the second busiest train station in the United
States.
60
<PAGE>
Office market conditions in the Grand Central submarket have improved
notably during the past several years. The vacancy rate for Class A office space
has fallen from 18.8% in 1993 to 13.0% as of September 30, 1996, as shown in the
following chart:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
OFFICE VACANCY RATES AND DIRECT ASKING RENTAL RATES FOR CLASS A OFFICE
SPACE
<S> <C> <C> <C> <C> <C>
Grand Central Submarket
1991 1992 1993 1994 1995
Direct Vacancy Rate 13.4% 14.6% 16.0% 13.9% 13.0%
Direct and Sublease Vacancy Rate 4.1% 3.5% 2.8% 1.8% 2.6%
Direct Asking Rental Rate $34.60 $32.75 $31.14 $31.59 $32.33
17.5% 18.1% 18.8% 15.7% 15.6%
Source: Cushman & Wakefield
<CAPTION>
OFFICE VACANCY RATES AND DIRECT ASKING RENTAL RATES FOR CLASS A OFFICE
SPACE
<S> <C>
Grand Central Submarket
3Q96
Direct Vacancy Rate 10.8%
Direct and Sublease Vacancy Rate 2.2%
Direct Asking Rental Rate $33.31
13.0%
Source: Cushman & Wakefield
</TABLE>
Following the Formation Transactions and the Offering, the Company expects
to have a presence in the Grand Central submarket through a 40% interest in Two
Park Avenue and an approximate 25% interest in 330 Madison Avenue. For more
information regarding Two Park Avenue and 330 Madison Avenue, see "The
Properties--Two Park Avenue" and "--330 Madison Avenue," respectively.
PLAZA SUBMARKET. Cushman & Wakefield considers the Plaza submarket to be
the area from 47th Street to 65th Street, Seventh Avenue to the East River. The
Plaza submarket is the largest of the Midtown submarkets, containing
approximately 83.2 million square feet of Class A office space.
61
<PAGE>
The Plaza submarket has experienced marked improvement during the past
several years. The vacancy rate for Class A office space fell from 16.3% in 1992
to 9.9% as of September 30, 1996, as shown in the following table:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
OFFICE VACANCY RATES AND DIRECT ASKING RENTAL RATES FOR CLASS A OFFICE
SPACE
<S> <C> <C> <C> <C> <C>
Plaza Submarket
1991 1992 1993 1994 1995
Direct Vacancy Rate 11.1% 11.3% 12.4% 9.3% 8.0%
Direct and Sublease Vacancy Rate 4.6% 5.0% 3.3% 2.9% 2.5%
Direct Asking Rental Rate $42.30 $38.87 $37.96 $39.66 $39.14
15.7% 16.3% 15.7% 12.2% 10.5%
Source: Cushman & Wakefield
<CAPTION>
OFFICE VACANCY RATES AND DIRECT ASKING RENTAL RATES FOR CLASS A OFFICE
SPACE
<S> <C>
Plaza Submarket
3Q96
Direct Vacancy Rate 7.5%
Direct and Sublease Vacancy Rate 2.4%
Direct Asking Rental Rate $39.93
9.9%
Source: Cushman & Wakefield
</TABLE>
The only scheduled construction projects in the Plaza submarket are a
build-to-suit 112,000 square foot tower for the mission of the Federal Republic
of Germany, which is building its headquarters near the United Nations, and a
build-to-suit 103,000 square foot building for the parent corporation of Louis
Vuitton.
Following the Formation Transactions and the Offering, the Company expects
to have a presence in the Plaza submarket through a 100% interest in 866 United
Nations Plaza and a 5.6% interest in 570 Lexington Avenue. For more information
regarding 866 United Nations Plaza and 570 Lexington Avenue, see "The
Properties--866 United Nations Plaza" and "--570 Lexington Avenue,"
respectively.
Information contained in this section contains "forward-looking statements"
relating to the future performance of the New York economy and the Manhattan
office market. Actual results may differ materially from those set forth herein
as the result of a number of factors, including, without limitation, the
national and regional economic climate (which may be adversely affected by
business layoffs or downsizing, industry slowdowns, relocations of businesses,
changing demographics, infrastructure quality and New York State and New York
City budgetary constraints) and priorities and conditions in the national,
regional and Manhattan office markets (such as over supply of or reduced demand
for office space, and increased telecommuting).
GENERAL TERMS OF LEASES IN THE MANHATTAN OFFICE MARKET
Leases entered into for space in the midtown Manhattan office market
typically contain terms which may not be contained in leases in other U.S.
office markets. The initial term of leases entered into for space in excess of
10,000 square feet in the midtown Manhattan office market generally is ten to 15
years. The tenant often will negotiate an option to extend the term of the lease
for one or two renewal periods of
62
<PAGE>
five years each. The base rent during the initial term often will provide for
agreed upon increases periodically over the term of the lease. Base rent for
renewal terms, and base rent for the final years of a long-term year lease (in
those leases which do not provide an agreed upon rent during such final years),
often is based upon a percentage of the fair market rental value of the premises
(determined by binding arbitration in the event the landlord and the tenant are
unable to mutually agree upon the fair market value) but not less than the base
rent payable at the end of the prior period. Leases typically do not provide for
increases in rent based upon increases in the consumer price index.
n addition to base rent, the tenant also generally will pay the tenant's pro
rata share of increases in real estate taxes and operating expenses for the
building over a base year. In some leases, in lieu of paying additional rent
based upon increases in building operating expenses, the tenant will pay
additional rent based upon increases in the wage rate paid to porters over the
porters' wage rate in effect during a base year.
Electricity is most often supplied by the landlord either on a submetered
basis or rent inclusion basis (I.E., a fixed fee is included in the rent for
electricity, which amount may increase based upon increases in electricity rates
or increases in electrical usage by the tenant). Base building services other
than electricity (such as heat, air-conditioning and freight elevator service
during business hours, and base building cleaning) typically are provided at no
additional cost, with the tenant paying additional rent only for services which
exceed base building services or for services which are provided other than
during normal business hours.
In a typical lease for a new tenant, the landlord, at its expense, will
deliver the premises with all existing improvements demolished and any asbestos
abated. The landlord also typically will provide a tenant improvement allowance,
which is a fixed sum which the landlord will make available to the tenant to
reimburse the tenant for all or a portion of the tenant's initial construction
of its premises. Such sum typically is payable as work progresses, upon
submission of invoices for the cost of construction. However, in certain leases
(most often for relatively small amounts of space), the landlord will construct
the premises for the tenant.
63
<PAGE>
THE PROPERTIES
THE PORTFOLIO
GENERAL. Upon the completion of the Offering, the Company will own
interests in seven office Properties located in midtown Manhattan which contain
approximately 5.5 million rentable square feet. See "Structure and Formation of
the Company--Formation Transactions." Cushman & Wakefield has classified each of
the Properties as Class A, which it defines as buildings which meet three or
more of the following criteria: centrally located; professionally managed and
maintained; attract high-quality tenants and command upper-tier rental rates;
and are modern structures or have been modernized to successfully compete with
newer buildings. Each of the Properties includes at least a small amount of
retail space on its lower floors, as well as basement/storage space. One
Property (866 United Nations Plaza) includes an underground parking garage which
is leased to a single tenant. The Company believes that each of the Properties
is adequately covered by property and liability insurance.
The Company will have less than a majority of the ownership interests in the
partnerships that own Eleven Penn Plaza, Two Park Avenue, 330 Madison Avenue and
570 Lexington Avenue. The Company will not act as the direct managing general
partner of any such Properties. With respect to three of the Properties (Eleven
Penn Plaza, Two Park Avenue and 330 Madison Avenue), Mr. Mendik will be the
managing general partner (or co-managing general partner), directly or
indirectly, of the entities which own those Properties. However, by reason of
the provisions of the existing partnership agreements (or the new agreements to
be executed concurrently with the completion of the Offering) governing the
entities which own interests in all four of these Properties, the Company will
be unable to effect certain actions with respect to these Properties (including
actions regarding management, sale, refinancing and the timing and amount of
distributions), but the Company will have approval rights with respect to
significant actions affecting these Properties. In addition, certain "buy-sell"
rights, rights of first refusal and/or forced sale rights exist with respect to
each of these Properties. See "--Eleven Penn Plaza," "--Two Park Avenue," "--330
Madison Avenue" and "--570 Lexington Avenue" below.
64
<PAGE>
The following table sets forth certain information with respect to each of
the Properties as of December 31, 1996:
<TABLE>
<CAPTION>
ANNUAL
NET
ANNUAL EFFECTIVE
THE ESCALATED RENT
COMPANY'S RENT PER PER
OWNERSHIP TOTAL LEASED LEASED
INTEREST RENTABLE PERCENT SQUARE SQUARE
AFTER THE YEAR SQUARE LEASED FOOT FOOT
PROPERTY OFFERING SUBMARKET BUILT FEET (1) (1) (1)(2) (1)(3)
- -------------------- --------- --------- ----- --------- ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Two Penn Plaza...... 100.0% Midtown 1968 1,474,526 69.0%(5) $27.99(5) $ 25.79 (5)
West
1740 Broadway....... 100.0 Midtown 1950 551,301 100.0 32.85 33.26
(The MONY West
Building)
866 United Nations 100.0 Plaza 1966 384,815 97.3 31.29 27.53
Plaza.............
Eleven Penn Plaza 49.9 Midtown 1923 956,280 95.5 27.64 21.49
(6)............... West
Two Park Avenue 40.0 Grand 1928 946,697 97.8 23.59 19.01
(6)............... Central
330 Madison Avenue 24.8 Grand 1963 770,828 96.5 34.77 31.10
(6)............... Central
570 Lexington Avenue 5.6(7) Plaza 1930 433,342 33.5 (8) 29.38(8) --
(6)...............
--------- ------- --------- ------
TOTAL/WEIGHTED 5,517,789 (6 89.0%(6)(9) $29.00(6)(9) $25.47(6)(9)
AVERAGE...........
--------- ------- --------- ------
--------- ------- --------- ------
<CAPTION>
PROPERTY SIGNIFICANT TENANTS (4)
- -------------------- --------------------------------
<S> <C> <C>
Two Penn Plaza...... Digital Equipment (12%)
1740 Broadway....... Mutual of New York (48%);
(The MONY William Douglas McAdams (11%)
Building)
866 United Nations Bear Stearns (17%)
Plaza.............
Eleven Penn Plaza Times Mirror (24%);
(6)............... General Mills (16%)
Two Park Avenue Times Mirror (30%);
(6)............... Smith Barney (11%)
330 Madison Avenue BDO Seidman (15%)
(6)...............
570 Lexington Avenue (8)
(6)...............
TOTAL/WEIGHTED
AVERAGE...........
</TABLE>
- ------------------------
(1) Includes, in the aggregate, 158,123 square feet of retail space (which, as
of December 31, 1996, was 92.0% leased to 48 tenants) and 151,839 square
feet of basement and storage space (which, as of December 31, 1996, was
74.7% leased to 48 tenants). Also includes 42,674 square feet of underground
parking garage space at 866 United Nations Plaza (which, as of December 31,
1996, was 100% leased to an independent garage operator).
(2) As used throughout this Prospectus, Annual Escalated Rent Per Leased Square
Foot represents the annualized monthly base rent in effect (after giving
effect to any contractual increases in monthly base rent that have occurred
up to December 31, 1996) including annualized monthly tenant pass-throughs
of operating and other expenses (but excluding tenant electricity costs)
under each lease executed as of December 31, 1996, or, if such monthly rent
has been reduced by a temporary rent concession, the monthly rent that would
have been in effect at such date in the absence of such concession presented
on a per leased square foot basis.
(3) As used throughout this Prospectus, Annual Net Effective Rent Per Leased
Square Foot represents the annualized monthly base rent for the nine months
ended September 30, 1996 (or, where applicable, for the 12 months ended
December 31 for years ended prior to 1996) including monthly tenant
pass-throughs of operating and other expenses (but excluding tenant
electricity costs), presented on a straight-line basis in accordance with
GAAP, minus amortization of tenant improvement costs and leasing
commissions, if any, paid or payable by the Mendik Group during such period
presented on a per leased square foot basis.
(4) Percentage shown represents significant tenant's percentage of square
footage leased at the Property. For a discussion of the material terms of
the leases with these tenants, see "--The Portfolio--Tenant Diversification"
below.
(5) A lease with respect to approximately 430,000 square feet at Two Penn Plaza
expired on October 31, 1996. The Company has entered into a non-binding
letter of intent with respect to approximately 180,000 square feet and
leases with respect to approximately 89,000 square feet of this space. See
"The Properties--Two Penn Plaza."
(6) Information with respect to Eleven Penn Plaza, Two Park Avenue, 330 Madison
Avenue and 570 Lexington Avenue is presented without regard to the effect of
the Company's partial interests in such Properties. The Company's pro rata
share of total rentable square feet of the Properties, taking into account
such partial interests, is 3,481,447 square feet.
(7) The Company will have certain rights to receive additional cash flow from
the operations of 570 Lexington Avenue under certain circumstances. See
"--570 Lexington Avenue" below.
(8) 570 Lexington Avenue was acquired in 1994 with substantially all of the
building unoccupied at that time. The building has been redeveloped and
currently is being leased.
(9) Excludes 570 Lexington Avenue.
65
<PAGE>
HISTORICAL OCCUPANCY. The Properties historically have achieved
consistently high occupancy rates in comparison to the overall midtown Manhattan
office market, as shown in the following table:
<TABLE>
<CAPTION>
PERCENT OCCUPANCY RATE OF
LEASED AT THE CLASS A MIDTOWN
PROPERTIES MANHATTAN OFFICE
YEAR-END (1) PROPERTIES (2)
- ------------------------------------------------------- ------------- -----------------------
<S> <C> <C>
1996................................................... 89.0%(3) 91.9%
1995................................................... 95.5% 90.5%
1994................................................... 95.0% 89.5%
1993................................................... 93.0% 86.9%
1992................................................... 94.4% 87.2%
</TABLE>
- ------------------------
(1) Includes space for leases that were executed as of the relevant date.
Percent Leased at the Properties is the weighted average for all of the
Properties (excluding 570 Lexington Avenue) as of the relevant date,
treating Eleven Penn Plaza, Two Park Avenue and 330 Madison Avenue as if
they were 100% owned by the Company.
(2) Includes vacant space available for direct lease, but does not include
vacant space available for sublease; including vacant space available for
sublease would reduce the occupancy rate as of each date shown. Source:
Cushman & Wakefield. Cushman & Wakefield has classified each of the
Properties as Class A office properties.
(3) A lease with respect to approximately 430,000 square feet at Two Penn Plaza
expired on October 31, 1996. The Company has entered into leases with
respect to approximately 89,000 square feet of this space and has entered
into a non-binding letter of intent with a single prospective tenant with
respect to an additional approximately 180,000 square feet of this space,
although there can be no assurance that this letter of intent will result in
an executed lease. By re-leasing this block of space, the Company expects to
increase the Percent Leased at the Properties to a level more comparable to
the historical Percent Leased at the Properties, which has averaged in
excess of 94% over the past five calendar years (excluding 570 Lexington
Avenue).
LEASE EXPIRATIONS. Leases at the Properties, as at many other Manhattan
office properties, typically extend for a term of ten or more years, compared to
typical lease terms of 5-10 years in other large U.S. office markets. Including
leases renewed prior to expiration, the Mendik Group has re-leased approximately
58% of the space at the Properties since 1993, with an average lease term of
approximately 11 years. The Company believes that, in light of the relatively
long-term nature of leases in the Manhattan office market, this level of leasing
activity is above average compared to that achieved by other owners of Manhattan
office properties during such period. As a result of the Mendik Group's
re-leasing efforts, leases covering approximately 29% of the leased space at the
Properties expire after 2007, and in no single year are leases covering more
than 10% of the leased space at the Properties scheduled to expire (in each
case, assuming no tenants exercise renewal or cancellation options and no tenant
bankruptcies or other tenant defaults).
66
<PAGE>
The following table sets out a schedule of the annual lease expirations at
the Properties (excluding 570 Lexington Avenue) with respect to leases in place
as of December 31, 1996 for each of the next ten years and thereafter (assuming
that no tenants exercise renewal or cancellation options and that there are no
tenant bankruptcies or other tenant defaults):
<TABLE>
<CAPTION>
ANNUAL
ESCALATED RENT
SQUARE ANNUAL PER LEASED
NUMBER OF FOOTAGE OF PERCENTAGE OF ESCALATED RENT SQUARE FOOT OF
EXPIRING LEASES EXPIRING TOTAL SQUARE FEET OF EXPIRING EXPIRING LEASES
YEAR OF LEASE EXPIRATION (1) LEASES (1) (1) LEASES (1)(2) (1)(3)
- ------------------------------------ --------------- ---------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
1997................................ 68 319,716 6.3% $ 10,672,225 $ 33.38(5)
1998................................ 46 481,873 9.5 15,403,296 31.97
1999................................ 57 425,150 8.4 12,472,477 29.34
2000................................ 23 144,963 2.8 4,596,738 31.71
2001................................ 22(6) 440,403(6) 8.7(6) 14,713,226(6) 33.41(6)
2002................................ 13 224,974 4.4 7,389,091 32.84
2003................................ 19 257,305 5.1 7,344,509 28.54
2004................................ 15 164,546 3.2 4,909,298 29.84
2005................................ 19 285,789 5.6 9,334,094 32.66
2006................................ 19 325,689 6.4 8,804,745 27.03
2007 and thereafter................. 37 1,456,525 28.6 35,635,438 24.47
--- ---------- ------ -------------- ------
SUBTOTAL/WEIGHTED AVERAGE........... 338 4,526,933 89.0% $ 131,275,137 $ 29.00
-------------- ------
-------------- ------
Unleased at 12/31/96................ 557,514 11.0
---------- ------
TOTAL............................... 5,084,447 100.0%
---------- ------
---------- ------
<CAPTION>
ANNUAL
ESCALATED RENT
PER LEASED
SQUARE FOOT OF
EXPIRING LEASES
WITH WITH
FUTURE STEP-UPS
YEAR OF LEASE EXPIRATION (1)(4)
- ------------------------------------ ---------------
<S> <C>
1997................................ $ 33.38(5)
1998................................ 31.97
1999................................ 29.59
2000................................ 31.80
2001................................ 32.37(6)
2002................................ 33.98
2003................................ 32.07
2004................................ 34.24
2005................................ 37.10
2006................................ 32.61
2007 and thereafter................. 32.44
------
SUBTOTAL/WEIGHTED AVERAGE........... $ 32.59
------
------
Unleased at 12/31/96................
TOTAL...............................
</TABLE>
- ------------------------
(1) Excludes 570 Lexington Avenue. In addition, the Company will own partial
interests in Eleven Penn Plaza, Two Park Avenue and 330 Madison Avenue.
Information in this table is presented without regard to the effect of such
partial interests.
(2) Annual Escalated Rent of Expiring Leases, as used throughout this
Prospectus, represents the annualized monthly base rent in effect (after
giving effect to any contractual increases in annualized monthly base rent
that have occurred up to December 31, 1996) including monthly tenant pass-
throughs of operating and other expenses (but excluding tenant electricity
costs) under each lease executed as of December 31, 1996, which expires in
the applicable year or, if such monthly rent has been reduced by a temporary
rent concession, the monthly rent that would have been in effect at such
date in the absence of such concession.
(3) Annual Escalated Rent Per Leased Square Foot of Expiring Leases, as used
throughout this Prospectus, represents Annual Escalated Rent of Expiring
Leases, as described in footnote (2) above, on a per leased square foot
basis.
(4) Annual Escalated Rent Per Leased Square Foot of Expiring Leases With Future
Step-Ups represents Annual Escalated Rent Per Leased Square Foot of Expiring
Leases, as described in footnote (3) above, adjusted to reflect contractual
increases in monthly base rent that occur after December 31, 1996.
(5) For comparison purposes, the Direct Weighted Average Rental Rate for the
direct Class A midtown Manhattan office market, according to Cushman &
Wakefield (as adjusted by the Company to weight the representation of the
Properties, excluding 570 Lexington Avenue and without regard to the
Company's partial interests in four of the Properties, in the Penn Station,
West Side, Murray Hill, United Nations and Grand Central submarkets), was
$31.16 as of December 31, 1996. The Direct Weighted Average Rental Rate
represents the weighted average of asking rental rates for direct Class A
office space. Asking rental rates generally are higher than actual rental
rates (which generally are not publicly available). In addition, the Direct
Weighted Average Rental Rate represents a large number of Class A properties
in various locations within the midtown Manhattan office market, and,
therefore, may not be representative of asking or actual rental rates at the
Properties.
(6) Includes an underground parking garage at 866 United Nations Plaza
comprising 42,674 square feet. As of December 31, 1996, the Annual Escalated
Rent Per Leased Square Foot for the underground parking garage space was
$16.29.
67
<PAGE>
TENANT DIVERSIFICATION. The Properties currently are leased to over 330
tenants which are engaged in a variety of businesses, including financial
services, investment banking, publishing, computer technology, health care
services, accounting and law. The following table sets forth information
regarding the leases with respect to the 20 largest tenants at the Properties
(excluding 570 Lexington Avenue), based on the amount of square footage leased
by such tenants as of December 31, 1996:
<TABLE>
<CAPTION>
REMAINING TOTAL RENTABLE PERCENTAGE OF
LEASE TERM SQUARE FEET AGGREGATE LEASED
PROPERTY IN MONTHS (1) SQUARE FEET (1)
----------------------------- ----------- -------------- -----------------
<S> <C> <C> <C> <C>
100% OWNED PROPERTIES
Mutual of New York ("MONY")......... 1740 Broadway 199 263,948 5.8%
Ogden Services Corp. ............... Two Penn Plaza 133 132,023 2.9
Digital Equipment Corp. ............ Two Penn Plaza 13 103,908(2) 2.3
UHC Management Co., Inc. ........... Two Penn Plaza 49 69,137(2) 1.5
Madison Square Garden............... Two Penn Plaza 100 67,023 1.5
Bear Stearns........................ 866 United Nations Plaza 10 64,710 1.4
William Douglas McAdams............. 1740 Broadway 131 62,774 1.4
Forest Electric Corp. .............. Two Penn Plaza 109 57,217 1.3
George B. Buck Consulting........... Two Penn Plaza 18 55,344 1.2
PARTIAL INTEREST PROPERTIES
Times Mirror........................ Two Park Avenue/ 164/54 513,684 11.3
Eleven Penn Plaza
R.H. Macy & Co. Inc. ............... Eleven Penn Plaza 72 153,588 3.4
BDO Seidman......................... 330 Madison Avenue 165 114,122 2.5
Smith Barney Inc. .................. Two Park Avenue 17 99,839 2.2
Bank Julius Baer.................... 330 Madison Avenue 102 67,322 1.5
Crowthers McCall Inc. .............. Eleven Penn Plaza 158 62,239 1.4
Herrick Feinstein LLP............... Two Park Avenue 165 61,337 1.4
Nortel Communications............... 330 Madison Avenue 18 58,026 1.3
Schiefeflin & Somerset Co. ......... Two Park Avenue 109 55,685 1.2
Executive Office Network............ Eleven Penn Plaza 183 51,886 1.1
Donald J. Fager & Associates........ Two Park Avenue 33 49,232 1.1
----------- -------------- ---
TOTAL/WEIGHTED AVERAGE.............. 108 2,163,044 47.7%
----------- -------------- ---
----------- -------------- ---
</TABLE>
- ------------------------
(1) The Company will own partial interests in Eleven Penn Plaza, Two Park
Avenue, 330 Madison Avenue and 570 Lexington Avenue. Information with
respect to Total Rentable Square Feet for each significant tenant listed for
these Properties represents the entire space leased (without adjustment to
reflect the Company's partial interest in the Property). In addition,
information with respect to Percentage of Aggregate Leased Square Feet is
based on the total rentable square footage at the Properties (excluding 570
Lexington Avenue), without adjustment to reflect the Company's partial
interest in any Property.
(2) As of December 31, 1996, Digital Equipment Corp. ("Digital") leased
approximately 178,000 square feet in Two Penn Plaza under leases that expire
on January 31, 1998. Digital has subleased approximately 53,000 square feet
to UHC Management Company, Inc., a health services company ("UHC"), and the
Company has entered into a direct lease with UHC for the space UHC currently
is subleasing from Digital, which direct lease will take effect upon the
expiration of UHC's sublease with Digital and will expire on January 31,
2001. In addition, Digital has subleased approximately 21,000 square feet to
Apartus Technology, a technology company ("Apartus"), and the Company has
entered into a
68
<PAGE>
direct lease with Apartus for the space Apartus currently is subleasing from
Digital, which direct lease will take effect upon the expiration of Apartus'
sublease with Digital and will expire on January 31, 2003. See "--Two Penn
Plaza" below.
LEASE DISTRIBUTION. The following table sets forth information relating to
the distribution of the Company's leases (excluding leases with respect to 570
Lexington Avenue), based on rentable square feet under lease, as of December 31,
1996:
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF AGGREGATE
AGGREGATE PORTFOLIO
TOTAL LEASED PORTFOLIO ANNUAL ANNUAL
NUMBER OF PERCENT OF ALL SQUARE FEET LEASED SQUARE ESCALATED RENT ESCALATED
SQUARE FEET UNDER LEASE LEASES (1) LEASES (1) (1) FEET (1) (1) RENT (1)
- ----------------------------------- ----------- --------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
2,500 or less...................... 130 38.5% 135,531 3.0% $ 3,579,457 2.7%
2,501-5,000........................ 63 18.6 223,410 4.9 5,894,204 4.5
5,001-7,500........................ 29 8.6 178,922 4.0 5,411,946 4.1
7,501-10,000....................... 22 6.5 192,464 4.3 5,820,882 4.4
10,001-20,000...................... 38 11.2 557,809 12.3 15,757,597 12.0
20,001-40,000...................... 26 7.7 741,968 16.4 22,701,674 17.3
40,000-75,000...................... 22 6.5 1,168,746 25.8 33,568,689 25.6
75,000+............................ 8 2.4 1,328,083 29.3 38,540,688 29.4
----- ----- -------------- ----- -------------- -----
TOTAL.............................. 338 100.0% 4,526,933 100.0% $ 131,275,137 100.0%
----- ----- -------------- ----- -------------- -----
----- ----- -------------- ----- -------------- -----
</TABLE>
- ------------------------
(1) Excludes 570 Lexington Avenue. In addition, the Company will own partial
interests in Eleven Penn Plaza, Two Park Avenue and 330 Madison Avenue.
Information in this table is presented without regard to the effect of such
partial interests.
TENANT RETENTION AND EXPANSIONS. The Company believes that the Mendik
Group's commitment to and reputation for providing a high-quality office
environment in terms of building systems, public spaces and tenant services has
encouraged tenants to renew their leases, attracted new tenants to the
Properties and supported competitive rent levels. The Company will continue the
Mendik Group's approach to identifying and responding quickly to tenant
requirements. The Company will establish personal contacts with its tenants and
maintain a program of regular tenant visits. In addition, the Company will
continue the Mendik Group's approach of rotating its building managers through
each of its properties in order to encourage a critical review of each
property's facilities and tenant services. The Company also will continue the
Mendik Group's approach of encouraging each of its employees to make suggestions
relating to the enhancement of a building's appearance or efficiency.
The Company's success in this area is demonstrated in part by the number of
existing tenants which have re-leased space, leased additional space to support
their expansion needs or moved to other space within the Company's portfolio.
For example, in 1995 the Mendik Group was able to facilitate The Times Mirror
Company's consolidation of its operations by permitting it to relocate to Two
Park Avenue the operations it previously conducted at Eleven Penn Plaza. See
"--Eleven Penn Plaza" below.
69
<PAGE>
HISTORICAL LEASE RENEWALS. The following table sets forth certain
historical information regarding tenants at the Properties who renewed an
existing lease at or prior to the expiration of such lease:
<TABLE>
<CAPTION>
TOTAL/
WEIGHTED
AVERAGE
1993 1994 1995 1996 1993-1996
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Number of leases expired during calendar year...... 83 84 82 65 314
Number of leases renewed........................... 39 53 51 47 190
Percentage of leases renewed....................... 47.0% 63.1% 62.2% 72.3% 60.5%
Aggregate rentable square footage of expiring
leases........................................... 658,122 485,331 687,704 902,394 2,733,551
Aggregate rentable square footage of lease
renewals......................................... 366,939 200,983 493,096 389,523 1,450,541
Percentage of expiring rentable square footage
renewed.......................................... 55.8% 41.4% 71.7% 43.2%(1) 53.1%(1)
</TABLE>
- ------------------------
(1) If the effect of the expiration on October 31, 1996 of the 430,000 square
foot lease with Equitable at Two Penn Plaza were excluded, the percentage of
expiring rentable square footage renewed for 1996 and 1993-1996 would be
82.4% and 63.0%, respectively.
HISTORICAL TENANT IMPROVEMENTS AND LEASING COMMISSIONS. Including leases
renewed prior to expiration, the Mendik Group has re-leased approximately 58% of
the space at the Properties since 1993 with an average lease term of
approximately 11 years. The following table sets forth certain historical
information regarding tenant improvement and leasing commission costs for
tenants at the Properties (excluding 570 Lexington Avenue) during this period:
<TABLE>
<CAPTION>
TOTAL/
JANUARY 1 TO WEIGHTED
SEPTEMBER 30, AVERAGE
1993 1994 1995 1996 1993-1996
--------- --------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
RENEWALS
Number of leases............................................... 39 53 51 33 176
Square feet (1)................................................ 366,939 200,983 493,096 338,712 1,399,730
Tenant improvement costs per square foot (2)................... $ 0.71 $ 12.84 $ 6.61 $ 11.12 $ 6.25
Leasing commission costs per square foot (2)................... $ 2.04 $ 4.66 $ 4.25 $ 9.52 $ 5.02
--------- --------- --------- ------------- ----------
Total tenant improvement and leasing commission costs per
square foot (2)............................................ $ 2.75 $ 17.50 $ 10.86 $ 20.64 $ 11.27
--------- --------- --------- ------------- ----------
--------- --------- --------- ------------- ----------
NEW LEASES
Number of leases............................................... 46 36 31 20 133
Square feet (1)................................................ 222,969 386,989 220,219 149,645 979,822
Tenant improvement costs per square foot (2)................... $ 23.24 $ 35.75 $ 30.11 $ 29.09 $ 30.14
Leasing commission costs per square foot (2)................... $ 6.85 $ 6.26 $ 5.51 $ 6.05 $ 6.23
--------- --------- --------- ------------- ----------
Total tenant improvement and leasing commission costs per
square foot (2)............................................ $ 30.09 $ 42.01 $ 35.62 $ 35.14 $ 36.37
--------- --------- --------- ------------- ----------
--------- --------- --------- ------------- ----------
TOTAL
Number of leases............................................... 85 89 82 53 309
Square feet (1)................................................ 589,908 587,972 713,315 488,357 2,379,552
Tenant improvement costs per square foot (2)................... $ 8.22 $ 25.13 $ 14.46 $ 19.90 $ 15.97
Leasing commission costs per square foot (2)................... $ 3.72 $ 5.54 $ 4.64 $ 8.25 $ 5.49
--------- --------- --------- ------------- ----------
Total tenant improvement and leasing commission costs per
square foot (2)............................................ $ 11.94 $ 30.67 $ 19.10 $ 28.15 $ 21.46
--------- --------- --------- ------------- ----------
--------- --------- --------- ------------- ----------
</TABLE>
- ------------------------
(1) Represents 100% of the leases signed during the period.
(2) Represents the Company's pro rata share of expenditures (including 49.9% of
expenditures at Eleven Penn Plaza, 40% of expenditures at Two Park Avenue
and 24.8% of the expenditures at 330 Madison Avenue).
70
<PAGE>
HISTORICAL CAPITAL EXPENDITURES. Since 1988, approximately $79 million has
been expended at the Properties (excluding 570 Lexington Avenue) for building
improvements and equipment upgrades (excluding the costs of tenant
improvements), including installation of state-of-the-art steam absorbers to
provide air conditioning, elevator computerization and refurbishment, lobby and
facade renovation, security systems upgrades, sprinkler system installation,
asbestos removal, window replacement and mechanical and electrical systems
upgrades. As a result of this recently completed renovation program, the Company
believes that the Properties have state-of-the-art infrastructure and are well
positioned to compete with other Class A office properties in their respective
submarkets, relatively few capital projects remain to be undertaken over the
next several years. For each of 1997 and 1998, the projected cost of building
improvements and equipment upgrades (excluding the costs of tenant improvements)
at the Properties is approximately $690,000 (or $0.20 per square foot), which
cost is expected to be paid from operating cash flows or cash reserves.
The following table sets forth information regarding historical capital
expenditures at the Properties (excluding 570 Lexington Avenue) since 1988:
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 TOTAL
------- ------- ------- ------- ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Two Penn Plaza..................... $ 722 $ 1,734 $ 529 $ 4,656 $ 930 $ 857 $2,103 $3,249 $1,943 $16,723
1740 Broadway...................... (1) (1) (1) 291 1,081 64 32 871 702 3,041
866 United Nations Plaza........... 349 609 999 50 100 726 42 533 345 3,753
Eleven Penn Plaza.................. 462 4,501 4,426 3,264 2,772 76 147 50 2,159 17,857
Two Park Avenue.................... 7,835 3,571 3,010 433 837 126 1,176 1,205 376 18,569
330 Madison Avenue................. 2,859 894 6,094 2,710 669 1,500 1,593 2,166 1,054 19,539
------- ------- ------- ------- ------ ------ ------ ------ ------ -------
Total.......................... $12,227 $11,309 $15,058 $11,404 $6,389 $3,349 $5,093 $8,074 $6,579 $79,482
------- ------- ------- ------- ------ ------ ------ ------ ------ -------
------- ------- ------- ------- ------ ------ ------ ------ ------ -------
</TABLE>
- ------------------------
(1) The Mendik Group acquired 1740 Broadway in 1990.
UNCONSOLIDATED PROPERTIES. The following table sets forth certain
information related to the four Properties in which the Company will own less
than a majority of the interests (which interests will be accounted for under
the equity method of accounting):
SELECTED OPERATING STATEMENT INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RENTAL AND
OWNERSHIP OTHER INTEREST DEPRECIATION AND OTHER NET INCOME
INTEREST REVENUE EXPENSE AMORTIZATION EXPENSES (LOSS)
------------- ----------- ----------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Eleven Penn Plaza................ 49.90% $ 31,952 $ 7,223 $ 4,655 $ 12,575 $ 7,499
Two Park Avenue.................. 40.00 23,896 7,534 7,549 11,519 (2,706)
330 Madison Avenue............... 24.75 26,913 7,337(2) 5,042 12,802 1,732
570 Lexington Avenue............. 5.58 4,428 3,584 431 5,419 (5,006)
<CAPTION>
FUNDS FROM
OPERATIONS
CONTRIBUTION TO
THE COMPANY (1)
-----------------
<S> <C>
Eleven Penn Plaza................ $ 5,892
Two Park Avenue.................. 1,865
330 Madison Avenue............... 3,183
570 Lexington Avenue............. (51)
</TABLE>
- ------------------------
(1) Represents the Funds from Operations Contribution to the Company from each
Property included in Funds from Operations, before minority interest of
holders of Units, as set forth in "Selected Financial Information."
(2) Each of the amount of mortgage payable outstanding and the interest rate
with respect to this loan currently is in dispute. See "The Properties--330
Madison Avenue."
71
<PAGE>
SELECTED BALANCE SHEET INFORMATION
AS OF SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CASH AND
OWNERSHIP RENTAL SHORT TERM TOTAL MORTGAGE INTEREST
INTEREST PROPERTY, NET INVESTMENTS (1) ASSETS PAYABLE RATE (2)
------------- ------------- ----------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Eleven Penn Plaza.................... 49.90% $ 34,859 $ 5,701 $ 69,318 $ 75,713 9.25
Two Park Avenue...................... 40.00 150,257 4,141 173,008 65,000 10.03
330 Madison Avenue................... 24.75 49,995 5,413 77,681 90,204(3) 8.59(3)
570 Lexington Avenue................. 5.58 35,800 174 47,703 -- --
<CAPTION>
MATURITY
DATE
-----------
<S> <C>
Eleven Penn Plaza.................... 1/31/99
Two Park Avenue...................... 12/19/98
330 Madison Avenue................... 10/30/99
570 Lexington Avenue................. --
</TABLE>
- ------------------------
(1) Does not necessarily reflect the cash expected to be outstanding as of the
completion of the Offering.
(2) Effective rate for 1996.
(3) Each of the amount of mortgage payable outstanding and the interest rate
with respect to this loan currently is in dispute. See "The Properties--330
Madison Avenue."
TWO PENN PLAZA
Two Penn Plaza is a 32-story office building that sits directly atop Penn
Station and occupies the entire block front on the west side of Seventh Avenue
between 31st and 33rd Streets (adjacent to Madison Square Garden). Built in
1968, Two Penn Plaza features approximately 1,475,000 rentable square feet
(including approximately 29,600 square feet of retail space and approximately
27,800 square feet of storage space) and a large floor plate of approximately
55,000 square feet, which floor plate the Company believes makes the building
well-suited for large corporate tenants. The Mendik Group acquired the leasehold
interest in Two Penn Plaza in 1978 and the fee interest in 1980.
As of December 31, 1996, approximately 69.0% of the rentable square footage
in Two Penn Plaza was leased. The office space was 68.7% leased and the retail
space was 88.1% leased. The following table sets forth certain information with
respect to the Property at the end of each of the past five years.
<TABLE>
<CAPTION>
ANNUAL NET
ANNUAL ESCALATED EFFECTIVE RENT
RENT PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- ---------------------- ------------------- ----------------- ---------------
<S> <C> <C> <C>
1996.................. 69.0% $ 27.99 $ 25.79(1)
1995.................. 93.7% $ 28.62 $ 25.83
1994.................. 94.2% $ 27.75 $ 25.36
1993.................. 96.0% $ 26.23 $ 24.76
1992.................. 94.7% $ 28.77 $ 25.76
</TABLE>
- ------------------------
(1) Information is as of September 30, 1996.
72
<PAGE>
Equitable, a large life and health insurance company, leased approximately
430,000 square feet under a lease which expired on October 31, 1996. Equitable
relocated the operations that it conducted at Two Penn Plaza to a building
closer to its Manhattan headquarters. The Company has executed leases with
respect to approximately 89,000 square feet of this space, including a lease
with respect to approximately 60,000 square feet with Madison Square Garden,
which operates the Madison Square Garden sports and entertainment facility,
which commenced on December 1, 1996 and ends on January 31, 2008, and a lease
with respect to approximately 29,000 square feet with Dean Witter Reynolds Inc.,
a large investment bank and brokerage house, for a period of approximately eight
years.
The Company also has entered into a signed letter of intent with respect to
approximately 180,000 square feet of space with Information Builders, Inc., a
large privately held software company ("IBI"), for a period of approximately 15
years. The Company anticipates that a lease will be executed with IBI in the
near future pursuant to the signed letter of intent, although there can be no
assurance that such a lease will be executed. The Mendik Group currently is
marketing the remaining 160,000 square feet of the former Equitable space.
As of December 31, 1996, one tenant leased space representing 10% or more of
the Property's rentable square feet. Digital, a large computer systems company,
leased approximately 178,000 square feet in the building under leases that
expire on January 31, 1998. Digital has subleased approximately 53,000 square
feet to UHC, a health services company. The Company has entered into a direct
lease with UHC for the space UHC currently is subleasing from Digital, which
direct lease will take effect upon the expiration of UHC's sublease with Digital
and will expire on January 31, 2001. (As of December 31, 1996, UHC leased an
additional approximate 16,000 square feet in the building on a direct basis from
the Company under a lease which also expires on January 31, 2001.) In addition,
Digital has subleased approximately 21,000 square feet to Apertus, a technology
company. The Company has entered into a direct lease with Apertus for the space
Apertus currently is subleasing from Digital, which direct lease will take
effect upon the expiration of Apertus' sublease with Digital and will expire on
January 31, 2003.
The following table sets out a schedule of the annual lease expirations at
Two Penn Plaza for leases executed as of December 31, 1996 with respect to each
of the next ten years and thereafter (assuming that no tenants exercise renewal
or cancellation options and that there are no tenant bankruptcies or other
tenant defaults):
<TABLE>
<CAPTION>
SQUARE ANNUAL
FOOTAGE ESCALATED ANNUAL ESCALATED
NUMBER OF OF PERCENTAGE RENT OF RENT PER LEASED
YEAR OF LEASE EXPIRING EXPIRING OF TOTAL EXPIRING SQUARE FOOT OF
EXPIRATION LEASES LEASES SQUARE FEET LEASES EXPIRING LEASES
------------- --------------- ---------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
1997................................... 17 55,520 3.8% $ 1,509,679 $ 27.19(1)
1998................................... 10 206,708 14.0 6,507,948 31.48
1999................................... 15 107,946 7.3 3,026,099 28.03
2000................................... 9 54,531 3.7 1,428,465 26.20
2001................................... 5 82,541 5.6 2,583,815 31.30
2002................................... 2 15,437 1.0 380,825 24.67
2003................................... 5 67,651 4.6 1,638,211 24.22
2004................................... 3 39,991 2.7 1,057,708 26.45
2005................................... 3 80,671 5.5 2,933,269 36.36
2006................................... 1 57,217 3.9 1,411,789 24.67
2007 and thereafter.................... 8 249,831 16.9 6,019,086 24.09
--
---------- ----- ------------- ------
SUBTOTAL/WEIGHTED AVERAGE.............. 78 1,018,044 69.0% $ 28,496,894 $ 27.99
--
------------- ------
Unleased at 12/31/96................... 456,482(2) 31.0
---------- -----
TOTAL.................................. 1,474,526 100.0%
---------- -----
---------- -----
<CAPTION>
ANNUAL ESCALATED
RENT PER LEASED
SQUARE FOOT OF
EXPIRING LEASES
YEAR OF LEASE WITH FUTURE
EXPIRATION STEP-UPS
------------- -----------------
<S> <C>
1997................................... $ 27.19(1)
1998................................... 31.48
1999................................... 28.08
2000................................... 26.44
2001................................... 24.48
2002................................... 28.40
2003................................... 26.61
2004................................... 29.94
2005................................... 41.39
2006................................... 29.15
2007 and thereafter.................... 29.80
------
SUBTOTAL/WEIGHTED AVERAGE.............. $ 29.86
------
Unleased at 12/31/96...................
TOTAL..................................
</TABLE>
- ------------------------
(1) For comparison purposes, according to Cushman & Wakefield, the Direct
Weighted Average Rental Rate for the direct Class A Penn Station submarket
(which, according to Cushman & Wakefield, is the area bounded by 30th Street
on the south, 35th Street on the north, the Hudson River on the west and
73
<PAGE>
Seventh Avenue on the east) was $31.47 as of December 31, 1996. Direct
Weighted Average Rental Rate represents the weighted average of asking
rental rates for direct Class A space. Asking rental rates generally are
higher than actual rental rates (which generally are not publicly
available). Therefore, the Direct Weighted Average Rental Rate may not be
representative of asking or actual rental rates at Two Penn Plaza.
(2) Includes approximately 341,000 square feet which remains vacant following
the expiration of the lease with Equitable for approximately 430,000 square
feet which expired on October 31, 1996.
Since 1988, approximately $16 million has been spent on various capital
improvements to Two Penn Plaza, which improvements the Mendik Group believes
have enhanced the building's competitiveness. In 1990, the building's main
entrance (on Seventh Avenue) was renovated and made more prominent by resetting
the stairs leading up to the entrance at a 45 DEG. angle to the street. At the
same time, the plaza area surrounding the building was renovated to create an
enhanced sense of security and control for tenants by encircling the north and
south sides with a decorative wrought iron fence (bordered by approximately 75
new trees). In 1991, the building's security systems were upgraded with the
addition of a message center for incoming package deliveries (to restrict access
to the building by outside messengers). In 1992, the entire sidewalk surrounding
the plaza area was replaced. In 1995, installation of a sprinkler system
throughout the entire building was completed. In addition, in 1995-96, the
building's air conditioning equipment was replaced with new high pressure steam
absorbers, which have improved operating efficiency, reduced operating costs and
enabled the building to operate without the use of certain chlorofluorocarbons,
the production of which is prohibited by Federal law because of suspected links
to the depletion of the atmosphere's ozone layer. (Chlorofluorocarbons continue
to be used by a majority of the commercial office buildings in the United
States.) Madison Square Garden paid approximately 30% of the cost of this
project pursuant to an air cooling operating agreement under which Two Penn
Plaza provides air conditioning and refrigeration to Madison Square Garden in
exchange for reimbursement. Also in 1995-96, the building's elevators were
refurbished and were computerized to improve operating efficiency.
The Penn Plaza area has been enhanced in recent years through the efforts of
the 34th Street Business Improvement District Partnership (the "34th Street
BID"), a public-private partnership which provides street cleaning services,
security personnel and other community services to businesses in the area. In
addition, the 34th Street BID has considered undertaking certain capital
projects in the Penn Plaza area. The 34th Street BID is funded through special
assessments collected by New York City from property owners which are similar to
real estate taxes. (These charges then may be passed on to tenants to the extent
permitted under applicable leases.) The 34th Street BID is governed by an
independent board of directors comprised of public officials and private
citizens. Mr. Mendik was involved in the establishment of the 34th Street BID.
The Penn Plaza area also has been enhanced in recent years by the
redevelopment efforts completed by certain of the Property's neighbors. Several
years ago, Madison Square Garden completed a redevelopment which included the
installation of skyboxes and the construction of new "V.I.P." entrances on 31st
and 33rd Streets, at a total cost of approximately $200 million. Long Island
Railroad recently completed a renovation of its portion of Penn Station,
including a new main entrance on 34th Street, at a cost of approximately $70
million. In addition, AMTRAK currently is considering converting the General
Post Office, located on Eighth Avenue between 31st and 33rd Streets, into a new
AMTRAK train station, a project for which Congress has to date allocated $25
million.
The Company currently is exploring the possibility of developing additional
retail space at Two Penn Plaza (on the building's plaza). The Company believes
that the development of additional retail space may, depending upon the amount
of space developed, provide the Company with a source of increased cash flow.
There can be no assurance, however, that any such additional retail space will
be developed. In addition, New Jersey Transit currently is considering building
a new entrance to Penn Station near the corner of Seventh Avenue and 31st
Street, which would utilize a portion of the plaza area surrounding the Two Penn
Plaza building in exchange for consideration with respect to which the Company
currently is
74
<PAGE>
engaged in discussions with New Jersey Transit. The Company also is engaged in
discussions with AMTRAK regarding AMTRAK's use of a portion of the Two Penn
Plaza premises for emergency ventilation in exchange for consideration to be
negotiated.
The aggregate undepreciated tax basis of depreciable real property at Two
Penn Plaza for Federal income tax purposes was $110,261,639 as of December 31,
1995. Depreciation and amortization are computed for Federal income tax purposes
on the declining balance or straight-line methods over lives which range from 15
to 39 years. As of December 31, 1995, the aggregate undepreciated tax basis of
depreciable personal property associated with Two Penn Plaza for Federal income
tax purposes was $1,240,756. Depreciation and amortization are computed on the
double declining balance method or straight-line method over lives which range
from 5 to 7 years.
The current real estate tax rate for all Manhattan office properties is
$10.252 per $100 of assessed value. The total annual tax for Two Penn Plaza at
this rate for the 1996-97 tax year, including the 34th Street BID tax of
$330,309, is $8,121,829 (at a taxable assessed value of $76,000,000).
1740 BROADWAY (THE MONY BUILDING)
1740 Broadway (The MONY Building) is a 27-story office building which
occupies the entire block front on the east side of Broadway between 55th and
56th Streets. Built in 1950, 1740 Broadway features approximately 551,000
rentable square feet (including approximately 15,000 square feet of retail space
and approximately 10,800 square feet of basement and storage space) and floor
plates that range from approximately 7,000 to 31,000 square feet, which floor
plates the Company believes make the building well-suited for large corporate
tenants. The Mendik Group acquired 1740 Broadway in 1990.
As of December 31, 1996, 100% of the rentable square footage in 1740
Broadway was leased (including space for leases that were executed as of
December 31, 1996). The following table sets forth certain information with
respect to the Property at the end of each of the past five years:
<TABLE>
<CAPTION>
ANNUAL NET
EFFECTIVE
ANNUAL ESCALATED RENT
RENT PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FEET
- --------------------------------------------- --------------- ----------------- -------------
<S> <C> <C> <C>
1996......................................... 100.0% $ 32.85 $ 33.26(1)
1995......................................... 100.0% $ 34.85 $ 34.77
1994......................................... 100.0% $ 33.57 $ 34.92
1993......................................... 100.0% $ 33.32 $ 35.29
1992......................................... 98.0% $ 30.79 $ 34.84
</TABLE>
- ------------------------
(1) Information is as of September 30, 1996.
As of December 31, 1996, two tenants leased 10% or more of the Property's
rentable square feet. Mutual of New York ("MONY"), a large life insurance
company, leased approximately 264,000 square feet (approximately 48% of the
building) under three leases, one for approximately 16,000 square feet (which
expires in February 1998), one for approximately 29,500 square feet (which
expires in December 2000), and one for approximately 218,500 square feet (which
expires in May 2016). MONY also has options to lease additional space at the
Property.
In addition, as of December 31, 1996, William Douglas McAdams, Inc., a
pharmaceutical advertising company, leased approximately 63,000 square feet
under a lease that expires in December 2007.
75
<PAGE>
The following table sets out a schedule of the annual lease expirations at
1740 Broadway with respect to leases executed as of December 31, 1996 for each
of the next ten years and thereafter (assuming that no tenants exercise renewal
or cancellation options and that there are no tenant bankruptcies or other
tenant defaults):
<TABLE>
<CAPTION>
SQUARE ANNUAL
FOOTAGE ESCALATED ANNUAL ESCALATED
NUMBER OF OF PERCENTAGE OF RENT OF RENT PER LEASED
YEAR OF LEASE EXPIRING EXPIRING TOTAL LEASED EXPIRING SQUARE FOOT OF
EXPIRATION LEASES LEASES SQUARE FEET LEASES EXPIRING LEASES
------------- --------------- ---------- --------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
1997................................. 5 8,175 1.5% $ 322,170 $ 39.41(1)
1998................................. 2 23,171 4.2 964,123 41.61
1999................................. 3 47,180 8.5 1,913,184 40.55
2000................................. 1 29,567 5.4 1,114,131 37.68
2001................................. 0 0 0.0 0 0.00
2002................................. 0 0 0.0 0 0.00
2003................................. 2 44,431 8.1 1,850,613 41.65
2004................................. 2 55,904 10.1 1,714,228 30.66
2005................................. 0 0 0.0 0 0.00
2006................................. 0 0 0.0 0 0.00
2007 and thereafter.................. 6 342,873 62.2 10,229,210 29.83
--
---------- ----- ------------- ------
SUBTOTAL/WEIGHTED AVERAGE............ 21 551,301 100.0% $ 18,107,659 $ 32.85
--
------------- ------
Unleased at 12/31/96................. 0 0
---------- -----
TOTAL................................ 551,301 100.0%
---------- -----
---------- -----
<CAPTION>
ANNUAL ESCALATED
RENT PER LEASED
SQUARE FOOT OF
EXPIRING LEASES
YEAR OF LEASE WITH FUTURE
EXPIRATION STEP-UPS
------------- -----------------
<S> <C>
1997................................. $ 39.41(1)
1998................................. 41.61
1999................................. 42.18
2000................................. 37.68
2001................................. 0.00
2002................................. 0.00
2003................................. 47.78
2004................................. 36.47
2005................................. 0.00
2006................................. 0.00
2007 and thereafter.................. 40.41
------
SUBTOTAL/WEIGHTED AVERAGE............ $ 40.64
------
Unleased at 12/31/96.................
TOTAL................................
</TABLE>
- ------------------------
(1) For comparison purposes, according to Cushman & Wakefield, the Direct
Weighted Average Rental Rate for the direct Class A West Side submarket
(which, according to Cushman & Wakefield, is the area bounded by 42nd Street
on the south, 57th Street on the north, the Hudson River on the west and
Seventh Avenue on the east) was $31.92 as of December 31, 1996. Direct
Weighted Average Rental Rate represents the weighted average of asking
rental rates for direct Class A space. Asking rental rates generally are
higher than actual rental rates (which generally are not publicly
available). In addition, the Direct Weighted Average Rental Rate represents
a large number of Class A properties in various locations within the West
Side submarket, and, therefore, may not be representative of asking or
actual rental rates at 1740 Broadway.
In addition to an estimated $40 million renovation completed by MONY when it
owned the building in the 1980s, approximately $3 million has been spent since
1990 on various capital improvements to 1740 Broadway. In 1991, the building's
security systems were upgraded with the addition of closed circuit television
cameras and a message center for incoming package deliveries (to restrict access
to the building by outside messengers). In 1993, a computerized energy
management system was installed to reduce energy consumption and costs. In
addition, in 1996, the building's air conditioning equipment was replaced with
new high pressure steam absorbers that are expected to improve operating
efficiency and reduce operating costs. This upgrade will allow the building to
operate without the use of certain chlorofluorocarbons, the production of which,
as of 1996, is prohibited by Federal law. Sprinklers are installed throughout
the entire building.
The aggregate undepreciated tax basis of depreciable real property at 1740
Broadway for Federal income tax purposes was $68,855,672 as of December 31,
1995. Depreciation and amortization are computed on the declining balance or
straight-line methods over 39 years. The aggregate undepreciated tax basis of
depreciable personal property associated with 1740 Broadway for Federal income
tax purposes was $9,694 as of December 31, 1995. Depreciation and amortization
are computed on the double declining balance method or straight-line method over
lives which range from 5 to 7 years.
76
<PAGE>
The current real estate tax rate for all Manhattan office properties is
$10.252 per $100 of assessed value. The total annual tax for 1740 Broadway at
this rate for the 1996-97 tax year is $3,871,104 (at an assessed value of
$37,759,500).
866 UNITED NATIONS PLAZA
866 United Nations Plaza is a 6-story office building which occupies the
entire block front on the east side of First Avenue between 48th and 49th
Streets. Built in 1966, 866 United Nations Plaza features approximately 385,000
rentable square feet (including an underground parking garage comprising
approximately 42,700 square feet and approximately 28,500 square feet of retail
space) and floor plates that range from approximately 28,000 to 65,000 square
feet. 866 United Nations Plaza also features views of the East River and United
Nations Park. Two residential co-operative towers sit atop 866 United Nations
Plaza (the "Residential Towers") and share the use and cost of a common
mechanical plant pursuant to the terms of a reciprocal easement agreement (the
"866 U.N. Reciprocal Easement Agreement"). Neither the Company nor the Mendik
Group (nor any of its affiliates) own any interest in the Residential Towers.
The Mendik Group acquired the leasehold interest in 866 United Nations Plaza in
1978 and the fee interest in 1985.
The building received the Building Owners and Managers Association (New
York) Operating Office Building of the Year Award for 1994-95 (100,000-500,000
Square Feet Category) (which award is "[p]resented to an office building in
recognition of physical attractiveness, efficiency of operation and the impact
it has had on the metropolitan business community").
As of December 31, 1996, approximately 97.3% of the rentable square footage
in 866 United Nations Plaza was leased. The office space was 98.4% leased, the
parking garage was 100% leased (to an independent garage operator) and the
retail space was 80.6% leased. The following table sets forth certain
information with respect to the Property at the end of each of the past five
years:
<TABLE>
<CAPTION>
ANNUAL NET
EFFECTIVE
ANNUAL ESCALATED RENT
RENT PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- --------------------------------------------- --------------- ----------------- -------------
<S> <C> <C> <C>
1996......................................... 97.3% $ 31.29 $ 27.53(1)
1995......................................... 95.6% $ 30.78 $ 28.06
1994......................................... 96.2% $ 30.88 $ 28.97
1993......................................... 94.9% $ 32.29 $ 30.18
1992......................................... 98.6% $ 34.50 $ 32.85
</TABLE>
- ------------------------
(1) Information is as of September 30, 1996.
As of December 31, 1996, two tenants leased 10% or more of the Property's
rentable square feet. Bear Stearns & Co., Inc., a large investment bank ("Bear
Stearns"), leased approximately 64,700 square feet under a lease that expires in
October 1997, which space was subleased to the United Nations. The Company does
not believe that Bear Stearns or its subtenant will remain in the building
following the expiration of the lease. In addition, Classic Parking Corporation,
a large, independent parking garage operator, operated the building's
underground parking garage containing approximately 42,700 square feet (which is
used by the general public, including tenants of the Residential Towers and
visitors to the United Nations) under a lease that expires in December 2001.
Because of its proximity to the United Nations, 866 United Nations Plaza
counted 32 foreign consulates and missions among its tenants as of December 31,
1996, including the Missions of Japan, Finland, Saudi Arabia and Kazakhstan.
The following table sets out a schedule of the annual lease expirations at
866 United Nations Plaza with respect to leases executed as of December 31, 1996
for each of the next ten years and thereafter
77
<PAGE>
(assuming that no tenants exercise renewal or cancellation options and that
there are no tenant bankruptcies or other tenant defaults):
<TABLE>
<CAPTION>
SQUARE ANNUAL
FOOTAGE ESCALATED ANNUAL ESCALATED
NUMBER OF OF PERCENTAGE OF RENT OF RENT PER LEASED
YEAR OF LEASE EXPIRING EXPIRING TOTAL LEASED EXPIRING SQUARE FOOT OF
EXPIRATION LEASES LEASES SQUARE FEET LEASES EXPIRING LEASES
------------- --------------- ---------- --------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
1997................................. 20 86,318 22.5% $ 3,097,671 $ 35.89(1)
1998................................. 19 49,409 12.8 1,570,823 31.79
1999................................. 10 30,515 7.9 964,092 31.59
2000................................. 10 21,878 5.7 658,710 30.11
2001................................. 5 58,856(2) 15.3 1,435,829(2) 24.40
2002................................. 4 17,870 4.6 590,894 33.07
2003................................. 4 16,676 4.3 561,195 33.65
2004................................. 2 4,676 1.2 136,177 29.12
2005................................. 3 13,447 3.5 389,196 28.94
2006................................. 2 40,372 10.5 1,269,493 31.44
2007 and thereafter.................. 2 34,384 9.0 1,039,732 30.24
--
---------- ----- ------------- ------
SUBTOTAL/WEIGHTED AVERAGE............ 81 374,401 97.3% $ 11,713,812 $ 31.29
--
------------- ------
Unleased at 12/31/96................. 10,414 2.7
---------- -----
TOTAL................................ 384,815 100.0%
---------- -----
---------- -----
<CAPTION>
ANNUAL ESCALATED
RENT PER LEASED
SQUARE FOOT OF
EXPIRING LEASES
YEAR OF LEASE WITH FUTURE
EXPIRATION STEP-UPS
------------- -----------------
<S> <C>
1997................................. $ 35.89(1)
1998................................. 31.79
1999................................. 31.59
2000................................. 30.11
2001................................. 26.09
2002................................. 34.30
2003................................. 34.14
2004................................. 30.36
2005................................. 31.36
2006................................. 34.06
2007 and thereafter.................. 38.32
------
SUBTOTAL/WEIGHTED AVERAGE............ $ 32.76
------
Unleased at 12/31/96.................
TOTAL................................
</TABLE>
- ------------------------
(1) For comparison purposes, according to Cushman & Wakefield, the Direct
Weighted Average Rental Rate for the direct Class A United Nations submarket
(which, according to Cushman & Wakefield, is the area bounded by 39th Street
on the south and 49th Street on the north and between Second Avenue on the
west and the East River on the east) was $31.40 as of December 31, 1996.
Direct Weighted Average Rental Rate represents the weighted average of
asking rental rates for direct Class A space. Asking rental rates generally
are higher than actual rental rates (which generally are not publicly
available). In addition, the Direct Weighted Average Rental Rate represents
a large number of Class A properties in various locations within the United
Nations submarket, and, therefore, may not be representative of asking or
actual rental rates at 866 United Nations Plaza.
(2) Includes an underground parking garage comprising 42,674 square feet. As of
December 31, 1996, the Annual Escalated Rent Per Leased Square Foot for the
underground parking garage space was $16.29.
Since 1988, approximately $4 million has been spent on various capital
improvements to 866 United Nations Plaza. In 1996, the building's air
conditioning equipment was replaced with new high pressure steam absorbers that
are expected to improve operating efficiency and reduce operating costs, and
will allow the building to operate without the use of certain
chlorofluorocarbons, the production of which, as of 1996, is prohibited by
Federal law. In conjunction with the installation of the new steam absorbers,
the building's computerized energy management system currently is scheduled to
be replaced in late 1996. Pursuant to the terms of the 866 U.N. Reciprocal
Easement Agreement, the Residential Towers paid approximately two-thirds of the
cost of the installation of the new steam absorbers and will pay approximately
two-thirds of the cost of the installation of the energy management system. In
addition, in 1996, the building's security systems were upgraded with the
addition of an electronic card access system, closed circuit television cameras
and a message center for incoming package deliveries (to restrict access to the
building by outside messengers). As of December 31, 1996, sprinklers were
installed in approximately 80% of the building.
The aggregate undepreciated tax basis of depreciable real property at 866
United Nations Plaza for Federal income tax purposes was $24,135,840 as of
December 31, 1995. Depreciation and amortization are
78
<PAGE>
computed on the declining balance or straight-line methods over lives which
range from 15 to 39 years. The aggregate undepreciated tax basis of depreciable
personal property associated with 866 United Nations Plaza for Federal income
tax purposes was $449,468 as of December 31, 1995. Depreciation and amortization
are computed on the double declining balance method or straight-line method over
lives which range from 5 to 10 years.
The current real estate tax rate for all Manhattan office properties is
$10.252 per $100 of assessed value. The total annual tax for 866 United Nations
Plaza at this rate for the 1996-97 tax year is $2,629,638 (at an assessed value
of $25,650,000).
ELEVEN PENN PLAZA (49.9% INTEREST)
Eleven Penn Plaza is a 26-story office building which occupies the entire
block front on the east side of Seventh Avenue between 31st and 32nd Streets
(across Seventh Avenue from Two Penn Plaza and Penn Station). Built in 1923,
Eleven Penn Plaza features approximately 956,000 rentable square feet (including
approximately 25,700 square feet of retail space and approximately 63,200 square
feet of basement and storage space) and floor plates that range from
approximately 16,000 to 52,000 square feet, which floor plates the Company
believes make the building well-suited for large corporate tenants. The Mendik
Group acquired a 50% interest in Eleven Penn Plaza in 1980 and the remaining 50%
interest in 1981.
The building has been awarded the Building Owners and Managers Association
(New York) Historic Office Building of the Year Award for 1996-97 (which award
is "[p]resented to an office building of at least 50 years, which has
demonstrated a commitment to preserving its historical integrity while
modernizing to accommodate the latest advances in real estate technology").
As of December 31, approximately 95.5% of the rentable square footage in
Eleven Penn Plaza was leased (including space for leases that were executed as
of December 31, 1996). The office space was 95.5% leased and the retail space
was 98.5% leased. The following table sets forth certain information with
respect to the Property at the end of each of the past five years.
<TABLE>
<CAPTION>
ANNUAL NET
EFFECTIVE
ANNUAL ESCALATED RENT
RENT PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- --------------------------------------------- --------------- ----------------- -------------
<S> <C> <C> <C>
1996......................................... 95.5% $ 27.64 $ 21.49(1)
1995......................................... 95.9% $ 24.59 $ 22.73
1994......................................... 94.1% $ 24.42 $ 23.77
1993......................................... 88.2% $ 24.39 $ 23.90
1992......................................... 88.6% $ 29.76 $ 29.24
</TABLE>
- ------------------------
(1) Information is as of September 30, 1996.
Two tenants at Eleven Penn Plaza leased over 10% of the rentable square
footage as of December 31, 1996. The Times Mirror Company, a publishing company
("Times Mirror"), leased approximately 226,000 square feet. In 1995, Matthew
Bender & Company, Incorporated ("Matthew Bender"), a publisher of law-related
textbooks and a wholly owned subsidiary of Times Mirror, entered into an
agreement with the Mendik Group with respect to its lease for approximately
226,000 square feet (which expires in June 2001). As a part of its downsizing
and restructuring, Times Mirror desired to consolidate its New York operations
by relocating the operations conducted by Matthew Bender at Eleven Penn Plaza to
Two Park Avenue, where an affiliate of Matthew Bender conducted operations.
Accordingly, Times Mirror assumed all the obligations of Matthew Bender under
the lease as modified, and Times Mirror subleased approximately 185,000 square
feet of the premises to the Mendik Group. The Mendik Group currently is
marketing this space at a rental in excess of the sublease rental.
The Company recently has entered into a non-binding letter of intent with
respect to leasing approximately 154,000 square feet with Federated Department
Stores, Inc., a large retailing company, for approximately 15 years, although
there can be no assurance that this letter of intent will result in an executed
lease.
79
<PAGE>
In addition, as of December 31, 1996, R.H. Macy & Co., Inc., a large
retailing company ("R.H. Macy"), occupied approximately 153,500 square feet
under a lease originally between the Mendik Group and General Mills, Inc.
("General Mills") that expires in December 2002, which lease General Mills
assigned to R.H. Macy in 1985. (General Mills remains liable under the lease.)
The following table sets out a schedule of the annual lease expirations at
Eleven Penn Plaza with respect to leases executed as of December 31, 1996 for
each of the next ten years and thereafter (assuming that no tenants exercise
renewal or cancellation options and that there are no tenant bankruptcies or
other tenant defaults):
<TABLE>
<CAPTION>
SQUARE ANNUAL
FOOTAGE ESCALATED ANNUAL ESCALATED
NUMBER OF OF PERCENTAGE OF RENT OF RENT PER LEASED
YEAR OF LEASE EXPIRING EXPIRING TOTAL LEASED EXPIRING SQUARE FOOT OF
EXPIRATION LEASES LEASES SQUARE FEET LEASES EXPIRING LEASES
------------- --------------- ---------- --------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
1997................................. 18 20,502 2.1% $ 281,445 $ 13.73(1)
1998................................. 8 11,383 1.2 215,251 18.91
1999................................. 15 96,419 10.1 2,294,205 23.79
2000................................. 1 1,958 0.2 48,705 24.87
2001................................. 6 252,720 26.4 9,300,960 36.80
2002................................. 2 157,256 16.4 5,257,358 33.43
2003................................. 3 52,973 5.5 1,073,341 20.26
2004................................. 0 0 0.0 0 0.00
2005................................. 5 46,808 4.9 1,382,819 29.54
2006................................. 4 57,865 6.1 1,278,990 22.10
2007 and thereafter.................. 8 215,684 22.6 4,115,583 19.08
--
---------- ----- ------------- --------
SUBTOTAL/WEIGHTED AVERAGE............ 70 913,568 95.5% $ 25,248,657 $ 27.64
--
------------- --------
Unleased at 12/31/96................. 42,712 4.5
---------- -----
TOTAL................................ 956,280 100.0%
---------- -----
---------- -----
<CAPTION>
ANNUAL ESCALATED
RENT PER LEASED
SQUARE FOOT OF
EXPIRING LEASES
YEAR OF LEASE WITH FUTURE
EXPIRATION STEP-UPS
------------- ----------------
<S> <C>
1997................................. $ 13.73(1)
1998................................. 18.91
1999................................. 23.79
2000................................. 24.87
2001................................. 36.80
2002................................. 33.53
2003................................. 23.81
2004................................. 0.00
2005................................. 33.92
2006................................. 32.14
2007 and thereafter.................. 24.81
--------
SUBTOTAL/WEIGHTED AVERAGE............ $ 30.07
--------
Unleased at 12/31/96.................
TOTAL................................
</TABLE>
- ------------------------
(1) For comparison purposes, according to Cushman & Wakefield, the Direct
Weighted Average Rental Rate for the direct Class A Penn Station submarket
(which, according to Cushman & Wakefield, is the area bounded by 30th Street
on the south, 35th Street on the north, the Hudson River on the west and
Seventh Avenue on the east) was $31.47 as of December 31, 1996. Direct
Weighted Average Rental Rate represents the weighted average of asking
rental rates for direct Class A space. Asking rental rates generally are
higher than actual rental rates (which generally are not publicly
available). Therefore, the Direct Weighted Average Rental Rate may not be
representative of asking or actual rental rates at Eleven Penn Plaza.
Since 1988, approximately $18 million has been spent on various capital
improvements to Eleven Penn Plaza. In 1989, the main entrance to the building
(on Seventh Avenue) was renovated and reclad with rose-colored granite, and the
building's limestone facade was cleaned and framed with decorative,
architectural bronze panels. Also in 1989, the building's electrical system was
upgraded. The building's security systems were upgraded with the addition in
1989 of closed circuit television cameras and in 1990 of a message center for
incoming package deliveries (to restrict access to the building by outside
messengers). In 1991, windows throughout the building were replaced and the
building's elevators were computerized to improve operating efficiency. In 1992,
the building's security systems were upgraded with the installation of an
electronic card access system which enhanced control of perimeter entry points
into the building. In addition, the building's air conditioning equipment is in
the process of being replaced with new high pressure steam absorbers at a cost
of approximately $2 million, which replacement has been planned since
80
<PAGE>
1994. These new steam absorbers are expected to improve operating efficiency and
reduce operating costs, and will allow the building to operate without the use
of certain chlorofluorocarbons, the production of which, as of 1996, is
prohibited by Federal law. As of September 30, 1996, sprinklers were installed
with respect to approximately 70% of the building.
The Penn Plaza area has been enhanced in recent years through the efforts of
the 34th Street BID and the redevelopment efforts completed by certain of the
Property's neighbors. See "--Two Penn Plaza" above.
Following the closing of the Offering and the Formation Transactions, the
Company will own approximately 49.9% of the economic interest in Eleven Penn
Plaza. The Company will not, either directly or indirectly, act as the managing
general partner of the Property-owning entity and thus will not have control
over the day-to-day operation and management of Eleven Penn Plaza. Rather, Mr.
Mendik will be the managing general partner and will direct the day-to-day
operation and management of Eleven Penn Plaza. However, the Company will have
approval rights with respect to significant actions affecting the Property.
Pursuant to the partnership agreements governing Eleven Penn Plaza Company
(the Property-owning entity) and the direct and indirect partners thereof, the
consent of a majority of the interests of the partners who made cash investments
in the Property, together with the consent of the managing general partner, is
required in order to sell the Property. In addition, such consents are required
in order to refinance the Property, other than in the six-month period
immediately preceding the maturity of any financing, during which period the
managing general partner has the right to cause Eleven Penn Plaza Company to
enter into a refinancing in an amount not greater than the outstanding balance
of the loan being refinanced. The Company will be subject to the partnership
agreements as they presently exist. However, because the Company is the holder
of the majority of the interests of the partners who made cash investments in
the Property, no sale or financing of the Property may be entered into without
the consent of the Company, except that the Company may not unreasonably
withhold its consent to a refinancing of the Property.
In addition, the partnership agreements governing Eleven Penn Plaza Company
provide that if a sale of the Property is consented to as set forth above, any
partner which did not consent to the proposed sale has a right of first refusal
to purchase the interests of the consenting partners for a purchase price based
on an offer to purchase the Property which the managing general partner is
prepared to accept. As a result, if the Company consents to the sale of
Property, and the other direct and indirect partners in Eleven Penn Plaza
Company do not consent, the Company may be required to sell its interests in
Eleven Penn Plaza Company to such other partners.
As described above, the Mendik Group will retain an interest in Eleven Penn
Plaza following the Offering, and the Company will have a right of first refusal
with respect to such interest for a period of ten years following the completion
of the Offering. See "--Assets Not Being Transferred to the Company" below.
TWO PARK AVENUE (40% INTEREST)
Two Park Avenue is a 29-story, vintage Art Deco office building which
occupies the entire block front on Park Avenue between 32nd and 33rd Streets.
Built in 1928, Two Park Avenue features approximately 947,000 rentable square
feet (including approximately 32,000 square feet of retail space and
approximately 11,500 square feet of basement and storage space) and floor plates
that range from approximately 25,000 to 44,000 square feet, which floor plates
the Company believes make the building well-suited for large corporate tenants.
Designed by renowned architect Ely Jacques Kahn, the building features an ornate
lobby, with decorative arches, vaulted ceilings, elegant chandeliers and marble
floors. Two Park Avenue is four blocks east of Penn Station and nine blocks
south of Grand Central Terminal, and has in-building access to a main subway
line (the IRT line). The Mendik Group acquired Two Park Avenue in 1986.
81
<PAGE>
As of December 31, 1996, approximately 97.8% of the rentable square footage
in Two Park Avenue was leased (including space for leases that were executed as
of December 31, 1996). The office space was 98.0% leased and the retail space
was 89.7% leased. The following table sets forth certain information with
respect to the Property at the end of each of the past five years:
<TABLE>
<CAPTION>
ANNUAL NET
ANNUAL ESCALATED EFFECTIVE RENT
RENT PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- ---------------------------------- ------------------- ----------------- ---------------
<S> <C> <C> <C>
1996.............................. 97.8% $ 23.59 $ 19.01(1)
1995.............................. 97.3% $ 22.94 $ 20.83
1994.............................. 92.1% $ 24.01 $ 21.61
1993.............................. 89.2% $ 23.86 $ 22.33
1992.............................. 92.1% $ 24.46 $ 23.16
</TABLE>
- ------------------------
(1) Information is as of September 30, 1996.
As of December 31, 1996, two tenants leased 10% or more of the Property's
rentable square feet. Times Mirror leased approximately 287,000 square feet in
Two Park Avenue under two leases that expire in September 2010. In addition,
Smith Barney, Inc., a large investment bank/brokerage house, leased
approximately 99,800 square feet in the building under a lease that expires in
May 1998.
The following table sets out a schedule of the annual lease expirations at
Two Park Avenue with respect to leases executed as of December 31, 1996 for each
of the next ten years and thereafter (assuming that no tenants exercise renewal
or cancellation options and that there are no tenant bankruptcies or other
tenant defaults).
<TABLE>
<CAPTION>
SQUARE ANNUAL
FOOTAGE ESCALATED ANNUAL ESCALATED
NUMBER OF OF PERCENTAGE OF RENT OF RENT PER LEASED
YEAR OF LEASE EXPIRING EXPIRING TOTAL LEASED EXPIRING SQUARE FOOT OF
EXPIRATION LEASES LEASES SQUARE FEET LEASES EXPIRING LEASES
------------- --------------- ---------- --------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
1997................................. 2 43,885 4.7 $ 1,466,387 $ 33.41(1)
1998................................. 4 116,466 12.3 3,368,597 28.92
1999................................. 6 99,746 10.6 2,790,447 27.98
2000................................. 1 75 0.0 1,530 20.40
2001................................. 4 23,912 2.5 574,822 24.04
2002................................. 1 2,150 0.2 72,084 33.53
2003................................. 1 4,818 0.5 102,872 21.35
2004................................. 5 42,632 4.5 1,171,434 27.48
2005................................. 3 42,757 4.5 918,197 21.47
2006................................. 6 120,359 12.7 3,089,285 25.67
2007 and thereafter.................. 8 428,736 45.3 8,280,699 19.31
--
---------- ----- ------------- ------
SUBTOTAL/WEIGHTED AVERAGE............ 41 925,536 97.8% $ 21,836,354 $ 23.59
--
------------- ------
Unleased at 12/31/96................. 21,161 2.2
---------- -----
TOTAL................................ 946,697 100.0%
---------- -----
---------- -----
<CAPTION>
ANNUAL ESCALATED
RENT PER LEASED
SQUARE FOOT OF
EXPIRING LEASES
YEAR OF LEASE WITH FUTURE
EXPIRATION STEP-UPS
------------- -----------------
<S> <C>
1997................................. $ 33.41
1998................................. 28.92
1999................................. 28.17
2000................................. 20.40
2001................................. 24.27
2002................................. 39.48
2003................................. 24.35
2004................................. 29.18
2005................................. 24.96
2006................................. 31.36
2007 and thereafter.................. 28.10
------
SUBTOTAL/WEIGHTED AVERAGE............ $ 28.70
------
Unleased at 12/31/96.................
TOTAL................................
</TABLE>
82
<PAGE>
- ------------------------
(1) For comparison purposes, according to Cushman & Wakefield, the Direct
Weighted Average Rental Rate for the direct Class A Murray Hill submarket
(which, according to Cushman & Wakefield, generally runs from 32nd Street on
the south to 39th Street on the north and from Fifth Avenue on the west to
the East River on the east) was $28.08 as of December 31, 1996. Direct
Weighted Average Rental Rate represents the weighted average of asking
rental rates for direct Class A space. Asking rental rates generally are
higher than actual rental rates (which generally are not publicly
available). In addition, the Direct Weighted Average Rental Rate represents
a large number of Class A properties in various locations within the Murray
Hill submarket, and, therefore, may not be representative of asking or
actual rental rates at Two Park Avenue.
Since 1988, approximately $18 million has been spent on various capital
improvements to the Property. In 1989, the building's elevators were
computerized to improve operating efficiency. The building's security systems
were upgraded in 1989 with the installation of an electronic card access system,
which enhanced control of perimeter entry points into the building, and in 1991
with the installation of a message center for incoming package deliveries (to
restrict access to the building by outside messengers). The building's
electrical, plumbing and heating systems were upgraded in 1989-90. In 1990, new
tenant storefronts were added. The building's air conditioning units generally
have been replaced with individual air-conditioning package units as new leases
have been signed in the building. Sprinklers have been installed throughout the
entire building.
The area surrounding Grand Central Terminal has been enhanced in recent
years through the efforts of the Grand Central Business Improvement District
Partnership (the "Grand Central BID"), a public-private partnership which
provides street cleaning services, security personnel and other community
services to businesses in the area. The Grand Central BID is funded through
special real estate assessments collected by New York City similar to real
estate taxes collected from property owners. (These charges then may be passed
on to tenants to the extent permitted under applicable leases). In addition, the
Grand Central BID has undertaken certain capital projects in the district,
including a program for improved street illumination and sidewalk
beautification. The Grand Central BID is governed by an independent board of
directors comprised of public officials and private citizens. Mr. Mendik
participated in the organization of the Grand Central BID, and an executive
officer of Mendik Realty (Michael M. Downey) currently serves on its board of
directors.
Following the completion of the Offering and the Formation Transactions, the
Company will own approximately 40% of the economic interests in Two Park Avenue.
Unless the Company and the other partner in the partnership which owns Two Park
Avenue jointly agree to appoint one of them as the managing general partner of
such partnership, the Company will be the co-managing general partner of Two
Park Avenue and all decisions with respect to the day-to-day operation and
management of Two Park Avenue (including approval of the annual budget for the
Property and the undertaking of all leasing transactions) will require the
consent of both the Company and the other partner in Two Park Avenue. In
addition, all decisions regarding the sale or other disposition of Two Park
Avenue or the refinancing of the Property will require the consent of the
Company, except that the Company may not unreasonably withhold its approval to a
proposed refinancing of the Property.
Pursuant to the partnership agreement of Two Park Company (the
Property-owning entity), each partner has the right to implement "buy-sell"
provisions. The Company, as an indirect partner in Two Park Company, will be
subject to the partnership agreement as it presently exists. Accordingly, if the
other partner in Two Park Company (which other partner is a publicly held real
estate limited partnership) exercises its buy-sell rights, the Company could be
compelled either to sell its interest in the applicable partnership to such
other partner, for the purchase price set forth in such other partner's notice
exercising its buy-sell rights, or to purchase the interests of the other
partners in such partnership for an amount based on such price. In addition,
under the partnership agreement of Two Park Company, if either partner
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receives a bona fide offer to purchase its interest in Two Park Company (which
such partner is willing to accept), such partner must give the other partner a
right of first refusal to purchase the partnership interest on the same terms
and conditions as the bona fide offer.
The Mendik Group will retain certain general partner and limited partner
interests in the publicly held partnership that owns a 60% interest in Two Park
Avenue following the Offering and the Formation Transactions, and the Company
will have a right of first refusal with respect to such general partner interest
for a period of up to ten years following the Offering. The Company will have no
such rights with respect to the Mendik Group's limited partner interests in Two
Park Avenue and in the publicly held partnership that owns a 60% interest in Two
Park Avenue. See "--Assets Not Being Transferred to the Company" below.
330 MADISON AVENUE (24.8% INTEREST)
330 Madison Avenue is a 41-story office building which occupies the entire
block front on the west side of Madison Avenue between 42nd and 43rd Streets,
one block from Grand Central Terminal. Built in 1963, 330 Madison Avenue
features approximately 771,000 rentable square feet (including approximately
18,900 square feet of retail space and approximately 28,000 square feet of
basement and storage space) and floor plates that range from approximately 8,600
to 37,000 square feet, which floor plates the Company believes makes the
building well-suited for large corporate tenants. In addition, the tower floors
of the building offer 360 DEG. views of the Manhattan skyline. The Mendik Group
acquired 330 Madison Avenue in 1979.
As of December 31, 1996, approximately 96.5% of the rentable square footage
in 330 Madison Avenue was leased (including space for leases executed as of
December 31, 1996). The office space was 96.4% leased and the retail space was
100.0% leased. The following table sets forth certain information with respect
to the Property at the end of each of the past five years:
<TABLE>
<CAPTION>
ANNUAL NET
EFFECTIVE
ANNUAL ESCALATED RENT
RENT PER LEASED PER LEASED
YEAR-END PERCENT LEASED SQUARE FOOT SQUARE FOOT
- ------------------------------------ ------------------- ----------------- -------------
<S> <C> <C> <C>
1996................................ 96.5% $ 34.77 $ 31.10(1)
1995................................ 93.2% $ 30.87 $ 27.77
1994................................ 97.3% $ 30.20 $ 29.94
1993................................ 91.9% $ 36.40 $ 36.41
1992................................ 98.9% $ 36.16 $ 36.06
</TABLE>
- ------------------------
(1) Information is as of September 30, 1996.
As of December 31, 1996, one tenant leased 10% or more of the Property's
rentable square feet. B.D.O. Seidman, an accounting and consulting firm, leased
approximately 114,000 square feet at 330 Madison Avenue under a lease that
expires in September 2010. The Company's headquarters also are located at this
Property.
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The following table sets out a schedule of the annual lease expirations at
330 Madison Avenue with respect to leases executed as of December 31, 1996 for
each of the next ten years and thereafter (assuming that no tenants exercise
renewal or cancellation options and that there are no tenant bankruptcies or
other tenant defaults):
<TABLE>
<CAPTION>
SQUARE ANNUAL
FOOTAGE ESCALATED ANNUAL ESCALATED
NUMBER OF OF PERCENTAGE OF RENT OF RENT PER LEASED
YEAR OF LEASE EXPIRING EXPIRING TOTAL LEASED EXPIRING SQUARE FOOT OF
EXPIRATION LEASES LEASES SQUARE FEET LEASES EXPIRING LEASES
------------- --------------- ---------- --------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
1997................................. 6 105,316 13.7% $ 3,994,873 $ 37.93(1)
1998................................. 3 74,736 9.7 2,776,554 37.15
1999................................. 8 43,344 5.6 1,484,450 34.25
2000................................. 1 36,954 4.8 1,345,197 36.40
2001................................. 2 22,374 2.9 817,800 36.55
2002................................. 4 32,261 4.2 1,087,930 33.72
2003................................. 4 70,756 9.2 2,118,277 29.94
2004................................. 3 21,343 2.8 829,751 38.88
2005................................. 5 102,106 13.2 3,710,613 36.34
2006................................. 6 49,876 6.4 1,755,188 35.19
2007 and thereafter.................. 5 185,017 24.0 5,951,128 32.17
--
---------- ----- ------------- ------
SUBTOTAL/WEIGHTED AVERAGE............ 47 744,083 96.5% $ 25,871,761 $ 34.77
--
---------- ------------- ------
UNLEASED AT 12/31/96................. 26,745 3.5
---------- -----
TOTAL................................ 770,828 100.0%
---------- -----
---------- -----
<CAPTION>
ANNUAL ESCALATED
RENT PER LEASED
SQUARE FOOT OF
EXPIRING LEASES
YEAR OF LEASE WITH FUTURE
EXPIRATION STEP-UPS
------------- -----------------
<S> <C>
1997................................. $ 37.93(1)
1998................................. 37.15
1999................................. 34.39
2000................................. 36.40
2001................................. 36.55
2002................................. 38.32
2003................................. 33.66
2004................................. 47.41
2005................................. 41.00
2006................................. 38.98
2007 and thereafter.................. 39.08
------
SUBTOTAL/WEIGHTED AVERAGE............ $ 38.19
------
UNLEASED AT 12/31/96.................
TOTAL................................
</TABLE>
- ------------------------
(1) For comparison purposes, according to Cushman & Wakefield, the Direct
Weighted Average Rental Rate for the direct Class A Grand Central submarket
(which, according to Cushman & Wakefield, is the area bounded by 39th Street
on the south, 47th Street on the north, Fifth Avenue on the west and Second
Avenue on the east, excluding Park Avenue north of 44th Street) was $33.33
as of December 31, 1996. Direct Weighted Average Rental Rate represents the
weighted average of asking rental rates for direct Class A space. Asking
rental rates generally are higher than actual rental rates (which generally
are not publicly available). In addition, the Direct Weighted Average Rental
Rate represents a large number of Class A properties in various locations
within the Grand Central submarket, and, therefore, may not be
representative of asking or actual rental rates at 330 Madison Avenue.
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<PAGE>
Since 1988, approximately $20 million has been spent on various capital
improvements to 330 Madison Avenue. In 1989, a new main roof was installed. In
1990, the cooling tower was retrofitted and refurbished and all of the
building's exterior signage was replaced and standardized. In 1991, the
building's marble lobby was renovated. Also, in 1991, the building's security
systems were upgraded with the addition of an electronic card access system,
closed circuit television cameras and a message center for incoming package
deliveries (to restrict access to the building by outside messengers). In
1993-1994, the building's elevators were computerized to improve operating
efficiency. In 1996, the building's air conditioning equipment was replaced with
new high pressure steam absorbers that are expected to improve operating
efficiency and reduce operating costs, and will allow the building to operate
without the use of certain chlorofluorocarbons, the production of which, as of
1996, is prohibited by Federal law. A central sprinkler system was installed and
sprinklers are being installed in tenant spaces as leases expire and new leases
are signed (as of December 31, 1996, sprinklers were installed in approximately
84% of the building). As of December 31, 1996, accessible asbestos had been
removed from approximately 85% of the building. The remaining accessible
asbestos in the building, including "spray-on" asbestos on the deck of certain
floors, currently is scheduled to be removed as space on such floors becomes
vacant, at an estimated cost, based on current market conditions, of $3.5
million (of which cost the Company will be responsible for 24.8%).
The Grand Central submarket has been enhanced in recent years through the
efforts of the Grand Central BID. See "--Two Park Avenue" above.
Following the completion of the Offering and the Formation Transactions, the
Company will own approximately 24.8% of the economic interests in 330 Madison
Avenue. The Company will not act as the managing general partner of the
Property. Rather, Mr. Mendik will be the managing general partner, directly or
indirectly, of the entity which owns 330 Madison Avenue and will direct the
day-to-day operation and management of 330 Madison Avenue. However, the Company
will have approval rights with respect to significant actions affecting the
Property.
Pursuant to the partnership agreement for 330 Madison Company (the
Property-owning entity), each partner has the right to implement "buy-sell"
provisions. The Company, as an indirect partner in 330 Madison Company, will be
subject to the partnership agreement as it presently exists. Accordingly, if the
other partner in 330 Madison Company exercises its buy-sell rights, the Company
could be compelled either to sell its interest in the applicable partnership to
such other partner, for the purchase price set forth in such other partner's
notice exercising its buy-sell rights, or to purchase the interests of the other
partners in such partnership for an amount based upon such price.
As described above, the Mendik Group will retain a general partner interest
in 330 Madison Avenue following the Offering and the Formation Transactions, and
the Company will have a right of first refusal with respect to such interest for
a period of up to ten years following the Offering. See "--Assets Not Being
Transferred to the Company" below.
330 Madison Company (the entity that owns 330 Madison Avenue) currently is
disputing the principal balance of the loan secured by an unrecorded first
mortgage on 330 Madison Avenue. Under the loan agreement, 330 Madison Company
has exercised its right to capitalize interest payments due to the lender;
however, 330 Madison Company and the lender disagree as to the rate at which
interest has been capitalized and, accordingly, as to the outstanding principal
balance. As of December 31, 1996, 330 Madison Company believes that the
outstanding principal balance of the loan was approximately $79 million, whereas
the lender believes such amount was approximately $94 million. If, in connection
with the resolution of this dispute, the lender and 330 Madison Company agree
that the principal amount of the loan may be satisfied by payment of an amount
less than the amount the lender believes is then due under the loan, the amount
of such discount, if any, will be allocated among the partners in 330 Madison
Company, including M 330 Associates, which owns a 25% interest in 330 Madison
Company. With respect to the amount allocated to M 330 Associates (in which the
Company will have an approximate 99% interest), a portion will be allocated to
the current partners in M 330 Associates (including the managing
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<PAGE>
general partner of M 330 Associates, which is an affiliate of the Mendik Group)
and a portion will be allocated to the Company (as the successor to the partners
in M 330 Associates).
570 LEXINGTON AVENUE (5.6% INTEREST)
570 Lexington Avenue is a 49-story vintage Art Deco office building located
between 50th and 51st Streets, four blocks from the proposed northern entrance
to Grand Central Station. Built in 1930, 570 Lexington Avenue features
approximately 433,000 rentable square feet (including approximately 8,300 square
feet of retail space and approximately 10,500 square feet of basement and
storage space) and floor plates that range from approximately 3,500 to 17,250
square feet, which floor plates the Company believes make the building
well-suited for tenants seeking full floor identity, particularly in the tower
floors of the building. In addition, the tower floors of the building offer
360 DEG. views of the Manhattan skyline. Formerly the headquarters of the
General Electric Company, the exterior of 570 Lexington Avenue was designated a
New York City landmark in 1985.
In November 1994, the Mendik Group acquired this substantially unoccupied
property and a $40 million redevelopment of the building (including tenant
improvements) is now being undertaken. As of December 31, 1996, approximately
$19.3 million had been expended at the Property for tenant improvements, to
upgrade building systems and refurbish public spaces, and for certain other
expenses related to the Property. The remaining redevelopment costs will be
incurred primarily to refurbish tenant space.
The $40 million to cover redevelopment costs is being contributed by 570
Lexington Associates, L.P., which owns a 50% interest in 570 Lexington Company
L.P. (the entity that owns 570 Lexington Avenue). The Mendik Group owns an
approximate 11.2% interest in 570 Lexington Associates. As a result of its 11.2%
interest in 570 Lexington Associates, the Company will be contractually
committed to invest an additional amount of up to $2.3 million which represents
its pro rata portion of the remaining redevelopment costs to be funded by 570
Lexington Associates. 570 Lexington Associates currently is discussing with
certain lenders the possibility of obtaining financing, in lieu of providing the
remaining required capital.
The redevelopment of the building is being conducted in cooperation with the
New York City Landmarks Preservation Commission. The building's exterior,
vestibule, lobby and elevator cabs have been restored to their original grandeur
and the elevators have been computerized to improve operating efficiency. In
addition, certain features that were contemplated by the building's original
architect but were never installed, such as chandeliers and the lobby's ornate
gate, have been crafted and installed. The building is being modernized with the
refurbishment of existing or installation of new air conditioning units on
substantially all floors and the renovation of restrooms on numerous floors in
anticipation of leasing activity. In addition, the building's security systems
were upgraded with the installation of closed circuit television cameras and an
electronic card access system, which enhanced control of perimeter entry points
into the building. It is anticipated that a message center for incoming package
deliveries (to restrict access to the building by outside messengers) will be
installed when the building is more fully leased up. As of December 31, 1996,
sprinklers were installed with respect to approximately 20% of the building.
As a result of this redevelopment, the building has received the following
awards: (i) The National Trust for Historic Preservation Honor Award for 1996;
(ii) 1996 New York Landmarks Preservation Commission Preservation Achievement
Award; (iii) 1995-96 Building Owners and Managers Association (New York) Award
for Excellence for Historic Building of the Year; and (iv) 1995 New York
Landmarks Conservancy Lucy G. Moses Preservation Award. In October 1995,
following completion of a substantial portion of the building's capital
projects, the Mendik Group commenced efforts to market and lease space in the
building to prospective tenants and, as of December 31, 1996, approximately
33.5% of the rentable square footage in the building was leased. No tenant
currently leases 10% or more of the rentable square feet of the building.
Substantially all of the leases relating to the Property expire in 2006 and
beyond,
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although certain of the leases permit tenants to cancel their leases on the
fifth anniversary of the date that the tenant first paid rent (upon payment of a
cancellation fee).
Following the completion of the Offering and the Formation Transactions, the
Company will own approximately 11.2% of the direct economic interests in 570
Lexington Associates, which in turn owns 50% interest in 570 Lexington Company,
L.P. (the entity that owns 570 Lexington Avenue). As a result, the Company will
be entitled to approximately 11.2% of the cash distributed by 570 Lexington
Company, L.P. to 570 Lexington Associates, L.P. (which is a general partner of
570 Lexington Company, L.P.). However, under the terms of the partnership
agreement governing 570 Lexington Associates, L.P., after the investors in 570
Lexington Associates, L.P. (including the Company) achieve certain rates of
return on their investments, the Company will receive certain preferential
payments with respect to further distributions made by 570 Lexington Company,
L.P. to 570 Lexington Associates, L.P. such that the Company will receive up to
a maximum of approximately 33.4% of such further distributions (taking account
of both the Company's preferential payments as well as its 11.2% interest).
In addition, the Company, as a general partner, directly or indirectly, of
the entity which owns the Property, will have significant influence over the
day-to-day management and operations of 570 Lexington Avenue. As described
below, the Company will also have certain rights with respect to sales,
financings or other dispositions of the Property or of interests in the
Property.
Subject to certain restrictions contained in the partnership agreements of
570 Lexington Company, L.P. as well as 570 Lexington Associates, L.P., the
Company may propose a financing of either 570 Lexington Associates, L.P. or 570
Lexington Company, L.P. Upon such proposal, the other partner in 570 Lexington
Company, L.P. or 570 Lexington Associates, L.P., as the case may be, not making
such proposal must either propose alternative financing or participate in the
originally proposed financing.
In addition, pursuant to the partnership agreement for 570 Lexington
Company, L.P., if after April 1, 1998 some but not all of the partners wish to
sell all or any part of 570 Lexington Avenue, any general partner may require
the Property to be offered for sale on an all-cash basis. In such event, any
partner or its affiliate may elect to present an all-cash offer for the Property
and, if such offer is the highest all-cash offer received by 570 Lexington
Company, L.P., such partner will have the right to purchase the interests of the
other partners for a purchase price based upon such all-cash offer. Pursuant to
the partnership agreement for 570 Lexington Associates, L.P., either general
partner may elect to compel the sale of 570 Lexington Avenue pursuant to the
rights described above. If a general partner (or affiliate thereof) of 570
Lexington Associates, L.P. presents the highest all-cash offer to 570 Lexington
Company, L.P., then such partner will be required to purchase the interests of
the other partners in 570 Lexington Associates, L.P. as well as the interests of
the other partners in 570 Lexington Company, L.P.
MORTGAGE INDEBTEDNESS
Upon completion of the Offering, the Company expects to have outstanding
approximately $113 million of indebtedness secured by two of the three
Properties that will be consolidated in the financial statements of the Company.
The four Properties in which the Company will own an interest but which will not
be consolidated in the financial statements of the Company are expected to
secure approximately $231 million of additional indebtedness.
The Company currently is negotiating with each of its lenders (and the
Property-owning entities are negotiating with each of their lenders) regarding
the terms of the indebtedness that will be outstanding after the Offering. The
following table sets forth the mortgage debt of the Company expected to be
outstanding after completion of the Offering and the Formation Transactions and
the Company's best estimate of the expected terms of such indebtedness. The
table also shows the Company's percentage of debt expected to be secured by
Properties that will not be consolidated in the financial statements of the
Company, based on the Company's expected ownership interest in the Property.
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<PAGE>
MORTGAGE INDEBTEDNESS TO BE OUTSTANDING AFTER THE COMPLETION OF THE OFFERING
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPANY'S COMPANY'S COMPANY'S
SHARE OF SHARE OF SHARE OF
ESTIMATED COMPANY EXPECTED ESTIMATED ESTIMATED ESTIMATED
INTEREST PERCENTAGE PRINCIPAL ANNUAL MATURITY BALANCE AT
PROPERTY RATE OWNERSHIP BALANCE DEBT SERVICE DATE MATURITY
- ------------------------------ ---------------- ------------- ----------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
100% OWNED PROPERTIES:
Two Penn Plaza................ 7.25%(1) 100.0% $ 80,000 $ 5,800(1) May 2005 $ 80,000
866 United Nations Plaza...... 7.25%(1) 100.0% 33,000 2,393(1) December 2004 33,000
----------- ------------ -----------
Total 100% Owned
Properties:............. $ 113,000 $ 8,193 $ 113,000
----------- ------------ -----------
PARTIAL INTEREST PROPERTIES:
Eleven Penn Plaza............. 8.00%(1) 49.9% $ 27,445 $ 2,542 February 2007 $ 22,166
9.25% 49.9% 10,545 975 February 1999 10,545
Two Park Avenue............... 7.25%(1) 40.0% 26,000 1,885(1) February 2000 26,000
330 Madison Avenue(2)......... 9.85% 24.8% 13,612(2) 1,340(2) October 1999 13,612(2)
LIBOR + .625% 24.8% 9,667(2) 643(2) October 1999 11,138(2)
----------- ------------ -----------
Total Partial Interest
Properties.............. $ 87,269 $ 7,385 $ 83,461
----------- ------------ -----------
Total................... $ 200,269 $ 15,578 $ 196,461
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
- ------------------------
(1) Estimated based upon current market interest rates.
(2) Each of the amount of the principal balance and interest rate with respect
to this loan currently is in dispute. See "The Properties--330 Madison
Avenue."
LINE OF CREDIT
The Company currently is engaged in discussions with various lenders
regarding the establishment of a revolving Line of Credit that will be used to
facilitate acquisitions and for working capital purposes. Although the Company
expects that the Line of Credit will be established shortly after the completion
of the Offering, there can be no assurance at this time as to whether the
Company will be successful in obtaining the Line of Credit, or, if the Line of
Credit is established, the terms governing the Line of Credit.
PROPERTY MANAGEMENT AND LEASING
The Company (through the Management Corporation and the Management LLC) will
conduct its management and leasing business largely in the same manner as it
currently is conducted by the Mendik Group. The Mendik Group currently provides
management and leasing services for 16 properties (including the Properties) in
the New York metropolitan area. The Mendik Group currently has an ownership
interest in 14 of these 16 office properties.
The Mendik Group's management and leasing business is an established office
property management and leasing business with extensive experience. The Mendik
Group has been managing and leasing Manhattan office properties since 1978.
The Company will continue the Mendik Group's approach of identifying and
responding quickly to tenant requirements. The Company will establish personal
contacts with its tenants and maintain a program of regular tenant visits. In
addition, the Company will continue the Mendik Group's approach of rotating its
building managers through each of its properties in order to encourage a
critical review of each property's facilities and tenant services. The Company
also will continue the Mendik Group's approach of encouraging each of its
employees to make suggestions relating to the enhancement of a building's
appearance or efficiency.
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The Mendik Group has established various committees to address issues facing
real estate owners and operators, including recycling, telecommunications,
electricity and similar topics. Each committee is comprised of building
management personnel who report to the head of operations. This committee system
will enhance the Company's ability to remain up to date with respect to
developments in the industry.
The Mendik Group believes that its commitment to providing first class,
cost-effective property services, combined with the continual enhancement of the
appearance and efficiency of its office properties, have encouraged tenants to
renew their leases, attracted new tenants and supported competitive rent levels.
The Company will continue to rely on this experienced management and leasing
team to provide cost-efficient, superior services at its properties.
After the completion of the Offering and the Formation Transactions, the
Company (through the Management Partnership) will provide management and leasing
services for properties in which the Company owns a 100% interest. In addition,
it is anticipated that the Company (through the Management Corporation) will
provide management and leasing services for properties in which the Company owns
a partial interest (including Eleven Penn Plaza, Two Park Avenue, 330 Madison
Avenue and 570 Lexington Avenue) and will provide management and leasing
services for properties in which the Company owns no interest, including
properties owned by entities in which the Mendik Group owns an interest or
serves as managing partner or managing member which are not being included in
the Formation Transactions. See "Certain Relationships and Transactions."
EMPLOYEES
The Company initially intends to employ approximately 50 persons. Of such 50
employees, approximately 40 will be "home office" executive and administrative
personnel and approximately 10 will be on-site management and administrative
personnel. Following the completion of the Offering and the Formation
Transactions, the Company currently expects that none of its employees will be
represented by a labor union.
TRANSFER OF PROPERTIES
The Properties will be acquired by the Company (through the Operating
Partnership) pursuant to agreements for contribution of interests (each a
"Transfer Agreement"). The acquisitions are subject to all of the terms and
conditions of such agreements. The holders of interests in the Property-owning
entities (which own partial or complete interests in the individual Properties)
will transfer their interests to entities controlled by the Company for cash or
Units. The Company will assume all the rights, obligations and responsibilities
of the contributors of interests. The transfer of ownership interests in each
Property is subject to the completion of the Offering. Any working capital or
other cash balance outstanding at the Property-owning entity immediately prior
to the completion of the Offering will be acquired by the Company.
The Transfer Agreements generally contain representations only with respect
to the ownership of the interests by the holders thereof and certain other
limited matters. Pursuant to a Supplemental Representations and Warranties
Agreement (the "Supplemental Agreement"), Mendik/FW LLC will agree to indemnify
the Company against certain breaches of representations and warranties made by
Mendik/FW LLC with respect to the Properties and the management and leasing
businesses being transferred to the Company for a period of one year following
the completion of the Offering. The maximum aggregate liability of Mendik/FW LLC
under the Supplemental Agreement is limited to $20 million, with no liability
being assumed until the aggregate liability exceeds $250,000. Recourse for any
liabilities under the Supplemental Agreement will be limited to Units received
by Mendik/FW LLC in the Formation Transactions. Mendik/FW LLC will pledge an
aggregate of $20 million of Units (based on the initial public
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<PAGE>
offering price of shares of Common Stock) to secure its indemnification
obligations under the Supplemental Agreement.
ASSETS NOT BEING TRANSFERRED TO THE COMPANY
PROPERTY INTERESTS. In addition to the interests of the Mendik Group in the
Properties which are being acquired by the Company, the Mendik Group also owns
interests in several other properties in Manhattan and in other parts of the New
York metropolitan area as well as indirect interests in three of the Properties
(Eleven Penn Plaza, Two Park Avenue and 330 Madison Avenue) which the Company
will not acquire at the time of the completion of the Offering and the Formation
Transactions. Except for passive investment interests and interests in
properties that are not of the same type as the Properties (E.G., retail
property) the Company will have an option to acquire each of these interests
from the Mendik Group for ten years after the Closing of the Offering at a price
determined by a formula specified in the applicable option agreement. The
Company also will have a right of first refusal during such ten-year period to
match any bona fide third party offer acceptable to the Mendik Group, in its
sole discretion, for the interests of the Mendik Group in these properties as
well as certain of the passive investment interests of the Mendik Group in other
office properties. Any such option rights or rights of first refusal will be
subject to fiduciary duties and contractual obligations owed or owing in the
future by the Mendik Group, including any consent rights or any limitations
imposed by applicable partnership agreements or financing or other agreements,
and the Company will not have any such options or rights of first refusal with
respect to any property-level transactions involving any of these properties.
Any exercise by the Company of its rights with respect to these interests will
require the approval of a majority of the disinterested directors of the
Company. See "Policies with Respect to Certain Activities--Conflict of Interest
Policies."
MIDTOWN MANHATTAN OFFICE PROPERTIES. The Company will not acquire certain
indirect general partner interests owned by the Mendik Group in two of the
Properties (Eleven Penn Plaza and 330 Madison) at the time of the Offering and
the Formation Transactions. These interests will not be acquired because the
required consent to transfer such interests was not obtained. However, the
Company will have the option right and the right of first refusal described
above with respect to these interests.
The Mendik Group also owns indirect interests in two midtown Manhattan
office properties (3301 West 34th Street and certain interests in Two Park
Avenue) through Mendik Real Estate Limited Partnership, a publicly held real
estate limited partnership (the "Mendik RELP"). The Company will not acquire
these interests at the time of the Offering and the Formation Transactions
because it is impractical to obtain all of the consents necessary from the
public investors in the RELP to effect such a transaction. However, as described
above, the Company will have an option to acquire the general partner interests
of the Mendik Group in the Mendik RELP as well as in the partnerships which,
directly or indirectly, own these properties and will have a right of first
refusal with respect to any proposed transfer of these general partner
interests. The Company will not have any options or rights of first refusal with
respect to the proposed transfer of any limited partner interests held by the
Mendik Group in the Mendik RELP or in such partnerships because such interests
are passive investments and the Company does not consider the Mendik Group's
limited partner interests in such partnerships to be material.
Another office property in Midtown Manhattan in which the Mendik Group owns
an interest (909 Third Avenue) which will not be acquired by the Company at the
time of the Offering and the Formation Transactions was excluded because the
value of such interest cannot be determined adequately and will depend on the
outcome of certain discussions with major tenants and/or lenders at the
property. The Company will have the option right and the right of first refusal
described above with respect to this interest.
The Mendik Group also owns indirect interests in three other midtown
Manhattan office properties through passive investments in partnerships
controlled by persons not affiliated with the Mendik Group. In two of these
properties (521 Fifth Avenue and 570 Seventh Avenue), the Mendik Group owns a
minority,
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non-controlling general partner interest, and in the remaining property (11 West
42nd Street) the Mendik Group interest is a passive limited partner interest.
For ten years after the completion of the Offering, the Company will have the
right of first refusal described above with respect to any proposed transfer of
these interests, but the Company will not have any direct option to acquire the
Mendik Group's interest in these properties.
The Mendik Group also owns an interest in a relatively small, boutique
office building located in midtown Manhattan (689 Fifth Avenue). The Company
believes that, because of its size and its primary suitability to upscale retail
tenants (the building is known as the Elizabeth Arden Building), this building
is not of the same type as the properties initially to be included in the
Company's portfolio. Accordingly, the Company will not have any option right or
rights of first refusal with respect to this interest.
DOWNTOWN MANHATTAN OFFICE PROPERTIES. The Mendik Group owns interests in
two downtown Manhattan office properties (20 Broad Street and 100 Church
Street). These interests will not be acquired by the Company at the time of the
completion of the Offering and the Formation Transactions because, in the case
of 20 Broad Street, the value of the interest cannot be determined adequately
and will depend on the outcome of certain discussions with major tenants and/or
lenders at the property, and, in the case of 100 Church Street, because the
property currently is the subject of a contract for sale with a third party
unaffiliated with the Mendik Group. The Company will have an option right and a
right of first refusal as described above with respect to the Mendik Group's
interests in both of these properties.
OTHER PROPERTIES. In addition to the office properties in Manhattan
described above, the Mendik Group owns interests in certain office properties
located in other parts of the New York metropolitan area as well as interests in
certain non-office properties located in Manhattan and elsewhere in the New York
metropolitan area. The Company will not acquire these interests in connection
with the Offering and the Formation Transactions because these properties are
not of the same type as the properties initially to be included in the Company's
portfolio and, in certain cases, because the interests of the Mendik Group are
passive investments in properties in which the Mendik Group does not have a
controlling interest and does not act as the managing general partner. In
certain cases (depending on the nature of the property and the nature of the
interest held by the Mendik Group in such property), the Company will have the
option right and/or the right of first refusal described above with respect to
such interests.
SERVICE BUSINESS INTERESTS. The Company will not acquire at the time of the
completion of the Offering any interest in certain office property service
businesses currently conducted by the Mendik Group. These services include
office cleaning (and related) services and security services with respect to the
Company's properties and properties in which the Company will not own any
interest, as well as facilities management services with respect to third
parties. The interests in these service businesses are not being transferred to
the Company at the time of the completion of the Offering in order to maintain
the Company's qualification as a REIT for Federal income tax purposes or because
the Company does not believe such services are directly related or material to
the Company's business strategy.
The Company requested a ruling from the IRS in order to permit the Company
to provide cleaning (and related) services with respect to properties in which
the Company has an ownership interest. The Company subsequently received
indications, however, that a favorable ruling would not be forthcoming.
Accordingly, after the completion of the Offering, the Company expects to retain
an entity owned by the Mendik Group and an affiliate of RMB Realty to provide
cleaning and related services for the Company's properties. With respect to
properties in which the Company will have a 100% interest, cleaning and related
services will be provided to the Company at the actual cost of payroll and
supplies. With respect to properties in which the Company will have less than a
100% interest, cleaning and related services will be provided on the same terms
as they are currently provided. In addition, the cleaning entity will have the
non-exclusive right to provide above-standard cleaning and related services to
individual tenants at the Company's properties at competitive rates that are
separately negotiated with tenants, which agreements will be cancellable by
tenants on 30 days' prior written notice. The cleaning entity will provide such
services to individual tenants pursuant to agreements on customary terms and for
terms not in excess of one year. See "Certain Relationships and Transactions."
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With respect to the three Properties in which the Company will own a 100%
interest, the Company expects these services to be provided under contracts with
the Mendik Group that will have an initial five-year term, but will be
terminable by either party upon 30 days' notice. With respect to the four
Properties in which the Company will own less than a 100% interest, the Company
expects these services to be provided under the existing contracts with the
Mendik Group. Any actions with respect to the contracts to provide these
services that may be taken by the Company in the future will need to be approved
by a vote of the disinterested members of the Board of Directors of the Company.
See "Policies with Respect to Certain Activities--Conflict of Interest
Policies."
After the completion of the Offering, certain employees of the Management
LLC will supervise the provision of cleaning and related services and security
services by the Mendik Group with respect to the Company's properties in which
the Company will own a 100% interest.
COMPETITION
All of the Properties are located in highly developed areas of midtown
Manhattan that include a large number of other office properties. (Manhattan is
by far the largest office market in the United States.) The number of
competitive office properties in Manhattan could have a material adverse effect
on the Company's ability to lease office space at its properties, and on the
effective rents the Company is able to charge. These competing properties may be
newer or better located. In addition, the Company may compete with other
property owners that have greater resources than the Company. In particular,
although currently no other publicly traded REITs have been formed primarily to
own, operate and acquire Manhattan office properties, the Company may in the
future compete with other such REITs. In addition, the Company may face
competition from other real estate companies (including other REITs that
currently invest in markets other than Manhattan) that have greater financial
resources than the Company or that are willing to acquire properties in
transactions which are more highly leveraged than the Company is willing to
undertake. The Company also will face competition from other real estate
companies that provide management, leasing and other services similar to those
to be provided by the Management Corporation.
REGULATION
GENERAL. Office properties in Manhattan are subject to various laws,
ordinances and regulations, including regulations relating to common areas. The
Company believes that each Property has the necessary permits and approvals to
operate its business.
AMERICANS WITH DISABILITIES ACT. The Company's properties must comply with
Title III of the ADA to the extent that such properties are "public
accommodations" as defined by the ADA. The ADA may require removal of structural
barriers to access by persons with disabilities in certain public areas of the
Company's properties where such removal is readily achievable. The Company
believes that the Properties are in substantial compliance with the ADA and that
it will not be required to make substantial capital expenditures with respect to
the Properties to address the requirements of the ADA. However, noncompliance
with the ADA could result in imposition of fines or an award of damages to
private litigants. The obligation to make readily achievable accommodations is
an ongoing one, and the Company will continue to assess its properties and to
make alterations as appropriate in this respect.
ENVIRONMENTAL MATTERS. Under various Federal, state and local laws,
ordinances and regulations, a current or previous owner or operator of real
estate may be required to investigate and clean up certain hazardous substances
released at a property, and may be held liable to a governmental entity or to
third parties for property damage or personal injuries and for investigation and
clean-up costs incurred by the parties in connection with the contamination.
Such laws often impose liability without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous substances. The
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presence of contamination or the failure to remediate contamination may
adversely affect the owner's ability to sell or lease real estate or to borrow
using the real estate as collateral. See "Risk Factors; Conflicts of
Interest--Risks of Operation--Possible Environmental Liabilities."
LEGAL PROCEEDINGS
The Company currently is not a party to any legal proceedings. The
Property-owning entities and the Mendik Group are parties to a variety of legal
proceedings relating to their ownership of Properties and the Mendik Group's
activities with regard to its management and leasing business, respectively,
arising in the ordinary course of business. Because the Company is acquiring the
Properties subject to associated liabilities, it may therefore become a
successor party-in-interest to certain of these proceedings as a result of the
Formation Transactions. The Company believes that substantially all of this
liability is covered by insurance. All of these matters, taken together, are not
expected to have a material adverse impact on the Company.
Two affiliated entities which are partners in certain partnerships in which
the Mendik Group serves as managing general partner (including the partnership
which currently owns Eleven Penn Plaza) and the individual principal in such
affiliated entities filed a lawsuit against Mr. Mendik and Mendik Realty on
November 21, 1994 in the U.S. District Court (S.D.N.Y.). After the completion of
the Offering and the Formation Transactions, the Company will be a partner with
such affiliated entities in the partnership which owns Eleven Penn Plaza, and
these affiliated entities will have a right of first refusal in certain
circumstances with respect to a proposed sale of Eleven Penn Plaza. See
"--Eleven Penn Plaza" above. The lawsuit alleges, among other things, fraud,
breach of fiduciary duty and breach of contract by Mr. Mendik and Mendik Realty
in connection with, in part, an agreement executed by Mr. Mendik and one of such
partners, pursuant to which such partner has a right to a portion of the
distributions received by Mr. Mendik with respect to certain partnerships (in
each of which the Mendik Group serves as managing general partner) and
businesses. The lawsuit originally included claims regarding distributions with
respect to the partnership which currently owns Eleven Penn Plaza, but the
claims with respect such partnership were dismissed because, under the terms of
the partnership agreement of such partnership, such claims are required to be
submitted to arbitration. To date, no arbitration proceeding has been commenced
asserting such claims with respect to the partnership which currently owns
Eleven Penn Plaza. The disputes which remain relate, in part, to which
distributions fall within the ambit of the agreement between Mr. Mendik and such
partner and whether the calculations of the portions of such distributions which
are payable to the partner are accurate. Mr. Mendik and Mendik Realty do not
believe that such lawsuit reasonably would be expected to have a material
adverse effect on Mr. Mendik or Mendik Realty. Mr. Mendik and Mendik Realty have
agreed to indemnify and hold harmless the Company against any expenses or
liabilities that may be incurred by the Company in connection with any such
litigation and arbitration.
On January 14, 1997, two individual investors in Mendik RELP, the publicly
held limited partnership that owns a 60% interest in Two Park Avenue, filed a
class action suit in the Supreme Court for the County of New York on behalf of
all investors in Mendik RELP alleging, among other things, that Mr. Mendik and
certain of his affiliated entities which act as the general partner of Mendik
RELP breached their fiduciary and contractual duties to the limited partners in
Mendik RELP by agreeing to transfer a 40% interest in Two Park Avenue to the
Company and not providing the investors in Mendik RELP with the opportunity to
transfer their interests as well. The suit claims that the Company and Mendik
RELP have different investment objectives with respect to Two Park Avenue and
that the control which the Company will have with respect to the operation and
management of Two Park Avenue following the Offering and the Formation
Transactions will effectively prevent Mendik RELP from liquidating its interest
in Two Park Avenue. The named plaintiffs in the suit are seeking a declaration
that the class action is proper and other declarative and equitable relief,
including an injunction against the completion of the Offering and the Formation
Transactions. Mendik/FW LLC has agreed to indemnify and hold harmless the
Company against any expenses or liabilities that may be incurred by the Company
in connection with any such litigation.
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MANAGEMENT
DIRECTORS, DIRECTOR NOMINEES AND EXECUTIVE OFFICERS
The Board of Directors of the Company will be expanded immediately following
the completion of the Offering to include the director nominees named below,
each of whom has been nominated for election and has consented to serve. Upon
election of the director nominees, a majority of directors will not be employees
or affiliates of the Company or the Mendik Group. Pursuant to the Company's
Charter, the Board of Directors is divided into three classes of directors. The
initial terms of the first, second and third classes will expire in 1997, 1998
and 1999, respectively. Beginning in 1997, directors of each class will be
chosen for three-year terms upon the expiration of their current terms and each
year one class of directors will be elected by the stockholders. The Company
believes that classification of the Board of Directors will help to assure the
continuity and stability of the Company's business strategies and policies as
determined by the Board of Directors. Holders of shares of Common Stock will
have no right to cumulative voting in the election of directors. Consequently,
at each annual meeting of stockholders, the holders of a majority of the shares
of Common Stock will be able to elect all of the successors of the class of
directors whose terms expire at that meeting.
The following table sets forth certain information with respect to the
directors, director nominees and executive officers of the Company immediately
following the completion of the Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ ----- --------------------------------------------------------------------
<S> <C> <C>
Bernard H. Mendik................... 67 Chairman of the Board and Chief Executive Officer (term will expire
1999)
David R. Greenbaum.................. 45 President, Chief Operating Officer and Director (term will expire
1997)
Thomas R. Delatour, Jr.............. 42 Director (term will expire 1999)
William S. Janes.................... 43 Director (term will expire 1998)
David B. Cornstein.................. 58 Director Nominee (term will expire 1999)
Lawrence S. Huntington.............. 61 Director Nominee (term will expire 1998)
Morris W. Offit..................... 59 Director Nominee (term will expire 1997)
Spencer M. Partrich................. 56 Director Nominee (term will expire 1997)
Leonard N. Stern.................... 58 Director Nominee (term will expire 1998)
Christopher G. Bonk................. 42 Senior Vice President and Chief Financial Officer
Michael M. Downey................... 55 Senior Vice President--Operations
John J. Silberstein................. 36 Senior Vice President--Acquisitions
David L. Sims....................... 50 Senior Vice President--Leasing
Kevin R. Wang....................... 39 Senior Vice President--Leasing
</TABLE>
BERNARD H. MENDIK has been the Chairman of the Board of Directors and Chief
Executive Officer of the Company since its formation. Mr. Mendik has been an
owner, manager and developer of office and commercial properties in the New York
metropolitan and surrounding areas since 1957. He has been Chairman of the Board
of Directors of Mendik Realty since 1990. He was President and sole shareholder
of Mendik Realty from its founding in 1978 until 1990. Mr. Mendik is involved
with various charitable, philanthropic and civic organizations. He has been
Chairman of the Board of Governors of the Real Estate Board of New York since
1992. Mr. Mendik serves as a Trustee of the New York Law School (of which he is
former Chairman), the Jewish Guild's Nursing Home for the Aged Blind, the
Montefiore Medical Center, The Bronx High School of Science Foundation, The City
College Fund and the Real Estate Advisory Board of Baruch College. He is the
Director of the Gracie Mansion Conservancy, a member of the Board of Regents of
the Cathedral Church of Saint John the Divine, former Chairman of the Jewish
Guild for the Blind, a member emeritus of the Character and Fitness Committee
for Admission to the New York Bar Association and past adjunct professor at New
York University's Real Estate Institute.
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Mr. Mendik is Mayor Giuliani's designee Board Member of the New York Hall of
Science, a member of the Mayor's Business Advisory Council and a member of the
Mayor's Commission on Youth Empowerment Services. He also is a 1993 recipient of
the Ellis Island Medal of Honor. He is a member of the New York Bar and holds
honorary Doctor of Laws degrees from the New York Law School and the City
College of the City University of New York. Mr. Mendik also is involved with
numerous organizations which focus on issues facing both New York City and the
New York real estate community. He is a Trustee of the Realty Advisory Board,
the Realty Foundation of New York and the Fifth Avenue Association. He also is a
Director of the Downtown-Lower Manhattan Association, Inc., a partner of the New
York City Partnership and a member of the Speaker's Legislative Advisory
Commission on the Homeless. In May 1996, Mayor Giuliani conferred upon Mr.
Mendik The City of New York's Fiorello H. LaGuardia Award for civic achievement.
Mr. Mendik received a B.B.A. degree from the City College of New York and a J.D.
degree from the New York Law School.
DAVID R. GREENBAUM has been the President and Chief Operating Officer and a
Director of the Company since its formation. Mr. Greenbaum is responsible for
acquisitions and the overall management, financing and leasing activities of the
property portfolio of the Company. He has been President of Mendik Realty since
1990. He was Executive Vice President of Mendik Realty from 1982 until 1990.
Prior to joining Mendik Realty, Mr. Greenbaum was a tax attorney with the New
York law firm of Weil, Gotshal & Manges. Mr. Greenbaum is a member of the Board
of Directors of the Real Estate Board of New York and Co-Chairman of its
Economic Development Committee. In addition, he is a member of the Board of
Trustees and is the Treasurer of the Citizens Budget Commission and Chairman of
its Economic Development Committee. Mr. Greenbaum has been appointed by Mayor
Giuliani to the Board of the New York City Industrial Development Authority. He
is a past Treasurer of the Grand Central BID and the 34th Street BID and was
selected by the New York City Partnership to participate in the 1994-95 David
Rockefeller Fellows Program. Mr. Greenbaum is a member of the Board of Trustees
of the Jewish Guild for the Blind and the Jewish Guild's Nursing Home for the
Aged Blind. He is a member of the New York University Real Estate Institute's
Advisory Board. Mr. Greenbaum received a B.A. degree from the University of
Rochester and a J.D. degree from the University of Chicago.
THOMAS R. DELATOUR, JR. has over 19 years of experience providing financial
advice to participants in the real estate industry. Mr. Delatour joined RMB
Realty in 1988 and presently serves as an executive officer and director. He
also serves as an executive officer and director of FWM Genpar, Inc., the
general partner of FWM, L.P. In addition, Mr. Delatour serves as a director of
Paragon Group, Inc., a publicly traded REIT headquartered in Dallas, Texas. Mr.
Delatour served as the Vice President--Finance, Southeast Region for Lincoln
Property Company from 1981 to 1987. He also served from 1993 to 1996 as a
director of Carr Realty Corporation (now known as CarrAmerica Realty
Corporation), a publicly traded REIT headquartered in Washington, D.C. In
addition, he is Chairman--Urban Development/Mixed Use Council for The Urban Land
Institute. Mr. Delatour earned a B.B.A. degree from the University of Texas.
WILLIAM S. JANES has over 19 years of experience providing financial advice
to participants in the real estate industry. Mr. Janes joined RMB Realty in 1991
and presently serves as an executive officer and director. He also serves as an
executive officer of FWM Genpar, Inc., the general partner of FWM, L.P. In
addition, Mr. Janes serves as a director of Paragon Group, Inc., a publicly
traded REIT headquartered in Dallas, Texas, as well as a director of CapStar
Hotel Company, a publicly traded corporation headquartered in Washington, D.C.
Prior to joining RMB Realty, Mr. Janes was with Lincoln Property Company from
1984 to 1989, serving as Regional General Partner and overseeing development
operations in the mid-Atlantic region. Mr. Janes maintains professional
affiliations as a member of NAREIT, the Society of Industrial and Office
Realtors, the Urban Land Institute and the Washington Board of Realtors. He also
is on the Development Committee of the Washington National Cathedral. Mr. Janes
earned a B.A. degree from Bowdoin College.
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DAVID B. CORNSTEIN has been Chairman of the Board of Directors of Finlay
Enterprises, Inc., a publicly traded company which is the largest operator of
licensed fine jewelry departments in the United States and France, since May
1993 and a director of that company and its wholly-owned subsidiary since
December 1988. Mr. Cornstein also is Chairman and Chief Executive Officer of
Finlay International. In addition, Mr. Cornstein is Chairman of What A World!,
Inc., a publicly traded company specializing in the retail sale of nature
related products. Mr. Cornstein is involved with various charitable,
philanthropic and civic organizations, and currently is the chairman of the New
York City Off-Track Betting Commission and the New York State Senate Advisory
Commission on the Future of New York City. Mr. Cornstein is the Vice Chairman of
the Economic Development Corporation of New York City, a member of the New York
State Advisory Council on State Productivity, and a member of the Mayor's
Business Advisory Council. Mr. Cornstein received a B.A. degree from Lafayette
University and an M.B.A. degree from New York University Business School.
LAWRENCE S. HUNTINGTON has been Chairman of the Board of Fiduciary Trust Co.
International since 1983 and Chief Executive Officer since 1973. He became
President in 1970 and has been affiliated with the company since 1961 when he
joined the investment department. Mr. Huntington is active in numerous civic and
business organizations and currently serves as Chairman of the St.
Luke's-Roosevelt Hospital Center. He also serves as Chairman of The New York Law
School and has served a term as Chairman of the New York City Citizen's Budget
Commission, a fiscal watchdog agency. Mr. Huntington also is a former Chairman
of the World Wildlife Fund. He is a member of the NASD International Markets
Advisory Board and served for ten years as a member of the New York State Common
Retirement Fund Investment Committee. He is a Director of Princeton Packet,
Inc., the publisher of a local weekly newspaper. Mr. Huntington received a B.A.
degree from Harvard College and a L.L.B. degree from the New York Law School.
MORRIS W. OFFIT has been Chief Executive Officer of OFFITBANK, a limited
purpose trust company whose core business is investment management services,
since 1990. Prior to the formation of OFFITBANK'S predecessor in 1983, Mr. Offit
was associated with the Julius Baer Group in Zurich, where as a Director of Baer
Holding Ltd., he was responsible for its U.S. investment operations. Mr. Offit
began his career at Mercantile Safe Deposit and Trust Company in Baltimore in
1960. In 1968 he joined Salomon Brothers, where he was a General Partner for 10
years. Mr. Offit is a trustee of The Johns Hopkins University, where he served
as Chairman from 1990 to 1996, and is a trustee of the Jewish Museum, where he
served as Chairman from 1987 to 1991. In 1983, Mr. Offit served as Adjunct
Professor of Finance at the Columbia Graduate School of Business, where he
lectured on the secondary capital markets. He has lectured widely at investment
seminars and graduate schools of business and international affairs. Mr. Offit
received a B.A. degree and an Honorary Doctor of Humane Letters degree from The
Johns Hopkins University and an M.B.A. degree from the Wharton School of the
University of Pennsylvania.
SPENCER M. PARTRICH has over 30 years of experience in the acquisition,
development and management of real estate. He is the Co-owner and a Director of
Lautrec, Ltd., a property management company founded in 1976 which is the
largest privately held owner/operator of manufactured housing communities in the
United States. He was President and Chief Operating Officer of that company from
1976 to 1986. Lautrec currently has over 20,000 manufactured home sites and
6,000 apartment units under management in addition to over 1,000 acres of land
under various stages of development for residential, commercial and manufactured
housing use. Mr. Partrich also has served on the Board of Directors of Arbor
Drugs, Inc., a publicly traded drug store chain, since 1988. He is a member of
the Michigan Bar Association. Mr. Partrich received B.A. and J.D. degrees from
Wayne State University.
LEONARD N. STERN is the Chairman, Chief Executive Officer and sole
stockholder of The Hartz Group, Inc., a company that manufactures and
distributes pet supplies and owns over 30 million square feet of commercial
space, primarily in the New Jersey Meadowlands, as well as a variety of other
major real estate
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developments, including the construction of 667 Madison Avenue and the Soho
Grand Hotel in Manhattan. In addition, The Hartz Group owns THE VILLAGE VOICE, a
New York weekly publication, and L.A. WEEKLY, a Los Angeles weekly newspaper.
Mr. Stern currently is a member of the Board of Trustees of the Rite Aid
Corporation, a publicly traded company. He has been a member of the Board of
Trustees of New York University, as well as a member of New York City
Partnership, Inc., Chemical Bank's Lower Manhattan Advisory Board and the
Regional Banking Advisory Board. Mr. Stern received B.S. and M.B.A. degrees from
New York University.
CHRISTOPHER G. BONK has been Senior Vice President and Chief Financial
Officer of the Company since its formation. Mr. Bonk is responsible for all
financing and accounting matters for the Company. He has been Senior Vice
President of Mendik Realty since 1981 and Chief Financial Officer of Mendik
Realty since 1994. Prior to joining Mendik Realty, Mr. Bonk was a Financial
Manager in the real estate group of The Equitable Life Assurance Society of the
United States. Mr. Bonk received a B.S. degree in Business Administration from
the University of Akron.
MICHAEL M. DOWNEY has been Senior Vice President--Operations of the Company
since its formation. Mr. Downey is responsible for operations, management and
construction for the Company. He has been Senior Vice President of Operations
for Mendik Realty since 1984. Mr. Downey joined Mendik Realty in 1978 as Chief
Engineer and also has served as Building Manager and Vice President. Prior to
joining Mendik Realty, Mr. Downey worked in the real estate field for several
other companies, including Alcoa Aluminum and Citibank. Mr. Downey has served as
President and Assistant Secretary to the Chairman of both the Finance and Waste
Management Committees of BOMA (the Building Owners' and Managers' Association)
of New York. Mr. Downey also has served as Chair of the Management Division of
the Real Estate Board of New York and presently serves as Chair of the Codes and
Regulations Committee. The Realty Advisory Board also has appointed him as a
permanent Member of the Union Labor Negotiating Committee. In addition, Mr.
Downey serves on the New York City Council's Legislative Advisory Commission on
the Homeless and belongs to the Association of Energy Engineers.
JOHN J. SILBERSTEIN has been Senior Vice President--Acquisitions of the
Company since its formation. Mr. Silberstein assists Mr. Greenbaum in the
overall management, finance and leasing of the property portfolio of the
Company, and also is responsible for acquisitions. He has been Senior Vice
President and General Counsel of Mendik Realty since 1990 and was Vice President
and General Counsel from 1989 until 1990. Prior to joining Mendik Realty, Mr.
Silberstein was a real estate attorney with the New York law firm of Skadden,
Arps, Slate, Meagher & Flom. Mr. Silberstein received a B.A. degree from Brown
University and a J.D. degree from New York University School of Law.
DAVID L. SIMS has been Senior Vice President--Leasing of the Company since
its formation. Mr. Sims is responsible for overseeing and directing leasing in
various of the Company's properties. He has been Senior Vice President of
Leasing for Mendik Realty since 1984. Prior to joining Mendik Realty, Mr. Sims
served as Assistant Vice President (Leasing) for Olympia and York and as a
mortgage/sales broker for Omni Funding Corporation. Mr. Sims is a lecturer at
New York University's Real Estate Institute. Mr. Sims received a B.A. degree
from Syracuse University.
KEVIN R. WANG has been Senior Vice President--Leasing of the Company since
its formation. Mr. Wang is responsible for overseeing and directing leasing in
various of the Company's properties. He has been Senior Vice President of
Leasing for Mendik Realty since 1985. Prior to joining Mendik Realty, Mr. Wang
served as Vice President of Cross & Brown, a commercial real estate brokerage
firm in New York City. Mr. Wang is currently Chairman of the General Meetings
Committee and a past Co-Chairman of the Seminar Committee of the Real Estate
Board of New York. He also is a past president of the New York Chapter of the
National Association of Industrial and Office Parks and a past chairman of The
Young Men's/Women's Real Estate Association of New York and the recipient of the
latter organization's Young Man of the Year Award for 1980. Mr. Wang is a
lecturer at New York University's Real Estate Institute, a
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member of the New York University Real Estate Round Table and a member of the
Cornell University Real Estate Council. Mr. Wang received a B.S. degree from
Cornell University.
COMMITTEES OF THE BOARD OF DIRECTORS
EXECUTIVE COMMITTEE. Promptly following the completion of the Offering, the
Board of Directors will establish an Executive Committee. Subject to the
Company's conflict of interest policies, the Executive Committee will be granted
the authority to acquire and dispose of real estate and the power to authorize,
on behalf of the full Board of Directors, the execution of certain contracts and
agreements, including those related to the borrowing of money by the Company
(and, consistent with the Partnership Agreement of the Operating Partnership, to
cause the Operating Partnership to take such actions). The Executive Committee
initially will consist of Messrs. Mendik and Greenbaum and at least two
additional directors.
AUDIT COMMITTEE. Promptly following the completion of the Offering, the
Board of Directors will establish an Audit Committee. The Audit Committee will
make recommendations concerning the engagement of independent public
accountants, review with the independent public accountants the scope 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. The Audit Committee
initially will consist of two or more independent directors.
COMPENSATION COMMITTEE. Promptly following the completion of the Offering,
the Board of Directors will establish a Compensation Committee consisting of at
least two independent directors to establish remuneration levels for executive
officers of the Company and to implement and administer the Company's stock
option plans and any other incentive programs.
The Board of Directors may from time to time establish certain other
committees to facilitate the management of the Company.
COMPENSATION OF DIRECTORS
The Company intends to pay its non-employee directors annual compensation of
$12,000 for their services. In addition, non-employee directors will receive a
fee of $1,000 for each Board of Directors meeting attended (in person or by
telephone). Non-employee directors will receive an additional fee of $500 for
each committee meeting attended (in person or by telephone), unless the
committee meeting is held on the day of a meeting of the Board of Directors.
Non-employee directors also will be reimbursed for reasonable expenses incurred
to attend director and committee meetings. Compensation and fees may be paid to
non-employee directors in the form of cash or Common Stock, at the election of
each such director. Officers of the Company who are directors will not be paid
any director's compensation or fees. Pursuant to the Company's Non-employee
Director Stock Option Plan, non-employee directors will receive, upon initial
election to the Board of Directors, an option to purchase 5,000 shares of Common
Stock (at the initial public offering price or, if elected following the
completion of the Offering, at the prevailing market price) which will vest
after 11 months. The plan also will provide for automatic grants of options to
non-employee directors at certain other times.
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EXECUTIVE COMPENSATION
The following table sets forth the annual base salary rates and other
compensation expected to be paid in 1997 to the Company's Chief Executive
Officer and each of the Company's other executive officers.
<TABLE>
<CAPTION>
1997 BASE OPTIONS
SALARY RATE ALLOCATED
NAME TITLE (1) (2)
- ----------------------------------------- ----------------------------------------- -------------- ------------
<S> <C> <C> <C>
Bernard H. Mendik........................ Chairman of the Board and $ 200,000 225,000
Chief Executive Officer
David R. Greenbaum....................... President and Chief Operating Officer 300,000 225,000
Christopher G. Bonk...................... Senior Vice President and 200,000 50,000
Chief Financial Officer
Michael M. Downey........................ Senior Vice President--Operations 200,000 50,000
John J. Silberstein...................... Senior Vice President--Acquisitions 200,000 50,000
David L. Sims............................ Senior Vice President--Leasing 200,000 50,000
Kevin R. Wang............................ Senior Vice President--Leasing 200,000 50,000
</TABLE>
- ------------------------
(1) Does not include bonuses that may be paid to the above individuals. See
"--Incentive Compensation" below.
(2) Upon the effective date of the Offering, options to purchase a total of
900,000 shares of Common Stock will be granted to officers and other
employees of the Company under the Company's stock option plan at a price
equal to the initial public offering price. See "--Stock Option Plan"
below."
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
PERCENT OF TOTAL ANNUAL RATES OF SHARE
OPTIONS TO PRICE APPRECIATION FOR
BE GRANTED EXERCISE OPTION TERM
OPTIONS TO TO EMPLOYEES PRICE EXPIRATION --------------------------
NAME BE GRANTED(1) IN FISCAL YEAR PER SHARE (2) DATE 5% 10%
- --------------------------- ------------- ----------------- ------------- -------------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Bernard H. Mendik.......... 225,000 25.0% $ 22.00 February , 2007 $ 3,113,028 $ 7,889,025
David R. Greenbaum......... 225,000 25.0% 22.00 February , 2007 3,113,028 7,889,025
Christopher G. Bonk........ 50,000 5.6% 22.00 February , 2007 691,784 1,753,116
Michael M. Downey.......... 50,000 5.6% 22.00 February , 2007 691,784 1,753,116
John J. Silberstein........ 50,000 5.6% 22.00 February , 2007 691,784 1,753,116
David L. Sims.............. 50,000 5.6% 22.00 February , 2007 691,784 1,753,116
Kevin R. Wang.............. 50,000 5.6% 22.00 February , 2007 691,784 1,753,116
</TABLE>
- ------------------------
(1) The options for one-third of the covered shares (disregarding fractional
shares, if any) will become exercisable on each of the first, second and
third anniversaries of the date of the grant.
(2) Based on the assumed initial public offering price. The exercise price per
share will be the initial public offering price.
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EMPLOYMENT AND SEVERANCE AGREEMENTS
Each of Messrs. Mendik and Greenbaum will enter into an employment agreement
with the Company which will be effective as of the completion of the Offering.
The employment agreements of Messrs. Mendik and Greenbaum will have an initial
term of three years and will provide for automatic one-year extensions following
the expiration of the initial term. For the first year of the term, the
employment agreements of Messrs. Mendik and Greenbaum provide for an initial
annual base compensation in the amounts set forth in the Executive Compensation
table, with the amount of any initial bonus to be determined by the Compensation
Committee. For subsequent years, both the amount of the base compensation and
the amount of any bonus will be determined by the Compensation Committee (but
the base compensation will not be less than the base compensation paid in the
first year).
The employment agreements of Messrs. Mendik and Greenbaum entitle the
executives to participate in the Company's stock option plan (each executive
initially will be allocated the number of stock options set forth in the
Executive Compensation table) and to receive certain other insurance and pension
benefits. In addition, in the event of a termination of employment by the
Company without "cause," a termination of employment by the executive for
"cause," or a termination of employment in connection with a "change in control"
of the Company (as such terms are defined in the respective employment
agreements), the terminated executive will be entitled to (i) a single severance
payment in an amount equal to $ , and (ii) continued receipt of certain
benefits, including medical insurance, life and disability insurance and
participation in all pension, 401(k) and other employee plans and benefits
established by the Company for its executive officers for a specified period of
time following the date of termination.
In addition, Messrs. Bonk, Downey, Silberstein, Sims and Wang will enter
into agreements with the Company which will provide that, in the event of a
termination of their employment by the Company without "cause," a termination by
the executive for "cause," or a termination in connection with a "change in
control" of the Company (as such terms are defined in the respective
agreements), the terminated executive will be entitled to a single severance
payment in an amount equal to $ .
NONCOMPETITION AGREEMENTS
Messrs. Mendik and Greenbaum will enter into noncompetition agreements with
the Company which will be effective as of the completion of the Offering. The
noncompetition agreements of Messrs. Mendik and Greenbaum will prohibit them,
under certain circumstances, from competing with the Company during the initial
term of their employment agreement and for a one-year period after termination
of employment. In addition, Messrs. Bonk, Downey, Silberstein, Sims and Wang
will enter into agreements which will prohibit them, under certain
circumstances, from competing with the Company during the term of their
employment with the Company.
STOCK OPTION PLAN
Prior to the completion of the Offering, the Company intends to adopt the
1997 Employee Stock Option, Restricted Stock, Restricted Stock Rights and Stock
Appreciation Rights Plan (the "Employee Plan") for the purpose of attracting and
retaining highly qualified executive officers, directors and employees.
The Employee Plan will be qualified under Rule 16b-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Employee Plan will be
administered by the Compensation Committee and will provide for the granting of
stock options, stock appreciation rights or restricted stock with respect to up
to 1,600,000 shares of Common Stock to executive or other key employees of the
Company. Stock options may be granted in the form of "incentive stock options"
as defined in Section 422 of the Code, or non-statutory stock options, and are
exercisable for up to 10 years following the date of the grant. The exercise
price of each option will be set by the Compensation Committee; provided,
however, that the
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price per share must be equal to or greater than the fair market value of the
Common Stock on the grant date.
The Employee Plan also provides for the issuance of stock appreciation
rights which generally will entitle a holder to receive cash or stock, as
determined by the Compensation Committee at the time of exercise, equal to the
difference between the exercise price and the fair market value of the Common
Stock. In addition, the Employee Plan permits the Company to issue shares of
restricted stock or restricted stock rights to executive or other key employees
upon such terms and conditions as shall be determined by the Compensation
Committee in its sole discretion.
INCENTIVE COMPENSATION PLAN
Prior to the completion of the Offering, the Company intends to establish an
incentive compensation plan for key officers of the Company and the Company's
subsidiaries and affiliates. This plan will provide for payment of cash bonuses
to participating officers after an evaluation of the officer's performance and
the overall performance of the Company has been completed. The Chief Executive
Officer will make recommendations to the Compensation Committee of the Board of
Directors, which will make the final determination for the award of bonuses in
its sole discretion. The Compensation Committee will determine the amount of
such bonuses, if any, for the Chief Executive Officer in its sole discretion.
401(K) PLAN
Effective upon the completion of the Offering, the Company intends to
establish The Mendik Company Section 401(k) Savings/Retirement Plan (the "401(k)
Plan") to cover eligible employees of the Company and any designated affiliate.
The 401(k) Plan will permit eligible employees of the Company to defer up to
15% of their annual compensation, subject to certain limitations imposed by the
Code. The employees' elective deferrals are immediately vested and
non-forfeitable upon contribution to the 401(k) Plan. The Company currently
intends to continue the Mendik Group's policy of matching employee contributions
up to 5% of salary.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (i) actual receipt of an improper benefit or profit in money,
property or services, or (ii) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liability to the maximum extent permitted
by the MGCL.
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (i) any present or
former director or officer, or (ii) any individual who, while a director of the
Company and at the request of the Company serves or has served another
corporation, limited liability company, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, member,
partner or trustee of such corporation, limited liability company, partnership,
joint venture, trust, employee benefit plan or other enterprise from and against
any claim or liability which such persons may incur by reason of his status as a
present or former stockholder, director or officer of the Company. The Bylaws
obligate the Company, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (i) any present or former director or officer who
is made a party to the proceeding by reason of his service in that capacity, or
(ii) any individual who while a director of the Company and at the request of
the Company serves or has served another corporation, limited liability company,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a director, officer, member, partner or trustee of
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such corporation, limited liability company, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity against any claim or
liability to which he may become subject by reason of such service. The Charter
and the Bylaws also permit the Company to indemnify and advance expenses to any
person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (i) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (A) was
committed in bad faith, or (B) was the result of active and deliberate
dishonesty, (ii) the director or officer actually received an improper personal
benefit in money, property or services, or (iii) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain (i) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the Bylaws, and (ii) a written statement by or on
his behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
The Partnership Agreement also provides for indemnification and advance of
expenses of the Company and its officers and directors to the same extent
indemnification and advance of expenses is provided to officers and directors of
the Company in the Charter and Bylaws, and limits the liability of the Company
and its officers and directors to the Operating Partnership and its partners to
the same extent liability of officers and directors of the Company to the
Company and its stockholders is limited under the Charter. See "Partnership
Agreement--Liability and Indemnification."
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STRUCTURE AND FORMATION OF THE COMPANY
THE OPERATING ENTITIES OF THE COMPANY
Following the completion of the Offering and the Formation Transactions, the
operations of the Company will be carried on through the Operating Partnership.
The Formation Transactions were designed to (i) enable the Company to raise the
necessary capital to acquire the Properties, repay certain mortgage indebtedness
secured by certain of the Properties and establish a working capital reserve,
(ii) provide a vehicle for future acquisitions, (iii) enable the Company to
comply with certain requirements under the Code (and the regulations thereto)
relating to REITs, and (iv) preserve certain tax advantages for certain
participants in the Formation Transactions.
THE OPERATING PARTNERSHIP. Following the completion of the Offering and the
Formation Transactions, substantially all of the Company's assets will be held
by, and its operations conducted through, the Operating Partnership and its
subsidiaries and affiliates. The Company is the sole general partner of the
Operating Partnership and will have the exclusive power under the Partnership
Agreement to manage and conduct the business of the Operating Partnership.
Except with respect to the Lock-out Provisions, limited partners generally will
have only limited consent rights. See "Partnership Agreement." The Board of
Directors of the Company will manage the affairs of the Company by directing the
affairs of the Operating Partnership. The Operating Partnership will continue
until December 31, 2095, unless sooner dissolved or terminated. The Operating
Partnership cannot be dissolved for a period of 50 years without the consent of
the limited partners, except in connection with a sale of all or substantially
all of its assets, which also requires the consent of the limited partners. See
"Partnership Agreement." The Company's limited and general partner interests in
the Operating Partnership will entitle it to share in cash distributions from,
and in the profits and losses of, the Operating Partnership in proportion to the
Company's percentage interest therein and will entitle the Company to vote on
substantially all matters requiring a vote of the limited partners.
Following the completion of the Offering and the Formation Transactions, the
Company initially will own an approximate % interest in the Operating
Partnership. Certain participants in the Formation Transactions, including the
Mendik Group and Mendik/FW LLC, will own the remaining Units. The Operating
Partnership anticipates that it will acquire additional properties in exchange
for Units in the future, in which case partners in the partnerships that own
such properties will become limited partners of the Operating Partnership.
After the completion of the Offering and the Formation Transactions, the
Operating Partnership expects to make regular quarterly cash distributions to
its partners (including the Company) in proportion to their percentage interests
in the Operating Partnership. The Company, in turn, will pay cash dividends to
its stockholders in an amount per share of Common Stock equal to the amount
distributed by the Operating Partnership per Unit. In addition, after a holding
period of up to two years following the completion of the Offering, and at any
time thereafter (for as long as the Operating Partnership is in existence and
subject to compliance with the securities laws and the ownership limits of the
Company's organizational documents), limited partners in the Operating
Partnership will be able to have their Units redeemed by the Operating
Partnership. In the event that the Company elects to acquire Units in exchange
for shares of Common Stock upon the exercise of a redemption right by a limited
partner, each such acquisition will increase the Company's percentage ownership
interest in the Operating Partnership and will decrease the aggregate percentage
ownership interest of the limited partners in the Operating Partnership.
THE MANAGEMENT CORPORATION. In order to maintain the Company's
qualification as a REIT while realizing income from management contracts with
third parties, all of the management and leasing operations with respect to
properties in which the Company will own less than a 100% interest (initially,
Eleven Penn Plaza, Two Park Avenue, 330 Madison Avenue and 570 Lexington Avenue)
and properties in which the Company will not own any interest will be conducted
through the Management Corporation.
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The Company, through the Operating Partnership, will own 100% of the non-voting
common stock (representing 95% of the total equity) of the Management
Corporation, and a note issued by the Management Corporation. Through dividends
on its equity interest and debt service payments on the note, the Operating
Partnership expects to receive substantially all of the cash flow from the
Management Corporation's operations. All of the voting common stock of the
Management Corporation (representing 5% of the total equity) will be held by the
Mendik Group. This controlling interest will give the Mendik Group the power to
elect all directors of the Management Corporation.
THE MANAGEMENT LLC. All of the management and leasing operations with
respect to properties in which the Company will own a 100% interest (initially,
Two Penn Plaza, 866 United Nations Plaza and 1740 Broadway) will be conducted
through the Management LLC. The Operating Partnership will own a 99% interest in
the Management LLC. The Management Corporation will own the remaining 1%
interest.
FORMATION TRANSACTIONS
The following Formation Transactions have been consummated or will be
consummated concurrently with the completion of the Offering.
- The Company was formed as a Delaware corporation in December 1995 and was
reincorporated as a Maryland corporation in December 1996.
- The Operating Partnership was formed as a Delaware limited partnership in
December 1996.
- Certain partners in (or members of) certain Property-owning entities (not
including the Mendik Group) have agreed to contribute direct or indirect
ownership interests in such Property-owning entities to the Company in
exchange for Units and shares of Common Stock with a value of approximately
$29.5 million (or 7.5% of the total equity of the Company immediately
following the completion of the Offering), based on the assumed initial
public offering price.
- The Mendik Group has agreed to contribute direct or indirect ownership
interests in the Property-owning entities in exchange for Units with a value
of approximately $15.0 million (or 3.8% of the total equity of the Company),
based on the assumed initial public offering price.
- Certain partners who own interests in 330 Madison Avenue prior to the
completion of the Formation Transactions will have the right to receive
Units from the Company with respect to the amount of the discount, if any,
agreed to by the current lender with respect to that Property in connection
with the repayment of the loan secured by that Property.
- Certain partners in certain Property-owning entities (not including the
Mendik Group) have agreed to sell to the Company the remaining direct or
indirect ownership interests in such Property-owning entities for
approximately $91.3 million in cash.
- Mendik/FW LLC will transfer the management and leasing business of the Mendik
Group with respect to Properties in which the Company will have a 100%
ownership interest to the Management LLC (in which the Company will own
substantially all of the economic interest), as a contribution in respect of
its interest in the Operating Partnership.
- The Mendik Group will transfer the management and leasing business of the
Mendik Group with respect to properties in which the Company will have a
partial ownership interest or no ownership interest to the Management
Corporation (in which the Company will own substantially all of the economic
interest), in exchange for shares of Common Stock with a value of
approximately $5.2 million, based on the assumed initial public offering
price, as well as approximately $2.2 million in cash, which cash corresponds
to the Mendik Group's income tax obligations associated with such transfer.
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- FWM II, L.P. has agreed to purchase 954,545 shares of Common Stock
(representing an investment of approximately $21.0 million, based on the
assumed initial public offering price) in the FWM Placement at the initial
public offering price. FWM II, L.P. may be able to sell the shares of Common
Stock it is purchasing in the FWM Placement in the public market pursuant to
registration or available exemptions from registration beginning one year
after the completion of the Offering.
- QIB will purchase 850,000 shares of Common Stock (representing an investment
of approximately $18.7 million, based on the assumed initial public offering
price) in the QIB Placement at the initial public offering price. QIB may be
able to sell the shares of Common Stock it is purchasing in the QIB
Placement in the public market pursuant to registration or available
exemptions from registration beginning six months after the completion of
the Offering.
- The Company will use approximately $91 million of the net proceeds of the
Offering and the Concurrent Placements to repay certain mortgage
indebtedness secured by two of the Properties.
- The Company will refinance with its existing lenders approximately $113
million of indebtedness secured by Two Penn Plaza and 866 United Nations
Plaza, and approximately $5 million of indebtedness secured by Two Penn
Plaza is expected to be forgiven by the lender.
- The Company expects to establish an initial reserve of approximately $38
million for tenant improvement costs and leasing commissions expected to be
incurred in connection with the re-leasing of space at the Properties, as
well as for interest and operating costs relating to vacant space at the
Properties and for general working capital needs.
CONSEQUENCES OF THE OFFERING AND THE FORMATION TRANSACTIONS
The Offering and the Formation Transactions will have the following
consequences:
- The Operating Partnership directly or indirectly will own substantially all
of the interests in the Properties currently owned by the Mendik Group and
its affiliates.
- The purchasers of the Common Stock offered in the Offering will own
approximately 81% of the outstanding Common Stock.
- The Company will be the general partner of, and will own approximately %
of the ownership interests in, the Operating Partnership.
If all limited partners in the Operating Partnership were to exchange their
Units for Common Stock immediately after the completion of the Offering
(notwithstanding the provision of the Partnership Agreement which prohibits such
exchange for up to two years following the completion of the Offering), but
subject to the Ownership Limit, then the participants in the Formation
Transactions would beneficially own approximately % of the outstanding shares
of Common Stock.
See "Risk Factors--Conflicts of Interests in the Formation Transactions and
the Business of the Company--Substantial Benefits to Related Parties" and
"Principal Stockholders."
BENEFITS TO RELATED PARTIES
The Mendik Group and Mendik/FW LLC will realize certain material benefits in
connection with the Formation Transactions and the Offering, including the
following:
- The Mendik Group will receive Units in consideration for its interests in the
Properties with a total value of approximately $15.0 million, based on the
assumed initial public offering price (representing approximately 3.8% of
the total equity of the Company). The net book value of such assets is
approximately $( ) million (or $ million less than the value to be
received by the Mendik Group with respect to such assets).
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- Mendik/FW LLC will receive shares of Common Stock in consideration for the
Mendik Group's management and leasing business with a value of approximately
$5.2 million, based on the assumed initial public offering price, as well as
approximately $2.2 million in cash, which cash corresponds to the Mendik
Group's income tax obligations associated with such transfer. The net book
value of such assets is approximately $790,000 (or approximately $6.6
million less than the value to be received by the Mendik/FW LLC with respect
to such assets).
- Mendik/FW LLC owns an interest in the Operating Partnership that initially
will have a value of approximately $ million, based on the assumed
initial public offering price.
- Messrs. Mendik and Greenbaum will enter into employment agreements with the
Company, and the other five executive officers will enter into
employment-related agreements with the Company. See "Management--Employment
and Severance Agreements." In addition, the Company will grant to Messrs.
Mendik and Greenbaum and the other five executive officers of the Company
options to purchase an aggregate of 700,000 shares of Common Stock at the
initial public offering price under the Company's stock option plan, subject
to certain vesting requirements. See "Management."
- The structure of the Company was designed in part to provide the Mendik Group
and others with the ability to transfer their interests in certain of the
Properties to the Operating Partnership in exchange for Units, which results
in deferral of income tax liabilities that would otherwise result from the
sale of such interests (or the sale of such Properties).
- The Mendik Group will receive all of the voting stock of the Management
Corporation (representing a 5% equity interest therein).
- Pursuant to the Lock-out Provisions, the Company will be restricted in its
ability to sell, or reduce the amount of mortgage indebtedness on, three of
the Properties (Two Penn Plaza, 866 United Nations Plaza and Eleven Penn
Plaza) for up to 15 years following the completion of the Offering, which
could enable certain participants in the Formation Transactions (including
the Mendik Group) to defer certain tax consequences associated with the
Formation Transactions.
See "Risk Factors--Conflicts of Interests in the Formation Transactions and
the Business of the Company," "Management" and "Certain Relationships and
Transactions."
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and other
policies of the Company. These policies have been determined by the Company's
Board of Directors and may be amended or revised from time to time by the Board
of Directors without a vote of the stockholders, except that (i) the Company
cannot change its policy of holding its assets and conducting its business only
through the Operating Partnership and its affiliates without the consent of the
holders of Units as provided in the Partnership Agreement, (ii) changes in
certain policies with respect to conflicts of interest must be consistent with
legal requirements, and (iii) the Company cannot take any action intended to
terminate its qualification as a REIT without the approval of the holders of a
majority of the outstanding shares of Common Stock.
INVESTMENT POLICIES
INVESTMENT IN REAL ESTATE OR INTERESTS IN REAL ESTATE. The Company will
conduct all of its investment activities through the Operating Partnership and
its affiliates. The Company's primary business objective is to maximize
stockholder value by growing the Company's asset base, enhancing the value of
its assets and maximizing cash flow from operations. More specifically, the
Company intends to (i) acquire interests in additional office properties,
primarily in midtown Manhattan, at attractive equity returns, thereby taking
advantage of the favorable supply/demand fundamentals that currently exist in
the Manhattan office
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market, and (ii) continue to provide tenants at its properties with a high
quality office environment in terms of building systems, public spaces and
tenant services and, in so doing, to retain existing tenants, attract new
tenants and increase rental revenues while achieving operating cost efficiencies
attributable to the size and geographic concentration of its portfolio. For a
discussion of the Properties and the Company's acquisition strategy and
operating strategy, see "The Properties" and "Business and Growth Strategies."
The Company expects to pursue its investment objectives primarily through
the direct or indirect ownership by the Operating Partnership of the Properties
and other acquired office properties. The Company currently intends to invest
primarily in existing improved properties but may, if market conditions warrant,
invest in development projects as well. Furthermore, the Company currently
intends to invest in or develop commercial office properties, primarily in
midtown Manhattan. However, future investment or development activities will not
be limited to any geographic area or product type or to a specified percentage
of the Company's assets. The Company does not have any limit on the amount or
percentage of its assets that may be invested in any one property or any one
geographic area. The Company intends to engage in such future investment or
development activities in a manner which is consistent with the maintenance of
its status as a REIT for Federal income tax purposes. In addition, the Company
may purchase or lease income-producing commercial properties and other types of
properties for long-term investment, expand and improve the real estate
presently owned or other properties purchased, or sell such real estate or other
properties, in whole or in part, if and when circumstances warrant.
The Company also may participate with third parties in property ownership,
through joint ventures or other types of co-ownership. Such investments may
permit the Company to own interests in larger assets without unduly restricting
diversification and, therefore, may add flexibility in structuring its
portfolio. While the Company currently does not have any plans to invest in
joint ventures or partnerships with affiliates of the Company, Messrs. Mendik
and Greenbaum own interests in several office properties in Manhattan and in
other parts of the New York metropolitan area that the Company may consider
acquiring in the future. In addition, the Company may in the future consider
acquiring additional interests in those Properties in which the Company owns
less than a 100% interest (Eleven Penn Plaza, Two Park Avenue, 330 Madison
Avenue and 570 Lexington Avenue). The Company will not, however, enter into a
joint venture or partnership to make an investment that would not otherwise meet
its investment policies.
Equity investments may be subject to existing mortgage financing and other
indebtedness or such financing or indebtedness as may be incurred in connection
with acquiring or refinancing these investments. Debt service on such financing
or indebtedness will have a priority over any distributions with respect to the
Common Stock. Investments also are subject to the Company's policy not to be
treated as an investment company under the Investment Company Act of 1940, as
amended (the "1940 Act").
INVESTMENTS IN REAL ESTATE MORTGAGES. While the Company's current portfolio
consists of, and the Company's business objectives emphasize, equity investments
in commercial real estate, the Company may, in the discretion of the Board of
Directors, invest in mortgages and other types of equity real estate interests
consistent with the Company's qualification as a REIT. The Company does not
presently intend to invest in mortgages or deeds of trust, but may invest in
participating or convertible mortgages if the Company concludes that it would be
in the Company's interest to do so. The Company also may acquire mortgages in
connection with the acquisition by the Company of economic interests in
properties. Investments in real estate mortgages are subject to the risk that
one or more borrowers may default under such mortgages and that the collateral
securing such mortgages may not be sufficient to enable an investor to recoup
its full investment.
SECURITIES OR INTERESTS IN PERSONS PRIMARILY ENGAGED IN REAL ESTATE
ACTIVITIES AND OTHER ISSUERS. Subject to the percentage of ownership
limitations and gross income tests necessary for REIT qualification, the Company
also may invest in securities of other REITs, securities of other entities
engaged in real estate
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activities or securities of other issuers, including for the purpose of
exercising control over such entities. See "Federal Income Tax
Considerations--Taxation of the Company." No such investment will be made,
however, unless the Board of Directors determines that the proposed investment
would not cause the Company or the Operating Partnership to be an "investment
company" within the meaning of the 1940 Act. The Company may acquire all or
substantially all of the securities or assets of other REITs or similar entities
if such investments would be consistent with the Company's investment policies.
DISPOSITION POLICIES
The Company does not currently intend to dispose of any of the Properties,
although it reserves the right to do so if, based upon management's periodic
review of the Company's portfolio, the Board of Directors determines that such
action would be in the best interests of the Company. The tax consequences of
the disposition of the Properties may, however, influence the decision of
certain directors and executive officers of the Company who hold Units as to the
desirability of a proposed disposition. See "Risk Factors--Conflicts of
Interests in the Formation Transactions and the Business of the Company."
Any decision to dispose of a Property must be approved by a majority of the
Board of Directors (and in accordance with the applicable partnership
agreement). In addition, under the Lock-out Provisions contained in the
Partnership Agreement, the Company may not sell (except in certain events,
including certain transactions that would not result in the recognition of any
gain for tax purposes) Two Penn Plaza, 866 United Nations Plaza or Eleven Penn
Plaza during the Lock-out Period without, in the case of each such Property, the
consent of holders of 75% of the Units originally issued to limited partners in
the Operating Partnership who immediately prior to completion of the Formation
Transactions owned direct or indirect interests in such Property that remain
outstanding at the time of such vote (other than Units held by the Company). The
Lock-out Provisions apply even if it would otherwise be in the best interest of
the stockholders for the Company to sell one or more of these three Properties.
FINANCING POLICIES
As a general policy, the Company intends to limit its total consolidated
indebtedness, and its pro rata share of unconsolidated indebtedness, so that at
the time any debt is incurred, the Company's debt-to-total market capitalization
ratio does not exceed 50%. Upon the completion of the Offering and the Formation
Transactions, the debt-to-total market capitalization ratio of the Company will
be approximately 33% (including the Company's pro rata share of unconsolidated
indebtedness). The Charter and Bylaws do not, however, limit the amount or
percentage of indebtedness that the Company may incur. In addition, the Company
may from time to time modify its debt policy in light of current economic
conditions, relative costs of debt and equity capital, market values of its
Properties, general conditions in the market for debt and equity securities,
fluctuations in the market price of its Common Stock, growth and acquisition
opportunities and other factors. Accordingly, the Company may increase its
debt-to-total market capitalization ratio beyond the limits described above. If
this policy were changed, the Company could become more highly leveraged,
resulting in an increased risk of default on its obligations and a related
increase in debt service requirements that could adversely affect the financial
condition and results of operations of the Company and the Company's ability to
make distributions to stockholders.
The Company has established its debt policy relative to the total market
capitalization of the Company computed at the time the debt is incurred, rather
than relative to the book value of its assets, a ratio that is frequently
employed, because it believes the book value of its assets (which to a large
extent is the depreciated value of real property, the Company's primary tangible
asset) does not accurately reflect its ability to borrow and to meet debt
service requirements. Total market capitalization, however, is subject to
greater fluctuation than book value, and does not necessarily reflect the fair
market value of the underlying assets of the Company at all times. Moreover, due
to fluctuations in the value of the Company's portfolio of properties over time,
and since any measurement of the Company's total consolidated indebtedness, and
its pro rata share of unconsolidated indebtedness incurred, to total market
capitalization
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is made only at the time debt is incurred, the debt to total market
capitalization ratio could exceed the 50% level.
The Company has not established any limit on the number or amount of
mortgages that may be placed on any single property or on its portfolio as a
whole.
Although the Company will consider factors other than total market
capitalization in making decisions regarding the incurrence of debt (such as the
purchase price of properties to be acquired with debt financing, the estimated
market value of properties upon refinancing, and the ability of particular
properties and the Company as a whole to generate sufficient cash flow to cover
expected debt service), there can be no assurance that the debt-to-total market
capitalization ratio, or any other measure of asset value, at the time the debt
is incurred or at any other time will be consistent with any particular level of
distributions to stockholders.
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies and entered into noncompetition
agreements with Messrs. Mendik and Greenbaum designed to eliminate or minimize
certain potential conflicts of interest. These policies include a resolution
adopted by the Company's Board of Directors which requires all transactions in
which executive officers or directors have a material conflicting interest to
that of the Company to be approved by a majority of the disinterested directors
or by the holders of a majority of the shares of Common Stock held by
disinterested stockholders. In addition, the Company's Board of Directors is
subject to certain provisions of Maryland law, which are designed to eliminate
or minimize certain potential conflicts of interest. There can be no assurance,
however, that these policies and provisions or these agreements always will be
successful in eliminating the influence of such conflicts, and if they are not
successful, decisions could be made that may fail to reflect fully the interests
of all stockholders.
INTERESTED DIRECTOR AND OFFICER TRANSACTIONS
Under Maryland law, a contract or other transaction between the Company and
a director or between the Company and any other corporation or other entity in
which a director is a director or has a material financial interest is not void
or voidable solely on the grounds of such common directorship or interest, the
presence of the director at the meeting at which the contract or transaction is
authorized, approved or ratified or the counting of the director's vote in favor
thereof if (i) the transaction or contract is authorized, approved or ratified
by the board of directors or a committee of the board, after disclosure of the
common directorship or interest, by the affirmative vote of a majority of
disinterested directors, even if the disinterested directors constitute less
than a quorum, or by a majority of the votes cast by disinterested stockholders,
or (ii) the transaction or contract is fair and reasonable to the Company.
Under Delaware law (where the Operating Partnership is formed), the Company,
as general partner, has a fiduciary duty to the Operating Partnership and,
consequently, such transactions also are subject to the duties of care and
loyalty that the Company, as general partner, owes to limited partners in the
Operating Partnership (to the extent such duties have not been eliminated
pursuant to the terms of the Partnership Agreement). Such transactions include,
but are not limited to, the provision of office property management and leasing
and other fee-based services by the Management Corporation to properties in
which the Mendik Group or its affiliates have an ownership interest but which
are not owned by the Company, the acquisition of properties or interests in
properties by the Company from the Company's directors or executive officers or
entities in which they have an interest, the provision of cleaning (and related)
services to the Properties by an entity owned by the Mendik Group and an
affiliate of RMB Realty or the provision of security services to the Properties
by the Mendik Group. The Company will adopt a policy which requires that all
contracts and transactions between the Company, the Operating Partnership or any
of its subsidiaries, on the one hand, and a director or executive officer of the
Company or any entity
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in which such director or executive officer is a director or has a material
financial interest, on the other hand, must be approved by the affirmative vote
of a majority of the disinterested directors. Where appropriate in the judgment
of the disinterested directors, the Board of Directors may obtain a fairness
opinion or engage independent counsel to represent the interests of
non-affiliated security holders, although the Board of Directors will have no
obligation to do so.
BUSINESS OPPORTUNITIES; NONCOMPETITION ARRANGEMENTS
Pursuant to Maryland law, each director is obligated to offer to the Company
any business opportunity (with certain limited exceptions) that comes to him and
that the Company reasonably could be expected to have an interest in pursuing.
After the Formation Transactions, the Mendik Group will continue to own
interests in a number of office properties as well as entities that will provide
cleaning (and related) services to office properties (and certain tenants
thereof) and security services to office properties, including the Properties.
See "The Company--Assets Not Being Transferred to the Company." The Company will
not have any interest in these properties or businesses. Messrs. Mendik and
Greenbaum will enter into agreements with the Company that require them, as long
as they are directors or executive officers of the Company, not to acquire
(other than as passive investors) any office properties within a specified
geographical area except through the Company. Messrs. Mendik and Greenbaum also
generally will agree, subject to any preexisting, contractual or fiduciary
obligations Messrs. Mendik or Greenbaum may owe to existing partnerships or
other entities, to grant a right of first refusal to the Company in connection
with any proposed sale of any interests in office properties that they now own
(other than their interests in the Company and certain passive investments). See
"The Properties--Assets Not Being Transferred to the Company."
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company and the Operating Partnership have authority to offer Common
Stock, Preferred Stock, Units, preferred Units or options to purchase capital
stock or Units in exchange for property and to repurchase or otherwise acquire
its Common Stock or Units or other securities in the open market or otherwise
and may engage in such activities in the future. Except in connection with the
Formation Transactions, the Company has not issued Common Stock, Units or any
other securities in exchange for property or any other purpose, and the Board of
Directors has no present intention of causing the Company to repurchase any
Common Stock. The Company may issue Preferred Stock from time to time, in one or
more series, as authorized by the Board of Directors without the need for
stockholder approval. See "Capital Stock--Preferred Stock." The Company has not
engaged in trading, underwriter or agency distribution or sale of securities of
other issuers other than the Operating Partnership, nor has the Company invested
in the securities of other issuers other than the Operating Partnership for the
purposes of exercising control, and does not intend to do so. At all times, the
Company intends to make investments in such a manner as to qualify as a REIT,
unless because of circumstances or changes in the Code (or the regulations
promulgated by the IRS thereunder (the "Treasury Regulations")), the Board of
Directors determines that it is no longer in the best interest of the Company to
qualify as a REIT and such determination is approved by a majority vote of the
Company's stockholders, as required by the Charter. The Company has not made any
loans to third parties, although it may in the future make loans to third
parties, including, without limitation, to joint ventures in which it
participates. The Company intends to make investments in such a way that it will
not be treated as an investment company under the 1940 Act. The Company's
policies with respect to such activities may be reviewed and modified or amended
from time to time by the Company's Board of Directors without a vote of the
stockholders.
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
FORMATION TRANSACTIONS
The terms of the acquisitions of interests in the Properties and the
acquisition of the Mendik Group's management and leasing business by the
Operating Partnership are described in "Structure and Formation of the
Company--The Formation Transactions."
MANAGEMENT AND LEASING SERVICES
The Mendik Group provides management and leasing services with respect to
the Properties. The aggregate amount of fees paid to the Mendik Group for such
services was approximately $3.7 million in 1993, $3.2 million in 1994 and $3.5
million in 1995. After the completion of the Offering, the Company (through the
Management Corporation and the Management LLC) will continue to provide
management and leasing services for the Properties.
The Mendik Group has provided management and leasing services with respect
to certain properties in which the Mendik Group has interests but in which the
Company will not acquire an interest in the Formation Transactions. The
aggregate amount of fees paid by the owners of such properties to the Mendik
Group was approximately $3.0 million in 1993, $4.7 million in 1994 and $3.6
million in 1995. After the completion of the Offering, the Company (through the
Management Corporation) expects to continue to provide management and leasing
services to such properties. With respect to properties in which the Company
will have less than a 100% interest, management and leasing services will be
provided immediately after the completion of the Offering on the same terms as
they are currently provided.
The cost of management services generally is passed through to tenants as
part of the operating expense escalation clause under leases.
CLEANING SERVICES
The Mendik Group provides cleaning and related services with respect to the
Properties. The Mendik Group currently is reimbursed for the direct cost of such
services plus an amount to cover a portion of overhead costs. The cost of
cleaning and related services generally is passed through to tenants as part of
the operating expense escalation clause under leases. The Mendik Group also
provides additional services directly to tenants on a separately negotiated
basis. The aggregate amount of reimbursement to the Mendik Group for services
provided (excluding services provided directly to tenants) was approximately
$12.6 million in 1993, $12.2 million in 1994 and $13.8 million in 1995. After
the completion of the Offering, the Company expects to retain an entity owned by
the Mendik Group and an affiliate of RMB Realty to provide cleaning and related
services for the Company's properties. With respect to properties in which the
Company will have a 100% interest, the cost to the Company with respect to the
cleaning and related services will be a direct pass-through of the cost of
payroll and supplies. With respect to properties in which the Company will have
less than a 100% interest, cleaning and related services will be provided on the
same terms as they are currently provided. In addition, the cleaning entity will
continue to have the non-exclusive opportunity to provide cleaning and related
services to individual tenants at the Company's properties on a basis separately
negotiated with any tenant seeking such additional services. The cleaning entity
will provide such services to individual tenants pursuant to agreements on
customary terms (including at market rates) and for terms not in excess of one
year.
ENGINEERING AND PREVENTIVE MAINTENANCE SERVICES
As part of its cleaning and related services business, the Mendik Group
provides engineering and preventive maintenance services with respect to the
Properties. The Mendik Group was reimbursed for the direct cost of such services
in the aggregate amount of approximately $3.7 million in 1993, $3.8 million in
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1994 and $4.7 million in 1995. These amounts generally are billed to tenants as
part of the operating expense, escalations and a portion of such costs are
recouped by the Property-owning entity from the tenants. After the completion of
the Offering, the Mendik Group expects to provide engineering and preventive
maintenance services for the Properties and will be reimbursed for the direct
payroll cost of such services.
SECURITY SERVICES
The Mendik Group provides security services with respect to the Properties.
The Mendik Group currently is reimbursed for the direct cost of such services
plus an amount to cover a portion of overhead costs. The aggregate amount of
reimbursements for such services was approximately $2.3 million in 1993, $2.5
million in 1994 and $2.5 million in 1995. After the completion of the Offering,
the Mendik Group will continue to provide security services for the Company's
properties and will be reimbursed for the direct payroll cost of such services
plus an amount to cover a portion of overhead costs. With respect to properties
in which the Company will have less than a 100% interest, security services will
be provided on the same terms as they are currently provided.
The cost of security services is generally passed through to tenants as part
of the operating expense clause under leases.
PARTNERSHIP AGREEMENT
THE FOLLOWING SUMMARY OF THE FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF THE OPERATING PARTNERSHIP (THE "PARTNERSHIP AGREEMENT"),
INCLUDING THE DESCRIPTIONS OF CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS
PROSPECTUS, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PARTNERSHIP
AGREEMENT, WHICH IS FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH
THIS PROSPECTUS IS A PART.
OPERATIONAL MATTERS
GENERAL. Holders of Units (other than the Company in its capacity as
general partner) will hold a limited partnership interest in the Operating
Partnership, and all holders of Units (including the Company in its capacity as
general partner) will be entitled to share in cash distributions from, and in
the profits and losses of, the Operating Partnership. Each Unit generally will
receive distributions in the same amount paid on each share of Common Stock. See
"Distributions."
Holders of Units will have the rights to which limited partners are entitled
under the Partnership Agreement and, to the extent not limited by the
Partnership Agreement, the Delaware Revised Uniform Limited Partnership Act (the
"Act"). The Units have not been and are not expected to be registered pursuant
to any Federal or state securities laws or listed on any exchange or quoted on
any national market system. The Partnership Agreement imposes certain
restrictions on the transfer of Units, as described below.
PURPOSES, BUSINESS AND MANAGEMENT. The purpose of the Operating Partnership
includes the conduct of any business that may be lawfully conducted by a limited
partnership formed under the Act, except that the Partnership Agreement requires
the business of the Operating Partnership to be conducted in such a manner that
will permit the Company to be classified as a REIT under Section 856 of the
Code, unless the Company ceases to qualify as a REIT for reasons other than the
conduct of the business of the Operating Partnership. Subject to the foregoing
limitation, the Operating Partnership may enter into partnerships, joint
ventures or similar arrangements and may own interests directly or indirectly in
any other entity.
The Company, as the general partner of the Operating Partnership, has the
exclusive power and authority to conduct the business of the Operating
Partnership, subject to the consent of the limited partners in certain limited
circumstances discussed below. No limited partner may take part in the
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operation, management or control of the business of the Operating Partnership by
virtue of being a holder of Units.
The Company may not conduct any business other than the business of the
Operating Partnership without the consent of the holders of a majority of the
limited partnership interests (not including the limited partnership interests
held by the Company in its capacity as a limited partner in the Operating
Partnership).
DISTRIBUTIONS. The Partnership Agreement provides for the quarterly
distribution of Available Cash (as defined below), as determined in the manner
provided in the Partnership Agreement, to the Company and the limited partners
in proportion to their percentage interests in the Operating Partnership.
"Available Cash" is generally defined as net income plus any reduction in
reserves and minus interest and principal payments on debt, capital
expenditures, any additions to reserves and other adjustments. Neither the
Company nor the limited partners are entitled to any preferential or
disproportionate distributions of Available Cash.
BORROWING BY THE OPERATING PARTNERSHIP. The Company is authorized to cause
the Operating Partnership to borrow money and to issue and guarantee debt as it
deems necessary for the conduct of the activities of the Operating Partnership.
Such debt may be secured by mortgages, deeds of trust, liens or encumbrances on
properties of the Operating Partnership. The Company also may cause the
Operating Partnership to borrow money to enable the Operating Partnership to
make distributions, including distributions in an amount sufficient to permit
the Company, as long as it qualifies as a REIT, to avoid the payment of any
Federal income tax. See "Policies with Respect to Certain Activities--Financing
Policies." Pursuant to the Lock-out Provisions, the Operating Partnership may
not, earlier than one year prior to its maturity, repay the mortgage
indebtedness on Two Penn Plaza or 866 United Nations Plaza and may not consent
to any such prepayment of mortage indebtedness on Eleven Penn Plaza (except for
the indebtedness secured by the second mortgage on Eleven Penn Plaza which may
be repaid in whole or in part at anytime) and 866 United Nations Plaza during
the Lock-out Period without, in the case of each such Property, the consent of
holders of 75% of the Units originally issued to limited partners in the
Operating Partnership who immediately prior to completion of the Formation
Transactions owned direct or indirect interests in such Property that remain
outstanding at the time of such vote (whether held by the original recipient of
such Units or by a successor or transferee of the original recipient, but
excluding Units held by the Company) unless the repayment is in connection with
either a refinancing of the outstanding debt (on a basis that is nonrecourse to
the Operating Partnership and the Company, provides for the least amount of
principal amortization that is available on commercially reasonable terms and
permits certain guarantees by the holders of the Units originally with respect
to the affected Property) or an involuntary sale pursuant to foreclosure of a
mortgage securing the debt (or other similar event). In addition, during the
Lock-out Period, the Company is obligated to use commercially reasonable
efforts, commencing one year prior to the stated maturity, to refinance at
maturity (on a basis that is nonrecourse to the Operating Partnership and the
Company provides for the least amount of principal amortization that is
available on commercially reasonable terms and permits certain guarantees by the
holders of the Units originally with respect to the affected Property) the
mortgage indebtedness secured by each of these three Properties at not less than
the principal amount outstanding on the maturity date. Finally, during the
Lock-out Period, the Company may not incur debt secured by any of these three
Properties if the amount of the new debt would exceed the greater of 75% of the
value of the Property securing the debt or the amount of existing debt being
refinanced (plus the costs associated therewith).
REIMBURSEMENT OF THE COMPANY; TRANSACTIONS WITH THE COMPANY AND ITS
AFFILIATES. The Company will not receive any compensation for its services as
general partner of the Operating Partnership. The Company, however, as a partner
in the Operating Partnership, has the same right to allocations and
distributions as other partners in the Operating Partnership. In addition, the
Operating Partnership will reimburse the Company for all expenses it incurs
relating to the ongoing operation of the Company and
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offerings of Units or shares of Common Stock (or rights, options, warrants or
convertible or exchangeable securities).
Except as expressly permitted by the Partnership Agreement, affiliates of
the Company will not engage in any transactions with the Operating Partnership
except on terms that are fair and reasonable and no less favorable to the
Operating Partnership than would be obtained from an unaffiliated third party.
SALES OF ASSETS. Under the Partnership Agreement, the Company generally has
the exclusive authority to determine whether, when and on what terms the assets
of the Operating Partnership (including the Properties) will be sold, subject to
the Lock-out Provisions. A sale of all or substantially all of the assets of the
Operating Partnership (or a merger of the Operating Partnership with another
entity) generally requires an affirmative vote of the holders of a majority of
the outstanding Units (including Units held by the Company), but also is subject
to the Lock-out Provisions.
Under the Lock-out Provisions, the Operating Partnership may not sell or
otherwise dispose of Two Penn Plaza, 866 United Nations Plaza or Eleven Penn
Plaza (or any direct or indirect interest therein) during the Lock-out Period
(except pursuant to a sale or other disposition of all or substantially all of
the Operating Partnership's assets approved as described below, an involuntary
sale pursuant to foreclosure of a mortgage secured by one of these Properties or
a bankruptcy proceeding, and certain transactions, including a "Section 1031
like-kind exchange," that would not result in the recognition of any gain for
tax purposes by the holders of Units issued in the Formation Transactions with
respect to these Properties) without, in the case of each such Property, the
consent of holders of 75% of the Units originally issued to limited partners in
the Operating Partnership who immediately prior to the completion of the
Formation Transactions owned direct or indirect interests in such Property that
remain outstanding at the time of such vote (whether held by the original
recipient of such Units or by a successor or transferee of the original
recipient, but excluding Units held by the Company). Under the Lock-out
Provisions, a sale or other disposition of all or substantially all of the
assets of the Operating Partnership during the Lock-out Period generally would
require the approval of the holders, as a group, of 75% of the aggregate Units
originally issued with respect to Two Penn Plaza, 866 United Nations Plaza and
Eleven Penn Plaza that remain outstanding (whether held by the original
recipient of such Units or by a successor or transferee of the original
recipient, but excluding Units held by the Company). The consent requirement
under the Lock-out Provisions, however, would not apply in the event of a merger
or consolidation involving the Operating Partnership and substantially all of
its assets if (i) the transaction would not result in the recognition of any
gain with respect to the Units originally issued with respect to Two Penn Plaza,
866 United Nations Plaza and Eleven Penn Plaza, (ii) the Lock-out Provisions
would continue to apply with respect to each of these three Properties, and
(iii) the surviving entity agrees to a number of restrictions and conditions for
the benefit of the holders of such Units designed to preserve the benefit of
certain provisions and restrictions in the Partnership Agreement for the holders
of such Units.
NO REMOVAL OF THE GENERAL PARTNER. The Partnership Agreement provides that
the limited partners may not remove the Company as general partner of the
Operating Partnership with or without cause (unless neither the General Partner
nor its parent entity is a "public company," in which case the General Partner
may be removed for cause).
ISSUANCE OF LIMITED PARTNERSHIP INTERESTS. The Company is authorized,
without the consent of the limited partners, to cause the Operating Partnership
to issue Units to the Company, to the limited partners or to other persons for
such consideration and upon on such terms and conditions as the Company deems
appropriate. The Operating Partnership also may issue partnership interests in
different series or classes, which may be senior to the Units. If Units are
issued to the Company, then the Company must issue shares of Common Stock and
must contribute to the Operating Partnership the proceeds received by the
Company from such issuance. In addition, the Company may cause the Operating
Partnership to issue to the Company partnership interests in different series or
classes of equity securities, which may be senior to the Units, in connection
with an offering of securities of the Company having substantially similar
rights
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upon the contribution of the proceeds therefrom to the Operating Partnership.
Consideration for partnership interests may be cash or any property or other
assets permitted by the Act. No limited partner has preemptive, preferential or
similar rights with respect to capital contributions to the Operating
Partnership or the issuance or sale of any partnership interests therein.
AMENDMENT OF THE PARTNERSHIP AGREEMENT. Generally, the Partnership
Agreement may be amended with the approval of the Company, as general partner,
and limited partners (including the Company) holding a majority of the Units.
Certain provisions regarding, among other things, the rights and duties of the
Company as general partner or the dissolution of the Operating Partnership, may
not be amended without the approval of a majority of the Units not held by the
Company. Notwithstanding the foregoing, the Company, as general partner, has the
power, without the consent of the limited partners, to amend the Partnership
Agreement in certain circumstances. Certain amendments that would affect the
fundamental rights of a limited partner must be approved by the Company and each
limited partner that would be adversely affected by such amendment. In addition,
any amendment that would affect the Lock-out Provisions with respect to Two Penn
Plaza, 866 United Nations Plaza or Eleven Penn Plaza during the Lock-out Period
would require, in the case of each such Property affected by the Amendment, the
consent of holders of 75% of the Units originally issued to limited partners in
the Operating Partnership of such Property Partnership that remain outstanding
at the time of such vote (whether held by the original recipient of such Units
or by a successor or transferee of the original recipient, but excluding Units
held by the Company).
DISSOLUTION, WINDING UP AND TERMINATION. The Operating Partnership will
continue until December 31, 2095, unless sooner dissolved and terminated. The
Operating Partnership will be dissolved prior to the expiration of its term, and
its affairs wound up upon the occurrence of the earliest of: (i) the withdrawal
of the Company as general partner without the permitted transfer of the
Company's interest to a successor general partner (except in certain limited
circumstances); (ii) the sale of all or substantially all of the Operating
Partnership's assets and properties (subject to the Lock-out Provisions during
the Lock-out Period); (iii) the entry of a decree of judicial dissolution of the
Operating Partnership pursuant to the provisions of the Act; (iv) the entry of a
final non-appealable order for relief in a bankruptcy proceeding of the general
partner, or the entry of a final non-appealable judgment ruling that the general
partner is bankrupt or insolvent (except that, in either such case, in certain
circumstances the limited partners (other than the Company) may vote to continue
the Operating Partnership and substitute a new general partner in place of the
Company); and (v) on or after January 1, 2046, at the option of the Company, in
its sole and absolute discretion. Upon dissolution, the Company, as general
partner, or any liquidator will proceed to liquidate the assets of the Operating
Partnership and apply the proceeds therefrom in the order of priority set forth
in the Partnership Agreement.
LIABILITY AND INDEMNIFICATION
LIABILITY OF THE COMPANY AND LIMITED PARTNERS. The Company, as general
partner of the Operating Partnership, is liable for all general recourse
obligations of the Operating Partnership to the extent not paid by the Operating
Partnership. The Company is not liable for the nonrecourse obligations of the
Operating Partnership. Assuming that a limited partner does not take part in the
control of the business of the Operating Partnership and otherwise acts in
conformity with the provisions of the Partnership Agreement and the Act, the
liability of a limited partner for obligations of the Operating Partnership
under the Partnership Agreement and the Act will be limited, subject to certain
exceptions, generally to the loss of such limited partner's investment in the
Operating Partnership represented by his Units. The Operating Partnership will
operate in a manner that the Company deems reasonable, necessary or appropriate
to preserve the limited liability of the limited partners.
EXCULPATION AND INDEMNIFICATION OF THE COMPANY. The Partnership Agreement
generally provides that the Company, as general partner of the Operating
Partnership, will incur no liability to the Operating
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Partnership or any limited partner for losses sustained, liabilities incurred or
benefits not derived as a result of errors in judgment or mistakes of fact or
law or of any act or omission, if the Company carried out its duties in good
faith. In addition, the Company is not responsible for any misconduct or
negligence on the part of its agents, provided the Company appointed such agents
in good faith.
The Partnership Agreement also provides for indemnification (including, in
certain circumstances, the advancement of expenses) of the Company, the
directors and officers of the Company and such other persons as the Company may
from time to time designate against any judgments, penalties, fines, settlements
and reasonable expenses that are actually (or will be) incurred by such person
in connection with a proceeding in which any such person is involved, or is
threatened to be involved, as a party or otherwise, unless it is established
that: (i) the act or omission of the indemnified person was material to the
matter giving rise to the proceeding and either was committed in bad faith or
was the result of active and deliberate dishonesty; (ii) the indemnified person
actually received an improper personal benefit in money, property or services;
or (iii) in the case of any criminal proceeding, the indemnified person had
reasonable cause to believe that the act or omission was unlawful.
TRANSFERS OF INTERESTS
RESTRICTIONS ON TRANSFER OF THE COMPANY'S INTEREST. The Company may not
transfer any of its interests as general or limited partner in the Operating
Partnership, except in connection with a merger or sale of all or substantially
all of its assets, in which (i) the limited partners in the Operating
Partnership either will receive, or will have the right to receive,
substantially the same consideration as holders of shares of Common Stock, and
(ii) such transaction has been approved by the holders of a majority of the
interests in the Operating Partnership (including interests held by the
Company). (The Company initially will hold a majority of the Units and thus
would control the outcome of this vote.) The Lock-out Provisions do not apply to
a sale or other transfer by the Company of its interests as a partner in the
Operating Partnership, but they would apply to transfers of assets of the
Operating Partnership undertaken during the Lock-out Period in connection with
or as part of any such transaction by the Company. See "--Operational
Matters--Sales of Assets" above.
RESTRICTIONS ON TRANSFERS OF UNITS BY LIMITED PARTNERS. For up to two years
after the completion of the Offering, a limited partner may not transfer any of
his rights as a limited partner without the consent of the Company, which
consent the Company may withhold in its sole discretion. Any attempted transfer
in violation of this restriction will be void AB INITIO and without any force or
effect. Beginning two years after the completion of the Offering, limited
partners (other than the Company) will be permitted to transfer all or any
portion of their Units without restriction as long as they satisfy certain
requirements set forth in the Partnership Agreement. In addition, limited
partners will be permitted to dispose of their Units following the expiration of
up to a two-year period following the completion of the Offering by exercising
the redemption right described below. See "--Redemption of Units" below.
The right of any permitted transferee of Units to become a substituted
limited partner is subject to the consent of the Company, which consent the
Company may withhold in its sole and absolute discretion. If the Company does
not consent to the admission of a transferee of Units as a substituted limited
partner, then the transferee will succeed to all economic rights and benefits
attributable to such Units (including the redemption right described below), but
will not become a limited partner or possess any other rights of limited
partners (including the right to vote).
REDEMPTION OF UNITS. Subject to certain limitations, holders of Units
(other than the Company) have the right to have each of their Units redeemed by
the Operating Partnership at any time beginning two years after the completion
of the Formation Transactions. Unless the Company elects to assume and perform
the Operating Partnership's obligation with respect to the redemption right, as
described below, the limited partner will receive cash from the Operating
Partnership in an amount equal to the market
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value of the Units to be redeemed. The market value of a Unit for this purpose
will be equal to the average of the closing trading price of a share of Common
Stock on the NYSE for the ten trading days before the day on which the
redemption notice was given to the Operating Partnership of exercise of the
redemption right. In lieu of the Operating Partnership's acquiring the Units for
cash, the Company will have the right (except as described below, if the Common
Stock is not publicly traded) to elect to acquire the Units directly from a
limited partner exercising the redemption right, in exchange for either cash or
shares of Common Stock, and, upon such acquisition, the Company will become the
owner of such Units. The redemption generally will occur on the tenth business
day after the notice to the Operating Partnership, except that no redemption or
exchange can occur if delivery of shares of Common Stock would be prohibited
either under the provisions of the Company's Charter designed primarily to
protect the Company's qualification as a REIT or under applicable Federal or
state securities laws as long as the shares of Common Stock are publicly traded.
In this regard, Mendik/FW LLC and entities that it controls are prohibited from
exercising the redemption right with respect to Units that they hold if the
issuance by the Company to them of shares of Common Stock in satisfaction of the
redemption right would be prohibited under the special restrictions contained in
the Charter that are applicable to their acquisition and ownership of shares of
Common Stock. See "Capital Stock--Restrictions on Transfer--Ownership Limits."
In the event that the Common Stock is not publicly traded but another entity
whose stock is publicly traded owns more than 50% of the capital stock of the
Company (referred to as the "Parent Entity"), the redemption right will be
determined by reference to the publicly traded stock of the Parent Entity and
the Company will have the right to elect to acquire the Units to be redeemed for
publicly traded stock of the Parent Entity. In the event that the Common Stock
is not publicly traded and there is no Parent Entity with publicly traded stock,
the redemption right will be based upon the fair market value of the Operating
Partnership's assets at the time the redemption right is exercised (as
determined in good faith by the Company based upon a commercially reasonable
estimate of the amount that would be realized by the Operating Partnership if
each asset of the Operating Partnership were sold to an unaffiliated purchaser
in an arm's length transaction where neither the purchaser nor the seller were
under economic compulsion to enter into the transaction), and the Company and
the Operating Partnership will be obligated to satisfy the redemption right in
cash (unless the redeeming partner, in such partner's sole and absolute
discretion, consents to the receipt of Common Stock), payable on the thirtieth
business day after notice was given to the Operating Partnership of exercise of
the redemption right.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock (or Common Stock for which Units are exchangeable) by
(i) each director (and director nominee) of the Company, (ii) each executive
officer of the Company, (iii) all directors (including director nominees) and
officers of the Company as a group, and (iv) each person or entity which is
expected to be the beneficial owner of 5% or more of the outstanding shares of
Common Stock immediately following the completion of the Offering. Except as
indicated below, all of such Common Stock is owned directly, and the indicated
person or entity has sole voting and investment power. The extent to which a
person will hold shares of Common Stock as opposed to Units is set forth in the
footnotes below.
<TABLE>
<CAPTION>
NUMBER OF
SHARES AND UNITS PERCENT OF
BENEFICIALLY PERCENT OF ALL SHARES
NAME OF BENEFICIAL OWNER OWNED ALL SHARES (1) AND UNITS (2)
- ---------------------------------------------------------------- ----------------- --------------- ---------------
<S> <C> <C> <C>
FW/Mendik REIT, L.L.C. (3)...................................... % %
Mendik Holdings LLC (4).........................................
FWM, L.P. (4)...................................................
FWM II, L.P. (5)................................................
QIB(5)..........................................................
Bernard H. Mendik (6)...........................................
David R. Greenbaum (7)..........................................
Thomas R. Delatour, Jr. (8).....................................
William S. Janes (9)............................................
David B. Cornstein..............................................
Lawrence S. Huntington..........................................
Morris W. Offit.................................................
Spencer M. Partrich.............................................
Leonard N. Stern................................................
Christopher G. Bonk (10)........................................
Michael M. Downey (10)..........................................
John J. Silberstein (10)........................................
David L. Sims (10)..............................................
Kevin R. Wang (10)..............................................
All directors, director nominees and executive officers as a
group (14 persons)............................................
</TABLE>
- ------------------------
* Less than 1%.
(1) Assumes 11,194,318 shares of Common Stock outstanding immediately following
the completion of the Offering. Assumes that all Units held by the person
are redeemed for shares of Common Stock. The total number of shares of
Common Stock outstanding used in calculating this percentage assumes that
none of the Units held by other persons are redeemed for shares of Common
Stock.
(2) Assumes a total of 18,000,000 shares of Common Stock and Units outstanding
immediately following the completion of the Offering (11,194,318 shares of
Common Stock and 6,805,682 Units, which Units may be redeemed for cash or
shares of Common Stock under certain circumstances). Assumes that all Units
held by the person are redeemed for shares of Common Stock. The total number
of shares of Common Stock outstanding used in calculating this percentage
assumes that all of the Units held by other persons are redeemed for shares
of Common Stock.
(3) FW/Mendik REIT, L.L.C. is a Delaware limited liability company comprised of
two members, Mendik Holdings LLC, which is indirectly controlled by Messrs.
Mendik and Greenbaum, and FWM, L.P., which is controlled by Mr. Delatour.
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(4) Represents Units which will be held by Mendik/FW LLC.
(5) Represents shares of Common Stock to be purchased from the Company pursuant
to the Concurrent Placements.
(6) Includes Units which will be held by Mendik/FW LLC. Also includes
237,500 shares of Common Stock in which Mr. Mendik will have a beneficial
interest.
(7) Includes Units which will be held by Mendik/FW LLC. Also includes
237,500 shares of Common Stock in which Mr. Greenbaum will have a beneficial
interest.
(8) Includes Units which will be held by Mendik/FW LLC. Also includes
954,545 shares of Common Stock to be purchased from the Company pursuant to
the FWM Placement, all of which will be held by FWM II, L.P.
(9) Mr. Janes owns an economic interest in FWM, L.P., but he disclaims
beneficial ownership of any Units or shares of Common Stock which will be
held by Mendik/FW LLC or FWM II, L.P.
(10) Includes Units which will be held by Mendik/FW LLC, in which the
individual will have a beneficial interest.
CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 100,000,000 shares
of capital stock, $.01 par value, of which 90,000,000 shares initially are
designated as shares of Common Stock. Under the Company's Charter, the Board of
Directors has authority to issue, without any further action by the
stockholders, shares of capital stock in one or more series having such
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption as the Board of Directors may determine and as may be evidenced by
Articles Supplementary to the Charter adopted by the Board of Directors. The
following description of the terms and provisions of the shares of capital stock
of the Company and certain other matters is not and does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
applicable provisions of Maryland law and the Company's Charter.
COMMON STOCK
Each holder of shares of Common Stock is entitled to one vote at
stockholders' meetings for each share of Common Stock held. Neither the Charter
nor the By-Laws provides for cumulative voting for the election of directors.
Subject to the prior rights of any series of Preferred Stock that may be
classified and issued, holders of shares of Common Stock are entitled to
receive, pro-rata, such dividends as may be declared by the Board of Directors
out of funds legally available therefor, and are entitled to share, pro-rata, in
any other distributions to the stockholders. The Company intends to pay
quarterly dividends on the shares of Common Stock following the Offering. The
Company will depend upon distributions from the Operating Partnership to fund
its dividends to stockholders. See "Partnership Agreement."
There will be no redemption or sinking fund provisions and no direct
limitations in any indenture or agreement on the payment of dividends.
Holders of shares of Common Stock will not have any preemptive rights or
other rights to subscribe for additional shares of any capital stock (or
convertible, exchangeable or similar securities) of the Company.
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PREFERRED STOCK
The Board of Directors is empowered by the Company's Charter to designate
and issue from time to time one or more classes or series of Preferred Stock
without stockholder approval. The Board of Directors may determine the relative
rights, preferences and privileges of each class or series of Preferred Stock so
issued. Because the Board of Directors has the power to establish the
preferences and rights of each class of series of Preferred Stock, it may afford
the holders in any series or class of Preferred Stock preferences, powers and
rights, voting or otherwise, senior to the rights of holders of Common Stock.
The issuance of Preferred Stock could have the effect of delaying or preventing
a change in control of the Company. The Board of Directors has no present plans
to issue any shares of Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
RESTRICTIONS ON TRANSFER
OWNERSHIP LIMITS. The Company's Charter contains certain restrictions on
the number of shares of capital stock that individual stockholders may own. For
the Company to qualify as a REIT under the Code, no more than 50% in number or
value of its outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
taxable year) or during a proportionate part of a shorter taxable year. In
addition, the capital stock must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year or during a proportionate part of a
shorter taxable year. Because the Company expects to qualify as a REIT, the
Company's Charter contains restrictions on the acquisition of shares of capital
stock, including shares of Common Stock, which restrictions are intended
primarily to ensure compliance with the Code.
Subject to certain exceptions to be specified in the Charter, no holder is
permitted to own, or to be deemed to own by virtue of the attribution provisions
of the Code, more than (i) 8.6% in number or value of the issued and outstanding
shares of Common Stock or (ii) 9.8% in number or value of the issued and
outstanding shares of any series of Preferred Stock (collectively, the
"Ownership Limit"). Although each of Bernard H. Mendik and FWM, L.P. may exceed
the Ownership Limit immediately after the Offering through the ownership of
shares of Common Stock that they receive in connection with the Formation
Transactions ("Excluded Holders"), they are permitted to continue to hold the
number of shares of Common Stock (plus the number of shares of Common Stock they
may acquire upon redemption of Units, the exercise of stock options pursuant to
a stock option plan or upon foreclosure on a pledge of shares of Common Stock or
Units) they so receive provided that such holdings do not exceed 15% in number
or value of the issued and outstanding shares of Common Stock (such amount being
the "Excluded Holder Limit"). However, in the case of FWM, L.P., if, through
FWM, L.P.'s ownership of Common Stock, any individual (as defined in the Code to
include certain entities) is deemed to own beneficially shares of Common Stock
in excess of the Ownership Limit, then the Excluded Holder Limit with respect to
FWM, L.P. will be reduced to a percentage of outstanding shares of Common Stock
of the Company as would result in such individual not being considered to own
beneficially shares of Common Stock in excess of the Ownership Limit.
The Board of Directors of the Company will have the authority to increase
the Ownership Limit from time to time, but will not have the authority to do so
to the extent that, after giving effect to such increase, five beneficial owners
of shares of Common Stock could beneficially own in the aggregate more than
49.5% of the outstanding shares of Common Stock. With a ruling from the IRS or
an opinion of counsel satisfactory to the Board of Directors (or such other
information as it determines to be necessary), the Board of Directors could, in
its sole and absolute discretion, waive the Ownership Limit or the Excluded
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Holder Limit with respect to a holder if such holder's ownership would not then
or in the future jeopardize the Company's status as a REIT.
If any stockholder attempts to transfer shares of Common Stock to a person
and either the transfer would result in the Company's failing to qualify as a
REIT, or the transfer would cause the transferee to hold more than the
applicable Ownership Limit or Excluded Holder Limit, the shares of Common Stock
purported to be transferred will be automatically transferred to a charitable
trust for the benefit of a charitable organization named by a trustee (the
"Trustee"). The Trustee will be appointed by the Company but will not be
affiliated with the Company. In addition, if any person were to hold shares of
Common Stock in excess of the applicable Ownership Limit or Excluded Holder
Limit, the shares of Common Stock that exceed the Ownership Limit or Excluded
Holder Limit, as the case may be, would be automatically transferred to a
charitable trust for the benefit of a charitable organization in the same manner
as described above. Such person would not receive dividends or distributions
with respect to the shares of Common Stock that exceed the Ownership Limit or
Excluded Holder Limit, as applicable, and would not be entitled to vote such
shares. In addition, the Trustee would be required to sell such shares of Common
Stock within 20 days of receiving notice from the Company that such shares of
Common Stock had been transferred to the trust. Upon such sale, the interest of
the trust in the shares of Common Stock would terminate, and the purported
transferee of such shares of Common Stock would receive the lesser of (1)(x) the
price per share of Common Stock paid by such transferee for such shares of
Common Stock in the purported transfer that resulted in the transfer of the
shares of Common Stock to the trust or, (y) if the purported transferee acquired
such shares of Common Stock for less than market value at the time of the
purported transfer, a price per share of Common Stock equal to the price per
share of Common Stock of the Company on the NYSE on the day of the purported
transfer, or (2) the price per share received by the Trustee in the sale. The
Company would be permitted to repurchase such shares of Common Stock on such
terms and conditions as the Trustee deemed appropriate. If the Company
repurchased the shares of Common Stock, it would be permitted to pay for the
shares with Units.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
Every owner (or deemed owner) of more than 5% (or such lower percentage as
required by the Code or regulations thereunder) in number or value of the issued
and outstanding shares of capital stock, including shares of Common Stock, must
file a written notice with the Company containing the information specified in
the Charter no later than January 30 of each year. In addition, each stockholder
will be required upon demand to disclose to the Company in writing such
information as the Company may request in order to determine the effect on the
Company's status as a REIT of such stockholder's direct, indirect and
constructive ownership of shares of Common Stock.
The foregoing ownership limitations may have the effect of preventing or
hindering any attempt to acquire control of the Company without the consent of
the Board of Directors by preventing the acquisition of shares of Common Stock
by a person or entity or a group of persons or entities acting in concert in
excess of the Ownership Limit or the Excluded Holder Limit, as applicable,
regardless of whether such acquisition by a particular person, entity or group
would jeopardize the Company's status as a REIT and regardless of whether such a
change of control might be in the best interests of the Company's stockholders.
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CERTAIN PROVISIONS OF MARYLAND LAW AND THE COMPANY'S CHARTER AND BYLAWS
THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND BYLAWS OF THE COMPANY DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT
TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MARYLAND LAW AND THE CHARTER
AND BYLAWS OF THE COMPANY, COPIES OF WHICH ARE EXHIBITS TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
The Charter and the bylaws of the Company (the "Bylaws") contain certain
provisions that could make more difficult an acquisition or change in control of
the Company by means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of the Company to negotiate first with the Board of Directors.
The Company believes that the benefits of these provisions outweigh the
potential disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals might result in an improvement of their
terms. The description set forth below is intended as a summary only and is
qualified in its entirety by reference to the Charter and the Bylaws, which have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part. See also "Capital Stock--Restrictions on Transfer."
CLASSIFICATION AND REMOVAL OF BOARD OF DIRECTORS; OTHER PROVISIONS
The Company's Charter provides for the Board of Directors to be divided into
three classes of directors, with each class to consist as nearly as possible of
an equal number of directors. The term of office of the first class of directors
will expire at the 1997 annual meeting of stockholders; the term of the second
class of directors will expire at the 1998 annual meeting of stockholders; and
the term of the third class will expire at the 1999 annual meeting of
stockholders. At each annual meeting of stockholders, the class of directors to
be elected at such meeting will be elected for a three-year term, and the
directors in the other two classes will continue in office. Because stockholders
will have no right to cumulative voting for the election of directors, at each
annual meeting of stockholders the holders of a majority of the shares of Common
Stock will be able to elect all of the successors to the class of directors
whose term expires at that meeting.
The Company's Charter also provides that, except for any directors who may
be elected by holders of a class or series of capital stock other than the
Common Stock, directors may be removed only for cause and only by the
affirmative vote of stockholders holding at least two-thirds of all the votes
entitled to be cast for the election of directors. Vacancies on the Board of
Directors may be filled by the affirmative vote of the remaining directors and,
in the case of a vacancy resulting from the removal of a director, by the
stockholders by a majority of the votes entitled to be cast for the election of
directors. A vote of stockholders holding at least two-thirds of all the votes
entitled to be cast thereon is required to amend, alter, change, repeal or adopt
any provisions inconsistent with the foregoing classified board and director
removal provisions. Under the Charter, the power to amend the Bylaws of the
Company is vested exclusively in the Board of Directors, and the stockholders do
not have any power to adopt, alter or repeal the Bylaws absent amendment to the
Charter to confer such power. These provisions may make it more difficult and
time-consuming to change majority control of the Board of Directors of the
Company and, thus, may reduce the vulnerability of the Company to an unsolicited
proposal for the takeover of the Company or the removal of incumbent management.
Because the Board of Directors will have the power to establish the
preferences and rights of additional series of capital stock without stockholder
vote, the Board of Directors may afford the holders of any series of senior
capital stock preferences, powers and rights, voting or otherwise, senior to the
rights of holders of shares of Common Stock. The issuance of any such senior
capital stock could have the effect of delaying or preventing a change in
control of the Company. The Board of Directors, however, currently does not
contemplate the issuance of any series of capital stock other than shares of
Common Stock.
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See "Management--Directors, Director Nominees and Executive Officers" for a
description of the limitations on liability of directors of the Company and the
provisions for indemnification of directors and officers provided for under
applicable Maryland law and the Charter.
BUSINESS COMBINATION STATUTE
The MGCL establishes special requirements with respect to "business
combinations" between Maryland corporations and "interested stockholders" unless
exemptions are applicable. Among other things, the law prohibits for a period of
five years a merger and other specified or similar transactions between a
Company and an interested stockholder and requires a supermajority vote for such
transactions after the end of the five-year period.
For this purpose, "interested stockholders" are all persons owning
beneficially, directly or indirectly, 10% or more of the outstanding voting
stock of a Maryland corporation, and affiliates and associates of the Maryland
corporation (which are, generally, any entities controlling, controlled by, or
under common control with, the Maryland corporation) which owned beneficially,
directly or indirectly, 10% or more of the outstanding voting stock of such
Maryland corporation. "Business combinations" include any merger or similar
transaction subject to a statutory vote and additional transactions involving
transfers of assets or securities in specified amounts to interested
stockholders or their affiliates. Unless an exemption is available, transactions
of these types may not be consummated between a Maryland corporation and an
interested stockholder or its affiliates for a period of five years after the
date on which the stockholder first became an interested stockholder.
Thereafter, the transaction may not be consummated unless recommended by the
board of directors and approved by the affirmative vote of at least 80% of the
votes entitled to be cast by all holders of outstanding shares of voting stock
and two-thirds of the votes entitled to be cast by all holders of outstanding
shares of voting stock other than the interested stockholder. A business
combination with an interested stockholder that is approved by the board of
directors of a Maryland corporation at any time before an interested stockholder
first becomes an interested stockholder is not subject to the special voting
requirements. An amendment to a Maryland corporation's charter electing not to
be subject to the foregoing requirements must be approved by the affirmative
vote of at least 80% of the votes entitled to be cast by all holders of
outstanding shares of voting stock and two-thirds of the votes entitled to be
cast by holders of outstanding shares of voting stock who are not interested
stockholders. Any such amendment is not effective until 18 months after the vote
of stockholders and does not apply to any business combination of a corporation
with a stockholder who was an interested stockholder on the date of the
stockholder vote. The Company has opted out of the business combination
provisions of the MGCL, but the Board of Directors may elect to adopt these
provisions of the MGCL in the future.
CONTROL SHARE ACQUISITION STATUTE
Maryland law imposes certain limitations on the voting rights in a "control
share acquisition." The MGCL considers a "control share acquisition" to occur at
each of the 20%, 33 1/3% and 50% acquisition levels, and requires the
affirmative vote of at least two-thirds of the votes entitled to be cast by
holders of outstanding shares of voting stock (excluding shares owned by the
acquiring person and certain members of management) to accord voting rights to
capital stock acquired in a control share acquisition. The statute also requires
Maryland corporations to hold a special meeting at the request of an actual or
proposed control share acquirer generally within 50 days after a request is made
by means of the submission of an "acquiring person statement," but only if the
acquiring person (i) posts a bond for the cost of a meeting (not including the
expenses of opposing approval of the voting rights) and (ii) submits a
definitive financing agreement with respect to the proposed control share
acquisition to the extent that financing is not provided by the acquiring
person. In addition, unless its charter or bylaws provide otherwise, the statute
gives a Maryland corporation, within certain time limitations, various
redemption rights if there is a stockholder vote on the issue and the grant of
voting rights is not approved, or if an acquiring person statement is not
delivered to the corporation within 10 days following an actual control share
acquisition.
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Moreover, unless the charter or bylaws provide otherwise, the statute provides
that if, before a control share acquisition occurs, voting rights are accorded
to control shares that result in the acquiring persons having majority voting
power, then minority stockholders have certain appraisal rights. An acquisition
of shares may be exempted from the control share statute, provided that a
charter or bylaw provision is adopted for such purpose prior to the control
share acquisition. The Company has opted out of the control share provisions of
the MGCL, but the Board of Directors may elect to adopt these provisions of the
MGCL in the future.
AMENDMENTS TO THE CHARTER
The Charter, including its provisions on classification of the Board of
Directors, restrictions on transferability of shares of Common Stock and removal
of directors, may be amended only by the affirmative vote of the holders of not
less than two-thirds of all of the votes entitled to be cast on the matter.
However, the provisions of the Charter relating to authorized shares of stock
and the classification and reclassification of shares of Common Stock and
Preferred Stock may be amended by the affirmative vote of the holders of not
less than a majority of the votes entitled to be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (i) with respect to an annual meeting
of stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(A) pursuant to the Company's notice of the meeting, (B) by the Board of
Directors or (C) by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in the Bylaws and (ii)
with respect to special meetings of the stockholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of stockholders and nominations of persons for election to the Board of
Directors may be made only (A) pursuant to the Company's notice of the meeting,
(B) by the Board of Directors or (C) provided that the Board of Directors has
determined that directors shall be elected at such meeting, by a stockholder who
is entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER
AND BYLAWS
The business combination provisions and the control share acquisition
provisions of the MGCL, in each case if they ever became applicable to the
Company, the provisions of the Charter on classification of the Board of
Directors and removal of directors and the advance notice provisions of the
Bylaws could delay, defer or prevent a transaction or a change in control of the
Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interests.
RIGHTS TO PURCHASE SECURITIES AND OTHER PROPERTY
The Charter authorizes the Board of Directors to create and issue rights
entitling the holders thereof to purchase from the Company shares of capital
stock or other securities or property. The times at which and terms upon which
such rights are to be issued would be determined by the Board of Directors and
set forth in the contracts or instruments that evidence such rights. This
provision is intended to confirm the Board of Directors' authority to issue
share purchase rights, which might have terms that could impede a merger, tender
offer or other takeover attempt, or other rights to purchase shares or
securities of the Company or any other corporation.
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SHARES AVAILABLE FOR FUTURE SALE
GENERAL
Upon the completion of the Offering, the Company will have outstanding
11,194,318 shares of Common Stock (12,566,818 shares if the Underwriters'
overallotment option is exercised in full). In addition, 6,805,682 shares of
Common Stock are reserved for issuance upon exchange of Units. The shares of
Common Stock issued in the Offering will be freely tradeable by persons other
than "affiliates" of the Company without restriction under the Securities Act,
subject to the limitations on ownership set forth in the Charter. See "Capital
Stock--Restrictions on Transfer." The shares of Common Stock received by the
participants in the Formation Transactions or acquired by any participant in
redemption of Units (the "Restricted Shares") will be "restricted" securities
under the meaning of Rule 144 promulgated under the Securities Act ("Rule 144")
and may not be sold in the absence of registration under the Securities Act
unless an exemption from registration is available, including exemptions
contained in Rule 144. As described below under "--Registration Rights," the
Company has granted certain holders registration rights with respect to their
shares of Common Stock.
In general, under Rule 144 as currently in effect, if two years have elapsed
since the later of the date of acquisition of Restricted Shares from the Company
or any "affiliate" of the Company, as that term is defined under the Securities
Act, the acquiror or subsequent holder thereof is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding shares of Common Stock or the average weekly trading volume
of the Common Stock during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 also are subject to certain
manner of sales provisions, notice requirements and the availability of current
public information about the Company. If three years have elapsed since the date
of acquisition of Restricted Shares from the Company or from any "affiliate" of
the Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the 90 days immediately
preceding a sale, such person is entitled to sell such shares in the public
market under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
The Commission has proposed to amend the holding period required by Rule 144
to permit sales of "restricted securities" after one year rather than two years
(and two years rather than three years for "non-affiliates" who desire to sell
such shares under Rule 144(k)). If such proposed amendment were enacted, the
"restricted securities" would become freely tradeable (subject to any applicable
contractual restrictions) at these earlier dates.
In connection with the Offering, the Mendik Group and certain affiliates
thereof have agreed, subject to certain exceptions, for a period of two years
from the date of this Prospectus, not to sell, pledge or otherwise dispose of
any shares of Common Stock acquired by the Mendik Group upon redemption of Units
without the consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. In
addition, FWM, L.P., FWM II, L.P., and certain other affiliates of RMB Realty
have agreed, subject to certain exceptions, (i) for a period of one year from
the date of this Prospectus, not to sell, pledge or otherwise dispose of any
shares of Common Stock acquired in the FWM Placement without the consent of
Merrill Lynch, Pierce, Fenner & Smith Incorporated or (ii) for a period of two
years from the date of this Prospectus, without the consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, sell, pledge or otherwise dispose of any
shares of Common Stock received upon redemption of Units. Each of these
restrictions, however, will not apply to any Units or other shares of Common
Stock purchased or otherwise acquired by the Mendik Group, FWM, L.P., FWM II,
L.P., any other affiliate of RMB Realty or QIB following the completion of the
Offering. QIB also has agreed, subject to certain exceptions, for a period of
six months from the date of this Prospectus, not to sell, pledge or otherwise
dispose of any shares of Common Stock acquired in the QIB Placement. See
"Underwriting."
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The Company has established various stock option plans for the purpose of
attracting and retaining highly qualified directors, executive officers and
other key employees. See "Management--Stock Option Plan" and "--Compensation of
Directors." The Company intends to issue options to purchase approximately
935,000 shares of Common Stock to directors, executive officers and certain key
employees prior to the completion of the Offering and has reserved 815,000
additional shares for future issuance under these plans. Prior to the expiration
of the initial 12-month period following the completion of the Offering, the
Company expects to file a registration statement with the Commission with
respect to the shares of Common Stock issuable under these plans, which shares
may be resold without restriction, unless held by affiliates.
Prior to the Offering, there has been no public market for the Common Stock.
Trading of the Common Stock on the New York Stock Exchange is expected to
commence immediately following the completion of the Offering. No prediction can
be made as to the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price prevailing
from time to time. Sales of substantial amounts of Common Stock (including
shares issued upon the exercise of options), or the perception that such sales
could occur, could adversely affect prevailing market prices of the Common
Stock. See "Risk Factors--Other Risks of Ownership of Common Stock" and
"Partnership Agreement-- Transfer of Interests."
REGISTRATION RIGHTS
The Company has granted the participants in the Formation Transactions who
received Units in the Formation Transactions and the purchasers of shares of
Common Stock in the Concurrent Placements certain registration rights with
respect to the shares of Common Stock owned by them or acquired by them in
connection with the exercise of the redemption right under the Partnership
Agreement. These registration rights require the Company to register all such
shares of Common Stock upon request. The Company will bear expenses incident to
its registration requirements under the registration rights, except that such
expenses shall not include any underwriting discounts or commissions or transfer
taxes, if any, relating to such shares.
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FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion summarizes Federal income tax considerations that
are generally applicable to all stockholders. The specific tax consequences of
owning Common Stock will vary for stockholders because of the different
circumstances of stockholders. Therefore, it is imperative that a stockholder
review the following discussion and consult with his own tax advisors to
determine the interaction of his individual tax situation with the anticipated
tax consequences of owning Common Stock.
The information in this section and the opinions of Roberts & Holland LLP
are based on the Code, existing and proposed Treasury Regulations thereunder,
current administrative interpretations and court decisions. No assurance can be
given that future legislation, Treasury Regulations, administrative
interpretations and court decisions will not significantly change current law or
affect existing interpretations of current law in a manner which is adverse to
stockholders. Any such change could apply retroactively to transactions
preceding the date of change. The Company and the Operating Partnership do not
plan to obtain any rulings from the IRS concerning any tax issue with respect to
the Company, with a few exceptions relating to the Company's qualification as a
REIT. Thus, no assurance can be provided that the opinions and statements set
forth herein (which do not bind the IRS or the courts) will not be challenged by
the IRS or will be sustained by a court if so challenged. The following
description does not constitute tax advice.
This summary does not give a detailed discussion of state, local or foreign
tax considerations. Except where indicated, the discussion below describes
general Federal income tax considerations applicable to individuals who are
citizens or residents of the United States. Accordingly, the following
discussion has limited application to domestic corporations and persons subject
to specialized Federal income tax treatment, such as foreign persons, trusts,
estates, tax-exempt entities, regulated investment companies and insurance
companies.
The following description and the opinions of Roberts & Holland LLP
described below specifically do not address the income tax consequences of
owning Common Stock for (i) Messrs. Mendik and Greenbaum, (ii) any present or
former employee of the Mendik Group, or (iii) Mendik/FW LLC or any affiliate
thereof.
As used in this section, the term "Company" refers solely to The Mendik
Company, Inc. and the term "Operating Partnership" refers solely to The Mendik
Company, L.P.
STOCKHOLDERS ARE STRONGLY URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH
REGARD TO THE APPLICATION OF THE FEDERAL INCOME TAX LAWS TO SUCH STOCKHOLDERS'
RESPECTIVE PERSONAL TAX SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION.
TAXATION OF THE COMPANY
GENERAL. The Company will make an election to be taxed as a REIT under
Sections 856 through 860 of the Code effective for its taxable year ending
December 31, 1997. The Company believes that, commencing with such taxable year,
it will be organized and will operate in such a manner as to qualify for
taxation as a REIT under the Code and the Company intends to continue to operate
in such a manner. Although the Company has been structured to be treated as a
REIT and a ruling has been requested from the IRS relating to certain limited
REIT qualification issues, no assurance can be given that the Company will
operate in a manner so as to qualify or remain qualified as a REIT.
Roberts & Holland LLP will provide the Company with an opinion letter in
connection with the Offering to the effect that, commencing with the Company's
taxable year ending December 31, 1997, and
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assuming that the actions contemplated herein are completed in a timely fashion,
the Company will be organized in conformity with the requirements for
qualification as a REIT and its proposed method of operation will enable it to
meet the requirements for qualification and taxation as a REIT under the Code.
This opinion will be based on various assumptions relating to the organization
and operation of the Company, the Operating Partnership, the Property-owning
entities, and the Management LLC, the Management Corporation (together with the
Management LLC, the "Management Entities") and will be conditioned upon certain
representations made by the Company, the Operating Partnership and the
Management Entities as to certain relevant factual matters, including matters
related to the organization and expected manner of operation of the Company, the
Operating Partnership, the Property-owning entities and the Management Entities.
Moreover, such qualification and taxation as a REIT will depend upon the
Company's ability to meet on a continuing basis, through actual annual operating
results, distribution levels, and diversity of stock ownership, the various
qualification tests imposed under the Code (discussed below). Roberts & Holland
LLP will not review compliance with these tests on a continuing basis. No
assurance can be given that the Company will satisfy such tests on a continuing
basis. See "-- Failure to Qualify," below.
The following is a general summary of the Code provisions that govern the
Federal income tax treatment of a REIT and its stockholders. These provisions of
the Code are highly technical and complex.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to Federal corporate income taxes on net income that it distributes
currently to stockholders. This treatment substantially eliminates the "double
taxation" (taxation at both the corporate and stockholder levels) that generally
results from investment in a corporation. However, the Company will be subject
to Federal income and excise tax in certain circumstances, including the
following circumstances. First, the Company will be taxed at regular corporate
rates on any undistributed REIT taxable income, including undistributed net
capital gains. Second, under certain circumstances, the Company may be subject
to the "alternative minimum tax" on its items of tax preference. Third, if the
Company has (i) net income from the sale or other disposition of "foreclosure
property" (which is, in general, property held primarily for sale to customers
in the ordinary course of business acquired by foreclosure or otherwise on
default of a loan secured by the property) or (ii) other nonqualifying income
from foreclosure property, the Company will be subject to tax at the highest
corporate rate on such income. Fourth, if the Company has net income from
prohibited transactions (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business), such income will be
subject to a 100% tax. Fifth, if the Company should fail to satisfy either the
75% gross income test or the 95% gross income test (both of which are discussed
below), but has nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a 100% tax on
the greater of the amount by which the Company fails the 75% or 95% test,
multiplied by a fraction intended to reflect the Company's profitability. Sixth,
if the Company should fail to distribute during each calendar year at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year and (iii) any undistributed taxable income
from prior years, the Company would be subject to a 4% excise tax on the excess
of such required distribution over (in general terms) the sum of (i) the amounts
actually distributed and (ii) the amounts on which the Company was subject to
tax for such calendar year. Seventh, if the Company acquires any asset from a C
corporation (I.E., a corporation generally subject to full corporate level tax)
in a transaction in which the basis of the asset in the Company's hands is
determined by reference to the basis of the asset (or any other property) in the
hands of the C corporation and the Company recognizes gain on the disposition of
such asset during the ten-year period beginning on the date on which such asset
was acquired by the Company, then, to the extent of such property's "built-in"
gain (the excess of the fair market value of such property at the time of
acquisition by the Company over the adjusted basis in such property at such
time), such gain will be subject to tax at the highest regular corporate rate
applicable.
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REQUIREMENTS FOR QUALIFICATION. The Code defines a "REIT" as a corporation,
trust, or association (i) that is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (iii) that would be taxable
as a domestic corporation, but for Section 856 through 859 of the Code; (iv)
that is neither a financial institution nor an insurance company subject to
certain provisions of the Code; (v) the beneficial ownership of which is held by
100 or more persons; (vi) during the last half of each taxable year not more
than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities); and (vii) that meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that conditions
(i) through (iv), inclusive, must be met during the entire taxable year and that
condition (v) must be met during at least 335 days of a taxable year of 12
months, or during a proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi), however, will not apply until after the first taxable
year for which an election is made to be taxed as a REIT. The Company
anticipates issuing sufficient shares of Common Stock in the Offering with
sufficient diversity of ownership to allow the Company to satisfy conditions (v)
and (vi) immediately following the Offering. In addition, the Company's Charter
will include restrictions regarding the transfer of its shares of capital stock
that are intended to assist the Company in continuing to satisfy the share
ownership requirements described in (v) and (vi), above. See "Capital
Stock--Restrictions on Transfer."
In addition, a corporation may not elect to become a REIT unless its taxable
year is the calendar year. The Company's taxable year will be the calendar year.
If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary,"
that subsidiary is disregarded for Federal income tax purposes and all assets,
liabilities and items of income, deduction and credit of the subsidiary are
treated as assets, liabilities and items of the REIT itself. (A qualified REIT
subsidiary is a corporation all of the capital stock of which has been owned by
the REIT from the commencement of such corporate existence.) Similarly, a single
member limited liability company owned by the REIT or by the Operating
Partnership is disregarded as a separate entity for Federal income tax purposes.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that for purposes of the gross income tests and assets tests
the REIT will be deemed to be entitled to the income of the partnership
attributable to the REIT's capital interest in the partnership. In addition, the
assets and gross income of the partnership will retain the same character in the
hands of the REIT for purposes of Section 856 of the Code, including satisfying
the gross income tests and asset tests. Thus, the Company's proportionate share
of the assets, liabilities and items of gross income of the Operating
Partnership (including assets, liabilities and gross income of the
Property-owning entities and the Management LLC) will be treated as assets,
liabilities and items of gross income of the Company for purposes of applying
the requirements described herein.
INCOME TESTS. In order to maintain qualification as a REIT, three gross
income tests must be satisfied annually. First, at least 75% of the REIT's gross
income (excluding gross income from "prohibited transactions") for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property (including "rents from real property"
and, in certain circumstances, interest) or from certain types of temporary
investments. Second, at least 95% of the REIT's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property investments described above and from dividends, interest and
gain from the sale or disposition of stock or securities, or from any
combination of the foregoing. Third, gain from the sale or other disposition of
stock or securities held for less than one year (I.E., short-term gain), gain
from prohibited transactions and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must represent less than 30% of the REIT's gross
income (including gross income from prohibited transactions) for each taxable
year. For purposes of applying the 30% gross income test, the holding period of
Properties and other assets
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acquired in the Formation Transactions will be deemed to have commenced on the
date of the Formation Transactions.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or percentages
of receipts or sales. Second, rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the Company,
or an owner of 10% or more of the Company, directly or constructively owns 10%
or more of such tenant (a "Related Party Tenant"). Third, if rent attributable
to personal property, leased in connection with a lease of real property, is
greater than 15% of the total rent received under the lease, then the portion of
rent attributable to such personal property will not qualify as "rents from real
property."
The Company anticipates that no more than a DE MINIMIS amount of its gross
annual income will be considered attributable to the rental of personal property
and that none of its gross annual income will be considered attributable to
rents that are based in whole or in part on the income of any person (excluding
rents based on a percentage of receipts or sales, which, as described above, are
permitted). Whether the Company derives significant income from Related Party
Tenants depends upon the application of certain complex ownership attribution
rules. The Company intends to take steps to determine whether it receives rent
from Related Party Tenants; the Company does not anticipate that more than
2- 1/2% of its gross annual income will be from Related Party Tenants.
Finally, in order for rents received with respect to a property to qualify
as "rents from real property," the Company generally must not operate or manage
the property or furnish or render services to tenants, except through an
"independent contractor" (as defined in Section 856 of the Code) from whom the
Company derives no income. The "independent contractor" requirement, however,
does not apply to the extent the services provided by the Company are "usually
or customarily rendered" in connection with the rental of space for occupancy
only and are not otherwise considered "rendered to the occupant." The Operating
Partnership and the Management Entities will not initially provide any services
with respect to the Properties (other than management-type services).
The Company believes that the aggregate amount of nonqualifying income in
any taxable year will not cause the Company to exceed the limits on
nonqualifying income under the 75% and 95% gross income tests.
If the Company fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it nevertheless may qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions generally will be available if the Company's failure to
meet any such tests was due to reasonable cause and not due to willful neglect,
the Company attaches a schedule of the sources of its income to its Federal
Corporate income tax return and any incorrect information on the schedule was
not due to fraud with intent to evade tax. It is not possible, however, to state
whether in all circumstances the Company would be entitled to the benefit of
these relief provisions. As discussed in "--General" above, even if these relief
provisions were to apply, a tax would be imposed with respect to the excess net
income. Moreover, these relief provisions are unavailable with regard to the 30%
gross income test.
ASSET TESTS. The Company must also satisfy three tests relating to the
nature of its assets. First, at least 75% of the value of the Company's total
assets must be represented by real estate assets (including (i) its allocable
share of real estate assets held by the Operating Partnership, any partnerships
in which the Operating Partnership owns an interest, or "qualified REIT
subsidiaries" of the Company and (ii) stock or debt instruments held for not
more than one year purchased with the proceeds of a stock offering or long-term
(I.E., at least five-year) public debt offering of the Company), cash, cash
items and government securities. Second, of the investments not included in the
75% asset class, the value of any one issuer's
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securities owned by the Company may not exceed 5% of the value of the Company's
total assets. Third, of the investments not included in the 75% asset class, the
Company may not own more than 10% of any one issuer's outstanding voting
securities. These asset tests must generally be met at or within 30 days after
the end of any quarter in which the Company acquires (directly or indirectly)
assets not included in the 75% asset class, including each time the Company
increases its ownership interest in the Operating Partnership or the Management
Corporation.
The Operating Partnership will own all of the non-voting stock of the
Management Corporation, which stock represents 95% of the equity of the
Management Corporation, and will hold a note from the Management Corporation.
See "Structure and Formation of the Company--The Operating Entities of the
Company--The Management Corporation." By virtue of its ownership of Units, the
Company will be considered to own its pro rata share of the assets of the
Operating Partnership, including the securities of the Management Corporation
described above. The Operating Partnership will not own more than 10% of the
voting securities of the Management Corporation and, therefore, the Company will
not own more than 10% of the voting securities of the Management Corporation. In
addition, the Company and the Management Corporation believe that the Company's
pro rata share of the value of the securities of the Management Corporation will
not exceed, as of the completion of the Offering, 5% of the total value of the
Company's assets. The Company's belief is based in part upon its analysis of the
anticipated operating cash flows of the Management Corporation. There can be no
assurance, however, that the IRS will not contend that the value of the
securities of the Management Corporation exceeds the 5% value limitation.
Roberts & Holland LLP, in rendering its opinion regarding the qualification of
the Company as a REIT, will rely on the conclusions of the Company and its
senior management as to the value of the securities of the Management
Corporation.
As noted above, the 5% value requirement must be satisfied at or within 30
days after the end of each quarter during which the Company increases its
(direct or indirect) ownership of securities of the Management Corporation
(including as a result of increasing its interest in the Operating Partnership).
Although the Company plans to take steps to ensure that it satisfies the 5%
value test for any quarter with respect to which retesting is to occur, there
can be no assurance that such steps always will be successful or will not
require a reduction in the Operating Partnership's overall interest in the
Management Corporation.
Although currently the IRS will not rule regarding compliance with the 10%
voting securities test, in the opinion of Roberts & Holland LLP the Company's
proposed structure will meet the current statutory requirements.
SPECIAL DISTRIBUTION REQUIREMENT. Because the Company was incorporated in
1995 but will not elect to be taxed as a REIT until its taxable year beginning
January 1, 1997, it will not have been a REIT for all its taxable years. The
Code provides that, in the case of a corporation which was not taxed as a REIT
for all of its taxable years beginning after February 28, 1986, such corporation
may be taxed as a REIT for a taxable year only if, as of the close of such
taxable year, it has no earnings and profits accumulated in any non-REIT year.
The Company believes that it will have no earnings and profits for its taxable
year ending December 31, 1996. However, the Company will request its accountants
to review its earnings and profits for such taxable year and also for its
taxable year ending December 31, 1997. The Company will make appropriate
distributions of any earnings and profits to comply with this requirement.
ANNUAL DISTRIBUTION REQUIREMENTS. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its stockholders in an amount at least equal to (i) the sum of (A) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and the REIT's net capital gain) and (B) 95% of the net income (after
tax), if any, from foreclosure property, minus (ii) the sum of certain items of
noncash income. Such distributions must be paid during the taxable year to which
they relate (or during the following taxable year, if declared before the
Company timely files its tax return for the preceding year and paid on or before
the first regular
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dividend payment after such declaration). To the extent that the Company does
not distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax
on the undistributed amount at regular corporate capital gains rates and
ordinary income tax rates. Furthermore, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its REIT ordinary
income of such year, (ii) 95% of its REIT capital gain income for such year and
(iii) any undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such amounts over (in general terms)
the sum of (i) the amounts actually distributed and (ii) the amounts on which
the Company was taxed for such calendar year.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements. In this regard, it is expected that the
Company's REIT taxable income will be less than its cash flow due to the
allowance of depreciation and other noncash charges in the computing of REIT
taxable income. Moreover, the Partnership Agreement of the Operating Partnership
authorizes the Company, as general partner, to take such steps as may be
necessary to cause the Operating Partnership to make distributions to its
partners of amounts sufficient to permit the Company to meet these distribution
requirements. It is possible, however, that the Company, from time to time, may
not have sufficient cash or other liquid assets to meet the 95% distribution
requirement due to timing differences between the actual receipt of income and
actual payment of deductible expenses and the inclusion of such income and
deduction of such expenses in arriving at REIT taxable income of the Company, or
due to an excess of nondeductible expenses such as principal amortization or
capital expenditures over noncash deductions such as depreciation. In the event
that such circumstances do occur, then in order to meet the 95% distribution
requirement, the Company may cause the Operating Partnership to arrange for
short-term, or possibly long-term, borrowings to permit the payment of required
dividends.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year that may be included in the Company's deduction for
dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends. However, the Company
would be required to pay to the IRS interest based upon the amount of any
deduction taken for deficiency dividends and any applicable penalties would be
computed with respect to this amount.
FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a REIT
in any taxable year and certain relief provisions do not apply, the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Unless entitled to relief under
specific statutory provisions, the Company also will be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all circumstances
the Company would be entitled to such statutory relief.
Distributions to stockholders in any year in which the Company fails to
qualify will not be deductible by the Company, nor will the Company be required
to make distributions. If the Company makes distributions, such distributions
will be taxable as ordinary income to the extent of the Company's current and
accumulated earnings and profits. Subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends received deduction.
TAXATION OF STOCKHOLDERS
TAXATION OF DOMESTIC STOCKHOLDERS. As long as the Company qualifies as a
REIT, distributions made to the Company's taxable domestic stockholders out of
current or accumulated earnings and profits (and not designated as capital gain
dividends) will be taken into account by them as ordinary income and corporate
stockholders will not be eligible for the dividends received deduction as to
such amounts. Distributions that are designated as capital gain dividends will
be taxed as long-term capital gains (to the extent they do not exceed the
Company's actual net capital gain for the taxable year) without regard to the
period for which the stockholder has held its stock. However, corporate
stockholders may be required to
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treat up to 20% of certain capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits will not
be taxable to a stockholder to the extent that they do not exceed the adjusted
basis of the stockholder's shares of Common Stock, but rather will reduce the
adjusted basis of a stockholder's shares of Common Stock. To the extent that
such distributions exceed the stockholder's adjusted basis in its shares of
Common Stock, they will be included in income as long-term capital gain (or
short-term capital gain if the shares have been held for one year or less),
assuming the shares of Common Stock are a capital asset in the hands of the
stockholder.
Any dividend declared by the Company in October, November or December of any
year payable to a stockholder of record on a specific date in any such month
shall be treated as both paid by the Company and received by the stockholder on
December 31 of such year, if the dividend is actually paid by the Company during
January of the following calendar year.
Stockholders may not include in their individual income tax returns net
operating losses or capital losses of the Company. In addition, distributions
from the Company and gain from the disposition of shares of Common Stock will
not be treated as "passive activity" income and, therefore, stockholders will
not be able to use passive losses to offset such income.
In general, any loss upon a sale or exchange of shares of Common Stock by a
stockholder which has held such shares of Common Stock for six months or less
(after applying certain holding period rules) will be treated as a long-term
capital loss to the extent of distributions from the Company required to be
treated by such stockholder as long-term capital gains.
BACKUP WITHHOLDING. The Company will report to its domestic stockholders
and the IRS the amount of dividends paid during each calendar year and the
amount of tax withheld, if any, with respect thereto. Under the backup
withholding rules, a stockholder may be subject to backup withholding at the
rate of 31% with respect to dividends paid unless such holder (i) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (ii) provides a taxpayer identification number and
certifies as to no loss of exemption. Any amount paid as backup withholding will
be creditable against the stockholder's income tax liability. The United States
Treasury has recently issued proposed regulations regarding the withholding and
information reporting rules discussed above. In general, the proposed
regulations do not alter the substantive withholding and information reporting
requirements but unify current certification procedures and forms and clarify
and modify reliance standards. If finalized in their current form, the proposed
regulations would generally be effective for payments made after December 31,
1997, subject to certain transition rules.
In addition, the Company may be required to withhold a portion of capital
gain distributions made to any stockholders which fail to certify their
nonforeign status to the Company. See "--Taxation of Foreign Stockholders"
below.
TAXATION OF TAX-EXEMPT STOCKHOLDERS. The IRS has ruled that amounts
distributed as dividends by a qualified REIT generally do not constitute
unrelated business taxable income ("UBTI") when received by a tax-exempt entity.
Based on that ruling, provided that a tax-exempt stockholder (except certain
tax-exempt stockholders described below) has not held its shares of Common Stock
as "debt financed property" within the meaning of the Code and such shares are
not otherwise used in a trade or business, the dividend income from the Company
Stock will not be UBTI to a tax-exempt stockholder. Similarly, income from the
sale of Common Stock will not constitute UBTI unless such tax-exempt stockholder
has held such shares as "debt financed property" within the meaning of the Code
or has used the shares in a trade or business.
For tax-exempt stockholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from Federal income taxation under Sections
501 (c)(7), (c)(9), (c)(17) and (c)(20) of the Code, respectively, income from
an investment in the Company will constitute UBTI unless the organization is
able to properly deduct
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amounts set aside or placed in reserve for certain purposes so as to offset the
income generated by its investment in the Company. Such prospective investors
should consult their own tax advisors concerning these "set aside" and reserve
requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" will be treated as UBTI as to any trust which (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section 501(a)
of the Code, and (iii) holds more than 10% (by value) of the interests in the
REIT. Tax-exempt pension, profit-sharing and stock bonus funds that are
described in Section 401(a) of the Code are referred to below as "qualified
trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code provides that stock owned by
qualified trusts shall be treated, for purposes of the "not closely held"
requirement, as owned by the beneficiaries of the trust (rather than by the
trust itself), AND (ii) EITHER (A) at least one such qualified trust holds more
than 25% (by value) of the interests in the REIT, OR (B) one or more such
qualified trusts, each of which owns more than 10% (by value) of the interests
in the REIT, hold in the aggregate more than 50% (by value) of the interests in
the REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (i) the gross income (less direct expenses related thereto) of the REIT
from unrelated trades or businesses (determined as if the REIT were a qualified
trust) to (ii) the total gross income (less direct expenses related thereto) of
the REIT. A DE MINIMIS exception applies where this percentage is less than 5%
for any year. The provisions requiring qualified trusts to treat a portion of
REIT distributions as UBTI will not apply if the REIT is able to satisfy the
"not closely held" requirement without relying upon the "look-through" exception
with respect to qualified trusts. As a result of certain limitations on transfer
and ownership of Common Stock contained in the Charter, the Company does not
expect to be classified as a "pension held REIT."
TAXATION OF FOREIGN STOCKHOLDERS. The rules governing U.S. Federal income
taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign stockholders (collectively, "Non-U.S.
Stockholders") are complex and no attempt will be made herein to provide more
than a limited summary of such rules. Prospective Non-U.S. Stockholders should
consult with their own tax advisors to determine the impact of U.S. Federal,
state and local income tax laws with regard to an investment in shares of Common
Stock, including any reporting requirements.
ORDINARY DIVIDENDS. Distributions, other than distributions that are
treated as attributable to gain from sales or exchanges by the Company of U.S.
real property interests (discussed below) and other than distributions
designated by the Company as capital gain dividends, will be treated as ordinary
income to the extent that they are made out of current or accumulated earnings
and profits of the Company. Such distributions to foreign stockholders will
ordinarily be subject to a withholding tax equal to 30% of the gross amount of
the distribution, unless an applicable tax treaty reduces that tax. However, if
income from the investment in the shares of Common Stock is treated as
effectively connected with the Non-U.S. Stockholder's conduct of a U.S. trade or
business, the Non-U.S. Stockholder generally will be subject to a tax at
graduated rates in the same manner as U.S. stockholders are taxed with respect
to such dividends (and may also be subject to the 30% branch profits tax if the
stockholder is a foreign corporation). The Company expects to withhold U.S.
income tax at the rate of 30% on the gross amount of any dividends, other than
dividends treated as attributable to gain from sales or exchanges of U.S. real
property interests and capital gain dividends, paid to a Non-U.S. Stockholder,
unless (i) a lower treaty rate applies and the required form evidencing
eligibility for that reduced rate is filed with the Company or (ii) the Non-U.S.
Stockholder files an IRS Form 4224 (or its future equivalent) with the Company
claiming that the distributions are "effectively connected" income.
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Distributions to a Non-U.S. Stockholder that are designated by the Company
at the time of distribution as capital gain dividends which are not attributable
to or treated as attributable to the disposition by the Company of a U.S. real
property interest generally will not be subject to U.S. Federal income taxation,
except as described below.
RETURN OF CAPITAL. Distributions in excess of current and accumulated
earnings and profits of the Company, which are not treated as attributable to
the gain from disposition by the Company of a U.S. real property interest, will
not be taxable to a Non-U.S. Stockholder to the extent that they do not exceed
the adjusted basis of the Non-U.S. Stockholder's shares of Common Stock, but
rather will reduce the adjusted basis of such shares of Common Stock. To the
extent that such distributions exceed the adjusted basis of a Non-U.S.
Stockholder's shares of Common Stock, they will give rise to tax liability if
the Non-U.S. Stockholder otherwise would be subject to tax on any gain from the
sale or disposition of its shares of Common Stock, as described below. If it
cannot be determined at the time a distribution is made whether such
distribution will be in excess of current and accumulated earnings and profits,
the distribution will be subject to withholding at the rate applicable to
dividends. However, the Non-U.S. Stockholder may seek a refund of such amounts
from the IRS if it is subsequently determined that such distribution was, in
fact, in excess of current and accumulated earnings and profits of the Company.
CAPITAL GAIN DIVIDENDS. For any year in which the Company qualifies as a
REIT, distributions that are attributable to gain from sales or exchanges by the
Company of U.S. real property interests will be taxed to a Non-U.S. Stockholder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980,
as amended ("FIRPTA"). Under FIRPTA, these distributions are taxed to a Non-U.S.
Stockholder as if such gain were effectively connected with a U.S. business.
Thus, Non-U.S. Stockholders will be taxed on such distributions at the normal
capital gain rates applicable to U.S. stockholders (subject to any applicable
alternative minimum tax and special alternative minimum tax in the case of
nonresident alien individuals). Also, distributions subject to FIRPTA may be
subject to a 30% branch profits tax in the hands of a corporate Non-U.S.
Stockholder not entitled to treaty relief or exemption. The Company is required
by applicable Treasury Regulations under FIRPTA to withhold 35% of any
distribution that could be designated by the Company as a capital gain dividend.
However, if the Company designates as a capital gain dividend a distribution
made prior to the day the Company actually effects such designation, then
(although such distribution may be taxable to a Non-U.S. Stockholder) such
distribution is not subject to withholding under FIRPTA; rather, the Company
must effect the 35% FIRPTA withholding from distributions made on and after the
date of such designation, until the distributions so withheld equal the amount
of the prior distribution designated as a capital gain dividend. The amount
withheld is creditable against the Non-U.S. Stockholder's U.S. tax liability.
COMMON STOCK SALES. Gain recognized by a Non-U.S. Stockholder upon a sale
or exchange of shares of Common Stock generally will not be taxed under FIRPTA
if the Company is a "domestically controlled REIT," defined generally as a REIT
in respect of which at all times during a specified testing period less than 50%
in value of the stock was held directly or indirectly by foreign persons. It is
currently anticipated that the Company will be a "domestically controlled REIT,"
and, therefore, the sale of shares of Common Stock will not be subject to
taxation under FIRPTA. However, gain not subject to FIRPTA will be taxable to a
Non-U.S. Stockholder if (i) investment in the shares of Common Stock is treated
as "effectively connected" with the Non-U.S. Stockholder's U.S. trade or
business, in which case the Non-U.S. Stockholder will be subject to the same
treatment as U.S. stockholders with respect to such gain, or (ii) the Non-U.S.
Stockholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States, or maintains an office or a fixed place of business in the United
States to which the gain is attributable, in which case the nonresident alien
individual will be subject to a 30% tax on the individual's capital gains. A
similar rule will apply to capital gain dividends not subject to FIRPTA.
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If the Company were not a domestically-controlled REIT, whether or not a
Non-U.S. Stockholder's sale of shares of Common Stock would be subject to tax
under FIRPTA would depend on whether or not the shares of Common Stock were
regularly traded on an established securities market (such as the NYSE, on which
the shares of Common Stock have been approved for listing, subject to official
notice of issuance, and on the size of the selling Non-U.S. Stockholder's
interest in the Company. If the gain on the sale of shares of Common Stock were
to be subject to tax under FIRPTA, the Non-U.S. Stockholder would be subject to
the same treatment as U.S. stockholders with respect to such gain (subject to
any applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals) and the purchaser of such shares of
Common Stock may be required to withhold 10% of the gross purchase price.
PROPOSED REGULATIONS. Pursuant to current Treasury Regulations, dividends
paid to an address in a country outside the United States are generally presumed
to be paid to a resident of such country for purposes of determining the
applicability of withholding discussed above and the applicability of a tax
treaty rate. Under proposed Treasury Regulations, not currently in effect,
however, a Non-U.S. Stockholder who wishes to claim the benefit of an applicable
treaty rate would be required to satisfy certain certification and other
requirements.
OTHER TAX CONSIDERATIONS
EFFECT OF TAX STATUS OF OPERATING PARTNERSHIP AND PROPERTY-OWNING ENTITIES
ON REIT QUALIFICATION. All of the Company's significant investments are held
through the Operating Partnership. The Operating Partnership holds interests in
the Properties through the Property-owning entities. The Operating Partnership
and Property-owning entities involve special tax considerations. These tax
considerations include (i) allocations of income and expense items of the
Operating Partnership and Property-owning entities, which could affect the
computation of taxable income of the Company, (ii) the status of the Operating
Partnership and Property-owning entities as partnerships or entities that are
disregarded as entities separate from their owners (as opposed to associations
taxable as corporations) for income tax purposes and (iii) the taking of actions
by the Operating Partnership or any of the Property-owning entities that could
adversely affect the Company's qualification as REIT.
Roberts & Holland LLP will render an opinion, based on certain
representations of the Company and the Operating Partnership, that neither the
Operating Partnership nor any of the Property-owning entities will be treated
for tax purposes as an association taxable as a corporation. If, however, the
Operating Partnership or any of the Property-owning entities were treated as an
association taxable as a corporation, the Company would fail to qualify as a
REIT for a number of reasons.
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for classification as a REIT. In this regard, the Company will control the
operation of the Operating Partnership through its rights as the sole general
partner of the Operating Partnership.
TAX ALLOCATIONS WITH RESPECT TO THE PROPERTIES. When property is
contributed to a partnership in exchange for an interest in the partnership, the
partnership generally takes a carryover basis in that property for tax purposes
(I.E., the partnership's basis is equal to the adjusted basis of the
contributing partner in the property), rather than a basis equal to the fair
market value of the property at the time of contribution. Pursuant to Section
704(c) of the Code, income, gain, loss and deductions attributable to such
contributed property must be allocated in a manner such that the contributing
partner is charged with, or benefits from, respectively, the unrealized gain or
unrealized loss associated with the property at the time of the contribution.
The amount of such unrealized gain or unrealized loss is generally equal to the
difference between the fair market value of the contributed property at the time
of contribution and the adjusted tax basis of such property at the time of
contribution (a "Book-Tax Difference"). Such
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allocations are solely for Federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners. The Operating Partnership will be funded by way of contributions of
appreciated property to the Operating Partnership in the Formation Transactions.
Consequently, the Operating Partnership Agreement will require such allocations
to be made in a manner consistent with Section 704(c) of the Code and the
regulations thereunder (the "Section 704(c) Regulations").
As a result of these special rules, the contributing partners will be
allocated lower amounts of depreciation deductions for tax purposes with respect
to Properties contributed to the Operating Partnership with a Book-Tax
Difference than the amount of such deductions that would be allocated to them if
such Properties had a tax basis equal to their fair market value at the time of
contribution. In the event of the disposition of any of the contributed
Properties which have a Book-Tax Difference, all income attributable to such
Book-Tax Difference generally will be allocated to the contributing partners,
and the Company generally will be allocated only its share of capital gains
attributable to appreciation as well as gains attributable to recapture of
depreciation actually claimed by the Company, if any, occurring after the
completion of the Offering. These allocations will tend to eliminate the
Book-Tax Differences with respect to the contributed Properties over the life of
the Operating Partnership. However, because of certain technical limitations,
the special allocation rules of Section 704(c) may not always entirely eliminate
the Book-Tax Difference on an annual basis or with respect to a specific taxable
transaction such as a sale. The Section 704(c) Regulations require partnerships
to use a "reasonable method" for allocation of items affected by Section 704(c)
of the Code and outline three methods which may be considered reasonable for
these purposes. Because the Operating Partnership intends to use the
"traditional method" (one of the three methods described in the Section 704(c)
Regulations), the carryover basis of the contributed Properties in the hands of
the Operating Partnership could cause the Company to be allocated lower amounts
of depreciation and other deductions for tax purposes than would be allocated to
the Company if all Properties were to have a tax basis equal to their fair
market value at the time of the Formation Transactions. These allocations
possibly could cause the Company to recognize taxable income in excess of cash
proceeds, which might adversely affect the Company's ability to comply with the
REIT distribution requirements. See "--Taxation of the Company--Annual
Distribution Requirements" above. These allocations could also result in a
higher portion of distributions being taxed as dividends than would have
occurred if all Properties were to have had a tax basis equal to their fair
market value at the time of the Formation Transactions.
MANAGEMENT CORPORATION. A portion of the amounts to be used by the
Operating Partnership to fund distributions to partners is expected to come from
the Management Corporation, through payments on the note issued by the
Management Corporation and dividends on non-voting stock of the Management
Corporation to be held by the Operating Partnership. The Management Corporation
will not qualify as a REIT and thus will pay Federal, state and local income
taxes on its net income at normal corporate rates. To the extent that the
Management Corporation is required to pay Federal, state and local income taxes,
the cash available for distribution to the Company's stockholders will be
reduced accordingly.
As described above, the value of the securities of the Management
Corporation held by the Operating Partnership cannot exceed 5% of the value of
the Operating Partnership's assets at a time when the Company is considered to
acquire additional securities of the Management Corporation. See "--Taxation of
the Company--Asset Tests." This limitation may restrict the ability of the
Management Corporation to increase the size of its business unless the value of
the assets of the Operating Partnership is increasing at a commensurate rate.
IMPORTANCE OF OBTAINING PROFESSIONAL TAX ASSISTANCE
This discussion is intended only as a summary of certain tax consequences of
the Offering and is not a substitute for careful tax planning with a tax
professional. The tax consequences are in many cases uncertain and may vary
depending on an investor's individual circumstances. Accordingly, investors are
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urged to consult with their tax advisors about the Federal, state, local and
foreign tax consequences of the Offering.
ERISA CONSIDERATIONS
THE FOLLOWING IS A SUMMARY OF MATERIAL CONSIDERATIONS ARISING UNDER THE
EMPLOYEES' RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED ("ERISA"), AND THE
PROHIBITED TRANSACTIONS PROVISIONS OF SECTION 4975 OF THE CODE THAT MAY BE
RELEVANT TO A PROSPECTIVE PURCHASER (INCLUDING WITH RESPECT TO THE DISCUSSION
CONTAINED IN "--STATUS OF THE COMPANY AND THE OPERATING PARTNERSHIP UNDER
ERISA," TO A PROSPECTIVE PURCHASER THAT IS NOT AN EMPLOYEE BENEFIT PLAN SUBJECT
TO ERISA, ANOTHER TAX-QUALIFIED PENSION, PROFIT SHARING OR STOCK BONUS PLAN, OR
AN INDIVIDUAL RETIREMENT ACCOUNT OR ANNUITY ("IRA")). THE DISCUSSION DOES NOT
PURPORT TO DEAL WITH ALL ASPECTS OF ERISA OR SECTION 4975 OF THE CODE THAT MAY
BE RELEVANT TO PARTICULAR PROSPECTIVE PURCHASERS (INCLUDING EMPLOYEE BENEFIT
PLANS SUBJECT TO ERISA, OTHER TAX QUALIFIED PLANS AND IRAS) OR MATERIAL
CONSIDERATIONS RELATING TO PROSPECTIVE PURCHASERS THAT ARE GOVERNMENTAL PLANS,
CHURCH PLANS OR OTHER EMPLOYEE BENEFIT PLANS THAT ARE EXEMPT FROM ERISA OR
SECTION 4975 OF THE CODE BUT THAT MAY BE SUBJECT TO STATE LAW REQUIREMENTS IN
LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.
A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES OF THE COMMON STOCK ON
BEHALF OF A PROSPECTIVE PURCHASER WHICH IS AN EMPLOYEE BENEFIT PLAN SUBJECT TO
ERISA, A TAX-QUALIFIED PENSION, PROFIT SHARING OR STOCK BONUS PLAN, AN IRA, A
CHURCH PLAN OR A GOVERNMENTAL PLAN IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR
REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE
CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF SHARES OF
THE COMMON STOCK BY SUCH PLAN OR IRA.
EMPLOYMENT BENEFIT PLANS, TAX-QUALIFIED PENSION, PROFIT SHARING OR STOCK BONUS
PLANS AND IRAS
Each fiduciary of an employee benefit plan subject to ERISA (an "ERISA
Plan") should carefully consider whether an investment in the Common Stock is
consistent with its fiduciary responsibilities under ERISA. In particular, the
fiduciary requirements of Part 4 of Title I of ERISA require an ERISA Plan's
investments to be (i) prudent and in the interests of the participants and
beneficiaries of the ERISA Plan, (ii) diversified in order to minimize the risk
of large losses, unless it is clearly prudent not to do so, and (iii) authorized
under the terms of the governing documents of the ERISA Plan. In addition, a
fiduciary of an ERISA Plan should not cause or permit such ERISA Plan to enter
into transactions prohibited under Section 406 of ERISA or Section 4975 of the
Code. In determining whether an investment in the Common Stock is prudent for
purposes of ERISA, the appropriate fiduciary of an ERISA Plan should consider
all of the facts and circumstances, including whether the investment is
reasonably designed, as a part of the ERISA Plan's investment portfolio for
which the fiduciary has responsibility, to meet the objectives of the ERISA
Plan, taking into consideration the risk of loss and opportunity for gain (or
other return) from the investment, the diversification, cash flow and funding
requirements of the ERISA Plan, and the liquidity and current return of the
ERISA Plan's investment portfolio. A fiduciary should also take into account the
nature of the Company's business, the length of the Company's operating history,
the terms of the management agreements and leasing agreements being transferred
from the Mendik Group to the Management Entities, the fact that certain
investment properties may not have been identified yet, other matters described
under "Risk Factors" and the possibility of UBTI. See "Federal Income Tax
Consequences--Taxation of Stockholders."
The fiduciary of an ERISA Plan, an IRA or a qualified pension, profit
sharing or stock bonus plan which is not subject to ERISA (a "Non-ERISA Plan")
but is subject to Section 4975 of the Code ("Other Plans") should ensure that
the purchase of Common Stock will not constitute a prohibited transaction under
ERISA or the Code.
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STATUS OF THE COMPANY AND THE OPERATING PARTNERSHIP UNDER ERISA
THE FOLLOWING SECTION DISCUSSES CERTAIN PRINCIPLES THAT APPLY IN DETERMINING
WHETHER THE FIDUCIARY REQUIREMENTS OF ERISA AND THE PROHIBITED TRANSACTION
PROVISIONS OF ERISA AND THE CODE APPLY TO AN ENTITY BECAUSE ONE OR MORE
INVESTORS IN THE ENTITY'S EQUITY INTERESTS IS AN ERISA PLAN OR OTHER PLAN. AN
ERISA PLAN FIDUCIARY SHOULD ALSO CONSIDER THE RELEVANCE OF THESE PRINCIPLES TO
ERISA'S PROHIBITION ON IMPROPER DELEGATION OF CONTROL OVER OR RESPONSIBILITY FOR
"PLAN ASSETS" AND ERISA'S IMPOSITION OF CO-FIDUCIARY LIABILITY ON A FIDUCIARY
WHO PARTICIPATES IN, PERMITS (BY ACTION OR INACTION) THE OCCURRENCE OF, OR FAILS
TO REMEDY A KNOWN BREACH BY ANOTHER FIDUCIARY.
If the assets of the Company are deemed to be assets of an ERISA Plan ("plan
assets"), (i) the prudence standards and other provisions of Part 4 of Title I
of ERISA and the prohibited transaction provisions of ERISA and the Code would
be applicable to any transactions involving the Company's assets and (ii)
persons who exercise any authority or control over the Company's assets, or who
provide investment advice to the Company, would be (for purposes of ERISA and
the Code) fiduciaries of ERISA Plans and Other Plans that acquire Common Stock.
The United States Department of Labor (the "DOL"), which has certain
administrative responsibility over ERISA Plans and Other Plans, has issued a
regulation defining plan assets for certain purposes (the "DOL Regulation"). The
DOL Regulation generally provides that when an ERISA Plan or Other Plan acquires
a security that is an equity interest in an entity and that security is neither
a "publicly-offered security" nor a security issued by an investment company
registered under the 1940 Act, the assets of the ERISA Plan or Other Plan
include both the equity interest and an undivided interest in each of the
underlying assets of the entity, unless it is established either that the entity
is an "operating company" (as defined in the DOL Regulation) or that equity
participation in the entity by "benefit plan investors" is not significant.
The DOL Regulation defines a "publicly-offered security" as a security that
is "widely held," "freely transferable" and either part of a class of securities
registered under the Exchange Act, or sold pursuant to an effective registration
statement under the Securities Act (provided the securities are registered under
the Exchange Act within 120 days, or such later time as may be allowed by the
SEC (the "registration period"), after the end of the fiscal year of the issuer
during which the offering occurred). The Common Stock is being sold in an
offering registered under the Securities Act and the Company intends to register
the Common Stock under the Exchange Act within the registration period.
The DOL Regulation provides that a security is "widely-held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control.
The DOL Regulation provides that whether a security is "freely transferable"
is a factual question to be determined on the basis of all relevant facts and
circumstances. The DOL Regulation further provides that where a security is part
of an offering in which the minimum investment is $10,000 or less, certain
restrictions ordinarily will not, alone or in combination, affect a finding that
such securities are "freely transferable." The Offering will not impose a
minimum investment requirement. The restrictions on transfer enumerated in the
DOL Regulation as ordinarily not affecting a finding that the securities are
"freely transferable" include: (i) any restriction on or prohibition against any
transfer or assignment that would result in a termination or reclassification of
the Company for Federal or state tax purposes, or that would otherwise violate
any state or Federal law or court order, (ii) any requirement that advance
notice of a transfer or assignment be given to the Company, (iii) any
requirement that either the transferor or transferee, or both, execute
documentation setting forth representations as to compliance with any
restrictions on transfer that are among those enumerated in the DOL Regulation
as not affecting free transferability, (iv) any administrative procedure that
established an effective date, or an event (such as completion of the Offering)
prior to which a transfer or assignment will not be effective, (v) any
prohibition against transfer or assignment to an ineligible or unsuitable
investor, and (vi) any limitation or
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restriction on transfer or assignment that is not imposed by the issuer or a
person acting on behalf of the issuer. The Company believes that the
restrictions imposed under the Charter on the transfer of Common Stock are of
the type of restrictions on transfer generally permitted under the DOL
Regulation or are not otherwise material and should not result in the failure of
the Common Stock to be "freely transferable" within the meaning of the DOL
Regulation. See "Capital Stock --Restrictions on Transfer." The Company also
believes that certain restrictions on transfer that derive from the securities
laws, from contractual arrangements with the Underwriters in connection with the
Offering and from certain provisions should not result in the failure of the
Common Stock to be "freely transferable." See "Underwriting" and "Certain
Provisions of Maryland Law and the Company's Charter and Bylaws." Furthermore,
the Company is not aware of any other facts or circumstances limiting the
transferability of the Common Stock that are not included among those enumerated
as not affecting their free transferability under the DOL Regulation, and the
Company does not expect to impose in the future (or to permit any person to
impose on its behalf) any other limitations or restrictions on transfer that
would not be among the enumerated permissible limitations or restrictions.
Assuming (i) that the Common Stock is "widely held" within the meaning of
the DOL Regulation and (ii) that no facts and circumstances other than those
referred to in the preceding paragraph exist that restrict transferability of
the Common Stock, the Company believes that, under the DOL Regulation, the
Common Stock should be considered "publicly-offered securities" and, therefore,
that the assets of the Company should not be deemed to be plan assets of any
ERISA Plan or Other Plan that invests in the Common Stock.
The DOL Regulation will also apply in determining whether the assets of the
Operating Partnership will be deemed to be plan assets. The partnership
interests in the Operating Partnership will not be publicly offered securities.
Nevertheless, if the Common Stock constitutes publicly offered securities, the
Company believes that the indirect investment in the Operating Partnership by
ERISA Plans or Other Plans through their ownership of the Common Stock will not
cause the assets of the Operating Partnership to be treated as plan assets.
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UNDERWRITING
Subject to the terms and conditions in the United States purchase agreement
(the "U.S. Purchase Agreement") among the Company and each of the underwriters
named below (the "U.S. Underwriters"), and concurrently with the sale of
1,372,500 shares to the International Managers (as defined below), the Company
has agreed to sell to each of the U.S. Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc., Dean Witter
Reynolds Inc., Lehman Brothers Inc., PaineWebber Incorporated, Legg Mason Wood
Walker, Incorporated, and UBS Securities LLC are acting as representatives (the
"U.S. Representatives"), and each of the U.S. Underwriters has severally agreed
to purchase from the Company, the respective number of shares of Common Stock
set forth below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- -------------------------------------------------------------------------------- ------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................................
Bear, Stearns & Co. Inc.........................................................
Dean Witter Reynolds Inc........................................................
Lehman Brothers Inc.............................................................
PaineWebber Incorporated........................................................
Legg Mason Wood Walker, Incorporated............................................
UBS Securities LLC..............................................................
------------
Total................................................................ 7,777,500
------------
------------
</TABLE>
The Company has also entered into a purchase agreement (the "International
Purchase Agreement," and together with the U.S. Purchase Agreement, the
"Purchase Agreements") with certain underwriters outside the United States and
Canada (the "International Managers" and, together with the U.S. Underwriters,
the "Underwriters") for whom Merrill Lynch International, Bear, Stearns
International Limited, Dean Witter International Limited, Lehman Brothers
International, PaineWebber International (U.K.) Ltd., Legg Mason Wood Walker,
Incorporated, and UBS Limited are acting as lead managers. Subject to the terms
and conditions set forth in the International Purchase Agreement and
concurrently with the sale of 7,777,500 shares of Common Stock to the U.S.
Underwriters pursuant to the U.S. Purchase Agreement, the Company has agreed to
sell to the International Managers, and the International Managers have
severally agreed to purchase from the Company, an aggregate of 1,372,500 shares
of Common Stock. The initial public offering price per share and the total
underwriting discount per share are identical under the U.S. Purchase Agreement
and the International Purchase Agreement.
In each Purchase Agreement, the several U.S. Underwriters and the several
International Managers have agreed, respectively, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all of the shares
of Common Stock being sold pursuant to such Purchase Agreement if any of such
shares of Common Stock are purchased. Under certain circumstances, the
commitments of non-defaulting U.S. Underwriters or International Managers (as
the case may be) may be increased. The sale of shares of Common Stock pursuant
to the U.S. Purchase Agreement and the International Purchase Agreement are
conditioned upon each other.
The U.S. Representatives have advised the Company that the U.S. Underwriters
propose to offer the Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per share. The U.S.
Underwriters may allow, and such dealers may re-allow, a discount not in excess
of $ per share on sales to certain other brokers and dealers. After the
initial public offering, the public offering price, concession and discount may
be changed.
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<PAGE>
The Company has been informed that the U.S. Underwriters and the
International Managers have entered into an agreement (the "Intersyndicate
Agreement") providing for the coordination of their activities. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and the International
Managers are permitted to sell shares of Common Stock to each other for purposes
of resale at the initial public offering price, less an amount not greater than
the selling concession. Under the terms of the Intersyndicate Agreement, the
International Managers and any dealer to whom they sell shares of Common Stock
will not offer to sell or sell shares of Common Stock to persons who are United
States persons or Canadian persons or to persons they believe intend to resell
to persons who are United States persons or Canadian persons, and the U.S.
Underwriters and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to persons who are non-United
States and non-Canadian persons or to persons they believe intend to resell to
non-United States and non-Canadian persons, except in each case for transactions
pursuant to such agreement.
The Company has granted to the U.S. Underwriters an option, exercisable for
30 days after the date of this Prospectus, to purchase up to 1,166,625
additional shares of Common Stock to cover over-allotments, if any, at the
initial public offering price, less the underwriting discount set forth on the
cover page of this Prospectus. If the U.S. Underwriters exercise this option,
each U.S. Underwriter will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the foregoing
table bears to the U.S. Underwriters' initial amount reflected in the foregoing
table. The Company also has granted an option to the International Managers,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to 205,875 additional shares of Common Stock to cover
over-allotments, if any, on terms similar to those granted to the U.S.
Underwriters.
At the request of the Company, the U.S. Underwriters have reserved up to
250,000 shares of Common Stock for sale at the initial public offering price to
certain employees of the Company, their business affiliates and related parties
who have expressed an interest in purchasing shares. The number of shares
available to the general public will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares that are not so purchased by
such persons at the closing of the Offering will be offered by the U.S.
Underwriters to the general public on the same terms as the other shares offered
by this Prospectus.
In the Purchase Agreements, the Company has agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act. Insofar as indemnification of the Underwriters for liabilities
arising under the Securities Act may be permitted pursuant to the foregoing
provision, the Company has been informed that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
The Company and the Operating Partnership have agreed, subject to certain
exceptions, for a period of one year from the date of this Prospectus, without
the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
not to, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of any share of Common Stock or any Unit or any securities convertible into or
exercisable or exchangeable for Common Stock or Units, or file any registration
statement under the Securities Act with respect to any of the foregoing, or (ii)
enter into any swap or any other agreement or any transaction that transfers, in
whole or in part, directly or indirectly, the economic consequence of ownership
of the Common Stock or Units, whether any such swap or transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or Units
or other securities, in cash or otherwise.
In connection with the Offering, the Mendik Group and certain affiliates
thereof have agreed, subject to certain exceptions, for a period of two years
from the date of this Prospectus, without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated, not to, directly or indirectly, (i)
offer,
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<PAGE>
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option to contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of Common Stock or
any Units, whether now owned or hereafter acquired by such person or with
respect to which such person has or hereafter acquires the power of disposition,
or file any registration statement under the Securities Act with respect to any
of the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock or Units, whether any such
swap or transaction is to be settled by delivery of Common Stock or Units or
other securities, in cash or otherwise. In addition, FWM, L.P., FWM II, L.P.,
certain other affiliates of RMB Realty and QIB have agreed to a similar
restriction with respect to any shares of Common Stock acquired in the
Concurrent Placements, for a period of one year (or, in the case of QIB, six
months) from the date of this Prospectus, and, with respect to any shares of
Common Stock received in exchange for Units, for a period of two years from the
date of this Prospectus. The Company has granted certain registration rights
pursuant to which purchasers of shares in the Concurrent Placements may require
the Company to file a registration statement with the Commission with respect to
sales of such shares.
The Underwriters do not intend to confirm sales to any account over which
they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations between the Company and the U.S. Representatives. Among the factors
to be considered in such negotiations, in addition to prevailing market
conditions, will be dividend yields and financial characteristics of publicly
traded REITs that the Company and the U.S. Representatives believe to be
comparable to the Company, the expected results of operations of the Company
(which will be based on the results of operations of the Properties and the
management and leasing business in recent periods), estimates of the future
business potential and earnings prospects of the Company as a whole and the
current state of the real estate market in the Company's primary markets and the
economy as a whole.
The Common Stock has been approved for listing, subject to official notice
of issuance, on the New York Stock Exchange.
An affiliate of UBS Securities LLC represents an investor in one of the
Properties whose interest will not be acquired by the Company. Affiliates of
Lehman Brothers Inc. own a general partner interest in the RELP and through the
RELP an approximate 0.45% interest in the entity which owns Two Park Avenue.
The Company will pay to Merrill Lynch, Pierce, Fenner & Smith Incorporated
an advisory fee equal to 0.75% of the gross proceeds received from the sale of
Common Stock to public investors in the Offering for financial advisory services
rendered in connection with the Company's formation as a REIT. In addition, the
Company will pay to Merrill Lynch, Pierce, Fenner & Smith Incorporated a
placement agent fee equal to 1% of the gross proceeds received from the sale of
Common Stock in the QIB Placement.
EXPERTS
The balance sheet of The Mendik Company, Inc. as of September 30, 1996 and
the combined financial statements of the Mendik Predecessors as of December 31,
1995 and 1994 and for each of the three years in the period ended December 31,
1995, all appearing in this Prospectus and Registration Statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The Rosen Market Study was prepared for the Company by Rosen Consulting
Group, which is a real estate consulting firm with significant expertise
relating to the New York metropolitan area economy and midtown Manhattan office
market and the various submarkets therein. Information relating to the New
145
<PAGE>
York economy and the Manhattan office market set forth in "New York Economy and
Manhattan Office Market" is derived from the Rosen Market Study and is included
in reliance upon the Rosen Consulting Group's authority as experts on such
matters.
LEGAL MATTERS
The validity of the shares of Common Stock will be passed upon for the
Company by Hogan & Hartson L.L.P., Washington, D.C. Certain matters of New York
law will be passed upon for the Company by Proskauer, Rose, Goetz and Mendelsohn
LLP, New York, New York. Certain tax matters will be passed upon for the Company
by Roberts & Holland LLP, New York, New York. In addition, the description of
Federal income tax consequences under the heading "Federal Income Tax
Consequences" is based upon the opinion of Roberts & Holland LLP. Certain legal
matters will be passed upon for the Underwriters by Brown & Wood LLP, New York,
New York.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 (of which this Prospectus is a part) under the Securities Act with respect
to the securities offered hereby. This Prospectus does not contain all
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement is qualified in all respects by such
reference and the exhibits and schedules hereto. For further information
regarding the Company and the Common Stock offered hereby, reference is hereby
made to the Registration Statement and such exhibits and schedules, which may be
obtained from the Commission as its principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of the fees prescribed by the Commission.
The Commission maintains a website at http://www.sec.gov containing reports,
proxy and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission. In
addition, the Company intends to file an application to list the Common Stock on
the New York Stock Exchange and, if the Common Stock is listed on the New York
Stock Exchange, similar information concerning the Company can be inspected and
copied at the offices of the New York Stock Exchange, 20 Broad Street, New York,
New York 10005.
The Company intends to furnish its stockholders with annual reports
containing audited combined financial statements and a report thereon by
independent certified public accountants.
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<PAGE>
GLOSSARY OF SELECTED TERMS
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus:
"ACMS" means asbestos containing materials.
"ACT" means the Delaware Revised Uniform Limited Partnership Act, as
amended.
"ADA" means the Americans with Disabilities Act, as amended.
"ANNUAL ESCALATED RENT PER LEASED SQUARE FOOT" means the annualized monthly
base rent in effect (after giving effect to any contractual increases in monthly
base rent that have occurred up to December 31) including monthly tenant
pass-throughs of operating and other expenses (but excluding tenant electricity
costs) under each lease executed as of December 31, 1996, or, if such monthly
rent has been reduced by a temporary rent concession, the monthly rent that
would have been in effect at such date in the absence of such concession.
"ANNUAL ESCALATED RENT OF EXPIRING LEASES" means annualized monthly base
rent for the nine months ended September 30, 1996 (or, where applicable, for the
twelve months ended December 31 for years ended prior to 1996) including monthly
tenant pass-throughs of operating and other expenses (but excluding electricity
costs), presented on a straight-line basis in accordance with GAAP, minus
amortization of tenant improvement costs and leasing commissions, if any, paid
or payable by the Mendik Group during such period, presented on a per leased
square foot basis.
"ANNUAL ESCALATED RENT PER LEASED SQUARE FOOT OF EXPIRING LEASES" means
Annual Escalated Rent of Expiring Leases on a per square foot basis.
"ANNUAL ESCALATED RENT PER LEASED SQUARE FOOT OF EXPIRING LEASES WITH FUTURE
STEP-UPS" means Annualized Escalated Rent Per Leased Square Foot of Expiring
Leases, adjusted to reflect contractual increases in monthly base rent that
occur after December 31, 1996.
"ANNUAL NET EFFECTIVE RENT PER LEASED SQUARE FOOT" means, (i) for leases in
effect at the time the relevant Property was acquired, the amount obtained by
dividing the remaining lease payments under the lease by the number of months
remaining under the lease and multiplying the result by 12; and (ii) for leases
executed after the relevant Property was acquired, the amount obtained by
dividing all lease payments under the lease by the number of months in the lease
and multiplying the result by 12. Such amounts were in all cases adjusted for
tenant improvement costs and leasing commissions, if any, paid or payable by the
Mendik Group.
"BIDS" means Business Improvement Districts (public/private ventures that
provide security, sanitation and other services within their boundaries).
"BOOK-TAX DIFFERENCE" means the difference between the fair market value of
a contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution.
"BYLAWS" means the Company's bylaws, as supplemented or amended.
"CHARTER" means the Company's articles of incorporation, as supplemented or
amended.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means shares of the Company's Common Stock, $.01 par value
per share.
"COMPANY" means The Mendik Company, Inc., a Maryland corporation, and one or
more of its subsidiaries (including the Operating Partnership), and the
predecessors thereof or, as the context may require, The Mendik Company, Inc.
only or the Operating Partnership only.
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"CONCURRENT PLACEMENTS" means the FWM Placement and the QIB Placement,
collectively.
"CUSHMAN & WAKEFIELD" means Cushman & Wakefield Research Services.
"DIRECT WEIGHTED AVERAGE RENTAL RATE" means the weighted average of asking
rental rates for a particular market or submarket.
"DOL" means the United States Department of Labor.
"DOL REGULATION" means the regulation issued by the DOL defining Plan Assets
for certain purposes.
"EMPLOYEE PLAN" means the Company's 1997 Employee Stock Option and
Restricted Stock Plan.
"EQUITABLE" means The Equitable Life Assurance Society of the United States.
"ERISA" means the Employees' Retirement Income Security Act of 1974, as
amended.
"ERISA PLAN" means an employee benefit plan subject to ERISA.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCLUDED HOLDER LIMIT" means the Existing Holders' limit not exceeding 15%
in number or value of the issued and outstanding shares of Common Stock.
"EXCLUDED HOLDERS" means Bernard H. Mendik and FWM, L.P., a Texas limited
partnership, with respect to the ownership of shares of Common Stock or the
ownership of Units that either holder receives in connection with the Formation
Transactions and which may exceed the Ownership Limit immediately after the
Offering.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"FORMATION TRANSACTIONS" means the transactions described in "Structure and
Formation of the Company--Formation Transactions."
"FWM PLACEMENT" means the sale of 954,545 shares of restricted Common Stock
to FWM II, L.P.
"401(K) PLAN" means The Mendik Company Section 401(k) Savings/Retirement
Plan.
"FUNDS FROM OPERATIONS" means net income (computed in accordance with GAAP)
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after adjustments for
unconsolidated partnerships and joint ventures.
"GAAP" means generally accepted accounting principals.
"GRAND CENTRAL BID" means the Grand Central Business Improvement District
Partnership.
"INTERESTED STOCKHOLDER" means, with respect to the business combination
provisions of the MGCL, any person who beneficially owns 10% or more of the
voting power of a corporation's shares.
"INTERNATIONAL MANAGERS" means Merrill Lynch International, Bear, Stearns
International Limited, Dean Witter International Ltd., Lehman Brothers
International, PaineWebber International (U.K.) Ltd., Legg Mason Wood Walker,
Incorporated and UBS Limited.
"INTERNATIONAL OFFERING" means the concurrent offering outside the United
States and Canada of an aggregate of 1,372,500 shares of Common Stock of the
Company.
"INTERNATIONAL PURCHASE AGREEMENT" means the agreement among the Company and
the International Managers.
"INTERSYNDICATE AGREEMENT" means the agreement entered into by the U.S.
Underwriters and the International Managers providing for the coordination of
their activities.
"IRA" means an individual retirement account or annuity.
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"IRS" means the United States Internal Revenue Service.
"LAW ENGINEERING" means Law Engineering and Environmental Services, P.C.
"LINE OF CREDIT" means the revolving line of credit which the Company
expects to establish in order to facilitate acquisitions of properties and for
working capital purposes.
"LOCK-OUT PERIOD" means the period, up to 15 years following the completion
of the Offering, during which the Lock-out Provisions will be in effect.
"LOCK-OUT PROVISIONS" means the limitations on the ability of the Company to
sell, or reduce the amount of mortgage indebtedness on, three of the Properties
(Two Penn Plaza, 866 United Nations Plaza and Eleven Penn Plaza) for up to 15
years following the completion of the Offering, except in certain circumstances.
"MANAGEMENT CORPORATION" means the corporation to which the Mendik Group
will transfer its management and leasing business with respect to Properties in
which the Company has a partial ownership interest or no ownership interest.
"MANAGEMENT ENTITIES" means the Management Corporation and the Management
LLC.
"MANAGEMENT LLC" means the limited liability company to which the Mendik
Group will transfer its management and leasing business with respect to
Properties in which the Company has a 100% interest.
"MENDIK GROUP" means Mendik Realty and Messrs. Mendik and Greenbaum and the
entities affiliated with Mendik Realty, including the Property-owning entities
but excluding Mendik/FW LLC.
"MENDIK/FW LLC" means FW/Mendik REIT, L.L.C., a Delaware limited liability
company in which Messrs. Mendik and Greenbaum and two additional members of the
Company's Board of Directors have an indirect financial interest.
"MENDIK PREDECESSORS" consists of 100% of the net assets and results of
operations of three Properties (Two Penn Plaza, 1740 Broadway and 866 United
Nations Plaza), equity interests in four other Properties (Eleven Penn Plaza,
Two Park Avenue, 330 Madison Avenue and 570 Lexington Avenue) and 100% of the
net assets and results of operations of the affiliated entities which conduct
the management and leasing business of the Mendik Group.
"MENDIK REALTY" means Mendik Realty Company, Inc., a New York corporation.
"MENDIK RELP" Means Mendik Real Estate Limited Partnership, a publicly held
limited partnership that owns a 60% interest in Two Park Avenue.
"MGCL" means the Maryland General Corporation Law.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"1940 ACT" means the Investment Company Act of 1940, as amended.
"NON-ERISA PLAN" means a qualified pension, profit sharing or stock bonus
plan not subject to ERISA.
"NON-U.S. STOCKHOLDERS" means nonresident alien individuals, foreign
corporations, foreign partnerships and other foreign stockholders.
"OFFERING" means this offering of shares of Common Stock of the Company
pursuant to and as described in this Prospectus.
"OPERATING PARTNERSHIP" means The Mendik Company, L.P., a Delaware limited
partnership.
"OTHER PLANS" means an IRA and a Non-ERISA Plan.
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"OWNERSHIP LIMIT" means the ownership limit of no more than (i) 8.6% in
number or value of the outstanding shares of Common Stock or (ii) 9.8% in number
or value of outstanding shares of any series of Preferred Stock.
"PARENT ENTITY" means an entity whose stock is publicly traded and which
owns more than 50% of the capital stock of the Company.
"PARTNERSHIP AGREEMENT" means the First Amended and Restated Agreement of
Limited Partnership of the Operating Partnership, as amended from time to time.
"PCBS" means polychlorinated biphenyls.
"PENN STATION" means Pennsylvania Station (which is located in midtown
Manhattan), the busiest train station in the United States.
"PLAN ASSETS" means the assets of the Company deemed to be assets of an
ERISA Plan.
"PREFERRED STOCK" means one or more classes of Preferred Stock of the
Company as designated and issued by the Board of Directors from time to time.
"PROPERTIES" means the seven Class A properties located in midtown Manhattan
in which the Company will own interests upon completion of the Offering.
"PURCHASE AGREEMENTS" means the U.S. Purchase Agreement and the
International Purchase Agreement.
"QIB" means .
"QIB PLACEMENT" means the sale of 850,000 shares of restricted Common Stock
to .
"REIT" means a real estate investment trust as defined by Sections 856
through 860 of the Code and applicable Treasury Regulations.
"RELATED PARTY TENANT" means, for purposes of determining whether rents
received by the Company will qualify as "rents from real property" for
satisfying the gross income requirements for a REIT, a tenant in which the
Company, or an owner of 10% or more of the Company, directly or constructively
has at least a 10% ownership interest.
"RESTRICTED SHARES" means the shares of Common Stock received by the
participants in the Formation Transactions or acquired by any participant in the
Formation Transactions as a result of the redemption of Units.
"RMB REALTY" means RMB Realty, Inc., a Texas corporation.
"ROSEN MARKET REPORT" means the report commissioned by the Company and
prepared by the Rosen Consulting Group, a nationally known real estate
consulting company.
"SECTION 704(C) REGULATIONS" means the regulations promulgated by the IRS
under Section 704(c) of the Code.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"34TH STREET BID" means the 34th Street Business Improvement District
Partnership.
"TREASURY REGULATIONS" means the regulations promulgated by the IRS under
the Code.
"TRUSTEE" means the trustee appointed by the Company, but not affiliated
with the Company, who will name a charitable trust for the benefit of a
charitable organization to receive any shares of Common Stock purportedly
transferred to a stockholder in violation of the applicable Ownership Limit or
Existing Holder Limit.
"UBTI" means unrelated business taxable income.
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"UNDERWRITERS" means the underwriters of the Offering for whom the
International Managers and the U.S. Underwriters are acting as representatives.
"UNITS" means units of partnership interest in the Operating Partnership.
"UPREIT" means a REIT conducting business through a partnership.
"U.S. OFFERING" means the public offering in the United States and Canada of
an aggregate of 7,777,500 shares of Common Stock of the Company.
"U.S. PURCHASE AGREEMENT" means the agreement among the Company and the U.S.
Underwriters.
"U.S. REPRESENTATIVES" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Bear, Stearns & Co. Inc., Dean Witter Reynolds Inc., Lehman
Brothers Inc., PaineWebber Incorporated, Legg Mason Wood Walker, Incorporated
and UBS Securities LLC.
"U.S. UNDERWRITERS" means the underwriters in the United States and Canada.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
THE MENDIK COMPANY, INC.
Pro Forma Combined Financial Statements (unaudited).................................. F-2
Pro Forma Combined Balance Sheet as of September 30, 1996.......................... F-3
Pro Forma Combined Statement of Income for the Nine Months Ended September 30,
1996............................................................................. F-4
Pro Forma Combined Statement of Income for the Year Ended December 31, 1995........ F-5
Notes to Pro Forma Combined Financial Statements................................... F-6
Historical
Report of Independent Auditors..................................................... F-10
Balance Sheet as of September 30, 1996............................................. F-11
Notes to Balance Sheet............................................................. F-12
THE MENDIK PREDECESSORS
Combined Financial Statements:
Report of Independent Auditors..................................................... F-15
Combined Balance Sheets as of September 30, 1996 (unaudited) and
December 31, 1995 and 1994....................................................... F-16
Combined Statements of Income for the Nine Months Ended September 30, 1996 and 1995
(unaudited) and the Years Ended December 31, 1995, 1994 and 1993................. F-17
Combined Statements of Owners' Equity for the Nine Months Ended September 30, 1996
(unaudited) and the Years Ended December 31, 1995, 1994 and 1993................. F-18
Combined Statements of Cash Flows for the Nine Months Ended September 30, 1996 and
1995 (unaudited) and the Years Ended December 31, 1995, 1994 and 1993............ F-19
Notes to the Combined Financial Statements......................................... F-20
Schedule III:
Real Estate and Accumulated Depreciation as of December 31, 1995................... F-31
</TABLE>
F-1
<PAGE>
THE MENDIK COMPANY, INC.
PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The unaudited pro forma financial and operating information as of September
30, 1996 and for the nine months ended September 30, 1996 and 1995 and the year
ended December 31, 1995 is presented as if the Offering and the Formation
Transactions consisting of three Office Property Entities (1740 Broadway, 866
U.N. Plaza and Two Penn Plaza), the Management Corporation and interests in four
partnerships all had occurred on September 30, 1996 with respect to the combined
balance sheet and at the beginning of each of the periods presented for the
combined statements of income. The pro forma records acquisitions of non-sponsor
interests at the purchase price of the interests and records contributed
interests at historical carryover basis of the contributing partners. The pro
forma September 30, 1996 balance sheet information also gives effect to the
recording of minority interests for Operating Partnership Units, as if these
transactions occurred on September 30, 1996.
The pro forma financial statements do not purport to represent what the
Company's financial position or results of operations would have been assuming
the completion of the Formation Transactions and the Offering on such date or at
the beginning of the period indicated, nor do they purport to project the
Company's financial position or results of operations at any future date or for
any future period.
F-2
<PAGE>
THE MENDIK COMPANY, INC.
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELIMINATION OF
HISTORICAL MANAGEMENT
MENDIK COMPANIES PRO FORMA COMPANY
PREDECESSORS (A) ADJUSTMENTS PRO FORMA
------------ -------------- ------------- ---------
<S> <C> <C> <C> <C>
ASSETS
Commercial real estate properties, at cost
Land................................................ $ 30,814 $-- $ 13,414
(20,372) $ 23,856
Building and improvements........................... 234,629 -- 61,568
(93,464) 202,733
Equipment, automobiles, furniture and fixtures...... 6,245 (4,502) (41) 1,702
------------ -------------- ------------- ---------
271,688 (4,502) (38,895) 228,291
Less--Accumulated depreciation.................... 119,719 (3,711) (17,171) 98,837
------------ -------------- ------------- ---------
151,969 (791) (21,724)(B) 129,454
Cash and available-for-sale securities................ 46,855 (1,640) (91,804)(B)
214,820(C)
(6,630)(D)
(90,879)(E)
(29,851)(F)
(2,200)(G) 38,671
Receivables........................................... 6,122 (2,016) -- 4,106
Related party receivable.............................. 2,336 -- -- 2,336
Deferred rents receivable............................. 26,097 -- (8,408)(B) 17,689
Prepaid expenses...................................... 5,725 (62) -- 5,663
Investment in partnerships............................ 19,081 -- (1,644)(B) 17,437
Tenant acquisition costs.............................. 7,191 -- (7,139)(B) 52
Deferred lease fees and loan costs, net............... 13,848 (677) (2,235)(H)
1,130(D)
(5,052)(B) 7,014
Security deposits..................................... 1,570 -- -- 1,570
Investment in management corporation.................. -- -- 791(J) 791
Note receivable from management -- -- -- --
corporation.........................................
------------ -------------- ------------- ---------
$280,794 $(5,186) $(50,825) $ 224,783
------------ -------------- ------------- ---------
------------ -------------- ------------- ---------
LIABILITIES AND EQUITY
Liabilities
Mortgage notes payable.............................. $208,879 $-- $(95,879)(E) $ 113,000
Tenant acquisition costs payable.................... 5,249 -- (537)(B) 4,712
Accounts payable and accrued expenses............... 8,800 (145) -- 8,655
Accounts payable to related parties................. 250 -- -- 250
Excess of distributions and share of losses 10,610 -- -- 10,610
over investments in partnership...................
Deferred rents...................................... 289 -- -- 289
Security deposits................................... 1,663 -- -- 1,663
------------ -------------- ------------- ---------
235,740 (145) (96,416) 139,179
Minority interest in Operating Partnership............ -- -- 32,367(I) 32,367
Equity................................................ 45,054 (5,041) (135,234)(B) 53,237
5,000(E)
(2,200)(G)
214,820(C)
(5,500)(D)
(2,235)(I)
(32,367)(I)
(29,851)(F)
791(J)
------------ -------------- ------------- ---------
$280,794 $(5,186) $(50,825) $ 224,783
------------ -------------- ------------- ---------
------------ -------------- ------------- ---------
</TABLE>
F-3
<PAGE>
THE MENDIK COMPANY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ELIMINATION
HISTORICAL OF
MENDIK MANAGEMENT PRO FORMA COMPANY
PREDECESSORS COMPANIES (K) ADJUSTMENTS PRO FORMA
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues
Rental revenue................................... $51,706 $ (32) $ 1,146(R) $ 52,820
Escalation and reimbursement revenues............ 8,252 -- -- 8,252
Construction revenues from affiliates............ 45 (45) -- --
Management revenues.............................. 3,013 (3,013) -- --
Leasing commissions.............................. 958 (958) -- --
Investment income................................ 1,282 (9) 495(L) 1,768
Equity in net income of management corporation... -- -- 617(N) 617
Equity in net income of investees................ 1,585 -- 1,020(Q) 2,605
------------ ------------- ------------- ------------
Total operating revenues........................... 66,841 (4,057) 3,278 66,062
------------ ------------- ------------- ------------
Expenses
Operating expenses............................... 15,958 (38) 105(M) 16,025
Real estate taxes................................ 10,975 -- -- 10,975
Rent expense to an affiliate..................... 519 -- -- 519
Interest......................................... 11,782 -- (5,637)( O ) 6,145
Depreciation and amortization.................... 8,356 (146) (2,291)(P) 5,919
Marketing, general and administrative............ 4,209 (3,170) 113(S) 1,152
------------ ------------- ------------- ------------
51,799 (3,354) (7,710) 40,735
------------ ------------- ------------- ------------
Income before minority interests................... $15,042 $ (703) 10,988 25,327
------------ -------------
------------ -------------
Minority interest in Operating Partnership......... (9,576)(T) (9,576)
------------- ------------
Net income......................................... $ 1,412 $ 15,751
------------- ------------
------------- ------------
Pro Forma Common Shares Outstanding Before
Conversion of Operating Partnership units........ 11,194,000
------------
------------
Income Per Share................................... $ 1.41
------------
------------
</TABLE>
F-4
<PAGE>
THE MENDIK COMPANY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ELIMINATION
HISTORICAL OF
MENDIK MANAGEMENT PRO FORMA COMPANY
PREDECESSORS COMPANIES (K) ADJUSTMENTS PRO FORMA
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues
Rental revenue................................... $48,859 $ (33) $ 1,110(R) $ 49,936
Escalation and reimbursement revenues............ 8,688 -- -- 8,688
Construction revenues from affiliates............ 134 (134) -- --
Management revenues.............................. 3,968 (3,968) -- --
Leasing commissions.............................. 588 (588) -- --
Investment income................................ 1,346 (56) 495(L) 1,785
Equity in net income of management corporation... -- -- 466(N) 466
Equity in net income of investees................ 1,753 -- 1,375(Q) 3,128
------------ ------------- ------------- ------------
Total operating revenues........................... 65,336 (4,779) 3,446 64,003
------------ ------------- ------------- ------------
Expenses
Operating expenses............................... 15,581 (44) (3)(M) 15,534
Real estate taxes................................ 11,538 -- -- 11,538
Rent expense to an affiliate..................... 490 -- -- 490
Interest......................................... 12,167 -- (6,022)( O ) 6,145
Depreciation and amortization.................... 8,418 (135) (2,219)(P) 6,064
Marketing, general and administrative............ 4,665 (3,282) 113(S) 1,496
------------ ------------- ------------- ------------
52,859 (3,461) (8,131) 41,267
------------ ------------- ------------- ------------
Income before minority interests................... $12,477 $(1,318) 11,577 22,736
------------ -------------
------------ -------------
Minority interest in Operating Partnership......... (8,596)(T) (8,596)
------------- ------------
Net income......................................... $ 2,981 $ 14,140
------------- ------------
------------- ------------
Pro Forma Common Shares Outstanding Before
Conversion of Operating Partnership units........ 11,194,000
------------
------------
Income Per Share................................... $ 1.26
------------
------------
</TABLE>
F-5
<PAGE>
THE MENDIK COMPANY, INC.
PRO FORMA COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ELIMINATION
HISTORICAL OF
MENDIK MANAGEMENT PRO FORMA COMPANY
PREDECESSORS COMPANIES (K) ADJUSTMENTS PRO FORMA
------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues
Rental revenue................................... $65,050 $ (40) $ 994(R) $ 66,004
Escalation and reimbursement revenue............. 11,668 -- -- 11,668
Construction revenues from affiliates............ 204 (204) -- --
Management revenues.............................. 5,671 (5,671) -- --
Leasing commissions.............................. 754 (754) -- --
Investment income................................ 2,096 (58) 660(L) 2,698
Equity in net income of management
corporation.................................... -- -- 790(N) 790
Equity in income of investees.................... 4,138 -- 2,014(Q) 6,152
------------ ------------- ----------- ------------
Total operating revenues........................... 89,581 (6,727) 4,458 87,312
------------ ------------- ----------- ------------
Expenses
Operating expenses............................... 20,524 (48) 149(M) 20,625
Real estate taxes................................ 15,281 -- -- 15,281
Rent expense to an affiliate..................... 657 -- -- 657
Interest......................................... 16,247 -- (8,054)(O) 8,193
Depreciation and amortization.................... 11,305 (247) (3,066)( P ) 7,992
Marketing, general and administrative............ 6,485 (4,542) 150(S) 2,093
------------ ------------- ----------- ------------
70,499 (4,837) (10,821) 54,841
------------ ------------- ----------- ------------
Income before minority interest.................... $19,082 $(1,890) 15,279 32,471
------------ -------------
------------ -------------
Minority interest in Operating Partnership......... (12,277)(T) (12,277)
----------- ------------
Net income......................................... $ 3,002 $ 20,194
----------- ------------
----------- ------------
Pro forma Common Shares Outstanding Before
Conversion of Operating Partnership units........ 11,194,000
------------
------------
Income Per Share................................... $ 1.80
------------
------------
</TABLE>
F-6
<PAGE>
THE MENDIK COMPANY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS)
1--ADJUSTMENTS TO THE PRO FORMA COMBINED BALANCE SHEET
The adjustments to the Pro Forma Condensed Combined Balance Sheet as of
September 30, 1996 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
(A) To reflect adjustments required to record the Company's investments in the
Management Corporation under the equity method of accounting as a result of
non-controlling interests held after the formation transactions. See (J)
below.
(B) Acquisition of non-continuing partners interests in 1740 Broadway, 2 Park
Avenue and 570 Lexington Avenue properties recorded at their cash purchase
price:
PARTNERS NET REDUCTION
SHARE OF OF HISTORIC
PURCHASE BOOK CARRYING
PRICE VALUE VALUE
----------- --------- -------------
1740 BROADWAY
Property and improvements.................................... $ 74,982 $ 96,706 $ 21,724
Tenant acquisition costs..................................... 7,139 7,139
Deferred lease fees and loan costs........................... 5,052 5,052
Deferred rents receivable.................................... 8,408 8,408
2 PARK AVENUE AND 570 LEXINGTON AVENUE
Investment in partnership.................................... 16,285 17,929 1,644
----------- --------- -------------
Total cash purchase price/book value......................... 91,267 $ 135,234 $ 43,967
--------- -------------
--------- -------------
Payment of tenant acquisition cost payable relating to
acquisition of 1740 Broadway............................... 537
-----------
Total cash payments.......................................... $ 91,804
-----------
-----------
</TABLE>
<TABLE>
<S> <C> <C>
(C) Sale of 10,954,545 shares of common stock in the offering and concurrent
offerings:
Proceeds from offering........................................................ $ 241,000
Costs associated with offering and formation transactions..................... (26,180)
---------
$ 214,820
---------
---------
(D) Refinancing of existing debt
Costs associated with new debt origination.................................... $ (1,130)
Interest rate swap breakage fees arising from repayment of debt in the
formation transaction....................................................... (5,500)
---------
$ (6,630)
---------
---------
(E) Reduction of certain mortgage loans
Payment of mortgage loans..................................................... $ 90,879
Partial forgiveness of debt repaid............................................ 5,000
---------
$ 95,879
---------
---------
(F) Preformation distributions of excess working capital to the partners/owners of
The Mendik Predecessors..................................................... $ 29,851
---------
---------
(G) Cash distributed in connection with acquisition of stock and note receivable
from management corporation (See (J) below)................................... $ 2,200
---------
---------
(H) Write off deferred loan fees relating to mortgages to be repaid............... $ (2,235)
---------
---------
</TABLE>
F-7
<PAGE>
THE MENDIK COMPANY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
1--ADJUSTMENTS TO THE PRO FORMA COMBINED BALANCE SHEET (CONTINUED)
<TABLE>
<S> <C> <C>
(I) To establish minority interests
</TABLE>
<TABLE>
<CAPTION>
UNITS/SHARES %
------------ ---------
<S> <C> <C> <C>
Units issued to continuing investors................................................. 6,805,682 37.81%
Common stock issued to new and continuing investors.................................. 11,194,318 62.19
------------ ---------
18,000,000 100%
------------ ---------
------------ ---------
Total equity and minority interest................................................... $ 85,604
Percentage applicable to units issued................................................ 37.81%
---------
Minority interest.................................................................... $ 32,367
---------
---------
</TABLE>
<TABLE>
<S> <C> <C>
(J) Investments in stock of management corporation
To reflect investment in nonvoting common stock representing the book value of
equipment transferred to management corporation accounted for on the equity
method........................................................................ $ 791
---------
---------
</TABLE>
2-- ADJUSTMENTS TO THE PRO FORMA COMBINED STATEMENTS OF INCOME
<TABLE>
<S> <C> <C>
(K) To reflect adjustments required to record the Company's investments in the
Management Corporation under the equity method of accounting as a result of
noncontrolling interests held after the formation transactions. See (N)
below.
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1995 1995
------------- ------------ -------------
<S> <C> <C> <C> <C>
(L) Investment income
Interest income from notes receivable from Management
Corporation.................................................. $ 495 $ 660 $ 495
------------- ------------ -------------
------------- ------------ -------------
(M) Increase in operating expenses
Net increase in cleaning expense due to contract changes....... $ 105 $ 149 $ (3)
------------- ------------ -------------
------------- ------------ -------------
(N) Equity in proforma net income of Management Corporation after
adjustments principally for elimination of nonrecurring
officer's bonuses, reduction for income taxes and interest
expense incurred on the note payable to the Company (see (L)
above) and elimination in 1995 of nonrecurring management fee
income....................................................... $ 617 $ 790 $ 466
------------- ------------ -------------
------------- ------------ -------------
(O) Decrease in interest expense
Decrease in interest expense due to repayments of loans........ $ (11,782) $ (16,247) $ (12,167)
Increase in interest expense related to the newly originated
debt......................................................... 6,145 8,193 6,145
------------- ------------ -------------
$ (5,637) $ (8,054) $ (6,022)
------------- ------------ -------------
------------- ------------ -------------
(P) Decrease in depreciation and amortization
</TABLE>
F-8
<PAGE>
THE MENDIK COMPANY, INC.
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
2-- ADJUSTMENTS TO THE PRO FORMA COMBINED STATEMENTS OF INCOME (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 1995 1995
------------- ------------ -------------
<S> <C> <C> <C> <C>
Decrease in depreciation and amortization due to the book value
in excess of purchase price of partners' interests relating
to 1740 Broadway property.................................... $ (1,742) $ (2,410) $ (1,742)
Net decrease for loan fee amortization related to the original
debt......................................................... (670) (817) (598)
Increase for amortization of new loan costs.................... 121 161 121
------------- ------------ -------------
$ (2,291) $ (3,066) $ (2,219)
------------- ------------ -------------
------------- ------------ -------------
(Q) Increase in equity in net income of investors
Reduction of financing costs--Two Park Avenue property......... $ 84 $ 196 $ 58
Decrease in interest expense due to refinancing of Two Park
Avenue property debt......................................... 1,956 3,009 2,282
Increase in interest expense due to newly originated Two Park
Avenue property debt......................................... (1,414) (1,885) (1,414)
Decrease in depreciation--Two Park Avenue property............. 43 58 43
Increase in depreciation--570 Lexington Avenue
property..................................................... (13) (18) (13)
Decrease in interest expense due to refinancing of Eleven Penn
Plaza property debt.......................................... 2,659 3,604 2,714
Increase in interest expense due to newly originated Eleven
Penn Plaza property debt..................................... (2,358) (3,141) (2,358)
Reduction of financing costs--Eleven Penn Plaza
property..................................................... 63 191 63
------------- ------------ -------------
$ 1,020 $ 2,014 $ 1,375
------------- ------------ -------------
------------- ------------ -------------
(R) Rental revenue
Adjustment of straight-line income resulting from the
application of the purchase method of accounting for the
purchase of partners' interests related to 1740 Broadway
property..................................................... $ 1,146 $ 994 $ 1,110
------------- ------------ -------------
------------- ------------ -------------
(S) Marketing general and administrative expenses
Net increase in REIT marketing general and administrative
expenses..................................................... $ 113 $ 150 $ 113
------------- ------------ -------------
------------- ------------ -------------
(T) Minority interest in Operating Partnership
Net income before minority interest............................ $ 25,327 $ 32,471 $ 22,736
Continuing investors' minority interest in the Company......... 37.810% 37.810% 37.810%
------------- ------------ -------------
$ 9,576 $ 12,277 $ 8,596
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
F-9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
The Mendik Company, Inc.
We have audited the accompanying balance sheet of The Mendik Company Inc.,
as of September 30, 1996. This balance sheet is the responsibility of the
management of The Mendik Company, Inc. 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 financial statement. 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 presents fairly, in all material respects,
the financial position of The Mendik Company, Inc. as of September 30, 1996 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
November 6, 1996
F-10
<PAGE>
THE MENDIK COMPANY, INC.
BALANCE SHEET
(NOTE 1)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
ASSETS
Cash (NOTE 2)...................................................................................... $ 510,000
-------------
Total assets....................................................................................... $ 510,000
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Commitments and contingencies (NOTE 4)............................................................. $ --
Common stock, $.01 par value, 90,000,000 shares authorized, 10,000 shares issued and outstanding
(NOTE 3)......................................................................................... --
Paid in capital.................................................................................... 500,000
Retained earnings (NOTE 3)......................................................................... 10,000
-------------
Total liabilities and stockholders' equity......................................................... $ 510,000
-------------
-------------
</TABLE>
See accompanying notes.
F-11
<PAGE>
THE MENDIK COMPANY, INC.
NOTES TO BALANCE SHEET
SEPTEMBER 30, 1996
1. ORGANIZATION AND FORMATION TRANSACTIONS
The Mendik Company, Inc. (the "Company") is a Maryland corporation whose
predecessor was incorporated in December 1995 to continue, through The Mendik
Company, L.P. (the "Operating Partnership") and other companies (the "Subsidiary
Companies"), the ownership, development, acquisition, leasing and management
operations of certain office property entities and affiliated real estate
management and leasing entities under common control ("The Mendik Company").
Subject to approval by the owners of The Mendik Predecessors, pursuant to a
certain Confidential Solicitation of Consents and Private Placement Memorandum,
the Company intends to file a Registration Statement on Form S-11 with the
Securities and Exchange Commission with respect to an initial public offering of
common stock (the "Offering"). In addition, the Company may enter into: (i) one
or more concurrent private placements, (ii) various refinancing transactions and
(iii) a line of credit agreement to facilitate future acquisitions and to
finance leasing and capital improvement expenditures. The Company intends to
qualify and will elect to be taxed as a real estate investment trust ("REIT")
for federal income tax purposes for the period ending December 31, 1997. To
maintain qualification as a REIT the Company must, among other things,
distribute to its stockholders at least 95% of its REIT taxable income. The
Company will be self-administered and self-managed and will conduct all of its
business activities through the Operating Partnership and the Subsidiary
Companies. The Company, which will be the sole general partner of the Operating
Partnership, will have control over the management of the Operating Partnership.
In addition, the Operating Partnership will own substantially all of the
economic interests in the Subsidiary Companies.
The following related transactions are expect to occur in connection with
the Offering:
- The Company will contribute the net proceeds from the Offering to the
Operating Partnership in exchange for Units in the Operating Partnership.
- The Operating Partnership will acquire 100% of the ownership interests in
three properties from The Mendik Predecessors. Two of the properties (Two
Penn Plaza and 866 United Nations Plaza) will be obtained in exchange for
Units in the Operating Partnership and common stock of the Company.
Certain non sponsors' interests in the third property (1740 Broadway)
will be acquired for cash and the remaining interests will be acquired in
exchange for Units in the Operating Partnership. The interests acquired
in exchange for Units or common stock from continuing investors will be
recorded at carryover basis and interests acquired in exchange for cash
will be recorded at the purchase price.
- The Operating Partnership will also acquire interests in four
partnerships that own interests in four additional properties that are
currently managed by The Mendik Predecessors. Interests in two of the
partnerships (Eleven Penn Plaza Company and 330 Madison Company) will be
acquired in exchange for Units in the Operating Partnership. Certain non
sponsors' interests in the other two partnerships (570 Lexington Company,
L.P. and Two Park Company) will be acquired for cash and the remaining
interests will be acquired in exchange for Units in the Operating
Partnership. The interests acquired in exchange for Units from continuing
investors will be recorded at carryover basis and interests acquired in
exchange for cash will be recorded at the purchase price.
F-12
<PAGE>
THE MENDIK COMPANY, INC.
NOTES TO BALANCE SHEET (CONTINUED)
SEPTEMBER 30, 1996
1. ORGANIZATION AND FORMATION TRANSACTIONS (CONTINUED)
- The Operating Partnership will acquire substantially all of the economic
interests in the Subsidiary Companies which currently conduct The Mendik
Predecessors' office management and leasing businesses.
- The Operating Partnership will repay or refinance, in full or part,
certain indebtedness secured by the properties and will enter into a line
of credit agreement.
- The remaining cash from the Offering will be used to establish an initial
reserve for leasing costs and capital expenditures and general working
capital needs.
The actual amount of net proceeds, the per share selling price of the common
stock and the number of shares of common stock that may be sold in the Offering
will not be determined until the consummation of the Offering. As a result, the
number of Units the Company would own of the Operating Partnership or the
Company's ownership percentage of the Operating Partnership cannot be determined
until such Offering is completed.
2. CASH
All of the Company's cash is deposited in an interest bearing checking
account at one bank which is insured by the Federal Deposit Insurance
Corporation up to $100,000.
3. STOCKHOLDERS' EQUITY
COMMON STOCK
The authorized capital stock of the Company will consist of 100,000,000
shares of capital stock, $.01 par value, of which 90,000,000 shares initially
will be designated as shares of Common Stock. Under the Company's Charter, the
Board of Directors will have authority to issue, without any further action by
the stockholders, shares of capital stock in one or more series having such
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption as the Board of Directors may determine.
RETAINED EARNINGS
The Company has not engaged in any operations from inception in 1995 through
September 30, 1996. Retained earnings on the accompanying balance sheet at
September 30, 1996 represents interest earned from inception (December 1995) to
September 30, 1996 on cash on deposit at a bank (see Note 2).
4. COMMITMENTS AND CONTINGENCIES
STOCK OPTION AND RESTRICTED STOCK PLANS AND INCENTIVE COMPENSATION PLAN
The Company intends to adopt stock option and restricted stock plans
designed to attract, retain and motivate executive officers of the Company and
other key employees. The plans will authorize the issuance of shares of Common
Stock pursuant to options granted under the plans. In addition, the plans will
F-13
<PAGE>
THE MENDIK COMPANY, INC.
NOTES TO BALANCE SHEET (CONTINUED)
SEPTEMBER 30, 1996
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
authorize issuance of restricted shares of Common Stock at no cost to employees,
with such vesting requirements as the Compensation Committee of the Board of
Directors determines to be advisable.
The Company intends to establish an incentive compensation plan for key
officers of the Company and its subsidiaries and affiliates. This plan will
provide for payment of cash bonuses to participating officers after evaluating
the officer's performance and the overall performance of the Company. The
Compensation Committee of the Board of Directors will make the determination for
the award of bonuses.
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation" establishes a fair value method of accounting for
stock-based compensation, such as option plans, but does not require that the
new method be adopted. The Company may elect to follow the methodology in APB
Opinion No. 25, "Accounting for Stock Issued to Employees", whereby the
compensation expense is measured as the difference between the exercise price of
the option and the stock price on the measurement date with the fair value of
options disclosed in the footnotes in the financial statements. SFAS No. 123 is
not expected to adversely affect the Company's future reported results.
F-14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners, Members and Stockholders of
The Mendik Predecessors
We have audited the accompanying combined balance sheets of The Mendik
Predecessors as of December 31, 1995 and 1994, and the related combined
statements of income, owners' equity and cash flows for each of the three years
in the period ended December 31, 1995. We have also audited the financial
statement schedule listed on the Index to Financial Statements included in the
Prospectus. These financial statements and financial statement schedule are the
responsibility of The Mendik Predecessors' management. Our responsibility is to
express an 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 audit 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
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of The Mendik
Predecessors at December 31, 1995 and 1994, and the combined results of their
operations and cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be set
forth therein.
Ernst & Young LLP
New York, New York
June 14, 1996, except for the last
paragraph of Note 8, which is
as of January 14, 1997
F-15
<PAGE>
THE MENDIK PREDECESSORS
COMBINED BALANCE SHEETS
(NOTE 1)
<TABLE>
<CAPTION>
(UNAUDITED) DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994
------------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Commercial real estate properties, at cost (NOTE 4)
Land.................................................................... $ 30,814 $ 30,814 $ 30,814
Buildings and improvements.............................................. 234,629 230,701 222,864
Equipment, autos, furniture and fixtures................................ 6,245 6,235 6,301
------------- ---------- ----------
271,688 267,750 259,979
Less accumulated depreciation........................................... 119,719 113,668 105,350
------------- ---------- ----------
151,969 154,082 154,629
Cash and cash equivalents............................................... 14,181 11,899 14,320
Restricted cash......................................................... 5,943 -- --
Available-for-sale securities (NOTE 1).................................. 26,731 19,863 18,114
Receivables............................................................. 6,122 5,057 4,336
Related party receivables............................................... 2,336 3,817 4,136
Deferred rents receivable (NOTE 6)...................................... 26,097 26,176 26,069
Prepaid expenses........................................................ 5,725 283 4,223
Investment in partnerships (NOTE 2)..................................... 19,081 22,280 21,962
Tenant acquisition costs (NOTE 3)....................................... 7,191 7,670 8,309
Deferred lease fees and loan costs, less accumulated
amortization of $16,717 (1996), $14,659 (1995) and $12,564
(1994)................................................................ 13,848 10,903 8,466
Security deposits....................................................... 1,570 1,678 1,588
------------- ---------- ----------
Total assets.............................................................. $ 280,794 $ 263,708 $ 266,152
------------- ---------- ----------
------------- ---------- ----------
LIABILITIES AND OWNERS' EQUITY
Mortgage notes payable (NOTE 4)......................................... $ 208,879 $ 208,829 $ 208,891
Tenant acquisition costs payable (NOTE 3)............................... 5,249 6,290 7,284
Accounts payable and accrued expenses................................... 8,800 4,580 4,813
Accounts payable to related parties..................................... 250 595 442
Excess of distributions and share of losses over investments in
partnership (NOTE 2).................................................. 10,610 6,847 10,607
Deferred rents.......................................................... 289 178 233
Security deposits....................................................... 1,663 1,771 1,681
------------- ---------- ----------
Total liabilities......................................................... 235,740 229,090 233,951
Owners' equity............................................................ 45,054 34,618 32,201
------------- ---------- ----------
Commitments and other comments (NOTES 5, 6 AND 8)
Total liabilities and owners' equity...................................... $ 280,794 $ 263,708 $ 266,152
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
See accompanying notes.
F-16
<PAGE>
THE MENDIK PREDECESSORS
COMBINED STATEMENTS OF INCOME
(NOTE 1)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues
Rental revenue (NOTE 6)...................... $ 51,706 $ 48,859 $ 65,050 $ 65,176 $ 63,826
Escalation and reimbursement revenues (NOTE
6)......................................... 8,252 8,688 11,668 11,331 13,385
Construction revenues from affiliates........ 45 134 204 130 107
Management revenues, including $2,722 and
$3,575 (nine months ended September 30,
1996 and 1995, respectively), $5,173
(1995), $4,641 (1994) and $3,671 (1993)
from affiliates............................ 3,013 3,968 5,671 5,061 4,160
Leasing commissions, including $524 and $406
(nine months ended September 30, 1996 and
1995, respectively), $555 (1995), $1,929
(1994) and $979 (1993) from affiliates..... 958 588 754 1,995 1,219
Investment income............................ 1,282 1,346 2,096 1,357 1,263
Equity in net income of investees (NOTE 2)... 1,585 1,753 4,138 1,307 751
--------- --------- --------- --------- ---------
Total revenues................................. 66,841 65,336 89,581 86,357 84,711
--------- --------- --------- --------- ---------
Expenses
Operating expenses, including $7,643 and
$7,426 (nine months ended September 30,
1996 and 1995, respectively), $10,251
(1995), $9,350 (1994), and $9,548 (1993) to
affiliates................................. 15,958 15,581 20,524 20,382 20,512
Real estate taxes............................ 10,975 11,538 15,281 15,276 15,598
Rent expense to affiliates................... 519 490 657 622 633
Interest (NOTE 4)............................ 11,782 12,167 16,247 16,121 16,749
Depreciation and amortization................ 8,356 8,418 11,305 10,788 11,290
Marketing, general and administrative........ 4,209 4,665 6,485 6,350 5,689
--------- --------- --------- --------- ---------
Total expenses................................. 51,799 52,859 70,499 69,539 70,471
--------- --------- --------- --------- ---------
Net income..................................... $ 15,042 $ 12,477 $ 19,082 $ 16,818 $ 14,240
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-17
<PAGE>
THE MENDIK PREDECESSORS
COMBINED STATEMENTS OF OWNERS' EQUITY
(NOTE 1)
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
BALANCE AT JANUARY 1, 1993 (MARCH 31, 1993 AS TO TWO PENN PLAZA ASSOCIATES L.P. AND 1740 BROADWAY
ASSOCIATES, L.P.)............................................................................... $ 22,829
Owners' (distributions)....................................................................... (9,880)
Owners' contributions......................................................................... 38
Net income for the year ended December 31, 1993............................................... 14,240
-------
BALANCE AT DECEMBER 31, 1993 (MARCH 31, 1994 AS TO TWO PENN PLAZA ASSOCIATES L.P. AND 1740
BROADWAY ASSOCIATES, L.P.)...................................................................... 27,227
Adjustment for change in fiscal year (NOTE 1)................................................. (3,655)
-------
Balance at December 31, 1993.................................................................. 23,572
Owners' (distributions)....................................................................... (8,698)
Owners' contributions......................................................................... 920
Unrealized loss on available-for-sale securities.............................................. (411)
Net income for the year ended December 31, 1994............................................... 16,818
-------
BALANCE AT DECEMBER 31, 1994.................................................................... 32,201
Owners' (distributions)......................................................................... (18,190)
Owners' contributions........................................................................... 893
Adjustment to unrealized loss on available-for-sale securities.................................. 632
Net income for the year ended December 31, 1995................................................. 19,082
-------
BALANCE AT DECEMBER 31, 1995...................................................................... 34,618
Owners' (distributions) (Unaudited)............................................................. (4,539)
Owners' contributions (Unaudited)............................................................... 163
Adjustment to unrealized gain on available-for-sale securities (Unaudited)...................... (230)
Net income for the nine months ended September 30, 1996 (Unaudited)............................. 15,042
-------
BALANCE AT SEPTEMBER 30, 1996 (UNAUDITED)......................................................... $ 45,054
-------
-------
</TABLE>
See accompanying notes.
F-18
<PAGE>
THE MENDIK PREDECESSORS
COMBINED STATEMENTS OF CASH FLOWS
(NOTE 1)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net Income.............................................. $ 15,042 $ 12,477 $ 19,082 $ 16,818 $ 14,240
Adjustments:
Depreciation and amortization......................... 8,356 8,418 11,305 10,788 11,290
Equity in net income of investees..................... (1,585) (1,753) (4.138) (1,307) (751)
Deferred rents receivable............................. (213) (5) 304 (782) (3,453)
Changes in operating assets and liabilities:
Restricted cash....................................... (5,943) -- -- -- --
Receivables........................................... (983) 410 (803) 97 (2,546)
Related party receivables............................. 1,362 1,239 319 (2,454) (401)
Tenant acquisition costs.............................. -- -- -- (160) (1,707)
Prepaid expenses...................................... (5,442) (5,452) 340 5,509 (144)
Deferred lease fees................................... (3,609) (881) (1,179) (1,827) (1,089)
Accrued interest receivable........................... (187) (335) 13 (157) (11)
Tenant acquisition costs payable...................... (1,041) (517) (994) (757) 16
Accounts payable and accrued expenses................. 3,478 3,007 (51) (1,877) (215)
Accounts payable to related parties................... (432) (57) 153 350 70
Deferred rents........................................ 111 120 (55) (641) 527
Security deposits..................................... 108 (1) (90) (72) (209)
Security deposits payable............................. (108) 1 90 72 169
--------- --------- --------- --------- ---------
Net cash provided by operating activities............... 8,914 16,671 24,296 23,600 15,786
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Additions to land, buildings and improvements........... (3,838) (3,411) (7,886) (8,142) (3,632)
Purchases of equipment, autos, furniture and fixtures... (124) (43) (60) (144) (424)
Contributions to partnership investments................ (864) (327) (587) (339) --
Distributions from partnership investments.............. 1,340 646 646 646 646
Proceeds from sales of securities....................... 18,270 13,258 36,201 22,936 34,474
Purchases of securities................................. (17,021) (28,941) (37,331) (22,738) (36,013)
--------- --------- --------- --------- ---------
Net cash used in investing activities................... (2,237) (18,818) (9,017) (7,781) (4,949)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Proceeds from mortgage notes payable.................... 50 -- -- -- 4,000
Payments of mortgage notes payable...................... -- (50) (62) (67) (3,899)
Cash distributions to owners............................ (4,539) (6,353) (18,190) (8,698) (9,880)
Cash contributions from owners.......................... 163 -- 893 920 38
Adjustment for change in fiscal year.................... -- -- -- (3,655) --
Deferred loan costs..................................... (69) (3,928) (3,941) (61) (64)
Deferred loan costs--escrow............................. -- 3,600 3,600 (3,600) --
--------- --------- --------- --------- ---------
Net cash used in financing activities................... (4,395) (6,731) (17,700) (15,161) (9,805)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents.... 2,282 (8,878) (2,421) 658 1,032
Cash and cash equivalents at beginning of period........ 11,899 14,320 14,320 13,662 12,630
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period.............. $ 14,181 $ 5,442 $ 11,899 $ 14,320 $ 13,662
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental cash flow disclosures
Interest paid......................................... $ 8,944 $ 9,147 $ 16,131 $ 16,221 $ 16,619
Income taxes paid..................................... 68 295 345 23 157
Supplemental disclosure of noncash transactions
Receipt of available-for-sale debt securities from
equity investee....................................... $ 8,160 $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-19
<PAGE>
THE MENDIK PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Mendik Predecessors are engaged in the ownership, management, operation,
leasing and development of real estate office properties (collectively, the
"Properties") located in the borough of Manhattan in New York City.
PRINCIPLES OF COMBINATION
The Mendik Predecessors are not legal entities but rather a combination of
real estate properties and interests in entities (see Note 2) that are organized
as partnerships and a limited liability company and affiliated real estate
management and leasing entities. All significant intercompany transactions and
balances have been eliminated in combination.
The accompanying combined financial statements include partnerships, a
limited liability company and S corporations which are under common control as
follows:
<TABLE>
<CAPTION>
ENTITY PROPERTY/SERVICE
- ---------------------------------------------- ----------------------------------------------
<S> <C>
Office Property Entities
Two Penn Plaza Associates L.P. Two Penn Plaza
1740 Broadway Associates, L.P. 1740 Broadway
866 U.N. Plaza Associates LLC 866 United Nations Plaza
Management Entities
Mendik Realty Company, Inc. Management and leasing
Mendik Management Company, Inc. Management
</TABLE>
Results of operations for the year ended December 31, 1993 include
operations of Two Penn Plaza Associates L.P. and 1740 Broadway Associates, L.P.
for their fiscal years ended March 31, 1994. Results of operations for the year
ended December 31, 1994 include results of operations of such partnerships for
the calendar year ended December 31, 1994. Accordingly, results of operations
for the period from January 1, 1994 to March 31, 1994 are included in the
results of operations for both of the years ended December 31, 1994 and 1993 so
that each year includes twelve months of operations. Revenue and net income for
the two entities for the period from January 1, 1994 to March 31, 1994
aggregated approximately $16 million and $3.7 million, respectively. The effect
of the change in fiscal year is shown as an adjustment in the combined
statements of owners' equity.
Additionally, four property-owning partnerships in which The Mendik
Predecessors owns less than a majority interest are accounted for under the
equity method. Under the equity method, The Mendik Predecessors record such
investments at cost and adjusts the investment account for its share of the
entities' income or loss and for cash distributions and contributions.
PROPOSED TRANSACTIONS
Concurrently with the consummation of an initial public offering of The
Mendik Company, Inc.'s (the "REIT") Common Stock (the "Offering"), which is
expected to be completed in 1997, the REIT and a newly formed limited
partnership, The Mendik Company, L.P. (the "Operating Partnership"), together
with the partners and members of The Mendik Predecessors and other parties which
hold ownership interests in the properties (collectively, the "Participants"),
will engage in certain formation transactions (the "Formation Transactions").
The Formation Transactions are designed to (i) enable the REIT to raise the
necessary capital to acquire interests in the properties and repay certain
mortgage debt relating thereto, (ii) to establish reserves for leasing costs,
capital expenditures, and working capital, (iii) provide a
F-20
<PAGE>
THE MENDIK PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
vehicle for future acquisitions, (iv) enable the REIT to comply with certain
requirements under the Federal income tax laws and regulations relating to real
estate investment trusts, and (v) preserve certain tax advantages for certain
Participants.
The operations of the REIT will be carried on primarily through the
Operating Partnership in order to assist the REIT and the Participants in
forming the REIT under the Internal Revenue Code of 1986. The REIT will be the
sole general partner in the Operating Partnership and the Participants will
transfer their property and operating interests in The Mendik Predecessors in
exchange for units of limited partnership interests in the Operating Partnership
and/or cash. In addition to interests in the Properties, the REIT, through the
Operating Partnership, will own substantially all of the economic interest in
the office management and leasing businesses, which are currently conducted by
the management entities.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REAL ESTATE PROPERTIES
Depreciation is computed by the straight-line method over the estimated
useful lives which range from ten to thirty-nine years for buildings and
improvements and four to seven years for equipment, autos, furniture and
fixtures. Tenant improvements, which are included in buildings and improvements
on the accompanying combined balance sheets, are amortized over the life of the
respective leases, using the straight-line method.
Included in fixed assets are approximately $2,990,000 (nine months ended
September 30, 1996) $4,652,000 (1995), $2,177,000 (1994) and $1,647,000 (1993)
of building improvements. In addition, $3,589,000 (nine months ended September
30, 1996), $3,421,000 (1995), $2,915,000 (1994) and $1,701,000 (1993) of
building improvements were recorded in the fixed assets of the equity investees,
exclusive of the 570 Lexington Avenue property, which was acquired in 1994.
CASH AND CASH EQUIVALENTS
The Mendik Predecessors consider highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents. Cash equivalents
consist primarily of U.S. Treasury Bills and certificates of deposit.
Most of the cash balances are in excess of federally insured limits.
RESTRICTED CASH
Restricted cash consists of escrows for collateral deposits for payment of
mortgage interest.
REVENUE RECOGNITION
Rental revenue is recognized on a straight-line basis over the term of the
lease. The excess of rents so recognized over amounts contractually due pursuant
to the underlying leases are included in deferred rents receivable on the
accompanying combined balance sheets. Contractually due but unpaid rents are
included
F-21
<PAGE>
THE MENDIK PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in tenant receivables on the accompanying combined balance sheets. Certain lease
agreements provide for reimbursement of real estate taxes, insurance and certain
common area maintenance costs and rental increases tied to increases.
DEFERRED COSTS
Leasing costs and loan costs are capitalized and amortized over the life of
the related lease or loan. Affiliates of The Mendik Predecessors have incurred
costs related to its proposed Offering. Such deferred offering costs will be
reimbursed to such affiliates upon successful completion of the Offering and
will be charged to the equity of the REIT at such time.
AVAILABLE-FOR-SALE SECURITIES
In May 1993 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," effective for fiscal years beginning after December
15, 1993. Under these rules, debt securities that The Mendik Predecessors have
both the positive intent and ability to hold to maturity are carried at
amortized cost. Debt securities that The Mendik Predecessors do not have the
positive intent and ability to hold to maturity and all marketable equity
securities are classified as available-for-sale and are carried at fair value.
Unrealized holding gains and losses on securities classified as
available-for-sale are carried as a separate component of owners' equity.
Through December 31, 1993, The Mendik Predcessors classified debt securities
as held-for-investment and carried them at amortized cost. Securities
held-for-sale were reported at the lower of aggregate cost or market. The Mendik
Predecessors adopted the new rules in the first quarter of 1994. The aggregate
difference between cost and fair value at the date of adoption was not material
and, accordingly, no adjustment to record the fair value was made.
At September 30, 1996 and December 31, 1995 and 1994, available-for-sale
securities, consisting principally of U.S. Treasury Obligations, had an
aggregate cost of $26,740,316 (unaudited), $19,641,348 and $18,524,353,
respectively, and an aggregate market value of $26,731,424 (unaudited),
$19,862,923 and $18,113,603, respectively. Gross unrealized gains (losses) at
September 30, 1996 and December 31, 1995 and 1994 were approximately $(8,892)
(unaudited), $221,575 and $(410,750), respectively. The cost of marketable
securities sold is determined using the specific identification method. At
September 30, 1996 and December 31, 1995 and 1994, the investment in marketable
debt securities includes accrued interest of $433,822 (unaudited), $250,422 and
$245,754, respectively.
Contractual maturities (including accrued interest) of the securities at
December 31, 1995 are as follows:
<TABLE>
<S> <C>
Within 1 year.................................................. $5,487,683
1-4 years...................................................... 14,058,223
----------
$19,545,906
----------
----------
</TABLE>
Available-for-sale securities at December 31, 1995 include a mutual fund
carried at its cost of $317,017, which approximates fair value.
F-22
<PAGE>
THE MENDIK PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The receipt of available-for-sale debt securities from an equity investee
has been recorded at fair market value at the date of distribution.
INCOME TAXES
The entities in The Mendik Predecessors are not taxpaying entities for
Federal income tax purposes, and, accordingly, no provision or credit has been
made in the accompanying financial statements for Federal income taxes. Owners'
allocable shares of taxable income or loss are reportable on their income tax
returns. Where applicable, state and local income taxes were provided.
INTERIM UNAUDITED FINANCIAL INFORMATION
The combined financial statements as of and for the nine months ended
September 30, 1996 and 1995 are unaudited; however, in the opinion of
management, all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of the combined financial statements for these
interim periods have been included. The results of interim periods are not
necessarily indicative of the results to be obtained for a full fiscal year.
CAPITAL CONTRIBUTIONS, DISTRIBUTIONS AND PROFITS AND LOSSES
Capital contributions, distributions and profits and losses are allocated in
accordance with the terms of the applicable agreements.
INTEREST RATE EXCHANGE AGREEMENTS
One of the office property entities has entered into interest rate exchange
agreements to reduce the impact of certain changes in interest rates on its
variable rate debt. Payments under these agreements are recognized as
adjustments to interest expense when incurred. Unamortized amounts paid under
interest rate exchange agreements are written off when the related debt is paid
prior to maturity. When the underlying debt is not repaid, any gain or loss
realized upon the early termination of interest rate exchange agreements is
recognized as an adjustment of interest expense over the remaining term of the
hedged debt. There is exposure to credit loss in the event of nonperformance by
the other party to the agreement. However, nonperformance by the counterparty is
not anticipated.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, which requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount. SFAS
No. 121 also addresses the accounting for long-lived assets that are expected to
be disposed of. The Mendik Predecessors adopted SFAS No. 121 in the first
quarter of 1996. The adoption had no effect on the financial statements.
F-23
<PAGE>
THE MENDIK PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT IN PARTNERSHIPS
The Mendik Predecessors' investments in the four partnerships which have
been accounted for under the equity method are as follows:
<TABLE>
<CAPTION>
THE MENDIK
COMPANY'S
PARTNERSHIP PROPERTY PERCENTAGE OWNERSHIP
- --------------------------------------------- --------------------------------------------- --------------------
<S> <C> <C>
330 Madison Company 330 Madison Avenue 24.75%
Two Park Company 2 Park Avenue 40%
Eleven Penn Plaza Company 11 Penn Plaza 49.9%
570 Lexington Company, L.P. 570 Lexington Avenue 5.576205%
</TABLE>
These investments are recorded initially at cost and subsequently adjusted
for equity in the net income or loss of investees and cash contributions and
distributions.
Condensed financial statements of the partnerships, which have been derived
from the September 30, 1996 unaudited financial statements and the 1995 and 1994
audited financial statements, are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER DECEMBER 31,
30, --------------------
1996 1995 1994
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CONDENSED BALANCE SHEETS
Commercial real estate property, net........................ $ 270,912 $ 269,709 $ 269,982
Receivables................................................. 56,682 63,506 67,626
Cash and short-term investments............................. 15,429 44,647 36,665
Prepaid expenses and other assets........................... 24,687 20,255 19,481
----------- --------- ---------
Total assets................................................ $ 367,710 $ 398,117 $ 393,754
----------- --------- ---------
----------- --------- ---------
Mortgages, including $65,000,000 (1996 and 1995) and
$75,000,000 (1994) due to an affiliate.................... $ 230,917 $ 228,372 $ 233,304
Accounts payable and other liabilities...................... 64,181 58,254 49,543
Partners' capital........................................... 72,612 111,491 110,907
----------- --------- ---------
Total liabilities and partners' capital..................... $ 367,710 $ 398,117 $ 393,754
----------- --------- ---------
----------- --------- ---------
</TABLE>
F-24
<PAGE>
THE MENDIK PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT IN PARTNERSHIPS (CONTINUED)
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF OPERATIONS
Rental revenue and escalations, including $559
and $468 (nine months ended September 30,
1996 and 1995, respectively), $700 (1995),
$880 (1994) and $895 (1993) from
affiliates................................... $ 56,220 $ 57,147 $ 82,602 $ 71,313 $ 75,735
Other revenue.................................. 5,474 4,471 4,587 4,429 2,653
--------- --------- --------- --------- ---------
Total revenues................................. 61,694 61,618 87,189 75,742 78,388
--------- --------- --------- --------- ---------
Interest....................................... 18,475 19,276 25,678 21,763 20,448
Depreciation and amortization.................. 13,326 12,483 17,677 15,205 14,801
Operating and other expenses, including $8,413
and $7,886 (nine months ended September 30,
1996 and 1995, respectively), $10,741 (1995),
$8,951 (1994), and $9,056 (1993) to
affiliates................................... 32,071 31,909 42,315 37,759 42,519
--------- --------- --------- --------- ---------
Total expenses................................. 63,872 63,668 85,670 74,727 77,768
--------- --------- --------- --------- ---------
Net income (loss).............................. $ (2,178) $ (2,050) $ 1,519 $ 1,015 $ 620
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Operating and other expenses paid to affiliates consist of management fees,
maintenance and security expenses. The following additional payments were made
to affiliates:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Leasing commissions..................... 370 69 181 346 618
Capital expenditures.................... 2 75 256 1,265 51
</TABLE>
F-25
<PAGE>
THE MENDIK PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT IN PARTNERSHIPS (CONTINUED)
The Mendik Predecessors' share of the net income (loss), including
preference allocations, and depreciation and amortization from each of the
investments included in the combined statement of operations is as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED
YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net income (loss)
330 Madison Company............................... $ 1,006 $ 619 $ 816 $ 1,310 $ 1,619
Two Park Company.................................. 165 (253) (349) (690) (882)
570 Lexington Company, L.P........................ (116) (68) (89) (12) --
Eleven Penn Plaza Company......................... 530 1,455 3,760 699 14
--------- --------- --------- --------- ---------
$ 1,585 $ 1,753 $ 4,138 $ 1,307 $ 751
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Depreciation and amortization
330 Madison Company............................... $ 1,299 $ 1,861 $ 2,452 $ 1,583 $ 1,438
Two Park Company.................................. 2,003 1,710 2,293 2,089 2,106
570 Lexington Company, L.P........................ 28 18 24 4 --
Eleven Penn Plaza Company......................... 1,445 1,435 2,323 1,865 1,719
--------- --------- --------- --------- ---------
$ 4,775 $ 5,024 $ 7,092 $ 5,541 $ 5,263
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Additionally, at September 30, 1996 and December 31, 1995 and 1994, included
in Mortgages was approximately $90,200,000 (unaudited), $86,400,000 and
$79,100,000, respectively, relating to 330 Madison Company. Such amounts are
collateralized by the respective properties and also a pledge of the partnership
interest of all the partners of 330 Madison Company. The mortgage is payable to
an entity which since 1991 has been under the control of liquidators. Since
1991, there has been uncertainty as to the applicable interest rate. Included in
the mortgage balance at September 30, 1996 and December 31, 1995 and 1994 is
approximately $32,200,000 (unaudited), $28,400,000 and $21,100,000,
respectively, of accrued interest. Such amount exceeds the interest which the
partnership believes should be accrued by approximately $14,000,000 (unaudited),
$11,600,000 and $8,300,000 at September 30, 1996 and December 31, 1995 and 1994,
respectively. The equity in earnings of the investee for the periods ended
September 30, 1996, December 31, 1995, 1994 and 1993, had 330 Madison Company's
position been applied, would have been greater by approximately $366,000
(unaudited), $428,000, $633,000, and $810,000, respectively.
On October 1, 1995, a tenant in 11 Penn Plaza subleased its space to a
partner in such entity. Under the sublease agreement (the "sublease"), which
covers the remainder of the lease term through June 2001, such tenant vacated
part of the space in November 1995 with the remainder to be vacated in January
1997. Additionally, the sublease required the tenant to expend approximately
$3,700,000 for tenant alterations for such space. For financial reporting
purposes, the transaction is treated as a lease termination. Net payments to be
received from the tenant for the entire term of the sublease were present valued
using an 8% interest rate. The present value of amounts to be received,
allocable to the space vacated in 1995, approximate $6,528,000. Income
recognized in 1995, net of an adjustment of approximately $1,409,000 for rent
income previously recognized on the straight-line basis, was approximately
$5,119,000. In addition, related prepaid leasing costs and unamortized tenant
improvements of approximately $181,000 and $669,000, respectively, were written
off in 1995. The present value of amounts to be received, allocable to
F-26
<PAGE>
THE MENDIK PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. INVESTMENT IN PARTNERSHIPS (CONTINUED)
the space to be vacated in 1997, approximate $17,938,000. Income to be
recognized in 1997, net of an adjustment of approximately $3,691,000 for rent
income previously recognized on the straight-line basis, will be approximately
$14,247,000. In addition, related prepaid leasing costs and unamortized tenant
improvements of approximately $762,000 and $2,900,000, respectively, will be
written off in 1997.
Additionally, pursuant to the partnership agreements of 330 Madison Company
and Two Park Company, each partner has the right to implement "buy-sell"
provisions. The Mendik Predecessors could be compelled either to sell its
partnership interest to such other partners, for the purchase price set forth in
such other partners' notice exercising its "buy-sell" rights, or to purchase the
interests of the other partners in the respective partnership. The Mendik
Predecessors have determined that prior to 1993 the investment in Two Park
Company declined in value and deemed such decline to be other than temporary.
Accordingly, the investment was written down by $25,000,000 prior to 1993. The
difference between The Mendik Predecessors' carrying amount of the investment
and the underlying equity in such investee is being amortized over the life of
the property.
3. TENANT ACQUISITION COSTS
Under the provisions of a leasing arrangement which commenced in December
1992, one of the property partnerships has assumed a tenant's obligation under a
pre-existing lease in a building previously occupied by such tenant expiring in
November 2000. The space was subleased on April 28, 1993 for the full lease
term. The estimated obligation (including costs incurred in connection with the
sublease), net of sublease income, is $9,733,000 and is being amortized on a
straight-line basis over the term of the tenant's lease with the partnership,
which expires December 2007.
F-27
<PAGE>
THE MENDIK PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. MORTGAGE NOTES PAYABLE
The mortgage notes payable collateralized by the respective properties and
assignment of leases at September 30, 1996 and December 31, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER DECEMBER 31,
30, --------------------
PROPERTY MORTGAGE NOTES WITH FIXED INTEREST: 1996 1995 1994
- ------------------------- --------------------------------------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
(A) Two Penn Plaza Mortgage notes with fixed interest
rates ranging from 6.7475% to 9.3625%,
due May 10, 2000....................... $ 155,000 $ 155,000 $ 155,000
(B) 866 United Mortgage note with fixed interest rates
Nations Plaza payable at 11.125%..................... -- 9,729 9,791
(B) 866 United Mortgage notes with fixed interest
Nations Plaza rates ranging from 6.72% to 9.87%, due
December 14, 1998...................... 49,779 40,000 40,000
----------- --------- ---------
Total Fixed Rate Notes................. 204,779 204,729 204,791
<CAPTION>
MORTGAGE NOTE WITH VARIABLE INTEREST:
---------------------------------------
<S> <C> <C> <C> <C> <C>
(A) Two Penn Plaza Mortgage note with variable interest
rates based on LIBOR plus 0.5625%
(average of 6.4% (unaudited), 6.75% and
6.50% at September 30, 1996 and
December 31, 1995 and 1994,
respectively), due May 10, 2000........ 4,100 4,100 4,100
----------- --------- ---------
Total Mortgage Notes Payable........... $ 208,879 $ 208,829 $ 208,891
----------- --------- ---------
----------- --------- ---------
</TABLE>
(A) TWO PENN PLAZA
The loan agreement is for $225,000,000 and requires payment of interest at a
floating rate. No additional borrowing in excess of the outstanding principal
balance may be made under the agreement. Two interest rate exchange agreements,
which mature within seven months of the loan maturity, have fixed the rate on
$155,000,000 of the loan at an average of approximately 7.4%. The effective rate
paid on the remaining balance of $4,100,000 was approximately 6.4% (unaudited),
6.9% (unaudited), 6.75% and 6.5% for the nine months ended September 30, 1996
and 1995 and for the years ended December 31, 1995 and 1994, respectively.
In 1994, the office property entity voluntarily paid approximately
$3,600,000 into a mortgage escrow deposit account. In 1995, the lender recorded
mortgages of $131,000,000, requiring a total payment of $3,941,591 for the
mortgage recording taxes, title insurance, and other costs. The office property
entity paid the amount due in excess of the balance in the escrow account.
(B) 866 UNITED NATIONS PLAZA
The first mortgage, with a balance of $9,729,004, matured on January 1, 1996
and required monthly payments of $96,180, including interest at 11-1/8%. The
mortgage was acquired by the second mortgage lender on January 2, 1996 at which
time an additional $50,000 was advanced by the lender.
The mortgage, which matures on December 14, 1998, may be extended by the
borrower to December 14, 2000. Interest is payable monthly at either the LIBOR
rate or a fixed rate option. The fixed rate option has been chosen for the
entire debt, through maturity, in six separate agreements with rates ranging
from 6.1% to 9.87%. The effective rate was approximately 8% for the years ended
December 31, 1995 and 1994. The effective rate beginning January 2, 1996 is
approximately 7.6%.
F-28
<PAGE>
THE MENDIK PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. MORTGAGE NOTES PAYABLE (CONTINUED)
(C) PRINCIPAL MATURITIES
Combined aggregate principal maturities of mortgages and notes payable as of
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1996.......................................................................... $ --
1997.......................................................................... --
1998.......................................................................... 49,729
1999.......................................................................... --
2000.......................................................................... 159,100
--------------
$ 208,829
--------------
--------------
</TABLE>
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of estimated fair value were determined by
management, using available market information and appropriate valuation
methodologies. Considerable judgment is necessary to interpret market data and
develop estimated fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts The Mendik Predecessors could realize
on disposition of financial instruments. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
Cash equivalents and variable rate mortgages are carried at amounts which
reasonably approximate their fair values.
At December 31, 1995, total mortgages and notes payable with an aggregate
carrying value of $208,829,000 have an estimated aggregate fair value of
approximately $206,000,000. Estimated fair value is based on interest rates
currently available to The Mendik Predecessors for issuance of debt with similar
terms and remaining maturities. The estimated fair value of the interest rate
exchange agreements is $(2,700,000) based upon the estimated amount that the
Company would have to pay to terminate the agreements at December 31, 1995.
Disclosure about fair value of financial instruments is based on pertinent
information available to management as of December 31, 1995. Although management
is not aware of any factors that would significantly affect the reasonable fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and current estimates of fair
value may differ significantly from the amounts presented herein.
6. RENTAL INCOME
The Mendik Predecessors' Properties are being leased to tenants under
operating leases. The minimum rental amounts due under the leases are generally
either subject to scheduled fixed increases or adjustments. The leases generally
also require that the tenants reimburse The Mendik Predecessors for increases in
certain operating costs and real estate taxes above their base year costs.
Approximate future minimum rents to be received over the next five years and
thereafter for leases in effect at December 31, 1995 are as follows:
F-29
<PAGE>
THE MENDIK PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
6. RENTAL INCOME (CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSAND)
-------------
<S> <C>
1996........................................................................... $ 64,143
1997........................................................................... 52,398
1998........................................................................... 39,154
1999........................................................................... 34,602
2000........................................................................... 30,048
Thereafter..................................................................... 139,081
-------------
$ 359,426
-------------
-------------
</TABLE>
Approximately 17.9% of rental revenue for 1995 is derived from one tenant
whose leases expire October 31, 1996 and has notified The Mendik Predecessors
that it does not intend to renew such leases. The leases provide for annual base
rents of approximately $11,840,000 and additional rents based on increases in
certain expenses over base period amounts.
7. RELATED PARTY TRANSACTIONS
Operating and other expenses paid to affiliates consist maintenance and
security expense. In addition, payments were made to an affiliate for capital
expenditures of $183 and $1,763 (nine months ended September 30, 1996 and 1995,
respectively), $1,828 (1995), $2,054 (1994) and $429 (1993).
8. COMMITMENTS AND CONTINGENCIES
DEFINED CONTRIBUTION PLAN
The Mendik Predecessors has a defined contribution plan (the "Plan") which
qualifies under Section 401(k) of the Internal Revenue Code and provides
coverage for all nonunion employees of The Mendik Predecessors. The maximum
percentage of annual compensation that participants may contribute to the Plan
is not to exceed the maximum allowed under the Internal Revenue Code. Matching
contributions are made by management for each participant with at least 1,000
hours of service, up to a maximum of the greater of $1,000 or 5% of
compensation. Additional amounts may be contributed as determined by management.
Pension plan expense for the nine months ended September 30, 1996 and 1995 and
the years ended December 31, 1995, 1994 and 1993 was $71,582 (unaudited),
$73,881 (unaudited), $98,612, $90,759 and $73,230, respectively.
F-30
<PAGE>
THE MENDIK PREDECESSORS
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER COMMITMENTS AND CONTINGENCIES
The Mendik Predecessors is subject to various legal proceedings and claims
that arise in the ordinary course of business. These matters are generally
covered by insurance. Management believes that the final outcome of such matters
will not have a material adverse effect on the financial position, results of
operations or liquidity of The Mendik Predecessors.
In 1994, two affiliated entities, including a partner in the Eleven Penn
Plaza Company, filed a lawsuit against the indirect managing general partner and
one of the management entities included in the combined financial statements.
The lawsuit alleges, among other things, fraud, breach of fiduciary duty and
breach of contract in connection with, in part, an agreement executed by the
indirect managing general partner and one of the affiliate entities, pursuant to
which the affiliated entities claim to have the right to a portion of
distributions received by such partner with respect to certain entities,
including the office property entities included in the combined financial
statements. The Mendik Predecessors do not believe that such litigation would
have a material adverse effect on the financial position, results of operations
or liquidity of The Mendik Predecessors.
As of September 30, 1996 and December 31, 1995, in accordance with tenant
leases, the office property entities have agreed to reimburse tenants up to a
maximum of approximately $3,080,000 (unaudited) and $4,200,000, respectively,
for initial tenant charges, as defined. As of September 30, 1996 and December
31, 1995, the office property entities paid approximately $1,767,000 (unaudited)
and $2,700,000, respectively, of such charges.
The Mendik Predecessors are in the process of installing new
state-of-the-art air conditioning equipment for several properties. The total
cost of the project will be approximately $11,000,000, of which approximately
$1,850,000 will be funded by a Con Edison rebate program and approximately
$435,000 will be funded by a vendor rebate. In addition, adjacent property
owners will fund approximately $3,800,000. At September 30, 1996 and December
31, 1995, approximately $10,700,000 (unaudited) and $4,900,000, respectively, of
the total cost of the project has been incurred, of which $4,360,000 (unaudited)
and $2,400,000, respectively, has been billed to tenants.
The Mendik Predecessors are contractually committed to make an additional
investment in 570 Lexington, L.P., representing its 5.5% pro rata portion of the
redevelopment costs of the building owned by such entity. Such additional
investment is estimated to approximate $1,500,000 (unaudited) and $1,900,000 at
September 30, 1996 and December 31, 1995, respectively.
On January 14, 1997, two individual investors in Mendik Real Estate Limited
Partnership ("Mendik RELP"), the publicly held limited partnership that owns a
60% interest in Two Park Avenue, filed a class action suit in the New York State
Supreme Court on behalf of all investors in Mendik RELP alleging, among other
things, that the indirect managing general partner and certain of his affiliated
entities which act as the general partner of Mendik RELP breached their
fiduciary and contractual duties to the limited partners in Mendik RELP by
agreeing to transfer a 40% interest in Two Park Avenue to the REIT and not
providing the investors in Mendik RELP with the opportunity to transfer their
interests as well. The suit claims that the REIT and Mendik RELP have different
investment objectives with respect to Two Park Avenue and that the control which
the REIT will have with respect to the operation and management of Two Park
Avenue following the Offering and the Formation Transactions will effectively
prevent Mendik RELP from liquidating its interest in Two Park Avenue. The named
plaintiffs in the suit are seeking a declaration that the class action is proper
and other declarative and equitable relief, including an injunction against the
completion of the Offering and the Formation Transactions. FW/Mendik REIT,
L.L.C., an affiliate of The Mendik Predecessors has agreed to indemnify and hold
harmless the Company against any expenses or liabilities that may be incurred by
the REIT in connection with any such litigation.
F-31
<PAGE>
THE MENDIK PREDECESSORS
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN D COLUMN E
------------------------ -----------------------------------
COLUMN C COST CAPITALIZED
------------------------ GROSS AMOUNT AT WHICH CARRIED
SUBSEQUENT TO
INITIAL COST ACQUISITION AT CLOSE OF PERIOD
COLUMN A COLUMN B ------------------------ ------------------------ -----------------------------------
- ---------------------- ------------- BUILDING AND BUILDING AND BUILDING AND
DESCRIPTION ENCUMBRANCE LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL
- ---------------------- ------------- --------- ------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Two Penn Plaza,....... $ 159,100 $ -- $ 53,707 $ 6,015 $ 59,451 $ 6,015 $ 113,158 $ 119,173
New York, NY (3 mortgages )
1740 Broadway,........ -- 20,520 86,723 -- 6,691 20,520 93,414 113,934
New York, NY
866 United Nations 49,729 4,280 12,210 -- 11,918 4,280 24,128 28,408
Plaza,.............. (6 mortgages )
New York, NY
------------- --------- ------------- --------- ------------- --------- ------------- ---------
$208,829 $ 24,800 $ 152,640 $ 6,015 $ 78,060 $ 30,815 $ 230,700 $ 261,515
------------- --------- ------------- --------- ------------- --------- ------------- ---------
------------- --------- ------------- --------- ------------- --------- ------------- ---------
<CAPTION>
COLUMN I
COLUMN F COLUMN G --------------
COLUMN A ------------ --------------- COLUMN H LIFE ON WHICH
- ---------------------- ACCUMULATED DATE OF ------------- DEPRECIATION
DESCRIPTION DEPRECIATION CONSTRUCTION DATE ACQUIRED IS COMPUTED
- ---------------------- ------------ --------------- ------------- --------------
<S> <C> <C> <C> <C>
Two Penn Plaza,....... $ 78,962 1968 1978 31 1/2--39
New York, NY years
1740 Broadway,........ 14,920 1950 1990 15--39 years
New York, NY
866 United Nations 14,607 1966 1978 10--39 years
Plaza,..............
New York, NY
------------
$ 108,489
------------
------------
</TABLE>
F-32
<PAGE>
THE MENDIK PREDECESSORS
SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
The changes in real estate for the three years ended December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
(IN THOUSANDS)
Balance at beginning of period............................................... $ 253,678 $ 248,778 $ 245,027
Improvements................................................................. 7,837 4,900 3,751
---------- ---------- ----------
Balance at end of period..................................................... $ 261,515 $ 253,678 $ 248,778
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The aggregate cost of land, buildings and improvements for Federal income
tax purposes at December 31, 1995 was approximately $230,000,000.
The changes in accumulated depreciation, exclusive of amounts relating to
equipment, autos, and furniture and fixtures, for the three years ended December
31, 1995 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Balance at beginning of period................................................. $ 100,377 $ 94,159 $ 85,746
Depreciation for period........................................................ 8,112 6,218 8,413
---------- ---------- ---------
Balance at end of period....................................................... $ 108,489 $ 100,377 $ 94,159
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
F-33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY OR THE OPERATING PARTNERSHIP SINCE THE DATE HEREOF.
--------------------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 13
The Company............................................................... 27
Business and Growth Strategies............................................ 29
Use of Proceeds........................................................... 32
Distributions............................................................. 34
Capitalization............................................................ 39
Dilution.................................................................. 40
Selected Financial Information............................................ 42
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 45
New York Economy and Manhattan Office Market.............................. 53
The Properties............................................................ 64
Management................................................................ 96
Structure and Formation of the Company.................................... 105
Policies with Respect to Certain Activities............................... 108
Certain Relationships and Transactions.................................... 113
Partnership Agreement..................................................... 114
Principal Stockholders.................................................... 120
Capital Stock............................................................. 121
Certain Provisions of Maryland Law and the Company's Charter and Bylaws... 124
Shares Available for Future Sale.......................................... 127
Federal Income Tax Consequences........................................... 129
ERISA Considerations...................................................... 140
Underwriting.............................................................. 143
Experts................................................................... 145
Legal Matters............................................................. 146
Additional Information.................................................... 146
Glossary of Selected Terms................................................ 147
Index to Financial Statements............................................. F-1
</TABLE>
--------------------------
UNTIL MARCH , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
9,150,000 SHARES
[LOGO]
THE MENDIK COMPANY, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
DEAN WITTER REYNOLDS INC.
LEHMAN BROTHERS
PAINEWEBBER INCORPORATED
LEGG MASON WOOD WALKER
INCORPORATED
UBS SECURITIES
FEBRUARY , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 29, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
[LOGO]
9,150,000 SHARES
THE MENDIK COMPANY, INC.
COMMON STOCK
------------------
The Mendik Company, Inc. (together with its subsidiaries, the "Company") has
been newly formed to continue and expand the operations of Mendik Realty
Company, Inc. and its affiliates, which for 40 years have been engaged in
owning, managing, leasing, acquiring, renovating and redeveloping office
properties in New York City. Upon completion of this offering (the "Offering"),
the Company will own interests in seven office properties located in midtown
Manhattan which contain approximately 5.5 million rentable square feet. The
Company will operate as a fully integrated, self-administered and self-managed
real estate company and will be a real estate investment trust (a "REIT") for
Federal income tax purposes. Upon completion of the Offering, the Company will
be one of the largest owners and operators of Manhattan office properties and
expects to be the first publicly traded REIT formed primarily to own, operate
and acquire Manhattan office properties.
All of the shares of Common Stock, par value $.01 per share, of the Company
("Common Stock") offered hereby are being sold by the Company. Of the 9,150,000
shares of Common Stock offered hereby, 1,372,500 shares are being offered
initially outside the United States and Canada and 7,777,500 shares are being
offered initially in the United States and Canada. In addition, a total of
1,804,545 shares of restricted Common Stock (representing a total investment of
approximately $39.7 million) will be sold by the Company in concurrent private
placements at the initial public offering price. Upon completion of the
Offering, approximately % of the equity in the Company will be beneficially
owned by officers and directors of the Company and certain other affiliated
parties.
Prior to the Offering, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price per share
will be in the range of $21.25 to $22.75. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The Common Stock has been approved for listing, subject to official notice of
issuance, on the New York Stock Exchange.
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING:
- Concentration of all of the Company's properties in midtown Manhattan, and
the dependence of such properties on the conditions of the New York
economy and the Manhattan office market.
- Inability to control certain property-level transactions at four of the
Company's properties.
- Absence of arm's length negotiations with respect to the properties and
other assets contributed to the Company in connection with its formation,
resulting in the risk that the consideration given by the Company for such
assets may exceed the fair market value of such assets and other potential
conflicts of interest.
- Limitations on the Company's ability to sell, or reduce the amount of
mortgage indebtedness on, three of the Company's properties.
- Substantial vacant space at one of the Company's properties as a result of
the expiration of a lease with a single tenant.
- Limitations on the stockholders' ability to change control of the Company,
including restrictions on ownership of more than 8.6% of the outstanding
shares of Common Stock.
- Immediate and substantial dilution of $17.63 in the net tangible book
value per share of the shares of Common Stock purchased in the Offering.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................................ $ $ $
Total(3)................................................. $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the International Managers a 30-day option to
purchase up to an additional 205,875 shares of Common Stock, and has granted
the U.S. Underwriters a 30-day option to purchase up to an additional
1,166,625 shares of Common Stock on the same terms and conditions as set
forth above, solely to cover over-allotments, if any. If such options are
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
------------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel to the Underwriters. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the shares of
Common Stock offered hereby will be made in New York, New York, on or about
February , 1997.
------------------------------
MERRILL LYNCH INTERNATIONAL
BEAR, STEARNS INTERNATIONAL LIMITED
DEAN WITTER INTERNATIONAL LTD.
LEHMAN BROTHERS INTERNATIONAL
PAINEWEBBER INTERNATIONAL (U.K.) LTD.
LEGG MASON WOOD WALKER
INCORPORATED
UBS LIMITED
------------------
The date of this Prospectus is February , 1997.
<PAGE>
UNDERWRITING
Subject to the terms and conditions in the international purchase agreement
(the "International Purchase Agreement") among the Company and each of the
underwriters named below (the "International Managers"), and concurrently with
the sale of 7,777,500 shares to the U.S. Underwriters (as defined below), the
Company has agreed to sell to each of the International Managers, for whom
Merrill Lynch International, Bear, Stearns International Limited, Dean Witter
International Limited, Lehman Brothers International, PaineWebber International
(U.K.) Ltd., Legg Mason Wood Walker, Incorporated and UBS Limited are acting as
lead managers (the "Lead Managers"), and each of the International Managers has
severally agreed to purchase from the Company, the respective number of shares
of Common Stock set forth below opposite their respective names.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Merrill Lynch International......................................................
Bear, Stearns International Limited..............................................
Dean Witter International Limited................................................
Lehman Brothers International....................................................
PaineWebber International (U.K.) Ltd.............................................
Legg Mason Wood Walker, Incorporated.............................................
UBS Limited......................................................................
----------
Total.................................................................. 1,372,500
----------
----------
</TABLE>
The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement," and together with the International Purchase Agreement, the
"Purchase Agreements") with certain underwriters in the United States and Canada
(the "U.S. Underwriters" and, together with the International Managers, the
"Underwriters") for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Bear, Stearns & Co. Inc., Dean Witter Reynolds Inc., Lehman Brothers Inc.,
PaineWebber Incorporated, Legg Mason Wood Walker, Incorporated and UBS
Securities LLC are acting as representatives. Subject to the terms and
conditions set forth in the U.S. Purchase Agreement and concurrently with the
sale of 1,372,500 shares of Common Stock to the International Managers pursuant
to the International Purchase Agreement, the Company has agreed to sell to the
U.S. Underwriters, and the U.S. Underwriters have severally agreed to purchase
from the Company, an aggregate of 7,777,500 shares of Common Stock. The initial
public offering price per share and the total underwriting discount per share
are identical under the U.S. Purchase Agreement and the International Purchase
Agreement.
In each Purchase Agreement, the several U.S. Underwriters and the several
International Managers have agreed, respectively, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all of the shares
of Common Stock being sold pursuant to such Purchase Agreement if any of such
shares of Common Stock are purchased. Under certain circumstances, the
commitments of non-defaulting U.S. Underwriters or International Managers (as
the case may be) may be increased. The sale of shares of Common Stock pursuant
to the U.S. Purchase Agreement and the International Purchase Agreement are
conditioned upon each other.
The International Managers have advised the Company that the International
Managers propose initially to offer the Common Stock to the public at the public
offering price per share set forth on the cover page of this Prospectus, and to
certain banks, brokers and dealers (the "Selling Group") at such price less a
concession not in excess of $ per share. The International Managers may allow,
and such dealers may re-allow with the consent of Merrill Lynch International, a
discount not in excess of $ per share on sales to other International Managers
and members of the Selling Group. After the date of this Prospectus, the public
offering price, concession and discount may be changed.
A-1
<PAGE>
The Company has been informed that the U.S. Underwriters and the
International Managers have entered into an agreement (the "Intersyndicate
Agreement") providing for the coordination of their activities. Under the terms
of the Intersyndicate Agreement, the U.S. Underwriters and the International
Managers are permitted to sell shares of Common Stock to each other for purposes
of resale at the initial public offering price, less an amount not greater than
the selling concession. Under the terms of the Intersyndicate Agreement, the
International Managers and any dealer to whom they sell shares of Common Stock
will not offer to sell or sell shares of Common Stock to persons who are United
States persons or Canadian persons or to persons they believe intend to resell
to persons who are United States persons or Canadian persons, and the U.S.
Underwriters and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to persons who are non-United
States and non-Canadian persons or to persons they believe intend to resell to
non-United States and non-Canadian persons, except in each case for transactions
pursuant to such agreement.
The Company has granted to the International Managers an option, exercisable
for 30 days after the date of this Prospectus, to purchase up to 205,875
additional shares of Common Stock to cover over-allotments, if any, at the
initial public offering price, less the underwriting discount set forth on the
cover page of this Prospectus. If the International Managers exercise this
option, each International Manager will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage thereof which
the number of shares of Common Stock to be purchased by it shown in the
foregoing table bears to the International Managers' initial amount reflected in
the foregoing table. The Company also has granted an option to the U.S.
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 1,166,625 additional shares of Common Stock to
cover over-allotments, if any, on terms similar to those granted to the
International Managers.
At the request of the Company, the U.S. Underwriters have reserved up to
250,000 shares of Common Stock for sale at the initial public offering price to
certain employees of the Company, their business affiliates and related parties
who have expressed an interest in purchasing shares. The number of shares
available to the general public will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares that are not so purchased by
such persons at the closing of the Offering will be offered by the U.S.
Underwriters to the general public on the same terms as the other shares offered
by this Prospectus.
In the Purchase Agreements, the Company has agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act. Insofar as indemnification of the Underwriters for liabilities
arising under the Securities Act may be permitted pursuant to the foregoing
provision, the Company has been informed that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
The Company and the Operating Partnership have agreed, subject to certain
exceptions, for a period of one year from the date of this Prospectus, without
the prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated,
not to, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of any share of Common Stock or any Unit or any securities convertible into or
exercisable or exchangeable for Common Stock or Units, or file any registration
statement under the Securities Act with respect to any of the foregoing, or (ii)
enter into any swap or any other agreement or any transaction that transfers, in
whole or in part, directly or indirectly, the economic consequence of ownership
of the Common Stock or Units, whether any such swap or transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or Units
or other securities, in cash or otherwise.
In connection with the Offering, the Mendik Group and certain affiliates
thereof have agreed, subject to certain exceptions, for a period of two years
from the date of this Prospectus, without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated not to, directly or indirectly, (i)
offer,
A-2
<PAGE>
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of Common Stock or
any Units, whether now owned or hereafter acquired by such person or with
respect to which such person has or hereafter acquires the power of disposition,
or file any registration statement under the Securities Act with respect to any
of the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock or Units, whether any such
swap or transaction is to be settled by delivery of Common Stock or Units or
other securities, in cash or otherwise. In addition, FWM, L.P., FWM II, L.P.,
certain other affiliates of RMB Realty and QIB have agreed to a similar
restriction with respect to any shares of Common Stock acquired in the
Concurrent Placements, for a period of one year (or, in the case of QIB, six
months) from the date of this Prospectus, and, with respect to the shares of
Common Stock received in exchange for Units, for a period of two years from the
date of this Prospectus. The Company has granted certain registration rights
pursuant to which purchasers of shares in the Concurrent Placements may require
the Company to file a registration statement with the Commission with respect to
sales of such shares.
The Underwriters do not intend to confirm sales to any account over which
they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations between the Company and the U.S. Representatives. Among the factors
to be considered in such negotiations, in addition to prevailing market
conditions, will be dividend yields and financial characteristics of publicly
traded REITs that the Company and the U.S. Representatives believe to be
comparable to the Company, the expected results of operations of the Company
(which will be based on the results of operations of the Properties and the
management and leasing business in recent periods), estimates of the future
business potential and earnings prospects of the Company as a whole and the
current state of the real estate market in the Company's primary markets and the
economy as a whole.
The Common Stock has been approved for listing, subject to official notice
of issuance, on the New York Stock Exchange will be made.
A foreign affiliate of UBS Limited represents an investor in one of the
Properties whose interest will not be acquired by the Company. Affiliates of
Lehman Brothers International own a general partner interest in the RELP and
through the RELP an approximate 0.45% interest in the entity which owns Two Park
Avenue.
The Company will pay to Merrill Lynch, Pierce, Fenner & Smith Incorporated
an advisory fee equal to 0.75% of the gross proceeds received from the sale of
Common Stock to public investors in the Offering for financial advisory services
rendered in connection with the Company's formation as a REIT. In addition, the
Company will pay to Merrill Lynch, Pierce, Fenner & Smith Incorporated a
placement agent fee equal to 1% of the gross proceeds received form the sale of
Common Stock in the QIB Placement.
A-3
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY OR THE OPERATING PARTNERSHIP SINCE THE DATE HEREOF.
--------------------------
SUMMARY TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 13
The Company............................................................... 27
Business and Growth Strategies............................................ 29
Use of Proceeds........................................................... 32
Distributions............................................................. 34
Capitalization............................................................ 39
Dilution.................................................................. 40
Selected Financial Information............................................ 42
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 45
New York Economy and Manhattan Office Market.............................. 53
The Properties............................................................ 64
Management................................................................ 96
Structure and Formation of the Company.................................... 105
Policies with Respect to Certain Activities............................... 108
Certain Relationships and Transactions.................................... 113
Partnership Agreement..................................................... 114
Principal Stockholders.................................................... 120
Capital Stock............................................................. 121
Certain Provisions of Maryland Law and the Company's Charter and Bylaws... 124
Shares Available for Future Sale.......................................... 127
Federal Income Tax Consequences........................................... 129
ERISA Considerations...................................................... 140
Underwriting.............................................................. 143
Experts................................................................... 145
Legal Matters............................................................. 146
Additional Information.................................................... 146
Glossary of Selected Terms................................................ 147
Index to Financial Statements............................................. F-1
</TABLE>
--------------------------
UNTIL MARCH , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
9,150,000 SHARES
[LOGO]
THE MENDIK COMPANY, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH INTERNATIONAL
BEAR, STEARNS INTERNATIONAL LIMITED
DEAN WITTER INTERNATIONAL LTD.
LEHMAN BROTHERS INTERNATIONAL
PAINEWEBBER INTERNATIONAL (U.K.) LTD.
LEGG MASON WOOD WALKER
INCORPORATED
UBS LIMITED
FEBRUARY , 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table itemizes the expenses incurred by the Company in
connection with the Offering. All amounts are estimated except for the
Registration Fee and the NASD Fee.
<TABLE>
<S> <C> <C>
Registration Fee................................................ $ 76,667
NASD Fee........................................................ 25,800
New York Stock Exchange Listing Fee.............................
Printing and Engraving Expenses.................................
Legal Fees and Expenses.........................................
Accounting Fees and Expenses....................................
Blue Sky Fees and Expenses......................................
Financial Advisory Fee..........................................
Environmental and Engineering Expenses..........................
Miscellaneous...................................................
-
---------
Total....................................................... $
-
-
---------
---------
Indemnification Insurance Costs (see Item 33)...................
-
---------
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 31. SALES TO SPECIAL PARTIES
See Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the formation of the Registrant, Mendik/FW LLC has been
issued a total of 1,100 shares of Common Stock for total consideration of
$505,000 in cash.
Prior to the filing of the Registration Statement, FWM II, L.P. agreed to
purchase 954,545 shares of Common Stock at the initial public offering price.
The closing of this purchase will occur concurrently with the closing of the
offering.
On January , 1997, agreed to purchase 850,000 shares of
Common Stock at the initial public offering price. The closing of this purchase
will occur concurrently with the closing of the offering.
Prior to the filing of the Registration Statement, Mendik/FW LLC agreed to
contribute the rights under certain management and leasing contracts with
respect to certain commercial properties to the Management Corporation in
exchange for voting common stock and non-voting common stock of the Management
Corporation and a promissory note from the Management Corporation. Mendik/FW LLC
will contribute the note and the non-voting common stock of the Management
Corporation to the Company in exchange for shares of Common Stock of the Company
with a value of approximately $7.425 million, and all voting common stock
ultimately will be held by the Mendik Group. The Company in turn will contribute
these assets to the Operating Partnership in exchange for Units.
Prior to the filing of the Registration Statement, Mendik/FW LLC executed an
agreement to acquire the approximate two-thirds interest in Two Penn Plaza
Associates held by two partners. Prior to the closing of the Offering, Mendik/FW
LLC will assign its interest in that agreement to the Company. The Company, in
turn, through the Operating Partnership, will acquire such partnership interest
in exchange for Units
II-1
<PAGE>
shares of or Common Stock, or a combination of Units and shares of Common Stock,
having an aggregate value of approximately $50,000.
All of the issuances of securities described in this Item 32 were made or
will be made in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's officers and directors are and will be indemnified under
Maryland and Delaware law, the Charter and Bylaws of the Company and the
Partnership Agreement of the Operating Partnership against certain liabilities.
The Company's Charter requires the Company to indemnify its directors and
officers to the fullest extent permitted from time to time under Maryland law.
The Company's bylaws require it to indemnify (a) any present or former
director or officer who has been successful, on the merits or otherwise, in the
defense of a proceeding to which he was made a party by reason of his service in
that capacity, against reasonable expenses incurred by him in connection with
the proceeding and (b) any present or former director or officer against any
claim or liability unless it is established that (i) his act or omission was
committed in bad faith or was the result of active or deliberate dishonesty,
(ii) he actually received an improper personal benefit in money, property or
services or (iii) in the case of a criminal proceeding, he had reasonable cause
to believe that his act or omission was unlawful. In addition, the Company's
Bylaws require the Company to pay or reimburse, in advance of final disposition
of a proceeding, reasonable expenses incurred by a present or former director or
officer made a party to a proceeding by reason of his service as a director or
officer provided that the Company shall have received (i) a written affirmation
by the director or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by the Company as authorized by the
Bylaws and (ii) a written understanding by or on his behalf to repay the amount
paid or reimbursed by the Company if it shall ultimately be determined that the
standard of conduct was not met. The Bylaws also (i) permit the Company to
provide indemnification and advance expenses to a present or former director or
officer who served a predecessor of the Company in such capacity, and to any
employee or agent of the Company or a predecessor of the Company, (ii) provide
that any indemnification or payment or reimbursement of the expenses permitted
or reimbursement of expenses under Section 2-418 of the MGCL for directors of
Maryland corporations and (iii) permit the Company to provide such other and
further indemnification or payment or reimbursement of expenses as may be
permitted by Section 2-418 of the MGCL for directors of Maryland corporations.
Under Maryland law, a corporation formed in Maryland is permitted to limit,
by provision in its charter, the liability of directors and officers so that no
director of officer of the Company shall be liable to the Company or to any
stockholder for money damages except to the extent that (i) the director or
officer actually received an improper benefit in money, property or services,
for the amount of the benefit or profit in money, property or services actually
received, or (ii) a judgment or other final adjudication adverse to the director
or officer is entered in a proceeding based on a finding in a proceeding that
the director's or officer's action was the result of active and deliberate
dishonesty and was material to the cause of action adjudicated in the
proceeding. The Charter has incorporated the provisions of such law limiting the
liability of directors and officers.
The Partnership Agreement also provides for indemnification of the Company
and its officers and directors to the same extent indemnification is provided to
officers and directors of the Company in its organizational documents, and
limits the liability of the Company and its officers and directors to the
Operating Partnership and its partners to the same extent liability of officers
and directors of the Company to the Company and its stockholders is limited
under their organizational documents.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not Applicable.
II-2
<PAGE>
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements, all of which are included in the Prospectus:
THE MENDIK COMPANY, INC.
<TABLE>
<S> <C>
Pro Forma Combined Financial Statements (unaudited):
Pro Forma Combined Balance Sheet as of September 30, 1996
Pro Forma Combined Statement of Income for the Nine Months Ended September 30,
1996
Pro Forma Combined Statement of Income for the Year Ended December 31, 1995
Notes to the Pro Forma Combined Financial Statements
Historical:
Report of Independent Auditors
Balance Sheet as of September 30, 1996
Notes to Balance Sheet
</TABLE>
THE MENDIK PREDECESSORS
<TABLE>
<S> <C>
Combined Financial Statements:
Report of Independent Auditors
Combined Balance Sheets as of September 30, 1996 (unaudited) and December 31, 1995
and 1994
Combined Statements of Income for the Nine Months Ended September 30, 1996 and
1995 (unaudited) and the Years Ended December 31, 1995, 1994 and 1993
Combined Statements of Owners' Equity for the Nine Months Ended September 30, 1996
(unaudited) and the Years Ended December 31, 1995, 1994 and 1993
Combined Statements of Cash Flows for the Nine Months Ended September 30, 1996 and
1995 (unaudited) and the Years Ended December 31, 1995, 1994 and 1993
Notes to the Combined Financial Statements
Schedule III:
Real Estate and Accumulated Depreciation as of December 31, 1995
</TABLE>
(b) Exhibits
<TABLE>
<C> <S>
*1.1 Form of U.S. Purchase Agreement among Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Bear, Stearns & Co., Inc., Dean Witter Reynolds Inc.,
Lehman Brothers Inc., PaineWebber Incorporated, Legg Mason Wood Walker, Incorporated
and UBS Securities LLC, as representatives of the several Underwriters, the Company
and the Operating Partnership
*1.2 Form of International Purchase Agreement among Merrill Lynch International, Bear,
Stearns International, Dean Witter International Limited, Lehman Brothers
International, PaineWebber International (U.K.) Ltd., Legg Mason Wood Walker,
Incorporated and UBS Limited, as representatives of the several Underwriters, the
Company and the Operating Partnership
+3.1 Articles of Incorporation of the Company
+3.2 Bylaws of the Company
*5.1 Opinion of Hogan & Hartson L.L.P. regarding the validity of the securities being
registered
*8.1 Opinion of Roberts & Holland LLP regarding tax matters
10.1 Form of First Amended and Restated Agreement of Limited Partnership of the Operating
Partnership
*10.2 Form of Articles of Incorporation and Bylaws of the Management Corporation
*10.3 Employment Agreement among Bernard H. Mendik and the Company
*10.4 Employment Agreement among David R. Greenbaum and the Company
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
*10.5 Form of Registration Rights Agreement between the Company and the persons named
therein
*10.6 1997 Employee Stock Option, Restricted Stock, Restricted Stock Rights and Stock
Appreciation Rights Plan (Company and the Management Corporation)
*10.7 Non-Employee Director Stock Option Plan
*10.8 Supplemental Representations and Warranties Agreement among the Company, the
Operating Partnership, and Mendik/FW LLC
+10.9 Forms of Agreement for Contribution of Interests
21.1 List of Subsidiaries
*23.1 Consent of Hogan & Hartson L.L.P. (included as part of Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
+23.3 Consent of Law Engineering and Environmental Services, P.C.
23.4 Consent of Rosen Consulting Group
+24.1 Power of Attorney
+27.1 Financial Data Schedule
+99.1 Consent of Leonard N. Stern to be named as a proposed director
+99.2 Consent of Spencer M. Partrich to be named as a proposed director
+99.3 Consent of Morris W. Offit to be named as a proposed director
+99.4 Consent of Lawrence S. Huntington to be named as a proposed director
+99.5 Consent of David B. Cornstein to be named as a proposed director
99.6 Rosen Market Report
</TABLE>
- ------------------------
+ Filed previously.
* To be filed by amendment.
ITEM 36. UNDERTAKINGS
The Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
the information omitted from the form of Prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in the form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required
by the underwriter to permit prompt delivery of each purchaser.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable ground to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in New York, New York on this 29th day of January, 1997.
THE MENDIK COMPANY, INC.
BY: /S/ DAVID R. GREENBAUM
-----------------------------------------
David R. Greenbaum
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of the 29th day of January, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ------------------------------------------------------
<C> <S>
* Chief Executive Officer and Chairman of the Board of
------------------------------------------- Directors
Bernard H. Mendik
/s/ DAVID R. GREENBAUM President, Chief Operating Officer and Director
------------------------------------------- (principal executive officer)
David R. Greenbaum
/s/ CHRISTOPHER G. BONK Senior Vice President and Chief Financial Officer
------------------------------------------- (principal financial officer and principal
Christopher G. Bonk accounting officer)
* Director
-------------------------------------------
Thomas R. Delatour, Jr.
* Director
-------------------------------------------
William S. Janes
</TABLE>
<TABLE>
<S> <C> <C>
*By: /s/ DAVID R. GREENBAUM
--------------------------------------
David R. Greenbaum
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ---------------
<C> <S>
*1.1 Form of U.S. Purchase Agreement among Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Bear, Stearns & Co., Inc., Dean Witter Reynolds Inc., Lehman Brothers Inc.,
PaineWebber Incorporated, Legg Mason Wood Walker, Incorporated and UBS Securities LLC, as
representatives of the several Underwriters, the Company and the Operating Partnership
*1.2 Form of International Purchase Agreement among Merrill Lynch International, Bear, Stearns
International, Dean Witter International Limited, Lehman Brothers International, PaineWebber
International (U.K.) Ltd., Legg Mason Wood Walker, Incorporated and UBS Limited, as representatives
of the several Underwriters, the Company and the Operating Partnership
+3.1 Articles of Incorporation of the Company
+3.2 Bylaws of the Company
*5.1 Opinion of Hogan & Hartson L.L.P. regarding the validity of the securities being registered
*8.1 Opinion of Roberts & Holland LLP regarding tax matters
10.1 Form of First Amended and Restated Agreement of Limited Partnership of the Operating Partnership
*10.2 Form of Articles of Incorporation and Bylaws of the Management Corporation
*10.3 Employment Agreement among Bernard H. Mendik and the Company
*10.4 Employment Agreement among David R. Greenbaum and the Company
*10.5 Form of Registration Rights Agreement between the Company and the persons named therein
*10.6 1997 Employee Stock Option, Restricted Stock, Restricted Stock Rights and Stock Appreciation Rights
Plan (Company and the Management Corporation)
*10.7 Non-Employee Director Stock Option Plan
*10.8 Supplemental Representations and Warranties Agreement among the Company, the Operating Partnership,
and Mendik/FW LLC
+10.9 Forms of Agreement for Contribution of Interests
21.1 List of Subsidiaries
*23.1 Consent of Hogan & Hartson L.L.P. (included as part of Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
+23.3 Consent of Law Engineering and Environmental Services, P.C.
23.4 Consent of Rosen Consulting Group
+24.1 Power of Attorney
+27.1 Financial Data Schedule
+99.1 Consent of Leonard N. Stern to be named as a proposed director
+99.2 Consent of Spencer M. Partrich to be named as a proposed director
+99.3 Consent of Morris W. Offit to be named as a proposed director
+99.4 Consent of Lawrence S. Huntington to be named as a proposed director
+99.5 Consent of David B. Cornstein to be named as a proposed director
99.6 Rosen Market Report
</TABLE>
- ------------------------
+ Filed previously.
* To be filed by amendment.
<PAGE>
Exh.10.1
----------------------------------
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
THE MENDIK COMPANY, L.P.
----------------------------------
Dated as of , 1997
<PAGE>
TABLE OF CONTENTS
ARTICLE I DEFINED TERMS . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II ORGANIZATIONAL MATTERS. . . . . . . . . . . . . . . . . . . . . 13
Section 2.1 Organization . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2.2 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 2.3 Registered Office and Agent; Principal Office . . . . . . 13
Section 2.4 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE III PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 3.1 Purpose and Business . . . . . . . . . . . . . . . . . . . 13
Section 3.2 Powers . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 3.3 Partnership Only for Purposes Specified . . . . . . . . . 14
ARTICLE IV CAPITAL CONTRIBUTIONS AND ISSUANCES OF PARTNERSHIP INTERESTS. . 14
Section 4.1 Capital Contributions of the Partners . . . . . . . . . . 14
Section 4.2 Issuances of Partnership Interests . . . . . . . . . . . . 15
Section 4.3 No Preemptive Rights . . . . . . . . . . . . . . . . . . . 16
Section 4.4 Other Contribution Provisions . . . . . . . . . . . . . . 16
Section 4.5 No Interest on Capital . . . . . . . . . . . . . . . . . . 16
ARTICLE V DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5.1 Requirement and Characterization of Distributions . . . . 17
Section 5.2 Amounts Withheld . . . . . . . . . . . . . . . . . . . . . 19
Section 5.3 Distributions Upon Liquidation . . . . . . . . . . . . . . 19
Section 5.4 Revisions to Reflect Issuance of Additional
Partnership Interests . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE VI ALLOCATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 6.1 Allocations For Capital Account Purposes . . . . . . . . . 20
Section 6.2 Revisions to Allocations to Reflect Issuance of
Additional Partnership Interests . . . . . . . . . . . . . . . . 21
ARTICLE VII MANAGEMENT AND OPERATIONS OF BUSINESS . . . . . . . . . . . . 21
Section 7.1 Management . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 7.2 Certificate of Limited Partnership . . . . . . . . . . . . 24
Section 7.3 Title to Partnership Assets . . . . . . . . . . . . . . . 25
Section 7.4 Reimbursement of the General Partner . . . . . . . . . . . 25
Section 7.5 Outside Activities of the General Partner . . . . . . . . 26
Section 7.6 Transactions with Affiliates . . . . . . . . . . . . . . . 28
Section 7.7 Indemnification . . . . . . . . . . . . . . . . . . . . . 28
Section 7.8 Liability of the General Partner . . . . . . . . . . . . . 30
Section 7.9 Other Matters Concerning the General Partner . . . . . . . 30
Section 7.10 Reliance by Third Parties . . . . . . . . . . . . . . . . 31
Section 7.11 Restrictions on General Partner's Authority . . . . . . . 31
Section 7.12 Loans by Third Parties . . . . . . . . . . . . . . . . . 38
ARTICLE VIII RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS . . . . . . . . . 38
Section 8.1 Limitation of Liability . . . . . . . . . . . . . . . . . 38
Section 8.2 Management of Business . . . . . . . . . . . . . . . . . . 38
Section 8.3 Outside Activities of Limited Partners . . . . . . . . . . 38
Section 8.4 Return of Capital . . . . . . . . . . . . . . . . . . . . 39
Section 8.5 Rights of Limited Partners Relating to the
Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 8.6 Redemption Right . . . . . . . . . . . . . . . . . . . . . 40
ARTICLE IX BOOKS, RECORDS, ACCOUNTING AND REPORTS . . . . . . . . . . . . 42
Section 9.1 Records and Accounting . . . . . . . . . . . . . . . . . . 42
Section 9.2 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . 42
Section 9.3 Reports . . . . . . . . . . . . . . . . . . . . . . . . . 42
- i -
<PAGE>
ARTICLE X TAX MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Section 10.1 Preparation of Tax Returns . . . . . . . . . . . . . . . 43
Section 10.2 Tax Elections . . . . . . . . . . . . . . . . . . . . . . 43
Section 10.3 Tax Matters Partner . . . . . . . . . . . . . . . . . . . 43
Section 10.4 Organizational Expenses . . . . . . . . . . . . . . . . . 44
Section 10.5 Withholding . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE XI TRANSFERS AND WITHDRAWALS . . . . . . . . . . . . . . . . . . . 45
Section 11.1 Transfer . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 11.2 Transfers of Partnership Interests of General
Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Section 11.3 Limited Partners' Rights to Transfer . . . . . . . . . . 46
Section 11.4 Substituted Limited Partners . . . . . . . . . . . . . . 47
Section 11.5 Assignees . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 11.6 General Provisions . . . . . . . . . . . . . . . . . . . 48
ARTICLE XII ADMISSION OF PARTNERS . . . . . . . . . . . . . . . . . . . . 50
Section 12.1 Admission of Successor General Partner . . . . . . . . . 50
Section 12.2 Admission of Additional Limited Partners . . . . . . . . 50
Section 12.3 Amendment of Agreement and Certificate of Limited
Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
ARTICLE XIII DISSOLUTION AND LIQUIDATION . . . . . . . . . . . . . . . . . 51
Section 13.1 Dissolution . . . . . . . . . . . . . . . . . . . . . . . 51
Section 13.2 Winding Up . . . . . . . . . . . . . . . . . . . . . . . 51
Section 13.3 Compliance with Timing Requirements of Regulations . . . 52
Section 13.4 Deemed Distribution and Recontribution . . . . . . . . . 53
Section 13.5 Rights of Limited Partners . . . . . . . . . . . . . . . 53
Section 13.6 Notice of Dissolution . . . . . . . . . . . . . . . . . . 53
Section 13.7 Cancellation of Certificate of Limited Partnership . . . 53
Section 13.8 Reasonable Time for Winding Up . . . . . . . . . . . . . 53
Section 13.9 Waiver of Partition . . . . . . . . . . . . . . . . . . . 54
Section 13.10 Liability of Liquidator . . . . . . . . . . . . . . . . 54
ARTICLE XIV AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS . . . . . . . . . 54
Section 14.1 Amendments . . . . . . . . . . . . . . . . . . . . . . . 54
Section 14.2 Meetings of the Partners . . . . . . . . . . . . . . . . 56
ARTICLE XV GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . 56
Section 15.1 Addresses and Notice . . . . . . . . . . . . . . . . . . 56
Section 15.2 Titles and Captions . . . . . . . . . . . . . . . . . . . 57
Section 15.3 Pronouns and Plurals . . . . . . . . . . . . . . . . . . 57
Section 15.4 Further Action . . . . . . . . . . . . . . . . . . . . . 57
Section 15.5 Binding Effect . . . . . . . . . . . . . . . . . . . . . 57
Section 15.6 Creditors . . . . . . . . . . . . . . . . . . . . . . . . 57
Section 15.7 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . 57
Section 15.8 Counterparts . . . . . . . . . . . . . . . . . . . . . . 57
Section 15.9 Applicable Law . . . . . . . . . . . . . . . . . . . . . 57
Section 15.10 Invalidity of Provisions . . . . . . . . . . . . . . . . 58
Section 15.11 Power of Attorney . . . . . . . . . . . . . . . . . . . 58
Section 15.12 Entire Agreement . . . . . . . . . . . . . . . . . . . . 59
Section 15.13 No Rights as Shareholders . . . . . . . . . . . . . . . 59
Section 15.14 Limitation to Preserve REIT Status . . . . . . . . . . . 59
- ii -
<PAGE>
EXHIBIT A
---------
PARTNERS AND
PARTNERSHIP INTERESTS
EXHIBIT B
---------
CAPITAL ACCOUNT MAINTENANCE
EXHIBIT C
---------
SPECIAL ALLOCATION RULES
EXHIBIT D
---------
NOTICE OF REDEMPTION
EXHIBIT E
---------
VALUE OF CONTRIBUTED PROPERTY
- iii -
<PAGE>
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
THE MENDIK COMPANY, L.P.
THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, DATED AS
OF , 1997, is entered into by and among The Mendik Company,
Inc., a Maryland corporation, as the General Partner of and a Limited Partner in
the Partnership, and FW/Mendik REIT, L.L.C., a Delaware limited liability
company, as a Limited Partner, together with any other Persons who become
Partners in the Partnership as provided herein.
WHEREAS, the Partnership was formed on October 2, 1996, and, on October 2,
1996, the Partnership adopted an Agreement of Limited Partnership (the "Prior
Agreement");
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby amend
and restate the Prior Agreement in its entirety and agree to continue the
Partnership as a limited partnership under the Delaware Revised Uniform
Limited Partnership Act, as amended from time to time, as follows:
ARTICLE I
DEFINED TERMS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Act" means the Delaware Revised Uniform Limited Partnership Act, as it may
be amended from time to time, and any successor to such statute.
"Additional Limited Partner" means a Person admitted to the Partnership as
a Limited Partner pursuant to Section 12.2 hereof and who is shown as such on
the books and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each Partnership Year (i) increased by any amounts
which such Partner is obligated to restore pursuant to any provision of this
Agreement or is deemed to be obligated to restore pursuant to the penultimate
sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and
(ii) decreased by the items described in Regulations
Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and
1.704-1(b)(2)(ii)(d)(6). The foregoing definition of Adjusted Capital
Account is intended to comply with the provisions of Regulations
Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
"Adjusted Capital Account Deficit" means, with respect to any Partner, the
deficit balance, if any, in such Partner's Adjusted Capital Account as of the
end of the relevant Partnership Year.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Exhibit B hereto.
"Adjustment Date" has the meaning set forth in Section 4.2.B hereof.
"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
<PAGE>
controlling ten percent (10%) or more of the outstanding voting interests of
such Person, (iii) any Person of which such Person owns or controls ten
percent (10%) or more of the voting interests or (iv) any officer, director,
general partner or trustee of such Person or any Person referred to in
clauses (i), (ii), and (iii) above. For purposes of this definition,
"control," when used with respect to any Person, means the power to direct
the management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise, and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Agreed Value" means (i) in the case of any Contributed Property
contributed to the Partnership as part of or in connection with the
Consolidation, the amount set forth on Exhibit E attached hereto as the Agreed
Value of such Property; (ii) in the case of any other Contributed Property, the
704(c) Value of such property as of the time of its contribution to the
Partnership, reduced by any liabilities either assumed by the Partnership upon
such contribution or to which such property is subject when contributed; and
(iii) in the case of any property distributed to a Partner by the Partnership,
the Partnership's Carrying Value of such property at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner upon
such distribution or to which such property is subject at the time of
distribution as determined under Section 752 of the Code and the regulations
thereunder.
"Agreement" means this First Amended and Restated Agreement of Limited
Partnership, as it may be amended, supplemented or restated from time to time.
"Articles of Incorporation" means the Articles of Incorporation or other
organizational document governing the General Partner, as amended or restated
from time to time.
"Assignee" means a Person to whom one or more Partnership Units have been
transferred in a manner permitted under this Agreement, but who has not become a
Substituted Limited Partner, and who has the rights set forth in Section 11.5
hereof.
"Available Cash" means, with respect to any period for which such
calculation is being made:
(a) all cash revenues and funds received by the Partnership from whatever
source (excluding the proceeds of any Capital Contribution) plus the amount of
any reduction (including, without limitation, a reduction resulting because the
General Partner determines such amounts are no longer necessary) in reserves of
the Partnership, which reserves are referred to in clause (b)(iv) below;
(b) less the sum of the following (except to the extent made with the
proceeds of any Capital Contribution):
(i) all interest, principal and other debt payments made during
such period by the Partnership,
(ii) all cash expenditures (including capital expenditures) made
by the Partnership during such period,
(iii) investments in any entity (including loans made thereto) to
the extent that such investments are permitted under this Agreement and are
not otherwise described in clauses (b)(i) or (ii), and
(iv) the amount of any increase in reserves established during
such period which the General Partner determines is necessary or appropriate in
its sole and absolute discretion.
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<PAGE>
Notwithstanding the foregoing, Available Cash shall not include any cash
received or reductions in reserves, or take into account any disbursements
made or reserves established, after commencement of the dissolution and
liquidation of the Partnership.
"Book-Tax Disparities" means, with respect to any item of Contributed
Property or Adjusted Property, as of the date of any determination, the
difference between the Carrying Value of such Contributed Property or
Adjusted Property and the adjusted basis thereof for federal income tax
purposes as of such date. A Partner's share of the Partnership's Book-Tax
Disparities in all of its Contributed Property and Adjusted Property will be
reflected by the difference between such Partner's Capital Account balance as
maintained pursuant to Exhibit B hereto and the hypothetical balance of such
Partner's Capital Account computed as if it had been maintained, with respect
to each such Contributed Property or Adjusted Property, strictly in
accordance with federal income tax accounting principles.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York are authorized or required by
law to close.
"Capital Account" means the Capital Account maintained for a Partner
pursuant to Exhibit B hereto.
"Capital Contribution" means, with respect to any Partner, any cash, cash
equivalents or the Agreed Value of Contributed Property which such Partner
contributes or is deemed to contribute to the Partnership pursuant to
Section 4.1 or 4.2 hereof.
"Carrying Value" means (i) with respect to a Contributed Property or
Adjusted Property, the 704(c) Value of such property reduced (but not below
zero) by all Depreciation with respect to such Contributed Property or Adjusted
Property, as the case may be, charged to the Partners' Capital Accounts and
(ii) with respect to any other Partnership property, the adjusted basis of such
property for federal income tax purposes, all as of the time of determination.
The Carrying Value of any property shall be adjusted from time to time in
accordance with Exhibit B hereto, and to reflect changes, additions or other
adjustments to the Carrying Value for dispositions and acquisitions of
Partnership properties, as deemed appropriate by the General Partner.
"Cash Amount" means an amount of cash equal to the Value on the Valuation
Date of the Shares Amount.
"Certificate" means the Certificate of Limited Partnership relating to the
Partnership filed in the office of the Delaware Secretary of State, as amended
from time to time in accordance with the terms hereof and the Act.
"Charter Documents" has the meaning set forth in Section 7.11.D hereof.
"Class A" has the meaning set forth in Section 5.1.C hereof.
"Class A Share" has the meaning set forth in Section 5.1.C hereof.
"Class A Unit" means any Partnership Unit that is not specifically
designated by the General Partner as being of another specified class of
Partnership Units.
"Class B" has the meaning set forth in Section 5.1.C hereof.
"Class B Share" has the meaning set forth in Section 5.1.C hereof.
- 3 -
<PAGE>
"Class B Unit" means a Partnership Unit that is specifically designated by
the General Partner as being a Class B Unit.
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time, as interpreted by the applicable regulations thereunder. Any
reference herein to a specific section or sections of the Code shall be deemed
to include a reference to any corresponding provision of future law.
"Consent" means the consent or approval of a proposed action by a Partner
given in accordance with Section 14.2 hereof.
"Consent of Certain Limited Partners" means Consent of the holders of 75%
in the aggregate of the Two Penn Plaza Units, the Eleven Penn Plaza Units,
and the 866 U.N. Plaza Units, collectively considered as one group, provided
that (i) if there has been a prior transaction involving the Two Penn Plaza
Property, the Eleven Penn Plaza Property, or the 866 U.N. Plaza Property, as
the case may be, that has been approved by the holders of the Two Penn Plaza
Units, the Eleven Penn Plaza Units, or the 866 U.N. Plaza Units, as the case
may be, pursuant to Section 7.11.C(1), 7.11.C(2) or 7.11.C(3), as applicable,
and (ii) no holder of the class of Partnership Units with respect to which
the prior transaction occurred (that is, the Two Penn Plaza Units the Eleven
Penn Plaza Units, or the 866 U.N. Plaza Units, as the case may be) would
recognize gain for federal income tax purposes with respect to (but only with
respect to) such Partnership Units in excess of $1.00 as a result of the sale
or other disposition of all such Partnership Units for $1.00 (that is, no
Limited Partner has a "negative capital account" with respect to such
Partnership Units), then the "Certain Limited Partners" shall not be
considered to include the holders of Partnership Units of that class.
"Consent of the Outside Limited Partners" means the Consent of Limited
Partners (excluding for this purpose any Limited Partnership Interests held by
the General Partner, any Person of which the General Partner owns or controls
more than fifty percent (50%) of the voting interests and any Person owning or
controlling, directly or indirectly, more than fifty percent (50%) of the
outstanding voting interests of the General Partner) holding Percentage
Interests that are greater than fifty percent (50%) of the aggregate Percentage
Interest of all Limited Partners who are not excluded for the purposes hereof.
"Consolidation" means the transactions whereby the Partnership will acquire
interests in certain office properties located in midtown Manhattan and certain
property management businesses, which provide services to those properties and
to other properties in the New York metropolitan area, in exchange for
Partnership Units, all as described in a Consent Solicitation/Memorandum dated
November 11, 1996.
"Consolidation Transaction" has the meaning set forth in Section 7.11.C.(6)
hereof.
"Contributed Property" means each property or other asset contributed to
the Partnership, in such form as may be permitted by the Act, but excluding cash
contributed or deemed contributed to the Partnership. Once the Carrying Value
of a Contributed Property is adjusted pursuant to Exhibit B hereto, such
property shall no longer constitute a Contributed Property for purposes of
Exhibit B hereto, but shall be deemed an Adjusted Property for such purposes.
"Conversion Factor" means 1.0; provided that in the event that the General
Partner Entity (i) declares or pays a dividend on its outstanding Shares in
Shares or makes a distribution to all holders of its outstanding Shares in
Shares, (ii) subdivides its outstanding Shares or (iii) combines its outstanding
Shares into a smaller number of Shares, the Conversion Factor shall be adjusted
by multiplying the Conversion Factor by a fraction, the numerator of which shall
be the number of Shares issued and outstanding on the record date for such
dividend, distribution, subdivision or
- 4 -
<PAGE>
combination (assuming for such purposes that such dividend, distribution,
subdivision or combination has occurred as of such time) and the denominator
of which shall be the actual number of Shares (determined without the above
assumption) issued and outstanding on the record date for such dividend,
distribution, subdivision or combination; and provided further that in the
event that an entity shall cease to be the General Partner Entity (the
"Predecessor Entity") and another entity shall become the General Partner
Entity (the "Successor Entity"), the Conversion Factor shall be adjusted by
multiplying the Conversion Factor by a fraction, the numerator of which is
the Value of one Share of the Predecessor Entity, determined as of the time
immediately prior to when the Successor Entity becomes the General Partner
Entity, and the denominator of which is the Value of one Share of the
Successor Entity, determined as of that same date. (For purposes of the
second proviso in the preceding sentence, in the event that any shareholders
of the Predecessor Entity will receive consideration in connection with the
transaction in which the Successor Entity becomes the General Partner Entity,
the numerator in the fraction described above for determining the adjustment
to the Conversion Factor (that is, the Value of one Share of the Predecessor
Entity) shall be the sum of the greatest amount of cash and the fair market
value of any securities and other consideration that the holder of one Share
in the Predecessor Entity could have received in such transaction (determined
without regard to any provisions governing fractional shares).) Any
adjustment to the Conversion Factor shall become effective immediately after
the effective date of such event retroactive to the record date, if any, for
the event giving rise thereto; it being intended that (x) adjustments to the
Conversion Factor are to be made in order to avoid unintended dilution or
anti-dilution as a result of transactions in which Shares are issued,
redeemed or exchanged without a corresponding issuance, redemption or
exchange of Partnership Units and (y) if a Specified Redemption Date shall
fall between the record date and the effective date of any event of the type
described above, that the Conversion Factor applicable to such redemption
shall be adjusted to take into account such event.
"Convertible Funding Debt" has the meaning set forth in Section 7.5.F
hereof.
"Debt" means, as to any Person, as of any date of determination, (i) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, (ii) all amounts owed by such Person to banks
or other Persons in respect of reimbursement obligations under letters of
credit, surety bonds and other similar instruments guaranteeing payment or
other performance of obligations by such Person, (iii) all indebtedness for
borrowed money or for the deferred purchase price of property or services
secured by any lien on any property owned by such Person, to the extent
attributable to such Person's interest in such property, even though such
Person has not assumed or become liable for the payment thereof, and (iv)
obligations of such Person incurred in connection with entering into a lease
which, in accordance with generally accepted accounting principles, should be
capitalized.
"Deemed Partnership Interest Value" means, as of any date with respect to
any class of Partnership Interests, the Deemed Value of the Partnership
Interest of such class multiplied by the applicable Partner's Percentage
Interest of such class.
"Deemed Value of the Partnership Interest" means, as of any date with
respect to any class of Partnership Interests, (a) if the shares of common
stock (or other comparable equity interests) of the General Partner are
Publicly Traded (i) the total number of shares of capital stock (or other
comparable equity interest) of the General Partner corresponding to such
class of Partnership Interest (as provided for in Section 4.2.B hereof)
issued and outstanding as of the close of business on such date (excluding
any treasury shares) multiplied by the Value of a share of such capital stock
(or other comparable equity interest) on such date divided by (ii) the
Percentage Interest of the General Partner in such class of Partnership
Interests on such date, and (b) otherwise, the aggregate Value of such class
of Partnership Interests determined as set forth in the fourth and fifth
sentences of the definition of Value.
- 5 -
<PAGE>
"Depreciation" means, for each fiscal year, an amount equal to the federal
income tax depreciation, amortization, or other cost recovery deduction
allowable with respect to an asset for such year, except that if the Carrying
Value of an asset differs from its adjusted basis for federal income tax
purposes at the beginning of such year or other period, Depreciation shall be an
amount which bears the same ratio to such beginning Carrying Value as the
federal income tax depreciation, amortization, or other cost recovery deduction
for such year bears to such beginning adjusted tax basis; provided, however,
that if the federal income tax depreciation, amortization, or other cost
recovery deduction for such year is zero, Depreciation shall be determined with
reference to such beginning Carrying Value using any reasonable method selected
by the General Partner.
"Distribution Period" has the meaning set forth in Section 5.1.C hereof.
"866 U.N. Plaza Associates" means 866 United Nations Plaza Associates LLC,
a New York limited liability company.
"866 U.N. Plaza Property" has the meaning set forth in Section 7.11.C
hereof.
"866 U.N. Plaza Units" has the meaning set forth in Section 7.11.C hereof.
"Effective Date" means the date of the closing of the Consolidation.
"Eleven Penn Partnerships" means M/F Associates, a New York limited
partnership, M/F Eleven Associates, a New York limited partnership, M/S
Associates, a New York limited partnership, and M/S Eleven Associates, a New
York limited partnership.
"Eleven Penn Plaza Property" has the meaning set forth in Section 7.11.C
hereof.
"Eleven Penn Plaza Units" has the meaning set forth in Section 7.11.C
hereof.
"Equity Merger" has the meaning set forth in Section 7.11.D hereof.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchanged Property" has the meaning set forth in Section 7.11.C hereof.
"Funding Debt" means the incurrence of any Debt by or on behalf of the
General Partner for the purpose of providing funds to the Partnership.
"General Partner" means The Mendik Company, Inc., a Maryland corporation,
or its successors as general partner of the Partnership.
"General Partner Entity" means the General Partner; provided, however,
that if (i) the shares of common stock (or other comparable equity interests)
of the General Partner are at any time not Publicly Traded and (ii) the
shares of common stock (or other comparable equity interests) of an entity
that owns, directly or indirectly, fifty percent (50%) or more of the shares
of common stock (or other comparable equity interests) of the General Partner
are Publicly Traded, the term "General Partner Entity" shall refer to such
entity whose shares of common stock (or other comparable equity securities)
are Publicly Traded. If both requirements set forth in clauses (i) and (ii)
above are not satisfied, then the term "General Partner Entity" shall mean
the General Partner.
"General Partner Payment" has the meaning set forth in Section 15.14
hereof.
- 6 -
<PAGE>
"General Partnership Interest" means a Partnership Interest held by the
General Partner that is a general partnership interest. A General Partnership
Interest may be expressed as a number of Partnership Units.
"IRS" means the Internal Revenue Service, which administers the internal
revenue laws of the United States.
"Immediate Family" means, with respect to any natural Person, such natural
Person's spouse, parents, descendants, nephews, nieces, brothers, and sisters.
"Incapacity" or "Incapacitated" means, (i) as to any individual Partner,
death, total physical disability or entry by a court of competent
jurisdiction adjudicating such Partner incompetent to manage his or her
Person or estate, (ii) as to any corporation which is a Partner, the filing
of a certificate of dissolution, or its equivalent, for the corporation or
the revocation of its charter, (iii) as to any partnership which is a
Partner, the dissolution and commencement of winding up of the partnership,
(iv) as to any estate which is a Partner, the distribution by the fiduciary
of the estate's entire interest in the Partnership, (v) as to any trustee of
a trust which is a Partner, the termination of the trust (but not the
substitution of a new trustee) or (vi) as to any Partner, the bankruptcy of
such Partner. For purposes of this definition, bankruptcy of a Partner shall
be deemed to have occurred when (a) the Partner commences a voluntary
proceeding seeking liquidation, reorganization or other relief under any
bankruptcy, insolvency or other similar law now or hereafter in effect, (b)
the Partner is adjudged as bankrupt or insolvent, or a final and
nonappealable order for relief under any bankruptcy, insolvency or similar
law now or hereafter in effect has been entered against the Partner, (c) the
Partner executes and delivers a general assignment for the benefit of the
Partner's creditors, (d) the Partner files an answer or other pleading
admitting or failing to contest the material allegations of a petition filed
against the Partner in any proceeding of the nature described in clause (b)
above, (e) the Partner seeks, consents to or acquiesces in the appointment of
a trustee, receiver or liquidator for the Partner or for all or any
substantial part of the Partner's properties, (f) any proceeding seeking
liquidation, reorganization or other relief under any bankruptcy, insolvency
or other similar law now or hereafter in effect has not been dismissed within
one hundred twenty (120) days after the commencement thereof, (g) the
appointment without the Partner's consent or acquiescence of a trustee,
receiver of liquidator has not been vacated or stayed within ninety (90) days
of such appointment or (h) an appointment referred to in clause (g) is not
vacated within ninety (90) days after the expiration of any such stay.
"Indemnitee" means (i) any Person made a party to a proceeding or
threatened with being made a party to a proceeding by reason of its status as
(A) the General Partner, (B) a Limited Partner or (C) a director or officer of
the Partnership or the General Partner and (ii) such other Persons (including
Affiliates of the General Partner, a Limited Partner or the Partnership) as the
General Partner may designate from time to time (whether before or after the
event giving rise to potential liability), in its sole and absolute discretion.
"Limited Partner" means any Person named as a Limited Partner in Exhibit A
attached hereto, as such Exhibit may be amended and restated from time to time,
or any Substituted Limited Partner or Additional Limited Partner, in such
Person's capacity as a Limited Partner in the Partnership.
"Limited Partnership Interest" means a Partnership Interest of a Limited
Partner in the Partnership representing a fractional part of the Partnership
Interests of all Limited Partners and includes any and all benefits to which the
holder of such a Partnership Interest may be entitled as provided in this
Agreement, together with all obligations of such Person to comply with the terms
and provisions of this Agreement. A Limited Partnership Interest may be
expressed as a number of Partnership Units.
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"Liquidating Event" has the meaning set forth in Section 13.1 hereof.
"Liquidating Transaction" has the meaning set forth in Section 7.11.C
hereof.
"Liquidator" has the meaning set forth in Section 13.2.A hereof.
"Mendik/FW LLC" means FW/Mendik REIT, L.L.C., a Delaware limited liability
company.
"Net Income" means, for any taxable period, the excess, if any, of the
Partnership's items of income and gain for such taxable period over the
Partnership's items of loss and deduction for such taxable period. The items
included in the calculation of Net Income shall be determined in accordance
with Exhibit B hereto. If an item of income, gain, loss or deduction that
has been included in the initial computation of Net Income is subjected to
the special allocation rules in Exhibit C hereto, Net Income or the resulting
Net Loss, whichever the case may be, shall be recomputed without regard to
such item.
"Net Loss" means, for any taxable period, the excess, if any, of the
Partnership's items of loss and deduction for such taxable period over the
Partnership's items of income and gain for such taxable period. The items
included in the calculation of Net Loss shall be determined in accordance with
Exhibit B. If an item of income, gain, loss or deduction that has been included
in the initial computation of Net Loss is subjected to the special allocation
rules in Exhibit C hereto, Net Loss or the resulting Net Income, whichever the
case may be, shall be recomputed without regard to such item.
"New Securities" means (i) any rights, options, warrants or convertible or
exchangeable securities having the right to subscribe for or purchase shares of
capital stock (or other comparable equity interest) of the General Partner,
excluding grants under any Stock Option Plan, or (ii) any Debt issued by the
General Partner that provides any of the rights described in clause (i).
"Nonrecourse Built-in Gain" means, with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or negative
pledge securing a Nonrecourse Liability, the amount of any taxable gain that
would be allocated to the Partners pursuant to Section 2.B of Exhibit C hereto
if such properties were disposed of in a taxable transaction in full
satisfaction of such liabilities and for no other consideration.
"Nonrecourse Deductions" has the meaning set forth in Regulations
Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a
Partnership Year shall be determined in accordance with the rules of Regulations
Section 1.704-2(c).
"Nonrecourse Liability" has the meaning set forth in Regulations
Section 1.752-1(a)(2).
"Notice of Redemption" means a Notice of Redemption substantially in the
form of Exhibit D attached hereto.
"Partner" means the General Partner or a Limited Partner, and "Partners"
means the General Partner and the Limited Partners.
"Partner Minimum Gain" means an amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i)(3).
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"Partner Nonrecourse Debt" has the meaning set forth in Regulations
Section 1.704-2(b)(4).
"Partner Nonrecourse Deductions" has the meaning set forth in Regulations
Section 1.704-2(i)(2), and the amount of Partner Nonrecourse Deductions with
respect to a Partner Nonrecourse Debt for a Partnership Year shall be determined
in accordance with the rules of Regulations Section 1.704-2(i)(2).
"Partnership" means the limited partnership formed under the Act and
continued upon the terms and conditions set forth in this Agreement, and any
successor thereto.
"Partnership Interest" means a Limited Partnership Interest or the General
Partnership Interest and includes any and all benefits to which the holder of
such a Partnership Interest may be entitled as provided in this Agreement,
together with all obligations of such Person to comply with the terms and
provisions of this Agreement. A Partnership Interest may be expressed as a
number of Partnership Units.
"Partnership Minimum Gain" has the meaning set forth in Regulations
Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as
any net increase or decrease in Partnership Minimum Gain, for a Partnership Year
shall be determined in accordance with the rules of Regulations
Section 1.704-2(d).
"Partnership Record Date" means the record date established by the
General Partner either (i) for the distribution of Available Cash pursuant to
Section 5.1 hereof, which record date shall be the same as the record date
established by the General Partner Entity for a distribution to its
shareholders of some or all of its portion of such distribution received by
the General Partner if the shares of common stock (or comparable equity
interests) of the General Partner Entity are Publicly Traded, or (ii) if
applicable, for determining the Partners entitled to vote on or consent to
any proposed action for which the consent or approval of the Partners is
sought pursuant to Section 14.2 hereof.
"Partnership Unit" means a fractional, undivided share of the Partnership
Interests of all Partners issued pursuant to Sections 4.1 and 4.2 hereof, and
includes Class A Units, Class B Units and any other classes or series of
Partnership Units established after the date hereof. The number of
Partnership Units outstanding and the Percentage Interests in the Partnership
represented by such Partnership Units are set forth in Exhibit A hereto, as
such Exhibit may be amended and restated from time to time. The ownership of
Partnership Units may be evidenced by a certificate in a form approved by the
General Partner.
"Partnership Year" means the fiscal year of the Partnership, which shall be
the calendar year.
"Percentage Interest" means, as to a Partner holding a class of Partnership
Interests, its interest in such class, determined by dividing the Partnership
Units of such class owned by such Partner by the total number of Partnership
Units of such class then outstanding as specified in Exhibit A attached hereto,
as such exhibit may be amended and restated from time to time, multiplied by the
aggregate Percentage Interest allocable to such class of Partnership Interests.
In the event that the Partnership shall at any time have outstanding more than
one class of Partnership Interests, the Percentage Interest attributable to each
class of Partnership Interests shall be determined as set forth in Section 4.2.B
hereof.
"Person" means a natural person, partnership (whether general or limited),
trust, estate, association, corporation, limited liability company,
unincorporated organization, custodian, nominee or any other individual or
entity in its own or any representative capacity.
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"Predecessor Entity" has the meaning set forth in the definition of
"Conversion Factor" herein.
"Publicly Traded" means listed or admitted to trading on the New York Stock
Exchange, the American Stock Exchange or another national securities exchange or
designated for quotation on the NASDAQ National Market, or any successor to any
of the foregoing.
"Qualified REIT Subsidiary" means any Subsidiary of the General Partner
that is a "qualified REIT subsidiary" within the meaning Section 856(i) of the
Code.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Section 743 of the Code) upon the
disposition of any property or asset of the Partnership, which gain is
characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Redeeming Partner" has the meaning set forth in Section 8.6.A hereof.
"Redemption Amount" means either the Cash Amount or the Shares Amount, as
determined by the General Partner in its sole and absolute discretion; provided
that in the event that the Shares are not Publicly Traded at the time a
Redeeming Partner exercises its Redemption Right, the Redemption Amount shall be
paid only in the form of the Cash Amount unless the Redeeming Partner, in its
sole and absolute discretion, consents to payment of the Redemption Amount in
the form of the Shares Amount. A Redeeming Partner shall have no right, without
the General Partner's consent, in its sole and absolute discretion, to receive
the Redemption Amount in the form of the Shares Amount.
"Redemption Right" has the meaning set forth in Section 8.6.A hereof.
"Regulations" means the Income Tax Regulations promulgated under the Code,
as such regulations may be amended from time to time (including corresponding
provisions of succeeding regulations).
"REIT" means a real estate investment trust under Section 856 of the Code.
"REIT Requirements" has the meaning set forth in Section 5.1.A hereof.
"Replacement Property" has the meaning set forth in Section 7.11.C hereof.
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of Contributed Property or
Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 2.B.1(a) or 2.B.2(a) of Exhibit C hereto to eliminate Book-
Tax Disparities.
"Safe Harbor" has the meaning set forth in Section 11.6.F hereof.
"Securities Act" means the Securities Act of 1933, as amended.
"704(c) Value" of any Contributed Property means the fair market value of
such property at the time of contribution as determined by the General Partner
using such reasonable method of valuation as it may adopt. Subject to Exhibit B
hereto, the General Partner shall, in its sole and absolute discretion, use such
method as it deems reasonable and appropriate to allocate the aggregate of the
704(c) Values of Contributed Properties in a single or integrated transaction
among each separate property on a basis proportional to their fair market
values. The 704(c) Values of the
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Contributed Properties contributed to the Partnership as part of or in
connection with the Consolidation are set forth on Exhibit E attached hereto.
"Share" means a share of capital stock (or other comparable equity
interest) of the General Partner Entity. Shares may be issued in one or more
classes or series in accordance with the terms of the Articles of
Incorporation (or, if the General Partner is not the General Partner Entity,
the organizational documents of the General Partner Entity). In the event
that there is more than one class or series of Shares, the term "Shares"
shall, as the context requires, be deemed to refer to the class or series of
Shares that correspond to the class or series of Partnership Interests for
which the reference to Shares is made. When used with reference to Class A
Units, the term "Shares" refers to shares of common stock (or other
comparable equity interest) of the General Partner Entity.
"Shares Amount" means a number of Shares equal to the product of the number
of Partnership Units offered for redemption by a Redeeming Partner times the
Conversion Factor; provided that, in the event the General Partner Entity issues
to all holders of Shares rights, options, warrants or convertible or
exchangeable securities entitling such holders to subscribe for or purchase
Shares or any other securities or property (collectively, the "rights"), then
the Shares Amount shall also include such rights that a holder of that number of
Shares would be entitled to receive; and provided further that, the Shares
Amount shall be adjusted pursuant to Section 7.5 hereof in the event that the
General Partner acquires material assets other than on behalf of the
Partnership.
"Specified Redemption Date" means the tenth Business Day after receipt by
the General Partner of a Notice of Redemption; provided that, if the Shares
are not Publicly Traded, the Specified Redemption Date means the thirtieth
Business Day after receipt by the General Partner of a Notice of Redemption.
"Stock Option Plan" means any stock incentive plan of the General Partner,
the Partnership or any Affiliate of the Partnership or the General Partner.
"Subsidiary" means, with respect to any Person, any corporation, limited
liability company, partnership or joint venture, or other entity of which a
majority of (i) the voting power of the voting equity securities or (ii) the
outstanding equity interests is owned, directly or indirectly, by such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 11.4 hereof.
"Successor Entity" has the meaning set forth in the definition of
"Conversion Factor" herein.
"Successor Partnership" has the meaning set forth in Section 7.11.C hereof.
"Tenant" means any tenant from which the General Partner derives rent,
either directly or indirectly through partnerships, including the Partnership,
or through any Qualified REIT Subsidiary.
"Terminating Capital Transaction" means any sale or other disposition of
all or substantially all of the assets of the Partnership for cash or a related
series of transactions that, taken together, result in the sale or other
disposition of all or substantially all of the assets of the Partnership for
cash.
"Termination Transaction" has the meaning set forth in Section 11.2.B
hereof.
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"Transferred Property" has the meaning set forth in Section 7.11.C. hereof.
"Two Penn Plaza Associates" means Two Penn Plaza Associates, L.P., a New
York limited partnership.
"Two Penn Plaza Property" has the meaning set forth in Section 7.11.C
hereof.
"Two Penn Plaza Units" has the meaning set forth in Section 7.11.C hereof.
"Unrealized Gain" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (i) the fair market
value of such property (as determined under Exhibit B hereto) as of such date,
over (ii) the Carrying Value of such property (prior to any adjustment to be
made pursuant to Exhibit B hereto) as of such date.
"Unrealized Loss" attributable to any item of Partnership property means,
as of any date of determination, the excess, if any, of (i) the Carrying Value
of such property (prior to any adjustment to be made pursuant to Exhibit B
hereto) as of such date, over (ii) the fair market value of such property (as
determined under Exhibit B hereto) as of such date.
"Valuation Date" means the date of receipt by the General Partner of a
Notice of Redemption or, if such date is not a Business Day, the first Business
Day thereafter.
"Value" means, with respect to any outstanding Shares of the General
Partner Entity that are Publicly Traded, the average of the daily market
price for the ten (10) consecutive trading days immediately preceding the
date with respect to which value must be determined or, if such date is not a
Business Day, the immediately preceding Business Day. The market price for
each such trading day shall be the closing price, regular way, on such day,
or if no such sale takes place on such day, the average of the closing bid
and asked prices on such day. In the event that the outstanding Shares of
the General Partner Entity are Publicly Traded and the Shares Amount includes
rights that a holder of Shares would be entitled to receive, then the Value
of such rights shall be determined by the General Partner acting in good
faith on the basis of such quotations and other information as it considers,
in its reasonable judgment, appropriate. In the event that the Shares of the
General Partner Entity are not Publicly Traded, the Value of the Shares
Amount per Partnership Unit offered for redemption (which will be the Cash
Amount per Partnership Unit offered for redemption payable pursuant to
Section 8.6A hereof) means the amount that a holder of one Partnership Unit
would receive if each of the assets of the Partnership were to be sold for
its fair market value on the Specified Redemption Date, the Partnership were
to pay all of its outstanding liabilities, and the remaining proceeds were to
be distributed to the Partners in accordance with the terms of this
Agreement. Such Value shall be determined by the General Partner, acting in
good faith and based upon a commercially reasonable estimate of the amount
that would be realized by the Partnership if each asset of the Partnership
(and each asset of each partnership. limited liability company, joint venture
or other entity in which the Partnership owns a direct or indirect interest)
were sold to an unrelated purchaser in an arms' length transaction where
neither the purchaser nor the seller were under economic compulsion to enter
into the transaction (without regard to any discount in value as a result of
the Partnership's minority interest in any property or any illiquidity of the
Partnership's interest in any property). In connection with determining the
Deemed Value of the Partnership Interest for purposes of determining the
number of additional Partnership Units issuable upon a Capital Contribution
funded by an underwritten public offering of shares of capital stock (or
other comparable equity interest) of the General Partner, the Value of such
shares shall be the public offering price per share of such class of the
capital stock (or other comparable equity interest) sold.
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ARTICLE II
ORGANIZATIONAL MATTERS
Section 2.1 Organization
The Partnership is a limited partnership organized pursuant to the
provisions of the Act and upon the terms and conditions set forth in the Prior
Agreement. The Partners hereby continue the Partnership and amend and restate
the Prior Agreement in its entirety. Except as expressly provided herein to the
contrary, the rights and obligations of the Partners and the administration and
termination of the Partnership shall be governed by the Act. The Partnership
Interest of each Partner shall be personal property for all purposes.
Section 2.2 Name
The name of the Partnership is The Mendik Company, L.P. The
Partnership's business may be conducted under any other name or names deemed
advisable by the General Partner, including the name of the General Partner
or any Affiliate thereof. The words "Limited Partnership," "L.P.," "Ltd." or
similar words or letters shall be included in the Partnership's name where
necessary for the purposes of complying with the laws of any jurisdiction
that so requires. The General Partner in its sole and absolute discretion
may change the name of the Partnership at any time and from time to time and
shall notify the Limited Partners of such change in the next regular
communication to the Limited Partners.
Section 2.3 Registered Office and Agent; Principal Office
The address of the registered office of the Partnership in the State of
Delaware shall be located at Corporation Trust Center, 1209 Orange Street,
Wilmington, County of New Castle, Delaware 19801, and the registered agent for
service of process on the Partnership in the State of Delaware at such
registered office shall be Corporation Trust Company. The principal office of
the Partnership shall be 330 Madison Avenue, New York, New York 10017, or such
other place as the General Partner may from time to time designate by notice to
the Limited Partners. The Partnership may maintain offices at such other place
or places within or outside the State of Delaware as the General Partner deems
advisable.
Section 2.4 Term
The term of the Partnership commenced on October 2, 1996, the date on which
the Certificate was filed in the office of the Secretary of State of the State
of Delaware in accordance with the Act, and shall continue until December 31,
2095, unless it is dissolved sooner pursuant to the provisions of Article XIII
hereof or as otherwise provided by law.
ARTICLE III
PURPOSE
Section 3.1 Purpose and Business
The purpose and nature of the business to be conducted by the Partnership
is (i) to conduct any business that may be lawfully conducted by a limited
partnership organized pursuant to the Act; provided, however, that such
business shall be limited to and conducted in such a manner as to permit the
General Partner Entity at all times to be classified as a REIT, unless the
General Partner Entity ceases to qualify, or is not qualified, as a REIT for
any reason or reasons not related
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to the business conducted by the Partnership; (ii) to enter into any
partnership, joint venture, limited liability company or other similar
arrangement to engage in any of the foregoing or the ownership of interests
in any entity engaged, directly or indirectly, in any of the foregoing; and
(iii) to do anything necessary or incidental to the foregoing. In connection
with the foregoing, the Partners acknowledge that the status of the General
Partner Entity as a REIT inures to the benefit of all the Partners and not
solely the General Partner or its Affiliates.
Section 3.2 Powers
The Partnership is empowered to do any and all acts and things necessary,
appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described herein
and for the protection and benefit of the Partnership, including, without
limitation, full power and authority, directly or through its ownership
interest in other entities, to enter into, perform and carry out contracts of
any kind, borrow money and issue evidences of indebtedness whether or not
secured by mortgage, deed of trust, pledge or other lien, acquire, own,
manage, improve and develop real property, and lease, sell, transfer and
dispose of real property; provided, however, that the Partnership shall not
take, or refrain from taking, any action which, in the judgment of the
General Partner, in its sole and absolute discretion, (i) could adversely
affect the ability of the General Partner Entity to continue to qualify as a
REIT, (ii) could subject the General Partner Entity to any additional taxes
under Section 857 or Section 4981 of the Code or (iii) could violate any law
or regulation of any governmental body or agency having jurisdiction over the
General Partner Entity or its securities, unless such action (or inaction)
shall have been specifically consented to by the General Partner in writing.
Section 3.3 Partnership Only for Purposes Specified
The Partnership shall be a partnership only for the purposes specified in
Section 3.1 above, and this Agreement shall not be deemed to create a
partnership among the Partners with respect to any activities whatsoever other
than the activities within the purposes of the Partnership as specified in
Section 3.1 above.
ARTICLE IV
CAPITAL CONTRIBUTIONS AND ISSUANCES
OF PARTNERSHIP INTERESTS
Section 4.1 Capital Contributions of the Partners
A. Initial Capital Contributions and Recapitalization of the
Partnership on the Effective Date. The General Partner and Mendik/FW LLC
previously made Capital Contributions to the Partnership. On the Effective
Date, the General Partner and certain other Persons (including Mendik/FW LLC)
will make additional Capital Contributions to the Partnership in connection
with the Consolidation. On the Effective Date, the Partnership shall be
recapitalized, and the General Partner will complete Exhibit A hereto to
reflect the Capital Contributions made by each Partner, the Partnership Units
assigned to each Partner and the Percentage Interest in the Partnership
represented by such Partnership Units. The Capital Accounts of the Partners
and the Carrying Values of the Partnership's Assets shall be determined as of
the Effective Date pursuant to Section I.D of Exhibit B hereto to reflect the
Capital Contributions made prior to and on the Effective Date.
B. General Partnership Interest. A number of Partnership Units held by
the General Partner equal to one percent (1%) of all outstanding Partnership
Units shall be deemed to be the General Partner Partnership Units and shall
be the General Partnership Interest. All other
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Partnership Units held by the General Partner shall be deemed to be Limited
Partnership Interests and shall be held by the General Partner in its
capacity as a Limited Partner in the Partnership.
C. Capital Contributions By Merger. To the extent the Partnership
acquires any property by the merger of any other Person into the Partnership,
Persons who receive Partnership Interests in exchange for their interests in
the Person merging into the Partnership shall become Partners and shall be
deemed to have made Capital Contributions as provided in the applicable
merger agreement and as set forth in Exhibit A hereto.
D. No Obligation to Make Additional Capital Contributions. Except as
provided in Sections 7.5 and 10.5 hereof, the Partners shall have no
obligation to make any additional Capital Contributions or provide any
additional funding to the Partnership (whether in the form of loans,
repayments of loans or otherwise). No Partner shall have any obligation to
restore any deficit that may exist in its Capital Account, either upon a
liquidation of the Partnership or otherwise.
Section 4.2 Issuances of Partnership Interests
A. General. The General Partner is hereby authorized to cause the
Partnership from time to time to issue to Partners (including the General
Partner and its Affiliates) or other Persons (including, without limitation,
in connection with the contribution of property to the Partnership)
Partnership Units or other Partnership Interests in one or more classes, or
in one or more series of any of such classes, with such designations,
preferences and relative, participating, optional or other special rights,
powers and duties, including rights, powers and duties senior to Limited
Partnership Interests, all as shall be determined, subject to applicable
Delaware law, by the General Partner in its sole and absolute discretion,
including, without limitation, (i) the allocations of items of Partnership
income, gain, loss, deduction and credit to each such class or series of
Partnership Interests, (ii) the right of each such class or series of
Partnership Interests to share in Partnership distributions and (iii) the
rights of each such class or series of Partnership Interests upon dissolution
and liquidation of the Partnership; provided that, no such Partnership Units
or other Partnership Interests shall be issued to the General Partner unless
either (a) the Partnership Interests are issued in connection with the grant,
award or issuance of Shares or other equity interests in the General Partner
having designations, preferences and other rights such that the economic
interests attributable to such Shares or other equity interests are
substantially similar to the designations, preferences and other rights
(except voting rights) of the additional Partnership Interests issued to the
General Partner in accordance with this Section 4.2.A or (b) the Partnership
Interests are issued to all Partners holding Partnership Interests in the
same class in proportion to their respective Percentage Interests in such
class. In the event that the Partnership issues Partnership Interests
pursuant to this Section 4.2.A, the General Partner shall make such revisions
to this Agreement (including but not limited to the revisions described in
Section 5.4, Section 6.2 and Section 8.6 hereof) as it deems necessary to
reflect the issuance of such additional Partnership Interests.
B. Percentage Interest Adjustments in the Case of Capital Contributions
for Partnership Units. Upon the acceptance of additional Capital
Contributions in exchange for Partnership Units, the Percentage Interest
related thereto shall be equal to a fraction, the numerator of which is equal
to the amount of cash, if any, plus the Agreed Value of Contributed Property,
if any, contributed with respect to such additional Partnership Units and the
denominator of which is equal to the sum of (i) the Deemed Value of the
Partnership Interests for all outstanding classes (computed as of the
Business Day immediately preceding the date on which the additional Capital
Contributions are made (an "Adjustment Date")) plus (ii) the aggregate amount
of additional Capital Contributions contributed to the Partnership on such
Adjustment Date in respect of such additional Partnership Units. The
Percentage Interest of each other Partner holding Partnership Interests not
making a full pro rata Capital Contribution shall be adjusted to a fraction the
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numerator of which is equal to the sum of (i) the Deemed Partnership Interest
Value of such Limited Partner (computed as of the Business Day immediately
preceding the Adjustment Date) plus (ii) the amount of additional Capital
Contributions (such amount being equal to the amount of cash, if any, plus
the Agreed Value of Contributed Property, if any, so contributed), if any,
made by such Partner to the Partnership in respect of such Partnership
Interest as of such Adjustment Date and the denominator of which is equal to
the sum of (i) the Deemed Value of the Partnership Interests of all
outstanding classes (computed as of the Business Day immediately preceding
such Adjustment Date) plus (ii) the aggregate amount of the additional
Capital Contributions contributed to the Partnership on such Adjustment Date
in respect of such additional Partnership Interests. For purposes of
calculating a Partner's Percentage Interest pursuant to this Section 4.2.B,
cash Capital Contributions by the General Partner will be deemed to equal the
cash contributed by the General Partner plus (a) in the case of cash
contributions funded by an offering of any equity interests in or other
securities of the General Partner, the offering costs attributable to the
cash contributed to the Partnership, and (b) in the case of Partnership Units
issued pursuant to Section 7.5.E hereof, an amount equal to the difference
between the Value of the Shares sold pursuant to any Stock Option Plan and
the net proceeds of such sale.
C. Classes of Partnership Units. From and after the Effective Date,
subject to Section 4.2.A above, the Partnership shall have two classes of
Partnership Units entitled "Class A Units" and "Class B Units." Either Class
A Units or Class B Units, at the election of the General Partner, in its sole
and absolute discretion, may be issued to newly admitted Partners in exchange
for the contribution by such Partners of cash, real estate partnership
interests, stock, notes or other assets or consideration; provided, that all
Partnership Units issued to Partners in connection with the Consolidation
shall be Class A Units; and, provided further, that any Partnership Unit that
is not specifically designated by the General Partner as being of a
particular class shall be deemed to be a Class A Unit. Each Class B Unit
shall be converted automatically into a Class A Unit on the day immediately
following the Partnership Record Date for the Distribution Period (as defined
in Section 5.1.C hereof) in which such Class B Unit was issued, without the
requirement for any action by either the Partnership or the Partner holding
the Class B Unit.
Section 4.3 No Preemptive Rights
Except to the extent expressly granted by the Partnership pursuant to
another agreement, no Person shall have any preemptive, preferential or other
similar right with respect to (i) additional Capital Contributions or loans
to the Partnership or (ii) issuance or sale of any Partnership Units or other
Partnership Interests.
Section 4.4 Other Contribution Provisions
In the event that any Partner is admitted to the Partnership and is given
a Capital Account in exchange for services rendered to the Partnership, such
transaction shall be treated by the Partnership and the affected Partner as
if the Partnership had compensated such Partner in cash, and the Partner had
contributed such cash to the capital of the Partnership.
Section 4.5 No Interest on Capital
No Partner shall be entitled to interest on its Capital Contributions or
its Capital Account.
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ARTICLE V
DISTRIBUTIONS
Section 5.1 Requirement and Characterization of Distributions
A. General. The General Partner shall distribute at least quarterly an
amount equal to one hundred percent (100%) of Available Cash generated by the
Partnership during such quarter or shorter period to the Partners who are
Partners on the Partnership Record Date with respect to such quarter or
shorter period as provided in Sections 5.1.B, 5.1.C and 5.1.D below.
Notwithstanding anything to the contrary contained herein, in no event may a
Partner receive a distribution of Available Cash with respect to a
Partnership Unit for a quarter or shorter period if such Partner is entitled
to receive a distribution with respect to a Share for which such Partnership
Unit has been redeemed or exchanged. Unless otherwise expressly provided for
herein or in an agreement at the time a new class of Partnership Interests is
created in accordance with Article IV hereof, no Partnership Interest shall
be entitled to a distribution in preference to any other Partnership
Interest. The General Partner shall make such reasonable efforts, as
determined by it in its sole and absolute discretion and consistent with the
qualification of the General Partner Entity as a REIT, to distribute
Available Cash (a) to Limited Partners so as to preclude any such
distribution or portion thereof from being treated as part of a sale of
property of the Partnership by a Limited Partner under Section 707 Code or
the Regulations thereunder; provided that, the General Partner and the
Partnership shall not have liability to a Limited Partner under any
circumstances as a result of any distribution to a Limited Partner being so
treated, and (b) to the General Partner in an amount sufficient to enable the
General Partner Entity to pay stockholder dividends that will (1) satisfy the
requirements for qualification as a REIT under the Code and the Regulations
(the "REIT Requirements") and (2) avoid any federal income or excise tax
liability for the General Partner Entity.
B. Method. (i) Each holder of Partnership Interests that are entitled
to any preference in distribution shall be entitled to a distribution in
accordance with the rights of any such class of Partnership Interests (and,
within such class, pro rata in proportion to the respective Percentage
Interests on such Partnership Record Date); and
(ii) To the extent there is Available Cash remaining after the payment of
any preference in distribution in accordance with the foregoing clause (i),
with respect to Partnership Interests that are not entitled to any preference
in distribution, pro rata to each such class in accordance with the terms of
such class (and, within each such class, pro rata in proportion to the
respective Percentage Interests on such Partnership Record Date).
C. Distributions When Class B Units Are Outstanding. If for any
quarter or shorter period with respect to which a distribution is to be made
(a "Distribution Period") Class B Units are outstanding on the Partnership
Record Date for such Distribution Period, the General Partner shall allocate
the Available Cash with respect to such Distribution Period available for
distribution with respect to the Class A Units and Class B Units collectively
between the Partners who are holders of Class A Units ("Class A") and the
Partners who are holders of Class B Units ("Class B") as follows:
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(1) Class A shall receive that portion of the
Available Cash (the "Class A Share") determined by
multiplying the amount of Available Cash by the following
fraction:
A x Y
---------------------
(A x Y)+(B x X)
(2) Class B shall receive that portion of the
Available Cash (the "Class B Share") determined by
multiplying the amount of Available Cash by the following
fraction:
B x X
---------------------
(A x Y)+(B x X)
(3) For purposes of the foregoing formulas, (i) "A"
equals the number of Class A Units outstanding on the
Partnership Record Date for such Distribution Period;
(ii) "B" equals the number of Class B Units outstanding on
the Partnership Record Date for such Distribution Period;
(iii) "Y" equals the number of days in the Distribution
Period; and (iv) "X" equals the number of days in the
Distribution Period for which the Class B Units were issued
and outstanding.
The Class A Share shall be distributed among Partners holding Class A
Units on the Partnership Record Date for the Distribution Period in
accordance with the number of Class A Units held by each Partner on such
Partnership Record Date; provided that, in no event may a Partner receive a
distribution of Available Cash with respect to a Class A Unit if a Partner is
entitled to receive a distribution out of such Available Cash with respect to
a Share for which such Class A Unit has been redeemed or exchanged. The
Class B Share shall be distributed among the Partners holding Class B Units
on the Partnership Record Date for the Distribution Period in accordance with
the number of Class B Units held by each Partner on such Partnership Record
Date. In no event shall any Class B Units be entitled to receive any
distribution of Available Cash for any Distribution Period ending prior to
the date on which such Class B Units are issued.
D. Distributions When Class B Units Have Been Issued on Different
Dates. In the event that Class B Units which have been issued on different
dates are outstanding on the Partnership Record Date for any Distribution
Period, then the Class B Units issued on each particular date shall be
treated as a separate series of Partnership Units for purposes of making the
allocation of Available Cash for such Distribution Period among the holders
of Partnership Units (and the formula for making such allocation, and the
definitions of variables used therein, shall be modified accordingly). Thus,
for example, if two series of Class B Units are outstanding on the
Partnership Record Date for any Distribution Period, the allocation formula
for each series, "Series B(1)" and "Series B(2)" would be as follows:
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(1) Series B(1) shall receive that portion of the
Available Cash determined by multiplying the amount of
Available Cash by the following fraction:
B(1) x X(1)
---------------------------------------
(A x Y)+(B(1) x X(1))+(B(2) x X(2))
(2) Series B(2) shall receive that portion of the
Available Cash determined by multiplying the amount of
Available Cash by the following fraction:
B(2) x X(2)
--------------------------------------
(A x Y)+(B(1) x X(1))+(B(2) x X(2))
(3) For purposes of the foregoing formulas the
definitions set forth in Section 5.1.C.3 above remain the
same except that (i) "B(1)" equals the number of Partnership
Units in Series B(1) outstanding on the Partnership Record
Date for such Distribution Period; (ii) "B(2)" equals the
number of Partnership Units in Series B(2) outstanding on the
Partnership Record Date for such Distribution Period;
(iii) "X(1)" equals the number of days in the Distribution
Period for which the Partnership Units in Series B(1) were
issued and outstanding; and (iv) "X(2)" equals the number of
days in the Distribution Period for which the Partnership
Units in Series B(2) were issued and outstanding.
E. Minimum Distributions if General Partner Not Publicly Traded. In
addition (and without regard to the amount of Available Cash), if the shares
of common stock (or other comparable equity interests) of the General Partner
are not Publicly Traded, the General Partner shall make cash distributions
with respect to the Class A Units at least annually for each taxable year of
the Partnership beginning prior to the fifteenth (15th) anniversary of the
Effective Date in an aggregate amount with respect to each such taxable year
at least equal to 95% of the Partnership's taxable income for such year
allocable to the Class A Units, with such distributions to be made not later
than 60 days after the end of such year. Notwithstanding Section
14.1.D.(iv), this Section 5.1.E may be amended with the Consent of Certain
Limited Partners.
Section 5.2 Amounts Withheld
All amounts withheld pursuant to the Code or any provisions of any state
or local tax law and Section 10.5 hereof with respect to any allocation,
payment or distribution to the General Partner, the Limited Partners or
Assignees shall be treated as amounts distributed to the General Partner,
Limited Partners or Assignees pursuant to Section 5.1 above for all purposes
under this Agreement.
Section 5.3 Distributions Upon Liquidation
Proceeds from a Terminating Capital Transaction shall be distributed to the
Partners in accordance with Section 13.2 hereof.
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Section 5.4 Revisions to Reflect Issuance of Additional Partnership Interests
In the event that the Partnership issues additional Partnership Interests
to the General Partner or any Additional Limited Partner pursuant to Article
IV hereof, the General Partner shall make such revisions to this Article V as
it deems necessary to reflect the issuance of such additional Partnership
Interests.
ARTICLE VI
ALLOCATIONS
Section 6.1 Allocations For Capital Account Purposes
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Exhibit B hereto) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided herein below.
A. Net Income. After giving effect to the special allocations set
forth in Section 1 of Exhibit C hereto and Section 6.1.E below, Net Income
shall be allocated (i) first, to the General Partner to the extent that Net
Losses previously allocated to the General Partner pursuant to the last
sentence of Section 6.1.B below exceed Net Income previously allocated to the
General Partner pursuant to this clause (i) of Section 6.1.A, (ii) second, to
the holders of any Partnership Interests that are entitled to any preference
in distribution in accordance with the rights of any such class of
Partnership Interests until each such Partnership Interest has been
allocated, on a cumulative basis pursuant to this clause (ii), Net Income
equal to the amount of distributions received which are attributable to the
preference of such class of Partnership Interests (and, within such class,
pro rata in proportion to the respective Percentage Interests as of the last
day of the period for which such allocation is being made) and (iii) third,
with respect to Partnership Interests that are not entitled to any preference
in the allocation of Net Income, pro rata to each such class in accordance
with the terms of such class (and, within such class, pro rata in proportion
to the respective Percentage Interests as of the last day of the period for
which such allocation is being made).
B. Net Losses. After giving effect to the special allocations set
forth in Section 1 of Exhibit C hereto and Section 6.1.E below, Net Losses
shall be allocated (i) first, to the holders of any Partnership Interests
that are entitled to any preference in distribution in accordance with the
rights of any such class of Partnership Interests to the extent that any
prior allocations of Net Income to such class of Partnership Interests
pursuant to Section 6.1.A(ii) above exceed, on a cumulative basis,
distributions with respect to such Partnership Interests pursuant to clause
(i) of Section 5.1.B hereof (and, within such class, pro rata in proportion
to the respective Percentage Interests as of the last day of the period for
which such allocation is being made) and (ii) second, with respect to classes
of Partnership Interests that are not entitled to any preference in
distribution, pro rata to each such class in accordance with the terms of
such class (and, within such class, pro rata in proportion to the respective
Percentage Interests as of the last day of the period for which such
allocation is being made); provided that, Net Losses shall not be allocated
to any Limited Partner pursuant to this Section 6.1.B to the extent that such
allocation would cause such Limited Partner to have an Adjusted Capital
Account Deficit (or increase any existing Adjusted Capital Account Deficit)
at the end of such taxable year (or portion thereof). All Net Losses in
excess of the limitations set forth in this Section 6.1.B shall be allocated
to the General Partner.
C. Allocation of Nonrecourse Debt. For purposes of Regulations
Section 1.752-3(a), the Partners agree that Nonrecourse Liabilities of the
Partnership in excess of the sum of (i) the amount of Partnership Minimum Gain
and (ii) the total amount of Nonrecourse Built-
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in Gain shall be allocated among the Partners in accordance with their
respective Percentage Interests.
D. Recapture Income. Any gain allocated to the Partners upon the sale
or other taxable disposition of any Partnership asset shall, to the extent
possible after taking into account other required allocations of gain
pursuant to Exhibit C hereto, be characterized as Recapture Income in the
same proportions and to the same extent as such Partners have been allocated
any deductions directly or indirectly giving rise to the treatment of such
gains as Recapture Income.
E. Cancellation of Indebtedness Income. Any cancellation of
indebtedness income required to be recognized by the Partnership with respect
to the Two Penn Plaza Property in connection with the acquisition of the Two
Penn Plaza Property by the Partnership and the restructuring of the
outstanding indebtedness with respect thereto shall be allocated solely to
holders of the Partnership Units issued with respect to Two Penn Plaza
Associates in the Consolidation. In the event that cancellation of
indebtedness income is recognized with respect to the property at 330 Madison
Avenue as a result of resolving the dispute with the lender under the loan
outstanding upon consummation of the Consolidation that is secured by a
mortgage on such property, holders of the Partnership Units issued with
respect to M 330 Associates, a New York limited partnership, shall be
specially allocated cancellation of indebtedness income in an amount equal to
their proportionate share of the dollar amount of the discount as a result of
the settlement resulting in the recognition of such cancellation of
indebtedness income.
Section 6.2 Revisions to Allocations to Reflect Issuance of Additional
Partnership Interests
In the event that the Partnership issues additional Partnership Interests
to the General Partner or any Additional Limited Partner pursuant to Article
IV hereof, the General Partner shall make such revisions to this Article VI
as it deems necessary to reflect the terms of the issuance of such additional
Partnership Interests, including making preferential allocations to classes
of Partnership Interests that are entitled thereto.
ARTICLE VII
MANAGEMENT AND OPERATIONS OF BUSINESS
Section 7.1 Management
A. Powers of General Partner. Except as otherwise expressly provided
in this Agreement, all management powers over the business and affairs of the
Partnership are and shall be exclusively vested in the General Partner, and
no Limited Partner shall have any right to participate in or exercise control
or management power over the business and affairs of the Partnership. The
General Partner may not be removed by the Limited Partners with or without
cause; provided, however, that if the Shares (or comparable equity
securities) of the General Partner Entity are not Publicly Traded, the
General Partner may be removed with cause with the Consent of the Outside
Limited Partners. In addition to the powers now or hereafter granted a
general partner of a limited partnership under applicable law or which are
granted to the General Partner under any other provision of this Agreement,
the General Partner, subject to Sections 7.6 and 7.11 below, shall have full
power and authority to do all things deemed necessary or desirable by it to
conduct the business of the Partnership, to exercise all powers set forth in
Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1
hereof, including, without limitation:
(1) the making of any expenditures, the lending or borrowing of money
(including, without limitation, making prepayments on loans and
borrowing money to permit the Partnership to make distributions to its
Partners in such
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<PAGE>
amounts as are required under Section 5.1.E hereof or will permit
the General Partner Entity (as long as the General Partner Entity
qualifies as a REIT) to avoid the payment of any federal income
tax (including, for this purpose, any excise tax pursuant to
Section 4981 of the Code) and to make distributions to its
shareholders sufficient to permit the General Partner Entity to
maintain REIT status), the assumption or guarantee of, or other
contracting for, indebtedness and other liabilities, the issuance of
evidences of indebtedness (including the securing of same by mortgage,
deed of trust or other lien or encumbrance on the Partnership's
assets) and the incurring of any obligations the General Partner deems
necessary for the conduct of the activities of the Partnership;
(2) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(3) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the
Partnership (including the exercise or grant of any conversion,
option, privilege or subscription right or other right available in
connection with any assets at any time held by the Partnership) or the
merger or other combination of the Partnership with or into another
entity, on such terms as the General Partner deems proper;
(4) the use of the assets of the Partnership (including, without
limitation, cash on hand) for any purpose consistent with the terms of
this Agreement and on any terms it sees fit, including, without
limitation, the financing of the conduct of the operations of the
Partnership or any of the Partnership's Subsidiaries, the lending of
funds to other Persons (including, without limitation, the
Partnership's Subsidiaries) and the repayment of obligations of the
Partnership and its Subsidiaries and any other Person in which the
Partnership has an equity investment and the making of capital
contributions to its Subsidiaries;
(5) the management, operation, leasing, landscaping, repair, alteration,
demolition or improvement of any real property or improvements owned
by the Partnership or any Subsidiary of the Partnership or any Person
in which the Partnership has made a direct or indirect equity
investment;
(6) the negotiation, execution, and performance of any contracts,
conveyances or other instruments that the General Partner considers
useful or necessary to the conduct of the Partnership's operations or
the implementation of the General Partner's powers under this
Agreement, including contracting with contractors, developers,
consultants, accountants, legal counsel, other professional advisors
and other agents and the payment of their expenses and compensation
out of the Partnership's assets;
(7) the distribution of Partnership cash or other Partnership assets in
accordance with this Agreement;
(8) the holding, managing, investing and reinvesting of cash and other
assets of the Partnership;
(9) the collection and receipt of revenues and income of the Partnership;
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(10) the selection and dismissal of employees of the Partnership
(including, without limitation, employees having titles such as
"president," "vice president," "secretary" and "treasurer") and
agents, outside attorneys, accountants, consultants and contractors of
the Partnership, and the determination of their compensation and other
terms of employment or hiring;
(11) the maintenance of such insurance for the benefit of the Partnership
and the Partners as it deems necessary or appropriate;
(12) the formation of, or acquisition of an interest in, and the
contribution of property to, any further limited or general
partnerships, joint ventures, limited liability companies or other
relationships that it deems desirable (including, without limitation,
the acquisition of interests in, and the contributions of property to
its Subsidiaries and any other Person in which it has an equity
investment from time to time);
(13) the control of any matters affecting the rights and obligations of the
Partnership, including the settlement, compromise, submission to
arbitration or any other form of dispute resolution or abandonment of
any claim, cause of action, liability, debt or damages due or owing to
or from the Partnership, the commencement or defense of suits, legal
proceedings, administrative proceedings, arbitrations or other forms
of dispute resolution, the representation of the Partnership in all
suits or legal proceedings, administrative proceedings, arbitrations
or other forms of dispute resolution, the incurring of legal expense
and the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(14) the determination of the fair market value of any Partnership property
distributed in kind, using such reasonable method of valuation as the
General Partner may adopt;
(15) the exercise, directly or indirectly, through any attorney-in-fact
acting under a general or limited power of attorney, of any right,
including the right to vote, appurtenant to any assets or investment
held by the Partnership;
(16) the exercise of any of the powers of the General Partner enumerated in
this Agreement on behalf of or in connection with any Subsidiary of
the Partnership or any other Person in which the Partnership has a
direct or indirect interest, individually or jointly with any such
Subsidiary or other Person;
(17) the exercise of any of the powers of the General Partner enumerated in
this Agreement on behalf of any Person in which the Partnership does
not have any interest pursuant to contractual or other arrangements
with such Person;
(18) the making, executing and delivering of any and all deeds, leases,
notes, deeds to secure debt, mortgages, deeds of trust, security
agreements, conveyances, contracts, guarantees, warranties,
indemnities, waivers, releases or other legal instruments or
agreements in writing necessary or appropriate in the judgment of the
General Partner for the accomplishment of any of the powers of the
General Partner under this Agreement;
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<PAGE>
(19) the distribution of cash to acquire Partnership Units held by a
Limited Partner in connection with a Limited Partner's exercise of its
Redemption Right under Section 8.6 hereof; and
(20) the amendment and restatement of Exhibit A hereto to reflect
accurately at all times the Capital Contributions and Percentage
Interests of the Partners as the same are adjusted from time to time
to the extent necessary to reflect redemptions, Capital Contributions,
the issuance of Partnership Units, the admission of any Additional
Limited Partner or any Substituted Limited Partner or otherwise, which
amendment and restatement, notwithstanding anything in this Agreement
to the contrary, shall not be deemed an amendment of this Agreement,
as long as the matter or event being reflected in Exhibit A hereto
otherwise is authorized by this Agreement.
B. No Approval by Limited Partners. Except as provided in Section 7.11
below, each of the Limited Partners agrees that the General Partner is
authorized to execute, deliver and perform the above-mentioned agreements and
transactions on behalf of the Partnership without any further act, approval
or vote of the Partners, notwithstanding any other provision of this
Agreement, the Act or any applicable law, rule or regulation, to the full
extent permitted under the Act or other applicable law. The execution,
delivery or performance by the General Partner or the Partnership of any
agreement authorized or permitted under this Agreement shall not constitute a
breach by the General Partner of any duty that the General Partner may owe
the Partnership or the Limited Partners or any other Persons under this
Agreement or of any duty stated or implied by law or equity.
C. Insurance. At all times from and after the date hereof, the General
Partner may cause the Partnership to obtain and maintain (i) casualty, liability
and other insurance on the properties of the Partnership, (ii) liability
insurance for the Indemnitees hereunder and (iii) such other insurance as the
General Partner, in its sole and absolute discretion, determines to be
necessary.
D. Working Capital and Other Reserves. At all times from and after the
date hereof, the General Partner may cause the Partnership to establish and
maintain working capital reserves in such amounts as the General Partner, in its
sole and absolute discretion, deems appropriate and reasonable from time to
time, including upon liquidation of the Partnership pursuant to Section 13.2
hereof.
E. No Obligations to Consider Tax Consequences of Limited Partners. In
exercising its authority under this Agreement, the General Partner may, but
shall be under no obligation to, take into account the tax consequences to any
Partner (including the General Partner) of any action taken (or not taken) by
it. The General Partner and the Partnership shall not have liability to a
Limited Partner for monetary damages or otherwise for losses sustained,
liabilities incurred or benefits not derived by such Limited Partner in
connection with such decisions, provided that the General Partner has acted in
good faith and pursuant to its authority under this Agreement.
Section 7.2 Certificate of Limited Partnership
The General Partner has previously filed the Certificate with the Secretary
of State of Delaware. To the extent that such action is determined by the
General Partner to be reasonable and necessary or appropriate, the General
Partner shall file amendments to and restatements of the Certificate and do all
the things to maintain the Partnership as a limited partnership (or a
partnership in which the limited partners have limited liability) under the laws
of the State of Delaware and each other state, the District of Columbia or other
jurisdiction in which the
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Partnership may elect to do business or own property. Subject to the terms of
Section 8.5.A(4) hereof, the General Partner shall not be required, before or
after filing, to deliver or mail a copy of the Certificate or any amendment
thereto to any Limited Partner. The General Partner shall use all reasonable
efforts to cause to be filed such other certificates or documents as may be
reasonable and necessary or appropriate for the formation, continuation,
qualification and operation of a limited partnership (or a partnership in
which the limited partners have limited liability) in the State of Delaware
and any other state, the District of Columbia or other jurisdiction in which
the Partnership may elect to do business or own property.
Section 7.3 Title to Partnership Assets
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partners, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title
to any or all of the Partnership assets may be held in the name of the
Partnership, the General Partner or one or more nominees, as the General
Partner may determine, including Affiliates of the General Partner. The
General Partner hereby declares and warrants that any Partnership assets for
which legal title is held in the name of the General Partner or any nominee
or Affiliate of the General Partner shall be held by the General Partner for
the use and benefit of the Partnership in accordance with the provisions of
this Agreement; provided, however, that the General Partner shall use its
best efforts to cause beneficial and record title to such assets to be vested
in the Partnership as soon as reasonably practicable. All Partnership assets
shall be recorded as the property of the Partnership in its books and
records, irrespective of the name in which legal title to such Partnership
assets is held.
Section 7.4 Reimbursement of the General Partner
A. No Compensation. Except as provided in this Section 7.4 and elsewhere
in this Agreement (including the provisions of Articles V and VI hereof
regarding distributions, payments and allocations to which it may be entitled),
the General Partner shall not be compensated for its services as general partner
of the Partnership.
B. Responsibility for Partnership Expenses. The Partnership shall be
responsible for and shall pay all expenses relating to the Partnership's
organization, the ownership of its assets and its operations. The General
Partner shall be reimbursed on a monthly basis, or such other basis as the
General Partner may determine in its sole and absolute discretion, for all
expenses it incurs relating to the ownership and operation of, or for the
benefit of, the Partnership (including, without limitation, expenses related
to the management and administration of any Subsidiaries of the General
Partner or the Partnership or Affiliates of the Partnership such as auditing
expenses and filing fees); provided that, the amount of any such
reimbursement shall be reduced by (i) any interest earned by the General
Partner with respect to bank accounts or other instruments or accounts held
by it as permitted in Section 7.5.A below and (ii) any amount derived by the
General Partner from any investments permitted in Section 7.5.A below. The
General Partner shall determine in good faith the amount of expenses incurred
by it related to the ownership and operation of, or for the benefit of, the
Partnership. In the event that certain expenses are incurred for the benefit
of the Partnership and other entities (including the General Partner), such
expenses will be allocated to the Partnership and such other entities in such
a manner as the General Partner in its sole and absolute discretion deems
fair and reasonable. Such reimbursements shall be in addition to any
reimbursement to the General Partner pursuant to Section 10.3.C hereof and as
a result of indemnification pursuant to Section 7.7 below. All payments and
reimbursements hereunder shall be characterized for federal income tax
purposes as expenses of the Partnership incurred on its behalf, and not as
expenses of the General Partner.
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C. Partnership Interest Issuance Expenses. The General Partner
shall also be reimbursed for all expenses it incurs relating to any issuance
of additional Partnership Interests, Shares, Debt of the Partnership or the
General Partner or rights, options, warrants or convertible or exchangeable
securities pursuant to Article IV hereof (including, without limitation, all
costs, expenses, damages and other payments resulting from or arising in
connection with litigation related to any of the foregoing), all of which
expenses are considered by the Partners to constitute expenses of, and for
the benefit of, the Partnership.
D. Purchases of Shares by the General Partner. In the event that
the General Partner exercises its rights under the Articles of Incorporation
to purchase shares or otherwise elects to purchase from its shareholders
Shares in connection with a stock repurchase or similar program or for the
purpose of delivering such Shares to satisfy an obligation under any dividend
reinvestment or stock purchase program adopted by the General Partner, any
employee stock purchase plan adopted by the General Partner or any similar
obligation or arrangement undertaken by the General Partner in the future,
the purchase price paid by the General Partner for such Shares and any other
expenses incurred by the General Partner in connection with such purchase
shall be considered expenses of the Partnership and shall be reimbursable to
the General Partner, subject to the conditions that: (i) if such Shares
subsequently are to be sold by the General Partner, the General Partner pays
to the Partnership any proceeds received by the General Partner for such
Shares (provided that a transfer of Shares for Partnership Units pursuant to
Section 8.6 hereof would not be considered a sale for such purposes); and
(ii) if such Shares are not retransferred by the General Partner within
thirty (30) days after the purchase thereof, the General Partner shall cause
the Partnership to cancel a number of Partnership Units of the appropriate
class (rounded to the nearest whole Partnership Unit) held by the General
Partner equal to the product attained by multiplying the number of such
Shares by a fraction, the numerator of which is one and the denominator of
which is the Conversion Factor.
E. Reimbursement not a Distribution. If and to the extent any
reimbursement made pursuant to this Section 7.4 is determined for federal
income tax purposes not to constitute a payment of expenses of the
Partnership, the amount so determined shall constitute a guaranteed payment
with respect to capital within the meaning of Section 707(c) of the Code,
shall be treated consistently therewith by the Partnership and all Partners
and shall not be treated as a distribution for purposes of computing the
Partners' Capital Accounts.
Section 7.5 Outside Activities of the General Partner
A. General. Without the Consent of the Outside Limited Partners,
the General Partner shall not, directly or indirectly, enter into or conduct
any business other than in connection with the ownership, acquisition and
disposition of Partnership Interests as a General Partner or Limited Partner
and the management of the business of the Partnership and such activities as
are incidental thereto. Without the Consent of the Outside Limited Partners,
the assets of the General Partner shall be limited to Partnership Interests
and permitted debt obligations of the Partnership (as contemplated by Section
7.5.F below), so that Shares and Partnership Units are completely fungible
except as otherwise specifically provided herein; provided, that the General
Partner shall be permitted to hold such bank accounts or similar instruments
or account in its own name as it deems necessary to carry out its
responsibilities and purposes as contemplated under this Agreement and its
organizational documents; and, provided further, that the General Partner
shall be permitted to acquire, directly or through a Qualified REIT
Subsidiary, up to a one percent (1%) interest in any partnership or limited
liability company at least ninety-nine percent (99%) of the equity of which
is owned by the Partnership. The General Partner and any of its Affiliates
may acquire Limited Partnership Interests and shall be entitled to exercise
all rights of a Limited Partner relating to such Limited Partnership
Interests. If, at any time, the General Partner acquires material assets
(other than on behalf of the Partnership), the definition of "Shares Amount"
shall be adjusted, as agreed to
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by the General Partner and the Limited Partners (which agreement shall be
evidenced by Consent of the Outside Limited Partners), to reflect the
relative value of a share of capital stock (or other comparable equity
interest) of the General Partner relative to the Deemed Partnership Interest
Value of the related Partnership Unit.
B. Repurchase of Shares. In the event the General Partner
exercises its rights under the Articles of Incorporation to purchase Shares
or otherwise elects to purchase from its shareholders Shares in connection
with a stock repurchase or similar program or for the purpose of delivering
such shares to satisfy an obligation under any dividend reinvestment or stock
purchase program adopted by the General Partner, any employee stock purchase
plan adopted by the General Partner or any similar obligation or arrangement
undertaken by the General Partner in the future, then the General Partner
shall cause the Partnership to purchase from the General Partner that number
of Partnership Units of the appropriate class equal to the product obtained
by multiplying the number of Shares purchased by the General Partner times a
fraction, the numerator of which is one and the denominator of which is the
Conversion Factor, on the same terms and for the same aggregate price that
the General Partner purchased such Shares.
C. Forfeiture of Shares. In the event the Partnership or the
General Partner acquires Shares as a result of the forfeiture of such Shares
under a restricted or similar share plan, then the General Partner shall
cause the Partnership to cancel that number of Partnership Units of the
appropriate class equal to the number of Shares so acquired, and, if the
Partnership acquired such Shares, it shall transfer such Shares to the
General Partner for cancellation.
D. Issuances of Shares. After the Effective Date, the General Partner
shall not grant, award, or issue any additional Shares (other than Shares
issued pursuant to Section 8.6 hereof or pursuant to a dividend or
distribution (including any stock split) of Shares to all of its
shareholders), other equity securities of the General Partner, New Securities
or Convertible Funding Debt unless (i) the General Partner shall cause,
pursuant to Section 4.2.A hereof, the Partnership to issue to the General
Partner Partnership Interests or rights, options, warrants or convertible or
exchangeable securities of the Partnership having designations, preferences
and other rights, all such that the economic interests are substantially the
same as those of such additional Shares, other equity securities, New
Securities or Convertible Funding Debt, as the case may be, and (ii) the
General Partner transfers to the Partnership, as an additional Capital
Contribution, the proceeds from the grant, award, or issuance of such
additional Shares, other equity securities, New Securities or Convertible
Funding Debt, as the case may be, or from the exercise of rights contained in
such additional Shares, other equity securities, New Securities or
Convertible Funding Debt, as the case may be. Without limiting the
foregoing, the General Partner is expressly authorized to issue additional
Shares, other equity securities, New Securities or Convertible Funding Debt,
as the case may be, for less than fair market value, and the General Partner
is expressly authorized, pursuant to Section 4.2.A hereof, to cause the
Partnership to issue to the General Partner corresponding Partnership
Interests, as long as (a) the General Partner concludes in good faith that
such issuance is in the interests of the General Partner and the Partnership
(for example, and not by way of limitation, the issuance of Shares and
corresponding Partnership Units pursuant to a stock purchase plan providing
for purchases of Shares, either by employees or shareholders, at a discount
from fair market value or pursuant to employee stock options that have an
exercise price that is less than the fair market value of the Shares, either
at the time of issuance or at the time of exercise) and (b) the General
Partner transfers all proceeds from any such issuance or exercise to the
Partnership as an additional Capital Contribution.
E. Stock Option Plan. If at any time or from time to time, the General
Partner sells Shares pursuant to any Stock Option Plan, the General Partner
shall transfer the net proceeds of the sale of such Shares to the Partnership
as an additional Capital Contribution in exchange for an amount of additional
Partnership Units equal to the number of Shares so sold divided by the
Conversion Factor.
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F. Funding Debt. The General Partner may incur a Funding Debt,
including, without limitation, a Funding Debt that is convertible into Shares
or otherwise constitutes a class of New Securities ("Convertible Funding
Debt"), subject to the condition that the General Partner lends to the
Partnership the net proceeds of such Funding Debt; provided, that Convertible
Funding Debt shall be issued pursuant to Section 7.5.D above; and, provided
further, that the General Partner shall not be obligated to lend the net
proceeds of any Funding Debt to the Partnership in a manner that would be
inconsistent with the General Partner's ability to remain qualified as a
REIT. If the General Partner enters into any Funding Debt, the loan to the
Partnership shall be on comparable terms and conditions, including interest
rate, repayment schedule and costs and expenses, as are applicable with
respect to or incurred in connection with such Funding Debt.
Section 7.6 Transactions with Affiliates
A. Transactions with Certain Affiliates. Except as expressly permitted
by this Agreement (other than Section 7.1.A hereof, which shall not be
considered authority for a transaction that otherwise would be prohibited by
this Section 7.6.A), the Partnership shall not, directly or indirectly, sell,
transfer or convey any property to, or purchase any property from, or borrow
funds from, or lend funds to, any Partner or any Affiliate of the Partnership
or the General Partner or the General Partner Entity that is not also a
Subsidiary of the Partnership, except pursuant to transactions that are on
terms that are fair and reasonable and no less favorable to the Partnership
than would be obtained from an unaffiliated third party.
B. Benefit Plans. The General Partner, in its sole and absolute
discretion and without the approval of the Limited Partners, may propose and
adopt on behalf of the Partnership employee benefit plans funded by the
Partnership for the benefit of employees of the General Partner, the
Partnership, Subsidiaries of the Partnership or any Affiliate of any of them
in respect of services performed, directly or indirectly, for the benefit of
the Partnership, the General Partner, or any of the Partnership's
Subsidiaries.
C. Conflict Avoidance. The General Partner is expressly
authorized to enter into, in the name and on behalf of the Partnership, a
right of first opportunity arrangement and other conflict avoidance
agreements with various Affiliates of the Partnership and General Partner on
such terms as the General Partner, in its sole and absolute discretion,
believes are advisable.
Section 7.7 Indemnification
A. General. The Partnership shall indemnify each Indemnitee from and
against any and all losses, claims, damages, liabilities, joint or several,
expenses (including, without limitation, attorneys fees and other legal fees
and expenses), judgments, fines, settlements and other amounts arising from
or in connection with any and all claims, demands, actions, suits or
proceedings, civil, criminal, administrative or investigative incurred by the
Indemnitee and relating to the Partnership or the General Partner or the
formation or operations of, or the ownership of property by, either of them
as set forth in this Agreement in which any such Indemnitee may be involved,
or is threatened to be involved, as a party or otherwise, unless it is
established by a final determination of a court of competent jurisdiction
that: (i) the act or omission of the Indemnitee was material to the matter
giving rise to the proceeding and either was committed in bad faith or was
the result of active and deliberate dishonesty, (ii) the Indemnitee actually
received an improper personal benefit in money, property or services or (iii)
in the case of any criminal proceeding, the Indemnitee had reasonable cause
to believe that the act or omission was unlawful. Without limitation, the
foregoing indemnity shall extend to any liability of any Indemnitee, pursuant
to a loan guarantee, contractual obligations for any indebtedness or other
obligations or otherwise, for any indebtedness of the Partnership or any
Subsidiary of the Partnership (including, without limitation, any
indebtedness which the Partnership or any Subsidiary of the Partnership has
assumed or taken
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subject to), and the General Partner is hereby authorized and empowered, on
behalf of the Partnership, to enter into one or more indemnity agreements
consistent with the provisions of this Section 7.7 in favor of any Indemnitee
having or potentially having liability for any such indebtedness. The
termination of any proceeding by judgment, order or settlement does not
create a presumption that the Indemnitee did not meet the requisite standard
of conduct set forth in this Section 7.7.A. The termination of any
proceeding by conviction or upon a plea of nolo contendere or its equivalent,
or an entry of an order of probation prior to judgment, creates a rebuttable
presumption that the Indemnitee acted in a manner contrary to that specified
in this Section 7.7.A with respect to the subject matter of such proceeding.
Any indemnification pursuant to this Section 7.7 shall be made only out of
the assets of the Partnership, and any insurance proceeds from the liability
policy covering the General Partner and any Indemnitees, and neither the
General Partner nor any Limited Partner shall have any obligation to
contribute to the capital of the Partnership or otherwise provide funds to
enable the Partnership to fund its obligations under this Section 7.7.
B. Advancement of Expenses. Reasonable expenses expected to be
incurred by an Indemnitee shall be paid or reimbursed by the Partnership in
advance of the final disposition of any and all claims, demands, actions,
suits or proceedings, civil, criminal, administrative or investigative made
or threatened against an Indemnitee upon receipt by the Partnership of (i) a
written affirmation by the Indemnitee of the Indemnitee's good faith belief
that the standard of conduct necessary for indemnification by the Partnership
as authorized in this Section 7.7.A has been met and (ii) a written
undertaking by or on behalf of the Indemnitee to repay the amount if it shall
ultimately be determined that the standard of conduct has not been met.
C. No Limitation of Rights. The indemnification provided by this
Section 7.7 shall be in addition to any other rights to which an Indemnitee
or any other Person may be entitled under any agreement, pursuant to any vote
of the Partners, as a matter of law or otherwise, and shall continue as to an
Indemnitee who has ceased to serve in such capacity unless otherwise provided
in a written agreement pursuant to which such Indemnitee is indemnified.
D. Insurance. The Partnership may purchase and maintain insurance on
behalf of the Indemnitees and such other Persons as the General Partner shall
determine against any liability that may be asserted against or expenses that
may be incurred by such Person in connection with the Partnership's
activities, regardless of whether the Partnership would have the power to
indemnify such Person against such liability under the provisions of this
Agreement.
E. Benefit Plan Fiduciary. For purposes of this Section 7.7, (i) the
Partnership shall be deemed to have requested an Indemnitee to serve as
fiduciary of an employee benefit plan whenever the performance by it of its
duties to the Partnership also imposes duties on, or otherwise involves
services by, it to the plan or participants or beneficiaries of the plan,
(ii) excise taxes assessed on an Indemnitee with respect to an employee
benefit plan pursuant to applicable law shall constitute fines within the
meaning of this Section 7.7 and (iii) actions taken or omitted by the
Indemnitee with respect to an employee benefit plan in the performance of its
duties for a purpose reasonably believed by it to be in the interest of the
participants and beneficiaries of the plan shall be deemed to be for a
purpose which is not opposed to the best interests of the Partnership.
F. No Personal Liability for Limited Partners. In no event may an
Indemnitee subject any of the Partners to personal liability by reason of the
indemnification provisions set forth in this Agreement.
G. Interested Transactions. An Indemnitee shall not be denied
indemnification in whole or in part under this Section 7.7 because the
Indemnitee had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise permitted by the
terms of this Agreement.
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H. Benefit. The provisions of this Section 7.7 are for the benefit of
the Indemnitees, their heirs, successors, assigns and administrators and
shall not be deemed to create any rights for the benefit of any other
Persons. Any amendment, modification or repeal of this Section 7.7, or any
provision hereof, shall be prospective only and shall not in any way affect
the limitation on the Partnership's liability to any Indemnitee under this
Section 7.7 as in effect immediately prior to such amendment, modification or
repeal with respect to claims arising from or related to matters occurring,
in whole or in part, prior to such amendment, modification or repeal,
regardless of when such claims may arise or be asserted.
I. Indemnification Payments Not Distributions. If and to the extent
any payments to the General Partner pursuant to this Section 7.7 constitute
gross income to the General Partner (as opposed to the repayment of advances
made on behalf of the Partnership), such amounts shall constitute guaranteed
payments within the meaning of Section 707(c) of the Code, shall be treated
consistently therewith by the Partnership and all Partners, and shall not be
treated as distributions for purposes of computing the Partners' Capital
Accounts.
Section 7.8 Liability of the General Partner
A. General. Notwithstanding anything to the contrary set forth in this
Agreement, the General Partner and its directors and officers shall not be
liable for monetary damages to the Partnership, any Partners or any Assignees
for losses sustained, liabilities incurred or benefits not derived as a
result of errors in judgment or mistakes of fact or law or of any act or
omission if the General Partner acted in good faith.
B. No Obligation to Consider Separate Interests of Limited Partners or
Shareholders. The Limited Partners expressly acknowledge that the General
Partner is acting on behalf of the Partnership and the General Partner's
shareholders collectively, that the General Partner is under no obligation to
consider the separate interests of the Limited Partners (including, without
limitation, the tax consequences to Limited Partners or Assignees or to such
shareholders) in deciding whether to cause the Partnership to take (or
decline to take) any actions and that the General Partner shall not be liable
for monetary damages or otherwise for losses sustained, liabilities incurred
or benefits not derived by Limited Partners in connection with such
decisions, provided that the General Partner has acted in good faith.
C. Actions of Agents. Subject to its obligations and duties as General
Partner set forth in Section 7.1.A above, the General Partner may exercise
any of the powers granted to it by this Agreement and perform any of the
duties imposed upon it hereunder either directly or by or through its agents.
The General Partner shall not be responsible for any misconduct or
negligence on the part of any such agent appointed by the General Partner in
good faith.
D. Effect of Amendment. Any amendment, modification or repeal of this
Section 7.8 or any provision hereof shall be prospective only and shall not
in any way affect the limitations on the General Partner's liability to the
Partnership and the Limited Partners under this Section 7.8 as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when such
claims may arise or be asserted.
Section 7.9 Other Matters Concerning the General Partner
A. Reliance on Documents. The General Partner may rely and shall be
protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request,
consent, order, bond, debenture or other paper or document believed by it in
good faith to be genuine and to have been signed or presented by the proper
party or parties.
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B. Reliance on Advisors. The General Partner may consult with legal
counsel, accountants, appraisers, management consultants, investment bankers
and other consultants and advisors selected by it, and any act taken or
omitted to be taken in reliance upon the opinion of such Persons as to
matters which the General Partner reasonably believes to be within such
Person's professional or expert competence shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such opinion.
C. Action Through Agents. The General Partner shall have the right, in
respect of any of its powers or obligations hereunder, to act through any of
its duly authorized officers and a duly appointed attorney or
attorneys-in-fact. Each such attorney shall, to the extent provided by the
General Partner in the power of attorney, have full power and authority to do
and perform all and every act and duty which is permitted or required to be
done by the General Partner hereunder.
D. Actions to Maintain REIT Status or Avoid Taxation of the General
Partner Entity. Notwithstanding any other provisions of this Agreement or
the Act, any action of the General Partner on behalf of the Partnership or
any decision of the General Partner to refrain from acting on behalf of the
Partnership undertaken in the good faith belief that such action or omission
is necessary or advisable in order (i) to protect the ability of the General
Partner Entity to continue to qualify as a REIT or (ii) to allow the General
Partner Entity to avoid incurring any liability for taxes under Section 857
or 4981 of the Code, is expressly authorized under this Agreement and is
deemed approved by all of the Limited Partners.
Section 7.10 Reliance by Third Parties
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner has full power and authority, without consent or approval of any
other Partner or Person, to encumber, sell or otherwise use in any manner any
and all assets of the Partnership, to enter into any contracts on behalf of
the Partnership and to take any and all actions on behalf of the Partnership,
and such Person shall be entitled to deal with the General Partner as if the
General Partner were the Partnership's sole party in interest, both legally
and beneficially. Each Limited Partner hereby waives any and all defenses or
other remedies which may be available against such Person to contest, negate
or disaffirm any action of the General Partner in connection with any such
dealing. In no event shall any Person dealing with the General Partner or its
representatives be obligated to ascertain that the terms of this Agreement
have been complied with or to inquire into the necessity or expedience of any
act or action of the General Partner or its representatives. Each and every
certificate, document or other instrument executed on behalf of the
Partnership by the General Partner or its representatives shall be conclusive
evidence in favor of any and every Person relying thereon or claiming
thereunder that (i) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full force and
effect, (ii) the Person executing and delivering such certificate, document
or instrument was duly authorized and empowered to do so for and on behalf of
the Partnership, and (iii) such certificate, document or instrument was duly
executed and delivered in accordance with the terms and provisions of this
Agreement and is binding upon the Partnership.
Section 7.11 Restrictions on General Partner's Authority
A. Consent Required. The General Partner may not take any action
in contravention of an express prohibition or limitation of this Agreement
without the written Consent of (i) all Partners adversely affected or (ii)
such lower percentage of the Limited Partnership Interests as may be
specifically provided for under a provision of this Agreement or the Act.
B. Sale of All Assets of the Partnership. Except as provided in
Article XIII hereof and subject to Section 7.11.C and Section 7.11.D below,
the General Partner may not, directly
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or indirectly, cause the Partnership to sell, exchange, transfer or otherwise
dispose of all or substantially all of the Partnership's assets in a single
transaction or a series of related transactions (including by way of merger
(including a triangular merger), consolidation or other combination with any
other Persons) (i) if such merger, sale or other transaction is in connection
with a Termination Transaction permitted under Section 11.2.B hereof, without
the Consent of the Partners holding a majority or more of the then
outstanding Partnership Units (including any Partnership Units held by the
General Partner), or (ii) otherwise, without the Consent of the Outside
Limited Partners.
C. Required Consent of Certain Partners. (i) The General Partner may
not, directly or indirectly, cause the Partnership to take any action
prohibited by this Section 7.11.C without the requisite approval as provided
in this Section 7.11.C.
(1) For a period of fifteen (15) years following the Effective
Date, the General Partner may not, directly or indirectly, cause
the Partnership to sell, exchange or otherwise dispose of the
property located at Two Penn Plaza, New York, New York or any
indirect interest therein (collectively, the "Two Penn Plaza
Property") (other than an involuntary sale pursuant to foreclosure
of the mortgage secured by the Two Penn Plaza Property or
otherwise, including pursuant to a deed in lieu of foreclosure
(provided that the General Partner may not execute any deed in lieu
of foreclosure unless the maturity of the indebtedness secured by
the Two Penn Plaza Property has been accelerated) or a proceeding
in connection with a bankruptcy) without the consent of the
Partners at the time of the proposed sale, exchange or other
disposition (other than the General Partner or the General Partner
Entity or any Subsidiary of either the General Partner or the
General Partner Entity) who hold seventy-five percent (75%) of the
Partnership Units which were issued with respect to Two Penn Plaza
Associates in the Consolidation and which remain outstanding
(whether held by the original recipient of such Partnership Units
or by a successor or transferee of the original recipient, but not
including the General Partner or the General Partner Entity or any
Subsidiary of either the General Partner or the General Partner
Entity) (referred to as "Two Penn Plaza Units"). In addition,
during such fifteen-year period, the General Partner may not,
directly or indirectly, cause the Partnership to repay, earlier
than one year prior to its stated maturity, any indebtedness
secured by the Two Penn Plaza Property without the consent of
Partners holding seventy-five percent (75%) of the Two Penn Plaza
Units, unless such repayment (a) is made in connection with the
refinancing (on a basis such that the new debt would be considered
a Nonrecourse Liability, or, as contemplated by clause (2) below, a
Partner Nonrecourse Debt) of such indebtedness for an amount not
less than the principal amount of such indebtedness on the date of
such refinancing, with such refinancing indebtedness (1) providing
for the least amount of principal amortization as is available on
commercially reasonable terms and (2) permitting (but not
requiring) a guarantee of such indebtedness by the holders of the
Two Penn Plaza Units who elect to join in such guarantee in a form
and on terms consistent with the guarantees by the holders of the
Two Penn Plaza Units in effect immediately prior to such
refinancing, provided that the opportunity to provide such
guarantee may be obtained on commercially reasonable terms, or (b)
is made in connection with an involuntary sale pursuant to
foreclosure of the mortgage secured by the Two Penn Plaza Property
or otherwise, including pursuant to a deed in lieu of foreclosure
(provided that the General Partner may not execute any deed in lieu
of foreclosure unless the maturity of the indebtedness secured by
the Two Penn Plaza Property has been accelerated) or a proceeding
in connection with
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a bankruptcy. During such fifteen-year period, the General Partner
shall use commercially reasonable efforts during the one-year
period prior to the stated maturity of such indebtedness to
cause the Operating Partnership to refinance (on a basis
such that the new debt would be considered a Nonrecourse
Liability, or, as contemplated by clause (2) below, a Partner
Nonrecourse Debt) the indebtedness for an amount not less than the
principal amount of such indebtedness on the date of such
refinancing, provided such refinancing can be obtained on
commercially reasonable terms, with such refinancing indebtedness
(1) providing for the least amount of principal amortization as is
available on commercially reasonable terms and (2) permitting (but
not requiring) a guarantee of such indebtedness by the holders of
the Two Penn Plaza Units who elect to join in such guarantee in a
form and on terms consistent with the guarantees by the holders of
the Two Penn Plaza Units in effect immediately prior to such
refinancing, provided that the opportunity to provide such guarantee
may be obtained on commercially reasonable terms. Finally, during
such fifteen-year period, the General Partner shall not, without the
consent of Partners holding seventy-five percent (75%) of the Two
Penn Plaza Units, incur indebtedness secured by the Two Penn Plaza
Property if, at the time such indebtedness is incurred, the
aggregate amount of the indebtedness secured by the Two Penn Plaza
Property would exceed the greater of (i) seventy-five percent (75%)
of the fair market value of the Two Penn Plaza Property (or the
interest therein) securing such indebtedness or (ii) the then
outstanding indebtedness being refinanced plus all costs (including
prepayment fees, "breakage" payments and similar costs) incurred in
connection with such refinancing.
(2) For a period of fifteen (15) years following the Effective
Date, the General Partner may not, directly or indirectly, cause
the Partnership to sell, exchange or otherwise dispose of the
property located at Eleven Penn Plaza, New York, New York or any
indirect interest therein (collectively, the "Eleven Penn Plaza
Property") (other than an involuntary sale pursuant to foreclosure
of the mortgage secured by the Eleven Penn Plaza Property or
otherwise, including pursuant to a deed in lieu of foreclosure
(provided that the General Partner may not execute any deed in lieu
of foreclosure unless the maturity of the indebtedness secured by
the Eleven Penn Plaza Property has been accelerated) or a
proceeding in connection with a bankruptcy) without the consent of
the Partners at the time of the proposed sale, exchange or other
disposition (other than the General Partner or the General Partner
Entity or any Subsidiary of either the General Partner or the
General Partner Entity) who hold seventy-five percent (75%) of the
Partnership Units which were issued with respect to the Eleven Penn
Partnerships in the Consolidation and which remain outstanding
(whether held by the original recipient of such Partnership Units
or by a successor or transferee of the original recipient, but not
including the General Partner or the General Partner Entity or any
Subsidiary of either the General Partner or the General Partner
Entity) (referred to as "Eleven Penn Plaza Units"). In addition,
during such fifteen-year period, the General Partner may not,
directly or indirectly, cause the Partnership to repay, earlier
than one year prior to its stated maturity, any indebtedness
secured by the Eleven Penn Plaza Property without the consent of
Partners who hold seventy-five percent (75%) of the Eleven Penn
Plaza Units, unless such repayment (a) is made in connection with
the refinancing (on a basis such that the new debt would be
considered a Nonrecourse Liability, or, as contemplated by clause
(2) below, a Partner Nonrecourse Debt) of such indebtedness for an
amount not less than
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the principal amount of such indebtedness on the date of such
refinancing, with such refinancing indebtedness (1) providing
for the least amount of principal amortization as is available
on commercially reasonable terms and (2) permitting (but not
requiring) a guarantee of such indebtedness by the holders of
the Eleven Penn Plaza Units who elect to join in such guarantee in
a form and on terms consistent with the guarantees by the holders
of the Eleven Penn Plaza Units in effect immediately prior to such
refinancing, provided that the opportunity to provide such
guarantee may be obtained on commercially reasonable terms, or (b)
is made in connection with an involuntary sale pursuant to
foreclosure of the mortgage secured by the Eleven Penn Plaza
Property or otherwise, including pursuant to a deed in lieu of
foreclosure (provided that the General Partner may not execute any
deed in lieu of foreclosure unless the maturity of the indebtedness
secured by the Eleven Penn Plaza Property has been accelerated) or
a proceeding in connection with a bankruptcy. During such
fifteen-year period, the General Partner shall use commercially
reasonable efforts during the one-year period prior to the stated
maturity of such indebtedness to cause the Operating Partnership to
refinance (on a basis such that the new debt would be considered a
Nonrecourse Liability, or, as contemplated by clause (2) below, a
Partner Nonrecourse Debt) the indebtedness for an amount not less
than the principal amount of such indebtedness on the date of such
refinancing, provided such refinancing can be obtained on
commercially reasonable terms, with such refinancing indebtedness
(1) providing for the least amount of principal amortization as is
available on commercially reasonable terms and (2) permitting (but
not requiring) a guarantee of such indebtedness by the holders of
the Eleven Penn Plaza Units who elect to join in such guarantee in
a form and on terms consistent with the guarantees by the holders
of the Eleven Penn Plaza Units in effect immediately prior to such
refinancing, provided that the opportunity to provide such
guarantee may be obtained on commercially reasonable terms.
Finally, during such fifteen-year period, the General Partner shall
not, without the consent of Partners holding seventy-five percent
(75%) of the Eleven Penn Plaza Units, incur indebtedness secured by
the Eleven Penn Plaza Property if, at the time such indebtedness is
incurred, the aggregate amount of the indebtedness secured by the
Eleven Penn Plaza Property would exceed the greater of (i)
seventy-five percent (75%) of the fair market value of the Eleven
Penn Plaza Property (or the interest therein) securing such
indebtedness or (ii) the then outstanding indebtedness being
refinanced plus all costs (including prepayment fees, "breakage"
payments and similar costs) incurred in connection with such
refinancing.
(3) For a period of fifteen (15) years following the Effective
Date, the General Partner may not, directly or indirectly, cause
the Partnership to sell, exchange, or otherwise dispose of the
property located at 866 U.N. Plaza, New York, New York or any
indirect interest therein (collectively, the "866 U.N. Plaza
Property") (other than an involuntary sale pursuant to foreclosure
of the mortgage secured by the 866 U.N. Plaza Property or
otherwise, including pursuant to a deed in lieu of foreclosure
(provided that the General Partner may not execute any deed in lieu
of foreclosure unless the maturity of the indebtedness secured by
the 866 U.N. Plaza Property has been accelerated) or a proceeding
in connection with a bankruptcy) without the consent of the
Partners at the time of the proposed sale, exchange or other
disposition (other than the General Partner or the General Partner
Entity or any Subsidiary of either the General Partner or the
General Partner Entity)
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who hold seventy-five percent (75%) of the Partnership Units which
were issued with respect to 866 U.N. Plaza Associates in the
Consolidation and which remain outstanding (whether held by the
original recipient of such Partnership Units or by a successor or
transferee of the original recipient, but not including the General
Partner or the General Partner Entity or any Subsidiary of either
the General Partner or the General Partner Entity) (referred to as
"866 U.N. Plaza Units"). In addition, during such fifteen-year
period, the General Partner may not, directly or indirectly, cause
the Partnership to repay, earlier than one year prior to its stated
maturity, any indebtedness secured by the 866 U.N. Plaza Property
without the consent of Partners holding seventy-five percent (75%)
of the 866 U.N. Plaza Units, unless such repayment (a) is made in
connection with the refinancing (on a basis such that the new debt
would be considered a , or, as contemplated by clause (2) below, a
Partner Nonrecourse Debt) of such indebtedness for an amount not
less than the principal amount of such indebtedness on the date of
such refinancing, with such refinancing indebtedness (1) providing
for the least amount of principal amortization as is available on
commercially reasonable terms and (2) permitting (but not
requiring) a guarantee of such indebtedness by the holders of the
866 U.N. Plaza Units who elect to join in such guarantee in a form
and on terms consistent with the guarantees by the holders of the
866 U.N. Plaza Units in effect immediately prior to such
refinancing, provided that the opportunity to provide such
guarantee may be obtained on commercially reasonable terms, or (b)
is made in connection with an involuntary sale pursuant to
foreclosure of the mortgage secured by the 866 U.N. Plaza Property
or otherwise, including pursuant to a deed in lieu of foreclosure
(provided that the General Partner may not execute any deed in lieu
of foreclosure unless the maturity of the indebtedness secured by
the 866 U.N. Plaza Property has been accelerated) or a proceeding
in connection with a bankruptcy. During such fifteen-year period,
the General Partner shall use commercially reasonable efforts
during the one-year period prior to the stated maturity of such
indebtedness to cause the Operating Partnership to refinance (on a
basis such that the new debt would be considered a Nonrecourse
Liability, or, as contemplated by clause (2) below, a Partner
Nonrecourse Debt) the indebtedness for an amount not less than the
principal amount of such indebtedness on the date of such
refinancing, provided such refinancing can be obtained on
commercially reasonable terms, with such refinancing indebtedness
(2) providing for the least amount of principal amortization as is
available on commercially reasonable terms and (2) permitting (but
not requiring) a guarantee of such indebtedness by the holders of
the 866 U.N. Plaza Units who elect to join in such guarantee in a
form and on terms consistent with the guarantees by the holders of
the 866 U.N. Plaza Units in effect immediately prior to such
refinancing, provided that the opportunity to provide such
guarantee may be obtained on commercially reasonable terms.
Finally, during such fifteen-year period, the General Partner shall
not, without the consent of Partners holding seventy-five percent
(75%) of the 866 U.N. Plaza Units, incur indebtedness secured by
the 866 U.N. Plaza Property if, at the time such indebtedness is
incurred, the aggregate amount of the indebtedness secured by the
866 U.N. Plaza Property would exceed the greater of (i)
seventy-five percent (75%) of the fair market value of the 866 U.N.
Plaza Property (or the interest therein) securing such indebtedness
or (ii) the then outstanding indebtedness being refinanced plus all
costs (including prepayment fees, "breakage" payments and similar
costs) incurred in connection with such refinancing.
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(4) Subparagraphs (1), (2), and (3) shall not apply to any transaction
that involves the Two Penn Plaza Property, the Eleven Penn Plaza
Property or the 866 U.N. Plaza Property, as the case may be (which
Property is referred to as the "Exchanged Property"), if such
transaction qualifies as a like-kind exchange under Section 1031 of
the Code in which no gain is recognized by the Partnership as long
as the following conditions are satisfied: (x) such exchange is
not with a "related party" within the meaning of Section 1031(f)(3)
of the Code; (y) the property received in exchange for the
Exchanged Property (referred to as the "Replacement Property") is
secured by nonrecourse indebtedness in an amount not less than the
outstanding principal amount of the nonrecourse indebtedness
secured by the Exchanged Property at the time of the exchange, nor
greater than the amount that would be permitted under Sections
7.11.C(1), (2), or (3), as the case may be, with a maturity not
earlier than, and a principal amortization rate not more rapid
than, the maturity and principal amortization rate of such
indebtedness secured by the Exchanged Property, which indebtedness
permits (but does not require) a guarantee of such indebtedness by
the holders of the Two Penn Plaza Units, the Eleven Penn Plaza
Units or the 866 U.N. Plaza Units, as the case may be, who elect to
join in such guarantee in a form and on terms consistent with the
guarantees by the holders of the Two Penn Plaza Units, the Eleven
Penn Plaza Units or the 866 U.N. Plaza Units, as the case may be,
in effect immediately prior to the time of the exchange, and (z)
the Replacement Property is thereafter treated for all purposes of
the restrictions in this Section 7.11.C as the Exchanged Property
and the indebtedness secured by such Replacement Property is
subject to the same restrictions and agreements as apply with
respect to the indebtedness secured by the Exchanged Property.
(5) Subparagraphs (1), (2), and (3) shall not apply to any
transaction that involves the Two Penn Plaza Property, the Eleven
Penn Plaza Property or the 866 U.N. Plaza Property, as the case may
be (which Property is referred to as the "Transferred Property"),
if (x) such transaction does not result in, and is not otherwise in
connection with, a dissolution of the Partnership, (y) such
transaction qualifies as a contribution to a partnership under
Section 721 of the Code in which no gain is recognized with respect
to the Two Penn Plaza Property, the Eleven Penn Plaza Property or
the 866 U.N. Plaza Property by the Partnership or the holders of
the Two Penn Plaza Units, the Eleven Penn Plaza Units, or the 866
U.N. Plaza Units, as the case may be (other than gain, if any,
resulting solely because the share, if any, of indebtedness
allocable to a Partnership Unit under Treas. Reg. Section
1.752-3(a)(3) (or any successor thereto) is reduced or eliminated),
and (z) the entity to which such Transferred Property is
transferred agrees, for the benefit of the holders of the Two Penn
Plaza Units, the Eleven Penn Plaza Units or the 866 U.N. Plaza
Units, as the case may be, that all of the restrictions of this
Section 7.11.C shall apply to the Transferred Property and the
indebtedness outstanding with respect thereto in the same manner
and to the extent set forth in this Section 7.11.C and such
agreement is reflected in the partnership agreement (or other
comparable governing instrument) of the entity to which the
Transferred Property is transferred.
(6) Subparagraphs (1), (2), and (3) shall not apply to any
transaction that involves either a merger or consolidation of the
Partnership with or into another entity that qualifies as a
"partnership" for federal income tax purposes (the "Successor
Partnership") or a transfer of all or substantially all
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of the assets of the Partnership to a Successor Partnership and
dissolution of the Partnership in connection therewith (in either
case, a "Consolidation Transaction") so long as (x) no gain is
recognized with respect to the Two Penn Plaza Property, the Eleven
Penn Plaza Property or the 866 U.N. Plaza Property by the
Partnership or the holders of the Two Penn Plaza Units, the Eleven
Penn Plaza Units or the 866 U.N. Plaza Units, as the case may be,
in connection with such Consolidation Transaction (other than gain,
if any, resulting solely because the share, if any, of indebtedness
allocable to a Partnership Unit under Treas. Reg. Section
1.752-3(a)(3) (or any successor thereto) is reduced or eliminated)
and (y) the Successor Partnership agrees in writing, for the
benefit of the holders of the Two Penn Plaza Units, the Eleven Penn
Plaza Units or the 866 U.N. Plaza Units, as the case may be, that
all of the restrictions of this Section 7.11.C shall apply to the
Two Penn Plaza Property, the Eleven Penn Plaza Property and the 866
U.N. Plaza Property and the indebtedness outstanding with respect
thereto in the same manner and to the extent set forth in this
Section 7.11.C.
(7) Subparagraphs (1), (2) and (3) shall not apply to any sale
or other disposition transaction not otherwise described in
Subparagraphs (4), (5) or (6) (including a merger or consolidation)
involving the Two Penn Plaza Property, the Eleven Penn Plaza
Property and/or the 866 U.N. Plaza Property that is undertaken in
connection with and as an integral part of a sale or other
disposition of all or substantially all of the assets of the
Partnership (referred to as a "Liquidating Transaction") so long as
the Liquidating Transaction is undertaken with the Consent of
Certain Limited Partners.
(ii) Nothing herein shall be deemed to require that the Partnership or
the General Partner take any action to avoid or prevent an involuntary
disposition of any property, whether pursuant to foreclosure of a mortgage
secured by such property or otherwise, including pursuant to a deed in lieu
of foreclosure or a proceeding in connection with a bankruptcy.
(iii) Nothing herein shall prevent the sale, exchange, transfer or
other disposition of any property pursuant to the dissolution and liquidation
of the Partnership in accordance with Article XIII hereof (other than Section
13.1(v), which shall be subject to this Section 7.11.C).
D. Merger or Consolidation in Which the Partnership is Not the
Surviving Entity. In the event that the Partnership is to merge or
consolidate with or into any other entity in a transaction in which holders
of Partnership Units will receive consideration other than cash or equity
securities that are Publicly Traded (an "Equity Merger") and such Equity
Merger would be prohibited by Section 7.11.C but for the application of
Section 7.11.C(6), then (in addition to any Consent requirements under
Section 7.11.B and Section 7.11.C) the Equity Merger shall require the
Consent of Certain Limited Partners unless:
(i) the partnership agreement, limited liability agreement or other
operative governing documents (the "Charter Documents") of the entity
that is the surviving entity in such Equity Merger contain provisions
that are comparable in all material respects to, or the entity that is
the surviving entity in such Equity Merger otherwise agree in writing,
for the benefit of the holders of the Two Penn Plaza Units, the Eleven
Penn Plaza Units, and the 866 U.N. Plaza Units, to restrictions that are
comparable in all material respects to the provisions of Section 4.2.A,
Article V and Article VI (except for differences that would be permitted
pursuant to Sections 4.2, 5.1.E, 5.4, 6.2 and 14.1.B(3) if such changes
were to be made to this Agreement), Section 7.1.A (second sentence only),
Section 7.6.A, Section 7.11.A, Section 7.11.B, this Section 7.11.D,
Section 8.6 (and all defined terms set forth in Article I that relate
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to the Redemption Right), Section 11.2, Section 13.1, Section 13.2.A(3)
(except as permitted pursuant to Sections 4.2, 5.4, 6.2 and 14.1.B(3)),
Section 14.1.C, Section 14.1.D, and Section 14.2, all as in effect
immediately prior to the Equity Merger; and
(ii) the Equity Merger would not either cause a holder of a Partnership
Unit to be a general partner or to have liability equivalent to that of a
general partner in a partnership or otherwise modify the limited
liability of a Limited Partner under this Agreement.
Section 7.12 Loans by Third Parties
The Partnership may incur Debt, or enter into similar credit, guarantee,
financing or refinancing arrangements for any purpose (including, without
limitation, in connection with any acquisition of property) with any Person
that is not the General Partner upon such terms as the General Partner
determines appropriate; provided that, the Partnership shall not incur any
Debt that is recourse to the General Partner, except to the extent otherwise
agreed to by the General Partner in its sole discretion.
ARTICLE VIII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
Section 8.1 Limitation of Liability
The Limited Partners shall have no liability under this Agreement except
as expressly provided in this Agreement, including Section 10.5 hereof, or
under the Act.
Section 8.2 Management of Business
No Limited Partner or Assignee (other than the General Partner, any of
its Affiliates or any officer, director, employee, partner, agent or trustee
of the General Partner, the Partnership or any of their Affiliates, in their
capacity as such) shall take part in the operation, management or control
(within the meaning of the Act) of the Partnership's business, transact any
business in the Partnership's name or have the power to sign documents for or
otherwise bind the Partnership. The transaction of any such business by the
General Partner, any of its Affiliates or any officer, director, employee,
partner, agent or trustee of the General Partner, the Partnership or any of
their Affiliates, in their capacity as such, shall not affect, impair or
eliminate the limitations on the liability of the Limited Partners or
Assignees under this Agreement.
Section 8.3 Outside Activities of Limited Partners
Subject to Section 7.5 hereof, and subject to any agreements entered into
pursuant to Section 7.6.C hereof and to any other agreements entered into by
a Limited Partner or its Affiliates with the Partnership or a Subsidiary, any
Limited Partner (other than the General Partner) and any officer, director,
employee, agent, trustee, Affiliate or shareholder of any Limited Partner
shall be entitled to and may have business interests and engage in business
activities in addition to those relating to the Partnership, including
business interests and activities in direct or indirect competition with the
Partnership. Neither the Partnership nor any Partners shall have any rights
by virtue of this Agreement in any business ventures of any Limited Partner
or Assignee. None of the Limited Partners (other than the General Partner)
nor any other Person shall have any rights by virtue of this Agreement or the
partnership relationship established hereby in any business ventures of any
other Person (other than the General Partner to the extent expressly provided
herein), and such Person shall have no obligation pursuant to this Agreement
to offer any interest in any such
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business ventures to the Partnership, any Limited Partner or any such other
Person, even if such opportunity is of a character which, if presented to the
Partnership, any Limited Partner or such other Person, could be taken by such
Person.
Section 8.4 Return of Capital
Except pursuant to the right of redemption set forth in Section 8.6
below, no Limited Partner shall be entitled to the withdrawal or return of
its Capital Contribution, except to the extent of distributions made pursuant
to this Agreement or upon termination of the Partnership as provided herein.
No Limited Partner or Assignee shall have priority over any other Limited
Partner or Assignee either as to the return of Capital Contributions (except
as permitted by Section 4.2.A hereof) or, except to the extent provided by
Exhibit C hereto or as permitted by Sections 4.2.A, 5.1.B(i), 6.1.A(ii) and
6.1.B(i) hereof or otherwise expressly provided in this Agreement, as to
profits, losses, distributions or credits.
Section 8.5 Rights of Limited Partners Relating to the Partnership
A. General. In addition to other rights provided by this Agreement or
by the Act, and except as limited by Section 8.5.D below, each Limited
Partner shall have the right, for a purpose reasonably related to such
Limited Partner's interest as a limited partner in the Partnership, upon
written demand with a statement of the purpose of such demand and at such
Limited Partner's own expense:
(1) to obtain a copy of the most recent annual and quarterly
reports filed with the Securities and Exchange Commission by the
General Partner Entity pursuant to the Exchange Act;
(2) to obtain a copy of the Partnership's federal, state and
local income tax returns for each Partnership Year;
(3) to obtain a current list of the name and last known
business, residence or mailing address of each Partner;
(4) to obtain a copy of this Agreement and the Certificate and
all amendments thereto, together with executed copies of all powers
of attorney pursuant to which this Agreement, the Certificate and
all amendments thereto have been executed; and
(5) to obtain true and full information regarding the amount
of cash and a description and statement of any other property or
services contributed by each Partner and which each Partner has
agreed to contribute in the future, and the date on which each
became a Partner.
B. Notice of Conversion Factor. The Partnership shall notify each
Limited Partner upon request of the then current Conversion Factor and any
changes that have been made thereto.
C. Notice of Extraordinary Transaction of the General Partner Entity.
The General Partner Entity shall not make any extraordinary distributions of
cash or property to its shareholders or effect a merger (including, without
limitation, a triangular merger), a sale of all or substantially all of its
assets or any other similar extraordinary transaction without notifying the
Limited Partners of its intention to make such distribution or effect such
merger, sale or other extraordinary transaction at least twenty (20) Business
Days prior to the record date to determine
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shareholders eligible to receive such distribution or to vote upon the
approval of such merger, sale or other extraordinary transaction (or, if no
such record date is applicable, at least twenty (20) business days before
consummation of such merger, sale or other extraordinary transaction). This
provision for such notice shall not be deemed (i) to permit any transaction
that otherwise is prohibited by this Agreement or requires a Consent of the
Partners or (ii) to require a Consent of the Limited Partners to a
transaction that does not otherwise require Consent under this Agreement.
Each Limited Partner agrees, as a condition to the receipt of the notice
pursuant hereto, to keep confidential the information set forth therein until
such time as the General Partner Entity has made public disclosure thereof
and to use such information during such period of confidentiality solely for
purposes of determining whether or not to exercise the Redemption Right;
provided, however, that a Limited Partner may disclose such information to
its attorney, accountant and/or financial advisor for purposes of obtaining
advice with respect to such exercise so long as such attorney, accountant
and/or financial advisor agrees to receive and hold such information subject
to this confidentiality requirement.
D. Confidentiality. Notwithstanding any other provision of this
Section 8.5, the General Partner may keep confidential from the Limited
Partners, for such period of time as the General Partner determines in its
sole and absolute discretion to be reasonable, any information that (i) the
General Partner reasonably believes to be in the nature of trade secrets or
other information the disclosure of which the General Partner in good faith
believes is not in the best interests of the Partnership or could damage the
Partnership or its business or (ii) the Partnership is required by law or by
agreements with unaffiliated third parties to keep confidential.
Section 8.6 Redemption Right
A. General. (i) Subject to Section 8.6.C below, on or after the date
two (2) years after the issuance of a Partnership Unit to a Limited Partner
pursuant to Article IV hereof (which two-year period shall commence upon the
issuance of such Partnership Unit regardless of whether such Partnership Unit
is designated upon issuance as a Class A Unit, a Class B Unit or otherwise
and shall include the period of time from the date such Partnership Unit is
issued to such Limited Partner as other than a Class A Unit until the date
such Partnership Unit is converted automatically to a Class A Unit pursuant
to Section 4.2.C hereof), or on or after such date prior to the expiration of
such two-year period as the General Partner, in its sole and absolute
discretion, designates with respect to any or all Class A Units then
outstanding, the holder of a Partnership Unit (if other than the General
Partner or the General Partner Entity or any Subsidiary of either the General
Partner or the General Partner Entity) shall have the right (the "Redemption
Right") to require the Partnership to redeem such Partnership Unit on a
Specified Redemption Date and at a redemption price equal to and in the form
of the Cash Amount to be paid by the Partnership. Any such Redemption Right
shall be exercised pursuant to a Notice of Redemption delivered to the
Partnership (with a copy to the General Partner) by the Limited Partner who
is exercising the Redemption Right (the "Redeeming Partner"). A Limited
Partner may not exercise the Redemption Right for less than one thousand
(1,000) Partnership Units or, if such Redeeming Partner holds less than one
thousand (1,000) Partnership Units, for less than all of the Partnership
Units held by such Redeeming Partner.
(ii) The Redeeming Partner shall have no right with respect to any
Partnership Units so redeemed to receive any distributions paid after the
Specified Redemption Date.
(iii) The Assignee of any Limited Partner may exercise the rights of
such Limited Partner pursuant to this Section 8.6, and such Limited Partner
shall be deemed to have assigned such rights to such Assignee and shall be
bound by the exercise of such rights by such Limited Partner's Assignee. In
connection with any exercise of the such rights by such Assignee on behalf of
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such Limited Partner, the Cash Amount shall be paid by the Partnership
directly to such Assignee and not to such Limited Partner.
(iv) In the event that the General Partner provides notice to the Limited
Partners, pursuant to Section 8.5.C hereof, the Redemption Right shall be
exercisable, without regard to whether the Partnership Units have been
outstanding for any specified period, during the period commencing on the
date on which the General Partner provides such notice and ending on the
record date to determine shareholders eligible to receive such distribution
or to vote upon the approval of such merger, sale or other extraordinary
transaction (or, if no such record date is applicable, at least twenty (20)
business days before the consummation of such merger, sale or other
extraordinary transaction). In the event that this subparagraph (iv)
applies, the Specified Redemption Date is the date on which the Partnership
and the General Partner receive notice of exercise of the Redemption Right,
rather than ten (10) Business Days after receipt of the notice of redemption.
B. General Partner Assumption of Right. (i) If a Limited Partner has
delivered a Notice of Redemption, the General Partner may, in its sole and
absolute discretion (subject to any limitations on ownership and transfer of
Shares set forth in the Articles of Incorporation), elect to assume directly
and satisfy a Redemption Right by paying to the Redeeming Partner either the
Cash Amount or the Shares Amount, as the General Partner determines in its
sole and absolute discretion (provided that payment of the Redemption Amount
in the form of Shares shall be in Shares registered under Section 12 of the
Exchange Act and listed for trading on the exchange or national market on
which the Shares are Publicly Traded, and provided further that, in the event
that the Shares are not Publicly Traded at the time a Redeeming Partner
exercises its Redemption Right, the Redemption Amount shall be paid only in
the form of the Cash Amount unless the Redeeming Partner, in its sole and
absolute discretion, consents to payment of the Redemption Amount in the form
of the Shares Amount), on the Specified Redemption Date, whereupon the
General Partner shall acquire the Partnership Units offered for redemption by
the Redeeming Partner and shall be treated for all purposes of this Agreement
as the owner of such Partnership Units. Unless the General Partner, in its
sole and absolute discretion, shall exercise its right to assume directly and
satisfy the Redemption Right, the General Partner shall not have any
obligation to the Redeeming Partner or to the Partnership with respect to the
Redeeming Partner's exercise of the Redemption Right. In the event the
General Partner shall exercise its right to satisfy the Redemption Right in
the manner described in the first sentence of this Section 8.6.B and shall
fully perform its obligations in connection therewith, the Partnership shall
have no right or obligation to pay any amount to the Redeeming Partner with
respect to such Redeeming Partner's exercise of the Redemption Right, and
each of the Redeeming Partner, the Partnership and the General Partner shall,
for federal income tax purposes, treat the transaction between the General
Partner and the Redeeming Partner as a sale of the Redeeming Partner's
Partnership Units to the General Partner. Nothing contained in this Section
8.6.B shall imply any right of the General Partner to require any Limited
Partner to exercise the Redemption Right afforded to such Limited Partner
pursuant to Section 8.6.A above.
(ii) In the event that the General Partner determines to pay the
Redeeming Partner the Redemption Amount in the form of Shares, the total
number of Shares to be paid to the Redeeming Partner in exchange for the
Redeeming Partner's Partnership Units shall be the applicable Shares Amount.
In the event this amount is not a whole number of Shares, the Redeeming
Partner shall be paid (i) that number of Shares which equals the nearest
whole number less than such amount plus (ii) an amount of cash which the
General Partner determines, in its reasonable discretion, to represent the
fair value of the remaining fractional Share which would otherwise be payable
to the Redeeming Partner.
(iii) Each Redeeming Partner agrees to execute such documents as the
General Partner may reasonably require in connection with the issuance of
Shares upon exercise of the Redemption Right.
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C. Exceptions to Exercise of Redemption Right. Notwithstanding the
provisions of Sections 8.6.A and 8.6.B above, a Partner shall not be entitled
to exercise the Redemption Right pursuant to Section 8.6.A above if (but only
as long as) the delivery of Shares to such Partner on the Specified
Redemption Date (i) would be prohibited under the Articles of Incorporation
or (ii) as long as the Shares are Publicly Traded, would be prohibited under
applicable federal or state securities laws or regulations (in each case
regardless of whether the General Partner would in fact assume and satisfy
the Redemption Right).
D. No Liens on Partnership Units Delivered for Redemption. Each
Limited Partner covenants and agrees with the General Partner that all
Partnership Units delivered for redemption shall be delivered to the
Partnership or the General Partner, as the case may be, free and clear of all
liens, and, notwithstanding anything contained herein to the contrary,
neither the General Partner nor the Partnership shall be under any obligation
to acquire Partnership Units which are or may be subject to any liens. Each
Limited Partner further agrees that, in the event any state or local property
transfer tax is payable as a result of the transfer of its Partnership Units
to the Partnership or the General Partner, such Limited Partner shall assume
and pay such transfer tax.
E. Additional Partnership Interests. In the event that the Partnership
issues Partnership Interests to any Additional Limited Partner pursuant to
Article IV hereof, the General Partner shall make such amendments to this
Section 8.6 as it determines are necessary to reflect the issuance of such
Partnership Interests (including setting forth any restrictions on the
exercise of the Redemption Right with respect to such Partnership Interests).
ARTICLE IX
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 9.1 Records and Accounting
The General Partner shall keep or cause to be kept at the principal
office of the Partnership appropriate books and records with respect to the
Partnership's business, including, without limitation, all books and records
necessary to provide to the Limited Partners any information, lists and
copies of documents required to be provided pursuant to Section 9.3 below.
Any records maintained by or on behalf of the Partnership in the regular
course of its business may be kept on, or be in the form of, punch cards,
magnetic tape, photographs, micrographics or any other information storage
device, provided that the records so maintained are convertible into clearly
legible written form within a reasonable period of time. The books of the
Partnership shall be maintained, for financial and tax reporting purposes, on
an accrual basis in accordance with generally accepted accounting principles.
Section 9.2 Fiscal Year
The fiscal year of the Partnership shall be the calendar year.
Section 9.3 Reports
A. Annual Reports. As soon as practicable, but in no event later than
the date on which the General Partner Entity mails its annual report to its
stockholders, the General Partner shall cause to be mailed to each Limited
Partner an annual report, as of the close of the most recently ended
Partnership Year, containing financial statements of the Partnership, or of
the General Partner Entity if such statements are prepared solely on a
consolidated basis with the Partnership, for such Partnership Year, presented
in accordance with generally accepted accounting
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principles, such statements to be audited by a nationally recognized firm of
independent public accountants selected by the General Partner Entity.
B. Quarterly Reports. If and to the extent that the General Partner
Entity mails quarterly reports to its stockholders, as soon as practicable,
but in no event later than the date on which such reports are mailed, the
General Partner shall cause to be mailed to each Limited Partner a report
containing unaudited financial statements, as of the last day of such
calendar quarter, of the Partnership, or of the General Partner Entity if
such statements are prepared solely on a consolidated basis with the
Partnership, and such other information as may be required by applicable law
or regulation, or as the General Partner determines to be appropriate.
ARTICLE X
TAX MATTERS
Section 10.1 Preparation of Tax Returns
The General Partner shall arrange for the preparation and timely filing
of all returns of Partnership income, gains, deductions, losses and other
items required of the Partnership for federal and state income tax purposes
and shall use all reasonable efforts to furnish, within ninety (90) days of
the close of each taxable year, the tax information reasonably required by
Limited Partners for federal and state income tax reporting purposes.
Section 10.2 Tax Elections
Except as otherwise provided herein, the General Partner shall, in its
sole and absolute discretion, determine whether to make any available
election pursuant to the Code; provided, however, that the General Partner
shall make the election under Section 754 of the Code in accordance with
applicable regulations thereunder. The General Partner shall have the right
to seek to revoke any such election (including, without limitation, the
election under Section 754 of the Code) upon the General Partner's
determination in its sole and absolute discretion that such revocation is in
the best interests of the Partners.
Section 10.3 Tax Matters Partner
A. General. The General Partner shall be the "tax matters partner" of
the Partnership for federal income tax purposes. Pursuant to Section
6223(c)(3) of the Code, upon receipt of notice from the IRS of the beginning
of an administrative proceeding with respect to the Partnership, the tax
matters partner shall furnish the IRS with the name, address, tax payer
identification number and profit interest of each of the Limited Partners and
any Assignees; provided, however, that such information is provided to the
Partnership by the Limited Partners.
B. Powers. The tax matters partner is authorized, but not required:
(1) to enter into any settlement with the IRS with
respect to any administrative or judicial proceedings for the
adjustment of Partnership items required to be taken into
account by a Partner for income tax purposes (such
administrative proceedings being referred to as a "tax audit"
and such judicial proceedings being referred to as "judicial
review"), and in the settlement agreement the tax matters
partner may expressly state that such agreement shall bind all
Partners, except that such settlement agreement shall not bind
any Partner (i) who (within the time prescribed pursuant to
the Code and
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Regulations) files a statement with the IRS providing that the
tax matters partner shall not have the authority to enter into
a settlement agreement on behalf of such Partner or (ii) who
is a "notice partner" (as defined in Section 6231(a)(8) of the
Code) or a member of a "notice group" (as defined in Section
6223(b)(2) of the Code);
(2) in the event that a notice of a final administrative
adjustment at the Partnership level of any item required to be
taken into account by a Partner for tax purposes (a "final
adjustment") is mailed to the tax matters partner, to seek
judicial review of such final adjustment, including the filing
of a petition for readjustment with the Tax Court or the filing
of a complaint for refund with the United States Claims Court
or the District Court of the United States for the district in
which the Partnership's principal place of business is located;
(3) to intervene in any action brought by any other Partner for
judicial review of a final adjustment;
(4) to file a request for an administrative adjustment with the IRS
at any time and, if any part of such request is not allowed by
the IRS, to file an appropriate pleading (petition or complaint)
for judicial review with respect to such request;
(5) to enter into an agreement with the IRS to extend the period for
assessing any tax which is attributable to any item required to
be taken into account by a Partner for tax purposes, or an item
affected by such item; and
(6) to take any other action on behalf of the Partners of the
Partnership in connection with any tax audit or judicial review
proceeding to the extent permitted by applicable law or
regulations.
The taking of any action and the incurring of any expense by the tax
matters partner in connection with any such proceeding, except to the extent
required by law, is a matter in the sole and absolute discretion of the tax
matters partner and the provisions relating to indemnification of the General
Partner set forth in Section 7.7 hereof shall be fully applicable to the tax
matters partner in its capacity as such.
C. Reimbursement. The tax matters partner shall receive no
compensation for its services. All third party costs and expenses incurred
by the tax matters partner in performing its duties as such (including legal
and accounting fees and expenses) shall be borne by the Partnership. Nothing
herein shall be construed to restrict the Partnership from engaging an
accounting firm or a law firm to assist the tax matters partner in
discharging its duties hereunder, as long as the compensation paid by the
Partnership for such services is reasonable.
Section 10.4 Organizational Expenses
The Partnership shall elect to deduct expenses, if any, incurred by it in
organizing the Partnership ratably over a sixty (60) month period as provided
in Section 709 of the Code.
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Section 10.5 Withholding
Each Limited Partner hereby authorizes the Partnership to withhold from
or pay on behalf of or with respect to such Limited Partner any amount of
federal, state, local, or foreign taxes that the General Partner determines
that the Partnership is required to withhold or pay with respect to any
amount distributable or allocable to such Limited Partner pursuant to this
Agreement, including, without limitation, any taxes required to be withheld
or paid by the Partnership pursuant to Section 1441, 1442, 1445, or 1446 of
the Code. Any amount paid on behalf of or with respect to a Limited Partner
shall constitute a recourse loan by the Partnership to such Limited Partner,
which loan shall be repaid by such Limited Partner within fifteen (15) days
after notice from the General Partner that such payment must be made unless
(i) the Partnership withholds such payment from a distribution which would
otherwise be made to the Limited Partner or (ii) the General Partner
determines, in its sole and absolute discretion, that such payment may be
satisfied out of the available funds of the Partnership which would, but for
such payment, be distributed to the Limited Partner. Any amounts withheld
pursuant to the foregoing clauses (i) or (ii) shall be treated as having been
distributed to such Limited Partner. Each Limited Partner hereby
unconditionally and irrevocably grants to the Partnership a security interest
in such Limited Partner's Partnership Interest to secure such Limited
Partner's obligation to pay to the Partnership any amounts required to be
paid pursuant to this Section 10.5. In the event that a Limited Partner
fails to pay any amounts owed to the Partnership pursuant to this Section
10.5 when due, the General Partner may, in its sole and absolute discretion,
elect to make the payment to the Partnership on behalf of such defaulting
Limited Partner, and in such event shall be deemed to have loaned such amount
to such defaulting Limited Partner and shall succeed to all rights and
remedies of the Partnership as against such defaulting Limited Partner
(including, without limitation, the right to receive distributions). Any
amounts payable by a Limited Partner hereunder shall bear interest at the
base rate on corporate loans at large United States money center commercial
banks, as published from time to time in the Wall Street Journal, plus four
(4) percentage points (but not higher than the maximum lawful rate) from the
date such amount is due (i.e., fifteen (15) days after demand) until such
amount is paid in full. Each Limited Partner shall take such actions as the
Partnership or the General Partner shall request in order to perfect or
enforce the security interest created hereunder.
ARTICLE XI
TRANSFERS AND WITHDRAWALS
Section 11.1 Transfer
A. Definition. The term "transfer," when used in this Article XI with
respect to a Partnership Interest or a Partnership Unit, shall be deemed to
refer to a transaction by which the General Partner purports to assign all or
any part of its General Partnership Interest to another Person or by which a
Limited Partner purports to assign all or any part of its Limited Partnership
Interest to another Person, and includes a sale, assignment, gift, pledge,
encumbrance, hypothecation, mortgage, exchange or any other disposition by
law or otherwise. The term "transfer" when used in this Article XI does not
include any redemption or repurchase of Partnership Units by the Partnership
from a Partner (including the General Partner) or acquisition of Partnership
Units from a Limited Partner by the General Partner pursuant to Section 8.6
hereof or otherwise. No part of the interest of a Limited Partner shall be
subject to the claims of any creditor, any spouse for alimony or support, or
to legal process, and may not be voluntarily or involuntarily alienated or
encumbered except as may be specifically provided for in this Agreement.
B. General. No Partnership Interest shall be transferred, in whole or
in part, except in accordance with the terms and conditions set forth in this
Article XI. Any transfer or purported transfer of a Partnership Interest not
made in accordance with this Article XI shall be null and void.
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Section 11.2 Transfers of Partnership Interests of General Partner
A. Except for transfers of Partnership Units to the Partnership as
provided in Section 7.5 or Section 8.6 hereof, the General Partner may not
transfer any of its Partnership Interest (including both its General
Partnership Interest and its Limited Partnership Interest) except in
connection with a transaction described in Section 11.2.B below or as
otherwise expressly permitted under this Agreement), nor shall the General
Partner withdraw as General Partner except in connection with a transaction
described in Section 11.2.B below.
B. The General Partner shall not engage in any merger (including a
triangular merger), consolidation or other combination with or into another
person, sale of all or substantially all of its assets or any
reclassification, recapitalization or change of outstanding Shares (other
than a change in par value, or from par value to no par value, or as a result
of a subdivision or combination as described in the definition of "Conversion
Factor") ("Termination Transaction"), unless the Termination Transaction has
been approved by the Consent of the Partners holding a majority or more of
the then outstanding Partnership Units (including any Partnership Units held
by the General Partner) and in connection with which all Limited Partners
either will receive, or will have the right to elect to receive, for each
Partnership Unit an amount of cash, securities, or other property equal to
the product of the Conversion Factor and the greatest amount of cash,
securities or other property paid to a holder of Shares, if any,
corresponding to such Partnership Unit was issued pursuant to Section 4.2.A
hereof in consideration of one such Share at any time during the period from
and after the date on which the Termination Transaction is consummated;
provided that, if, in connection with the Termination Transaction, a
purchase, tender or exchange offer shall have been made to and accepted by
the holders of more than fifty percent (50%) of the outstanding Shares, each
holder of Partnership Units shall receive, or shall have the right to elect
to receive, the greatest amount of cash, securities, or other property which
such holder would have received had it exercised the Redemption Right and
received Shares in exchange for its Partnership Units immediately prior to
the expiration of such purchase, tender or exchange offer and had thereupon
accepted such purchase, tender or exchange offer.
Section 11.3 Limited Partners' Rights to Transfer
A. General. Subject to the provisions of Sections 11.3.C, 11.3.D,
11.3.E, 11.4 and 11.6 below, prior to the second anniversary of the Effective
Date, a Limited Partner may not transfer any of such Limited Partner's rights
as a Limited Partner without the consent of the General Partner, which
consent the General Partner may withhold in its sole discretion if it
determines that such a transfer would cause any or all of the Limited
Partners other than the Limited Partner seeking to transfer its rights as a
Limited Partner to be subject to tax liability as a result of such transfer.
Any purported transfer attempted in violation of the foregoing sentence shall
be deemed void ab initio and shall have no force or effect. Subject to the
provisions of Sections 11.3.C, 11.3.D, 11.3.E, 11.4 and 11.6 below, on or
after the second anniversary of the Effective Date, a Limited Partner (other
than the General Partner) may transfer, with or without the consent of the
General Partner, all or any portion of its Partnership Interest, or any of
such Limited Partner's rights as a Limited Partner, provided that prior
written notice of such proposed transfer is delivered to the General Partner.
B. Incapacitated Limited Partners. If a Limited Partner is subject to
Incapacity, the executor, administrator, trustee, committee, guardian,
conservator or receiver of such Limited Partner's estate shall have all the
rights of a Limited Partner, but not more rights than those enjoyed by other
Limited Partners for the purpose of settling or managing the estate and such
power as the Incapacitated Limited Partner possessed to transfer all or any
part of its interest in the Partnership. The Incapacity of a Limited
Partner, in and of itself, shall not dissolve or terminate the Partnership.
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C. No Transfers Violating Securities Laws. The General Partner may
prohibit any transfer of Partnership Units by a Limited Partner if, in the
opinion of legal counsel to the Partnership, such transfer would require
filing of a registration statement under the Securities Act or would
otherwise violate any federal, or state securities laws or regulations
applicable to the Partnership or the Partnership Unit.
D. No Transfers Affecting Tax Status of Partnership. No transfer of
Partnership Units by a Limited Partner (including a redemption or exchange
pursuant to Section 8.6 hereof) may be made to any Person if (i) in the
opinion of legal counsel for the Partnership, it would result in the
Partnership being treated as an association taxable as a corporation for
federal income tax purposes or would result in a termination of the
Partnership for federal income tax purposes (except as a result of the
redemption or exchange for Shares of all Partnership Units held by all
Limited Partners other than the General Partner or the General Partner Entity
or any Subsidiary of either the General Partner or the General Partner Entity
or pursuant to a transaction expressly permitted under Section 7.11.B or
Section 11.2 hereof), (ii) in the opinion of legal counsel for the
Partnership, it would adversely affect the ability of the General Partner
Entity to continue to qualify as a REIT or would subject the General Partner
Entity to any additional taxes under Section 857 or Section 4981 of the Code
or (iii) such transfer is effectuated through an "established securities
market" or a "secondary market (or the substantial equivalent thereof)"
within the meaning of Section 7704 of the Code.
E. No Transfers to Holders of Nonrecourse Liabilities. No pledge or
transfer of any Partnership Units may be made to a lender to the Partnership
or any Person who is related (within the meaning of Section 1.752-4(b) of the
Regulations) to any lender to the Partnership whose loan constitutes a
Nonrecourse Liability without the consent of the General Partner, in its sole
and absolute discretion; provided that, as a condition to such consent the
lender will be required to enter into an arrangement with the Partnership and
the General Partner to exchange or redeem for the Redemption Amount any
Partnership Units in which a security interest is held simultaneously with
the time at which such lender would be deemed to be a partner in the
Partnership for purposes of allocating liabilities to such lender under
Section 752 of the Code.
Section 11.4 Substituted Limited Partners
A. Consent of General Partner. No Limited Partner shall have the right
to substitute a transferee as a Limited Partner in its place without the
consent of the General Partner to the admission of a transferee of the
interest of a Limited Partner pursuant to this Section 11.4 as a Substituted
Limited Partner, which consent may be given or withheld by the General
Partner in its sole and absolute discretion. The General Partner's failure
or refusal to permit a transferee of any such interests to become a
Substituted Limited Partner shall not give rise to any cause of action
against the Partnership or any Partner.
B. Rights of Substituted Limited Partner. A transferee who has been
admitted as a Substituted Limited Partner in accordance with this Article XI
shall have all the rights and powers and be subject to all the restrictions
and liabilities of a Limited Partner under this Agreement. The admission of
any transferee as a Substituted Limited Partner shall be conditioned upon the
transferee executing and delivering to the Partnership an acceptance of all
the terms and conditions of this Agreement (including, without limitation,
the provisions of Section 15.11 hereof and such other documents or
instruments as may be required to effect the admission).
C. Amendment and Restatement of Exhibit A. Upon the admission of a
Substituted Limited Partner, the General Partner shall amend and restate
Exhibit A hereto to reflect the name, address, Capital Account, number of
Partnership Units, and Percentage Interest of
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such Substituted Limited Partner and to eliminate or adjust, if necessary,
the name, address, Capital Account and Percentage Interest of the predecessor
of such Substituted Limited Partner.
Section 11.5 Assignees
If the General Partner, in its sole and absolute discretion, does not
consent to the admission of any permitted transferee under Section 11.3 above
as a Substituted Limited Partner, as described in Section 11.4 above, such
transferee shall be considered an Assignee for purposes of this Agreement.
An Assignee shall be entitled to all the rights of an assignee of a limited
partnership interest under the Act, including the right to receive
distributions from the Partnership and the share of Net Income, Net Losses,
gain, loss and Recapture Income attributable to the Partnership Units
assigned to such transferee, and shall have the rights granted to the Limited
Partners under Section 8.6 hereof, but shall not be deemed to be a holder of
Partnership Units for any other purpose under this Agreement, and shall not
be entitled to vote such Partnership Units in any matter presented to the
Limited Partners for a vote (such Partnership Units being deemed to have been
voted on such matter in the same proportion as all other Partnership Units
held by Limited Partners are voted). In the event any such transferee
desires to make a further assignment of any such Partnership Units, such
transferee shall be subject to all the provisions of this Article XI to the
same extent and in the same manner as any Limited Partner desiring to make an
assignment of Partnership Units.
Section 11.6 General Provisions
A. Withdrawal of Limited Partner. No Limited Partner may withdraw from
the Partnership other than as a result of a permitted transfer of all of such
Limited Partner's Partnership Units in accordance with this Article XI or
pursuant to redemption of all of its Partnership Units under Section 8.6
hereof.
B. Termination of Status as Limited Partner. Any Limited Partner who
shall transfer all of its Partnership Units in a transfer permitted pursuant
to this Article XI or pursuant to redemption of all of its Partnership Units
under Section 8.6 hereof shall cease to be a Limited Partner.
C. Timing of Transfers. Transfers pursuant to this Article XI may only
be made on the first day of a fiscal quarter of the Partnership, unless the
General Partner otherwise agrees.
D. Allocations. If any Partnership Interest is transferred during any
quarterly segment of the Partnership's fiscal year in compliance with the
provisions of this Article XI or redeemed or transferred pursuant to Section
8.6 hereof, Net Income, Net Losses, each item thereof and all other items
attributable to such interest for such fiscal year shall be divided and
allocated between the transferor Partner and the transferee Partner by taking
into account their varying interests during the fiscal year in accordance
with Section 706(d) of the Code, using the interim closing of the books
method (unless the General Partner, in its sole and absolute discretion,
elects to adopt a daily, weekly, or a monthly proration period, in which
event Net Income, Net Losses, each item thereof and all other items
attributable to such interest for such fiscal year shall be prorated based
upon the applicable method selected by the General Partner). Solely for
purposes of making such allocations, each of such items for the calendar
month in which the transfer or redemption occurs shall be allocated to the
Person who is a Partner as of midnight on the last day of said month. All
distributions of Available Cash attributable to any Partnership Unit with
respect to which the Partnership Record Date is before the date of such
transfer, assignment or redemption shall be made to the transferor Partner or
the Redeeming Partner, as the case may be, and, in the case of a transfer or
assignment other than a redemption, all distributions of Available Cash
thereafter attributable to such Partnership Unit shall be made to the
transferee Partner.
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E. Additional Restrictions. In addition to any other restrictions on
transfer herein contained, including without limitation the provisions of
this Article XI, in no event may any transfer or assignment of a Partnership
Interest by any Partner (including pursuant to Section 8.6 hereof) be made
without the express consent of the General Partner, in its sole and absolute
discretion, (i) to any person or entity who lacks the legal right, power or
capacity to own a Partnership Interest; (ii) in violation of applicable law;
(iii) of any component portion of a Partnership Interest, such as the Capital
Account, or rights to distributions, separate and apart from all other
components of a Partnership Interest; (iv) if in the opinion of legal counsel
to the Partnership such transfer would cause a termination of the Partnership
for federal or state income tax purposes (except as a result of the
redemption or exchange for Shares of all Partnership Units held by all
Limited Partners or pursuant to a transaction expressly permitted under
Section 7.11.B or Section 11.2 hereof); (v) if in the opinion of counsel to
the Partnership, such transfer would cause the Partnership to cease to be
classified as a partnership for federal income tax purposes (except as a
result of the redemption or exchange for Shares of all Partnership Units held
by all Limited Partners or pursuant to a transaction expressly permitted
under Section 7.11.B or Section 11.2 hereof); (vi) if such transfer would
cause the Partnership to become, with respect to any employee benefit plan
subject to Title I of ERISA, a "party-in-interest" (as defined in Section
3(14) of ERISA) or a "disqualified person" (as defined in Section 4975(c) of
the Code); (vii) if such transfer would, in the opinion of counsel to the
Partnership, cause any portion of the assets of the Partnership to constitute
assets of any employee benefit plan pursuant to Department of Labor
Regulations Section 2510.1-101; (viii) if such transfer requires the
registration of such Partnership Interest pursuant to any applicable federal
or state securities laws; (ix) if such transfer is effectuated through an
"established securities market" or a "secondary market" (or the substantial
equivalent thereof) within the meaning of Section 7704 of the Code or such
transfer causes the Partnership to become a "publicly traded partnership," as
such term is defined in Section 469(k)(2) or Section 7704(b) of the Code; (x)
if such transfer subjects the Partnership to regulation under the Investment
Company Act of 1940, the Investment Advisors Act of 1940 or the Employee
Retirement Income Security Act of 1974, each as amended; (xi) if the
transferee or assignee of such Partnership Interest is unable to make the
representations set forth in Section 15.15 hereof or such transfer could
otherwise adversely affect the ability of the General Partner Entity to
remain qualified as a REIT; or (xii) if in the opinion of legal counsel for
the Partnership, such transfer would adversely affect the ability of the
General Partner Entity to continue to qualify as a REIT or subject the
General Partner Entity to any additional taxes under Section 857 or Section
4981 of the Code.
F. Avoidance of "Publicly Traded Partnership" Status. The General
Partner shall monitor the transfers of interests in the Partnership to
determine (i) if such interests are being traded on an "established
securities market" or a "secondary market (or the substantial equivalent
thereof)" within the meaning of Section 7704 of the Code and (ii) whether
additional transfers of interests would result in the Partnership being
unable to qualify for at least one of the "safe harbors" set forth in
Regulations Section 1.7704-1 (or such other guidance subsequently published
by the IRS setting forth safe harbors under which interests will not be
treated as "readily tradable on a secondary market (or the substantial
equivalent thereof)" within the meaning of Section 7704 of the Code) (the
"Safe Harbors"). The General Partner shall take all steps reasonably
necessary or appropriate to prevent any trading of interests or any
recognition by the Partnership of transfers made on such markets and, except
as otherwise provided herein, to insure that at least one of the Safe Harbors
is met.
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ARTICLE XII
ADMISSION OF PARTNERS
Section 12.1 Admission of Successor General Partner
A successor to all of the General Partner's General Partnership Interest
pursuant to Section 11.2 hereof who is proposed to be admitted as a successor
General Partner shall be admitted to the Partnership as the General Partner,
effective upon such transfer. Any such transferee shall carry on the
business of the Partnership without dissolution. In each case, the admission
shall be subject to the successor General Partner's executing and delivering
to the Partnership an acceptance of all of the terms and conditions of this
Agreement and such other documents or instruments as may be required to
effect the admission.
Section 12.2 Admission of Additional Limited Partners
A. General. No Person shall be admitted as an Additional Limited
Partner without the consent of the General Partner, which consent shall be
given or withheld in the General Partner's sole and absolute discretion. A
Person who makes a Capital Contribution to the Partnership in accordance with
this Agreement, including, without limitation, pursuant to Section 4.1.C
hereof, or who exercises an option to receive Partnership Units shall be
admitted to the Partnership as an Additional Limited Partner only with the
consent of the General Partner and only upon furnishing to the General
Partner (i) evidence of acceptance in form satisfactory to the General
Partner of all of the terms and conditions of this Agreement, including,
without limitation, the power of attorney granted in Section 15.11 hereof and
(ii) such other documents or instruments as may be required in the discretion
of the General Partner in order to effect such Person's admission as an
Additional Limited Partner. The admission of any Person as an Additional
Limited Partner shall become effective on the date upon which the name of
such Person is recorded on the books and records of the Partnership,
following the consent of the General Partner to such admission.
B. Allocations to Additional Limited Partners. If any Additional
Limited Partner is admitted to the Partnership on any day other than the
first day of a Partnership Year, then Net Income, Net Losses, each item
thereof and all other items allocable among Partners and Assignees for such
Partnership Year shall be allocated among such Additional Limited Partner and
all other Partners and Assignees by taking into account their varying
interests during the Partnership Year in accordance with Section 706(d) of
the Code, using the interim closing of the books method (unless the General
Partner, in its sole and absolute discretion, elects to adopt a daily, weekly
or monthly proration method, in which event Net Income, Net Losses, and each
item thereof would be prorated based upon the applicable period selected by
the General Partner). Solely for purposes of making such allocations, each
of such items for the calendar month in which an admission of any Additional
Limited Partner occurs shall be allocated among all the Partners and
Assignees including such Additional Limited Partner. All distributions of
Available Cash with respect to which the Partnership Record Date is before
the date of such admission shall be made solely to Partners and Assignees
other than the Additional Limited Partner, and all distributions of Available
Cash thereafter shall be made to all the Partners and Assignees including
such Additional Limited Partner.
Section 12.3 Amendment of Agreement and Certificate of Limited Partnership
For the admission to the Partnership of any Partner, the General Partner
shall take all steps necessary and appropriate under the Act to amend the
records of the Partnership (including an amendment and restatement of Exhibit
A hereto) and, if necessary, to prepare as soon as practical an amendment of
this Agreement and, if required by law, shall prepare and file an amendment to
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the Certificate and may for this purpose exercise the power of attorney
granted pursuant to Section 15.11 hereof.
ARTICLE XIII
DISSOLUTION AND LIQUIDATION
Section 13.1 Dissolution
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement.
Upon the withdrawal of the General Partner, any successor General Partner
shall continue the business of the Partnership. The Partnership shall
dissolve, and its affairs shall be wound up, upon the first to occur of any
of the following ("Liquidating Events") :
(i) the expiration of its term as provided in Section 2.4
hereof;
(ii) an event of withdrawal of the General Partner, as defined
in the Act (other than an event of bankruptcy), unless, within ninety (90)
days after the withdrawal a "majority in interest" (as defined below) of the
remaining Partners Consent in writing to continue the business of the
Partnership and to the appointment, effective as of the date of withdrawal,
of a substitute General Partner;
(iii) an election to dissolve the Partnership made by the
General Partner, in its sole and absolute discretion, after December 31, 2046;
(iv) entry of a decree of judicial dissolution of the
Partnership pursuant to the provisions of the Act;
(v) the sale of all or substantially all of the assets and
properties of the Partnership for cash or for marketable securities (subject
to Section 7.11.C); or
(vi) a final and nonappealable judgment is entered by a court
of competent jurisdiction ruling that the General Partner is bankrupt or
insolvent, or a final and nonappealable order for relief is entered by a
court with appropriate jurisdiction against the General Partner, in each case
under any federal or state bankruptcy or insolvency laws as now or hereafter
in effect, unless prior to or within ninety days after of the entry of such
order or judgment a "majority in interest" (as defined below) of the
remaining Partners Consent in writing to continue the business of the
Partnership and to the appointment, effective as of a date prior to the date
of such order or judgment, of a substitute General Partner.
As used herein, a "majority in interest" shall refer to Partners
(excluding the General Partner) who hold more than fifty percent (50%) of the
outstanding Percentage Interests not held by the General Partner.
Section 13.2 Winding Up
A. General. Upon the occurrence of a Liquidating Event, the
Partnership shall continue solely for the purposes of winding up its affairs
in an orderly manner, liquidating its assets, and satisfying the claims of
its creditors and Partners. No Partner shall take any action that is
inconsistent with, or not necessary to or appropriate for, the winding up of
the Partnership's business and affairs. The General Partner (or, in the
event there is no remaining General Partner, any Person elected by a majority
in interest of the Limited Partners (the "Liquidator")) shall be
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responsible for overseeing the winding up and dissolution of the Partnership
and shall take full account of the Partnership's liabilities and property and
the Partnership property shall be liquidated as promptly as is consistent
with obtaining the fair value thereof, and the proceeds therefrom (which may,
to the extent determined by the General Partner, include equity or other
securities of the General Partner or any other entity) shall be applied and
distributed in the following order:
(1) First, to the payment and discharge of all of the
Partnership's debts and liabilities to creditors other than the
Partners;
(2) Second, to the payment and discharge of all of the
Partnership's debts and liabilities to the Partners; and
(3) The balance, if any, to the Partners in accordance with
their Capital Accounts, after giving effect to all contributions,
distributions, and allocations for all periods.
The General Partner shall not receive any additional compensation for any
services performed pursuant to this Article XIII.
B. Deferred Liquidation. Notwithstanding the provisions of Section
13.2.A above which require liquidation of the assets of the Partnership, but
subject to the order of priorities set forth therein, if prior to or upon
dissolution of the Partnership the Liquidator determines that an immediate
sale of part or all of the Partnership's assets would be impractical or would
cause undue loss to the Partners, the Liquidator may, in its sole and
absolute discretion, defer for a reasonable time the liquidation of any
assets except those necessary to satisfy liabilities of the Partnership
(including to those Partners as creditors) or distribute to the Partners, in
lieu of cash, as tenants in common and in accordance with the provisions of
Section 13.2.A above, undivided interests in such Partnership assets as the
Liquidator deems not suitable for liquidation. Any such distributions in
kind shall be made only if, in the good faith judgment of the Liquidator,
such distributions in kind are in the best interest of the Partners, and
shall be subject to such conditions relating to the disposition and
management of such properties as the Liquidator deems reasonable and
equitable and to any agreements governing the operation of such properties at
such time. The Liquidator shall determine the fair market value of any
property distributed in kind using such reasonable method of valuation as it
may adopt.
Section 13.3 Compliance with Timing Requirements of Regulations
Subject to Section 13.4 below, in the event the Partnership is
"liquidated" within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g),
distributions shall be made pursuant to this Article XIII to the General
Partner and Limited Partners who have positive Capital Accounts in compliance
with Regulations Section 1.704-1(b)(2)(ii)(b)(2). If any Partner has a
deficit balance in its Capital Account (after giving effect to all
contributions, distributions and allocations for all taxable years, including
the year during which such liquidation occurs), such Partner shall have no
obligation to make any contribution to the capital of the Partnership with
respect to such deficit, and such deficit shall not be considered a debt owed
to the Partnership or to any other Person for any purpose whatsoever. In the
discretion of the General Partner, a pro rata portion of the distributions
that would otherwise be made to the General Partner and Limited Partners
pursuant to this Article XIII may be: (A) distributed to a trust established
for the benefit of the General Partner and Limited Partners for the purposes
of liquidating Partnership assets, collecting amounts owed to the Partnership
and paying any contingent or unforeseen liabilities or obligations of the
Partnership or of the General Partner arising out of or in connection with
the Partnership (in which case the assets of any such trust shall be
distributed to the General Partner and Limited Partners from time to time, in
the reasonable discretion of the General Partner, in the same proportions as
the amount
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distributed to such trust by the Partnership would otherwise have been
distributed to the General Partner and Limited Partners pursuant to this
Agreement); or (B) withheld to provide a reasonable reserve for Partnership
liabilities (contingent or otherwise) and to reflect the unrealized portion
of any installment obligations owed to the Partnership, provided that such
withheld amounts shall be distributed to the General Partner and Limited
Partners as soon as practicable.
Section 13.4 Deemed Distribution and Recontribution
Notwithstanding any other provision of this Article XIII, in the event
the Partnership is deemed liquidated within the meaning of Regulations
Section 1.704-1(b)(2)(ii)(g) but no Liquidating Event has occurred, the
Partnership's property shall not be liquidated, the Partnership's liabilities
shall not be paid or discharged and the Partnership's affairs shall not be
wound up. Instead, for federal income tax purposes and for purposes of
maintaining Capital Accounts pursuant to Exhibit B hereto, the Partnership
shall be deemed to have distributed its assets in kind to the General Partner
and Limited Partners, who shall be deemed to have assumed and taken such
assets subject to all Partnership liabilities, all in accordance with their
respective Capital Accounts. Immediately thereafter, the General Partner and
Limited Partners shall be deemed to have recontributed the Partnership assets
in kind to the Partnership, which shall be deemed to have assumed and taken
such assets subject to all such liabilities.
Section 13.5 Rights of Limited Partners
Except as otherwise provided in this Agreement, each Limited Partner
shall look solely to the assets of the Partnership for the return of its
Capital Contributions and shall have no right or power to demand or receive
property other than cash from the Partnership. Except as otherwise expressly
provided in this Agreement, no Limited Partner shall have priority over any
other Limited Partner as to the return of its Capital Contributions,
distributions, or allocations.
Section 13.6 Notice of Dissolution
In the event a Liquidating Event occurs or an event occurs that would,
but for provisions of an election or objection by one or more Partners
pursuant to Section 13.1 above, result in a dissolution of the Partnership,
the General Partner shall, within thirty (30) days thereafter, provide
written notice thereof to each of the Partners and to all other parties with
whom the Partnership regularly conducts business (as determined in the
discretion of the General Partner) and shall publish notice thereof in a
newspaper of general circulation in each place in which the Partnership
regularly conducts business (as determined in the discretion of the General
Partner).
Section 13.7 Cancellation of Certificate of Limited Partnership
Upon the completion of the liquidation of the Partnership cash and
property as provided in Section 13.2 above, the Partnership shall be
terminated and the Certificate and all qualifications of the Partnership as a
foreign limited partnership in jurisdictions other than the State of Delaware
shall be canceled and such other actions as may be necessary to terminate the
Partnership shall be taken.
Section 13.8 Reasonable Time for Winding Up
A reasonable time shall be allowed for the orderly winding up of the
business and affairs of the Partnership and the liquidation of its assets
pursuant to Section 13.2 above, in order to
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<PAGE>
minimize any losses otherwise attendant upon such winding-up, and the
provisions of this Agreement shall remain in effect among the Partners during
the period of liquidation.
Section 13.9 Waiver of Partition
Each Partner hereby waives any right to partition of the Partnership
property.
Section 13.10 Liability of Liquidator
The Liquidator shall be indemnified and held harmless by the Partnership
in the same manner and to the same degree as an Indemnitee may be indemnified
pursuant to Section 7.11 hereof.
ARTICLE XIV
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS
Section 14.1 Amendments
A. General. Amendments to this Agreement may be proposed by the
General Partner or by any Limited Partners holding twenty-five percent (25%)
or more of the Partnership Interests. Following such proposal (except an
amendment pursuant to Section 14.1.B below), the General Partner shall submit
any proposed amendment to the Limited Partners. The General Partner shall
seek the written vote of the Partners on the proposed amendment or shall call
a meeting to vote thereon and to transact any other business that it may deem
appropriate. For purposes of obtaining a written vote, the General Partner
may require a response within a reasonable specified time, but not less than
fifteen (15) days, and failure to respond in such time period shall
constitute a vote which is consistent with the General Partner's
recommendation with respect to the proposal. Except as provided in Section
14.1.B, 14.1.C or 14.1.D below, a proposed amendment shall be adopted and be
effective as an amendment hereto if it is approved by the General Partner and
it receives the Consent of Partners holding a majority of the Percentage
Interests of the Limited Partners (including Limited Partnership Interests
held by the General Partner).
B. Amendments Not Requiring Limited Partner Approval. Notwithstanding
Section 14.1.A or Section 14.1.C hereof, the General Partner shall have the
power, without the Consent of the Limited Partners, to amend this Agreement
as may be required to facilitate or implement any of the following purposes:
(1) to add to the obligations of the General Partner or
surrender any right or power granted to the General Partner or any
Affiliate of the General Partner for the benefit of the Limited
Partners;
(2) to reflect the admission, substitution, termination or
withdrawal of any Partner in accordance with this Agreement;
(3) to set forth the designations, rights, powers, duties, and
preferences of the holders of any additional Partnership Interests
issued pursuant to Article IV hereof;
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<PAGE>
(4) to reflect a change that does not adversely affect any of the Limited
Partners in any material respect, or to cure any ambiguity, correct or
supplement any provision in this Agreement not inconsistent with law
or with other provisions, or make other changes with respect to
matters arising under this Agreement that will not be inconsistent
with law or with the provisions of this Agreement or as may be
expressly provided by any other provisions of this Agreement; and
(5) to satisfy any requirements, conditions, or guidelines contained in
any order, directive, opinion, ruling or regulation of a federal,
state or local agency or contained in federal, state or local law.
The General Partner shall notify the Limited Partners when any action under this
Section 14.1.B is taken in the next regular communication to the Limited
Partners.
C. Amendments Requiring Limited Partner Approval (Excluding General
Partner). Notwithstanding Section 14.1.A above, without the Consent of the
Outside Limited Partners, the General Partner shall not amend Section 4.2.A,
Section 5.1.E, Section 7.1.A (second sentence only), Section 7.5, Section 7.6,
Section 7.8, Section 7.11.B, Section 11.2, Section 13.1, this Section 14.1.C or
Section 14.2.
D. Other Amendments Requiring Certain Limited Partner Approval.
Notwithstanding anything in this Section 14.1 to the contrary, this Agreement
shall not be amended with respect to any Partner adversely affected without the
Consent of such Partner adversely affected if such amendment would (i) convert a
Limited Partner's interest in the Partnership into a general partner's interest,
(ii) modify the limited liability of a Limited Partner, (iii) amend
Section 7.11.A, (iv) amend Article V, Article VI, or Section 13.2.A(3) (except
as permitted pursuant to Sections 4.2, 5.1.E, 5.4, 6.2 and 14.1(B)(3)), (v)
amend Section 8.6 or any defined terms set forth in Article I that relate to the
Redemption Right (except as permitted in Section 8.6.E), or (vi) amend this
Section 14.1.D. In addition, any amendment to Section 7.11.C of this Agreement
shall require the following consent:
(i) In the event that the amendment to Section 7.11.C affects the Two Penn
Plaza Property or the rights of holders of Two Penn Plaza Units, such
amendment shall require the Consent of Partners (other than the General
Partner or the General Partner Entity or any Subsidiary of either the
General Partner or the General Partner Entity) who hold seventy-five
percent (75%) of the Two Penn Plaza Units;
(ii) In the event that the amendment to Section 7.11.C affects the Eleven
Penn Plaza Property or the rights of holders of Eleven Penn Plaza Units,
such amendment shall require the Consent of Partners (other than the
General Partner or the General Partner Entity or any Subsidiary of either
the General Partner or the General Partner Entity) who hold seventy-five
percent (75%) of the Eleven Penn Plaza Units; and
(iii) In the event that the amendment to Section 7.11.C affects the 866
U.N. Plaza Property or the rights of holders of 866 U.N. Plaza Units, such
amendment shall require the Consent of Partners (other than the General
Partner or the General Partner Entity or any Subsidiary of either the
General Partner or the General Partner Entity) who hold seventy-five
percent (75%) of the 866 U.N. Plaza Units.
E. Amendment and Restatement of Exhibit A Not An Amendment.
Notwithstanding anything in this Article XIV or elsewhere in this Agreement to
the contrary, any amendment and restatement of Exhibit A hereto by the General
Partner to reflect events or changes
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<PAGE>
otherwise authorized or permitted by this Agreement, whether pursuant to Section
7.1.A(20) hereof or otherwise, shall not be deemed an amendment of this
Agreement and may be done at any time and from time to time, as necessary by the
General Partner without the Consent of the Limited Partners.
Section 14.2 Meetings of the Partners
A. General. Meetings of the Partners may be called by the General
Partner and shall be called upon the receipt by the General Partner of a written
request by Limited Partners holding twenty-five percent (25%) or more of the
Partnership Interests. The call shall state the nature of the business to be
transacted. Notice of any such meeting shall be given to all Partners not less
than seven (7) days nor more than thirty (30) days prior to the date of such
meeting. Partners may vote in person or by proxy at such meeting. Whenever the
vote or Consent of Partners is permitted or required under this Agreement, such
vote or Consent may be given at a meeting of Partners or may be given in
accordance with the procedure prescribed in Section 14.1.A above. Except as
otherwise expressly provided in this Agreement, the Consent of holders of a
majority of the Percentage Interests held by Limited Partners (including Limited
Partnership Interests held by the General Partner) shall control.
B. Actions Without a Meeting. Any action required or permitted to be
taken at a meeting of the Partners may be taken without a meeting if a written
consent setting forth the action so taken is signed by a majority of the
Percentage Interests of the Partners (or such other percentage as is expressly
required by this Agreement). Such consent may be in one instrument or in
several instruments, and shall have the same force and effect as a vote of a
majority of the Percentage Interests of the Partners (or such other percentage
as is expressly required by this Agreement). Such consent shall be filed with
the General Partner. An action so taken shall be deemed to have been taken at a
meeting held on the effective date so certified.
C. Proxy. Each Limited Partner may authorize any Person or Persons to
act for him by proxy on all matters in which a Limited Partner is entitled to
participate, including waiving notice of any meeting, or voting or participating
at a meeting. Every proxy must be signed by the Limited Partner or its
attorney-in-fact. No proxy shall be valid after the expiration of eleven (11)
months from the date thereof unless otherwise provided in the proxy. Every
proxy shall be revocable at the pleasure of the Limited Partner executing it,
such revocation to be effective upon the Partnership's receipt of notice thereof
in writing.
D. Conduct of Meeting. Each meeting of Partners shall be conducted by
the General Partner or such other Person as the General Partner may appoint
pursuant to such rules for the conduct of the meeting as the General Partner or
such other Person deems appropriate.
ARTICLE XV
GENERAL PROVISIONS
Section 15.1 Addresses and Notice
Any notice, demand, request or report required or permitted to be given or
made to a Partner or Assignee under this Agreement shall be in writing and shall
be deemed given or made when delivered in person or when sent by first class
United States mail or by other means of written communication to the Partner or
Assignee at the address set forth in Exhibit A hereto or such other address as
the Partners shall notify the General Partner in writing.
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<PAGE>
Section 15.2 Titles and Captions
All article or section titles or captions in this Agreement are for
convenience only. They shall not be deemed part of this Agreement and in no way
define, limit, extend or describe the scope or intent of any provisions hereof.
Except as specifically provided otherwise, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement.
Section 15.3 Pronouns and Plurals
Whenever the context may require, any pronoun used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns, pronouns and verbs shall include the plural and vice versa.
Section 15.4 Further Action
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
Section 15.5 Binding Effect
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 15.6 Creditors
Other than as expressly set forth herein with regard to any Indemnitee,
none of the provisions of this Agreement shall be for the benefit of, or shall
be enforceable by, any creditor of the Partnership.
Section 15.7 Waiver
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach or any other covenant, duty, agreement or condition.
Section 15.8 Counterparts
This Agreement may be executed in counterparts, all of which together shall
constitute one agreement binding on all the parties hereto, notwithstanding that
all such parties are not signatories to the original or the same counterpart.
Each party shall become bound by this Agreement immediately upon affixing its
signature hereto.
Section 15.9 Applicable Law
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Delaware, without regard to the principles
of conflicts of law.
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<PAGE>
Section 15.10 Invalidity of Provisions
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
Section 15.11 Power of Attorney
A. General. Each Limited Partner and each Assignee who accepts
Partnership Units (or any rights, benefits or privileges associated therewith)
is deemed to irrevocably constitute and appoint the General Partner, any
Liquidator and authorized officers and attorneys-in-fact of each, and each of
those acting singly, in each case with full power of substitution, as its true
and lawful agent and attorney-in-fact, with full power and authority in its
name, place and stead to:
(1) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (a) all certificates, documents and other
instruments (including, without limitation, this Agreement and the
Certificate and all amendments or restatements thereof) that the
General Partner or any Liquidator deems appropriate or necessary to
form, qualify or continue the existence or qualification of the
Partnership as a limited partnership (or a partnership in which the
limited partners have limited liability) in the State of Delaware and
in all other jurisdictions in which the Partnership may conduct
business or own property, (b) all instruments that the General Partner
or any Liquidator deems appropriate or necessary to reflect any
amendment, change, modification or restatement of this Agreement in
accordance with its terms, (c) all conveyances and other instruments
or documents that the General Partner or any Liquidator deems
appropriate or necessary to reflect the dissolution and liquidation of
the Partnership pursuant to the terms of this Agreement, including,
without limitation, a certificate of cancellation, (d) all instruments
relating to the admission, withdrawal, removal or substitution of any
Partner pursuant to, or other events described in, Article XI, XII or
XIII hereof or the Capital Contribution of any Partner and (e) all
certificates, documents and other instruments relating to the
determination of the rights, preferences and privileges of Partnership
Interests; and
(2) execute, swear to, acknowledge and file all ballots, consents,
approvals, waivers, certificates and other instruments appropriate or
necessary, in the sole and absolute discretion of the General Partner
or any Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action which is made or
given by the Partners hereunder or is consistent with the terms of
this Agreement or appropriate or necessary, in the sole discretion of
the General Partner or any Liquidator, to effectuate the terms or
intent of this Agreement.
Nothing contained in this Section 15.11 shall be construed as authorizing
the General Partner or any Liquidator to amend this Agreement except in
accordance with Article XIV hereof or as may be otherwise expressly provided for
in this Agreement.
B. Irrevocable Nature. The foregoing power of attorney is hereby
declared to be irrevocable and a power coupled with an interest, in recognition
of the fact that each of the Partners will be relying upon the power of the
General Partner or any Liquidator to act as contemplated by this Agreement in
any filing or other action by it on behalf of the Partnership, and it shall
survive
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<PAGE>
and not be affected by the subsequent Incapacity of any Limited Partner or
Assignee and the transfer of all or any portion of such Limited Partner's or
Assignee's Partnership Units and shall extend to such Limited Partner's or
Assignee's heirs, successors, assigns and personal representatives. Each such
Limited Partner or Assignee hereby agrees to be bound by any representation made
by the General Partner or any Liquidator, acting in good faith pursuant to such
power of attorney; and each such Limited Partner or Assignee hereby waives any
and all defenses which may be available to contest, negate or disaffirm the
action of the General Partner or any Liquidator, taken in good faith under such
power of attorney. Each Limited Partner or Assignee shall execute and deliver
to the General Partner or the Liquidator, within fifteen (15) days after receipt
of the General Partner's or Liquidator's request therefor, such further
designation, powers of attorney and other instruments as the General Partner or
the Liquidator, as the case may be, deems necessary to effectuate this Agreement
and the purposes of the Partnership.
Section 15.12 Entire Agreement
This Agreement contains the entire understanding and agreement among the
Partners with respect to the subject matter hereof and supersedes any prior
written oral understandings or agreements among them with respect thereto.
Section 15.13 No Rights as Shareholders
Nothing contained in this Agreement shall be construed as conferring upon
the holders of the Partnership Units any rights whatsoever as shareholders of
the General Partner Entity, including, without limitation, any right to receive
dividends or other distributions made to shareholders of the General Partner
Entity or to vote or to consent or receive notice as shareholders in respect to
any meeting of shareholders for the election of directors of the General Partner
Entity or any other matter.
Section 15.14 Limitation to Preserve REIT Status
To the extent that any amount paid or credited to the General Partner or
its officers, directors, employees or agents pursuant to Section 7.4 or
Section 7.7 hereof would constitute gross income to the General Partner Entity
for purposes of Section 856(c)(2) or 856(c)(3) of the Code (a "General Partner
Payment") then, notwithstanding any other provision of this Agreement, the
amount of such General Partner Payments for any fiscal year shall not exceed the
lesser of:
(i) an amount equal to the excess, if any, of (a) 4.20% of the General
Partner Entity's total gross income (but not including the amount of any General
Partner Payments) for the fiscal year which is described in subsections (A)
though (H) of Section 856(c)(2) of the Code over (b) the amount of gross income
(within the meaning of Section 856(c)(2) of the Code) derived by the General
Partner Entity from sources other than those described in subsections (A)
through (H) of Section 856(c)(2) of the Code (but not including the amount of
any General Partner Payments); or
(ii) an amount equal to the excess, if any of (a) 25% of the General
Partner Entity's total gross income (but not including the amount of any General
Partner Payments) for the fiscal year which is described in subsections (A)
through (I) of Section 856(c)(3) of the Code over (b) the amount of gross income
(within the meaning of Section 856(c)(3) of the Code) derived by the General
Partner Entity from sources other than those described in subsections (A)
through (I) of Section 856(c)(3) of the Code (but not including the amount of
any General Partner Payments);
provided, however, that General Partner Payments in excess of the amounts set
forth in subparagraphs (i) and (ii) above may be made if the General Partner
Entity, as a condition
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<PAGE>
precedent, obtains an opinion of tax counsel that the receipt of such excess
amounts would not adversely affect the General Partner Entity's ability to
qualify as a REIT. To the extent General Partner Payments may not be made in a
year due to the foregoing limitations, such General Partner Payments shall
carry over and be treated as arising in the following year, provided, however,
that such amounts shall not carry over for more than five years, and if not
paid within such five year period, shall expire; provided further, that (i) as
General Partner Payments are made, such payments shall be applied first to carry
over amounts outstanding, if any, and (ii) with respect to carry over amounts
for more than one Partnership Year, such payments shall be applied to the
earliest Partnership Year first.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
THE MENDIK COMPANY, INC.
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
LIMITED PARTNERS:
THE MENDIK COMPANY, INC.
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
FW/MENDIK REIT, L.L.C.
By: FWM, L.P., member
By: FWM Genpar, Inc., general partner
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
By: Mendik Holdings LLC, member
By: Mendik Holdings, Inc., managing
member
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
[ADD OTHER LIMITED PARTNERS]
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<PAGE>
EXHIBIT A
PARTNERS AND PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
Class A Class B Agreed Initial
Partnership Partnership Capital Percentage
Name and Address of Partner Units Units Account Interest
- --------------------------- ----------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
GENERAL PARTNER:
The Mendik Company, Inc.
330 Madison Avenue
New York, New York 10017
LIMITED PARTNERS:
The Mendik Company, Inc.
330 Madison Avenue
New York, New York 10017
FW/Mendik REIT, L.L.C.
330 Madison Avenue
New York, New York 10017
[List Other Partners]
TOTAL 100.00%
----------- ----------- ------------- ----------
</TABLE>
<PAGE>
EXHIBIT B
CAPITAL ACCOUNT MAINTENANCE
1. Capital Accounts of the Partners
A. The Partnership shall maintain for each Partner a separate Capital
Account in accordance with the rules of Regulations Section l.704-l(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount of all Capital
Contributions and any other deemed contributions made by such Partner to the
Partnership pursuant to this Agreement and (ii) all items of Partnership income
and gain (including income and gain exempt from tax) computed in accordance with
Section 1.B hereof and allocated to such Partner pursuant to Section 6.1 of the
Agreement and Exhibit C hereof, and decreased by (x) the amount of cash or
Agreed Value of all actual and deemed distributions of cash or property made to
such Partner pursuant to this Agreement and (y) all items of Partnership
deduction and loss computed in accordance with Section 1.B hereof and allocated
to such Partner pursuant to Section 6.1 of the Agreement and Exhibit C hereof.
B. For purposes of computing the amount of any item of income, gain,
deduction or loss to be reflected in the Partners' Capital Accounts, unless
otherwise specified in this Agreement, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes determined in
accordance with Section 703(a) of the Code (for this purpose all items of
income, gain, loss or deduction required to be stated separately pursuant to
Section 703(a)(1) of the Code shall be included in taxable income or loss), with
the following adjustments:
(1) Except as otherwise provided in Regulations Section
1.704-1(b)(2)(iv)(m), the computation of all items of income, gain,
loss and deduction shall be made without regard to any election under
Section 754 of the Code which may be made by the Partnership, provided
that the amounts of any adjustments to the adjusted bases of the assets
of the Partnership made pursuant to Section 734 of the Code as a result
of the distribution of property by the Partnership to a Partner (to the
extent that such adjustments have not previously been reflected in the
Partners' Capital Accounts) shall be reflected in the Capital Accounts
of the Partners in the manner and subject to the limitations prescribed
in Regulations Section l.704-1(b)(2)(iv) (m)(4).
(2) The computation of all items of income, gain, and deduction shall be
made without regard to the fact that items described in Sections
705(a)(l)(B) or 705(a)(2)(B) of the Code are not includable in gross
income or are neither currently deductible nor capitalized for federal
income tax purposes.
(3) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis
of such property as of such date of disposition were equal in amount
to the Partnership's Carrying Value with respect to such property as
of such date.
(4) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or
loss, there shall be taken into account Depreciation for such fiscal
year.
(5) In the event the Carrying Value of any Partnership Asset is adjusted
pursuant to Section 1.D hereof, the amount of any such adjustment
shall be taken into account as gain or loss from the disposition of
such asset.
<PAGE>
(6) Any items specially allocated under Section 2 of Exhibit C hereof
shall not be taken into account.
C. Generally, a transferee (including any Assignee) of a Partnership Unit
shall succeed to a pro rata portion of the Capital Account of the transferor.
The Capital Accounts of such reconstituted Partnership shall be maintained in
accordance with the principles of this Exhibit B.
D. (1) Consistent with the provisions of Regulations
Section 1.704-1(b)(2)(iv)(f), and as provided in
Section 1.D(2), the Carrying Values of all Partnership assets
shall be adjusted upward or downward to reflect any Unrealized Gain
or Unrealized Loss attributable to such Partnership property, as of
the times of the adjustments provided in Section 1.D(2) hereof, as if
such Unrealized Gain or Unrealized Loss had been recognized on an
actual sale of each such property and allocated pursuant to
Section 6.1 of the Agreement.
(2) Such adjustments shall be made as of the following times: (a)
immediately prior to the acquisition of an additional interest in the
Partnership by any new or existing Partner in exchange for more than a
de minimis Capital Contribution; (b) immediately prior to the
distribution by the Partnership to a Partner of more than a de minimis
amount of property as consideration for an interest in the
Partnership; and (c) immediately prior to the liquidation of the
Partnership within the meaning of Regulations Section 1.704-
l(b)(2)(ii)(g), provided however that adjustments pursuant to clauses
(a) and (b) above shall be made only if the General Partner determines
that such adjustments are necessary or appropriate to reflect the
relative economic interests of the Partners in the Partnership.
(3) In accordance with Regulations Section 1.704-l(b)(2)(iv)(e), the
Carrying Value of Partnership assets distributed in kind shall be
adjusted upward or downward to reflect any Unrealized Gain or
Unrealized Loss attributable to such Partnership property, as of the
time any such asset is distributed.
(4) In determining Unrealized Gain or Unrealized Loss for purposes of this
Exhibit B, the aggregate cash amount and fair market value of all
Partnership assets (including cash or cash equivalents) shall be
determined by the General Partner using such reasonable method of
valuation as it may adopt, or in the case of a liquidating
distribution pursuant to Article XIII of the Agreement, shall be
determined and allocated by the Liquidator using such reasonable
methods of valuation as it may adopt. The General Partner, or the
Liquidator, as the case may be, shall allocate such aggregate fair
market value among the assets of the Partnership in such manner as it
determines in its sole and absolute discretion to arrive at a fair
market value for individual properties.
E. The provisions of the Agreement (including this Exhibit B and the
other Exhibits to the Agreement) relating to the maintenance of Capital Accounts
are intended to comply with Regulations Section 1.704-1(b), and shall be
interpreted and applied in a manner consistent with such Regulations. In the
event the General Partner shall determine that it is prudent to modify the
manner in which the Capital Accounts, or any debits or credits thereto
(including, without limitation, debits or credits relating to liabilities which
are secured by contributed or distributed property or which are assumed by the
Partnership, the General Partner, or the Limited Partners) are computed in order
to comply with such Regulations, the General Partner may make such modification
without regard to Article XIV of the Agreement, provided that it is not likely
to have a material effect on the amounts distributable to any Person pursuant to
Article XIII of the Agreement
B-2
<PAGE>
upon the dissolution of the Partnership. The General Partner also shall (i)
make any adjustments that are necessary or appropriate to maintain equality
between the Capital Accounts of the Partners and the amount of Partnership
capital reflected on the Partnership's balance sheet, as computed for book
purposes, in accordance with Regulations Section l.704-l(b)(2)(iv)(q), and
(ii) make any appropriate modifications in the event unanticipated events
might otherwise cause this Agreement not to comply with Regulations Section
l.704-1(b).
2. No Interest
No interest shall be paid by the Partnership on Capital Contributions or on
balances in Partners' Capital Accounts.
3. No Withdrawal
No Partner shall be entitled to withdraw any part of its Capital
Contribution or Capital Account or to receive any distribution from the
Partnership, except as provided in Articles IV, V, VII and XIII of the
Agreement.
B-3
<PAGE>
EXHIBIT C
SPECIAL ALLOCATION RULES
1. Special Allocation Rules.
Notwithstanding any other provision of the Agreement or this Exhibit C, the
following special allocations shall be made in the following order:
A. Minimum Gain Chargeback. Notwithstanding the provisions of
Section 6.1 of the Agreement or any other provisions of this Exhibit C, if there
is a net decrease in Partnership Minimum Gain during any Partnership Year, each
Partner shall be specially allocated items of Partnership income and gain for
such year (and, if necessary, subsequent years) in an amount equal to such
Partner's share of the net decrease in Partnership Minimum Gain, as determined
under Regulations Section 1.704-2(g). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Partner pursuant thereto. The items to be so allocated shall
be determined in accordance with Regulations Section 1.704-2(f)(6). This
Section 1.A is intended to comply with the minimum gain chargeback requirements
in Regulations Section 1.704-2(f) and for purposes of this Section 1.A only,
each Partner's Adjusted Capital Account Deficit shall be determined prior to any
other allocations pursuant to Section 6.1 of this Agreement with respect to such
Partnership Year and without regard to any decrease in Partner Minimum Gain
during such Partnership Year.
B. Partner Minimum Gain Chargeback. Notwithstanding any other
provision of Section 6.1 of this Agreement or any other provisions of this
Exhibit C (except Section 1.A hereof), if there is a net decrease in Partner
Minimum Gain attributable to a Partner Nonrecourse Debt during any
Partnership Year, each Partner who has a share of the Partner Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance with
Regulations Section 1.704-2(i) (5), shall be specially allocated items of
Partnership income and gain for such year (and, if necessary, subsequent
years) in an amount equal to such Partner's share of the net decrease in
Partner Minimum Gain attributable to such Partner Nonrecourse Debt,
determined in accordance with Regulations Section 1.704-2(i) (5).
Allocations pursuant to the previous sentence shall be made in proportion to
the respective amounts required to be allocated to each General Partner and
Limited Partner pursuant thereto. The items to be so allocated shall be
determined in accordance with Regulations Section 1.704-2(i) (4). This
Section 1.B is intended to comply with the minimum gain chargeback
requirement in such Section of the Regulations and shall be interpreted
consistently therewith. Solely for purposes of this Section 1.B, each
Partner's Adjusted Capital Account Deficit shall be determined prior to any
other allocations pursuant to Section 6.1 of the Agreement or this Exhibit
with respect to such Partnership Year, other than allocations pursuant to
Section 1.A hereof.
C. Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in Regulations
Sections 1.704-l(b)(2)(ii)(d)(4), l.704-1(b)(2)(ii)(d)(5), or
1.704-l(b)(2)(ii)(d)(6), and after giving effect to the allocations required
under Sections 1.A and 1.B hereof with respect to such Partnership Year, such
Partner has an Adjusted Capital Account Deficit, items of Partnership income
and gain (consisting of a pro rata portion of each item of Partnership income,
including gross income and gain for the Partnership Year) shall be specially
allocated to such Partner in an amount and manner sufficient to eliminate,
to the extent required by the Regulations, its Adjusted Capital Account
Deficit created by such adjustments, allocations or distributions as quickly
as possible. This Section 1.C is intended to constitute a "qualified income
offset" under Regulations Section 1.704-1(b)(2)(ii)(d) and shall be
interpreted consistently therewith.
D. Gross Income Allocation. In the event that any Partner has an
Adjusted Capital Account Deficit at the end of any Partnership Year (after
taking into account allocations to
<PAGE>
be made under the preceding paragraphs hereof with respect to such Partnership
Year), each such Partner shall be specially allocated items of Partnership
income and gain (consisting of a pro rata portion of each item of Partnership
income, including gross income and gain for the Partnership Year) in an amount
and manner sufficient to eliminate, to the extent required by the Regulations,
its Adjusted Capital Account Deficit.
E. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership
Year shall be allocated to the Partners in accordance with their respective
Percentage Interests. If the General Partner determines in its good faith
discretion that the Partnership's Nonrecourse Deductions must be allocated in a
different ratio to satisfy the safe harbor requirements of the Regulations
promulgated under Section 704(b) of the Code, the General Partner is authorized,
upon notice to the Limited Partners, to revise the prescribed ratio for such
Partnership Year to the numerically closest ratio which would satisfy such
requirements.
F. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions
for any Partnership Year shall be specially allocated to the Partner who bears
the economic risk of loss with respect to the Partner Nonrecourse Debt to which
such Partner Nonrecourse Deductions are attributable in accordance with
Regulations Sections 1.704-2(b)(4) and 1.704-2(i).
G. Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b)
of the Code is required, pursuant to Regulations Section 1.704-l(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such item of gain or loss shall be specially
allocated to the Partners in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section of the
Regulations.
2. Allocations for Tax Purposes
A. Except as otherwise provided in this Section 2, for federal income tax
purposes, each item of income, gain, loss and deduction shall be allocated among
the Partners in the same manner as its correlative item of "book" income, gain,
loss or deduction is allocated pursuant to Section 6.1 of the Agreement and
Section 1 of this Exhibit C.
B. In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss, and
deduction shall be allocated for federal income tax purposes among the Partners
as follows:
(1) (a) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners consistent with the
principles of Section 704(c) of the Code to take into account the
variation between the 704(c) Value of such property and its
adjusted basis at the time of contribution (taking into account
Section 2.C of this Exhibit C); and
(b) any item of Residual Gain or Residual Loss attributable to a
Contributed Property shall be allocated among the Partners in the
same manner as its correlative item of "book" gain or loss is
allocated pursuant to Section 6.1 of the Agreement and Section 1
of this Exhibit C.
C-2
<PAGE>
(2) (a) In the case of an Adjusted Property, such items shall
(i) first, be allocated among the Partners in a manner consistent
with the principles of Section 704(c) of the Code to take into
account the Unrealized Gain or Unrealized Loss attributable to
such property and the allocations thereof pursuant to Exhibit B;
(ii) second, in the event such property was originally a
Contributed Property, be allocated among the Partners in a manner
consistent with Section 2.B(1) of this Exhibit C; and
(b) any item of Residual Gain or Residual Loss attributable to an
Adjusted Property shall be allocated among the Partners in the
same manner its correlative item of "book" gain or loss is
allocated pursuant to Section 6.1 of the Agreement and Section 1
of this Exhibit C.
C. To the extent Regulations promulgated pursuant to Section 704(c) of
the Code permit a Partnership to utilize alternative methods to eliminate
the disparities between the Carrying Value of property and its adjusted basis,
the General Partner shall, subject to the following, have the authority to
elect the method to be used by the Partnership and such election shall be
binding on all Partners. With respect to the Contributed Properties
transferred to the Partnership in connection with the Consolidation, the
Partnership shall elect to use the "traditional method" set forth in Treasury
Regulation Section 1.704-3(b).
C-3
<PAGE>
EXHIBIT D
NOTICE OF REDEMPTION
The undersigned hereby irrevocably (i) redeems Partnership
Units in The Mendik Company, L.P. in accordance with the terms of the First
Amended and Restated Agreement of Limited Partnership of The Mendik Company,
L.P., as amended, and the Redemption Right referred to therein, (ii)
surrenders such Partnership Units and all right, title and interest therein
and (iii) directs that the Cash Amount or Shares Amount (as determined by the
General Partner) deliverable upon exercise of the Redemption Right be
delivered to the address specified below, and if Shares are to be delivered,
such Shares be registered or placed in the name(s) and at the address(es)
specified below. The undersigned hereby represents, warrants, and certifies
that the undersigned (a) has marketable and unencumbered title to such
Partnership Units, free and clear of the rights of or interests of any other
person or entity, (b) has the full right, power and authority to redeem and
surrender such Partnership Units as provided herein and (c) has obtained the
consent or approval of all persons or entities, if any, having the right to
consult or approve such redemption and surrender.
Dated: Name of Limited Partner:
------------------ --------------------------
-----------------------------------
(Signature of Limited Partner)
-----------------------------------
(Street Address)
-----------------------------------
(City) (State) (Zip Code)
Signature Guaranteed by:
--------------------------
If Shares are to be issued, issue to:
Name:
Please insert social security or identifying number:
<PAGE>
EXHIBIT E
VALUE OF CONTRIBUTED PROPERTY
Underlying Property 704(c) Value Agreed Value
- ------------------- ------------ ------------
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
The following entities will be "subsidiaries" within the meaning of the
Exchange Act upon the closing of the offering to which this Registration
Statement relates:
The Mendik Company, L.P., a Delaware limited partnership
Mendik Management Company, Inc., a New York corporation
Mendik Management LLC, a New York limited liability corporation
1740 Broadway Associates LLC, a New York limited liability corporation
Two Penn Plaza Associates LLC, a New York limited liability company
M 393 Associates, a New York general partnership
M Eleven Associates, a New York general partnership
M/F Associates L.P., a New York limited partnership
M/F Eleven Associates L.P., a New York limited partnerhip
866 U.N. Plaza Associates LLC, a New York limited liability company
570 Lexington Associates, L.P., a New York limited partnership
B&B Park Avenue LLC, a New York limited liability company
M330 Associates, L.P., a New York limited partnership
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated June 14, 1996, except for the last paragraph of
Note 8, which is as of January 14, 1997 for the Mendik Predecessors and November
6, 1996 for the Mendik Company, Inc. in Amendment No. 1 to the Registration
Statement (Form S-11) (No. 333-18183), and related Prospectus of The Mendik
Company, Inc.
ERNST & YOUNG LLP
New York, New York
January 29, 1997
<PAGE>
EXHIBIT 23.4
CONSENT
Rosen Consulting Group hereby consents to the use of its report regarding
the New York economy and midtown Manhattan office market, the references to the
firm and such report under the captions "New York Economy and Manhattan Office
Market" and "Experts" in the Registration Statement on Form S-11 of The Mendik
Company, Inc. and the inclusion of its report as an exhibit thereto.
Rosen Consulting Group
By: /s/ KENNETH T. ROSEN
---------------------------------------------------------------
Name: Kenneth T. Rosen
Title: President, RCG
Date: January 22, 1997
- --------------------------------------------------------------------------------
THE NEW YORK ECONOMY AND
MIDTOWN OFFICE MARKET
January 16, 1997
Prepared for
The Mendik Company, Inc.
by
Rosen Consulting Group
1950 Addison Street, Suite 101
Berkeley, CA 94704
(510) 549-4510
(c)1997 Rosen Consulting Group
- --------------------------------------------------------------------------------
<PAGE>
Table of Contents
The New York Metropolitan Economy
Summary ................................................................... 1
Economic Overview ......................................................... 2
The Services Sector ..................................................... 5
The Trade Sector ........................................................ 9
Finance, Insurance and Real Estate Employment ........................... 9
The Transportation, Communications, Public Utilities and
Manufacturing Sectors ................................................... 10
The Public Sector ....................................................... 10
Employment Outlook ........................................................ 11
Quality of Life ........................................................... 12
The Office Market
Summary ................................................................. 13
Demand Analysis ......................................................... 15
Forecasted Supply Analysis .............................................. 19
Rent Analysis ........................................................... 19
Midtown West Submarket .................................................. 21
Grand Central Submarket ................................................. 23
Plaza Submarket ......................................................... 25
Forecasted Office Market Trends ......................................... 26
Rosen Consulting Group i
<PAGE>
- --------------------------------------------------------------------------------
The New York Metropolitan Economy
- --------------------------------------------------------------------------------
Summary
Strong growth of the national economy has significantly benefited New York City,
causing the New York metropolitan economy to improve significantly in recent
years. As the headquarters of 47 Fortune 500 companies, the largest of which are
AT&T, Philip Morris, Citicorp and Metropolitan Life Insurance, Manhattan is home
to more Fortune 500 companies than any other city in the country. In addition to
this diverse base of large businesses, Manhattan also has a large base of small
companies. The New York City Office of the Comptroller reports that 99.7% of all
private sector businesses in New York City had fewer than 500 employees and that
these "small" businesses, representing 70.7% of the private sector work force,
added 68,821 jobs between 1994 and 1995. Sixty-four of the 100 largest law firms
in the country have a presence in Manhattan, and 27 of those are based there.
Four of the "Big Six" accounting firms are headquartered in Manhattan, and three
of the four largest U.S. commercial banks are based in Manhattan. In addition,
four of the nation's ten largest money managers and 23 of the 25 largest
securities firms are based in Manhattan. This concentration of business makes
Manhattan one of the world's most important business centers.
The outlook in the New York metropolitan area is for healthy private sector
employment growth through 1998. Within Manhattan, Mayor Giuliani's efforts to
improve services, reduce taxes and crime, and streamline local government have
made this vibrant 24-hour city more attractive to businesses. In addition,
office rents in Manhattan are relatively inexpensive when compared
internationally with other major cities. In July of 1996, Richard Ellis Company
ranked Midtown Manhattan 14th among major business centers around the world in
terms of office rents. A number of businesses are expanding within Manhattan or
opening local offices, and a number of companies have made long term commitments
to Manhattan by purchasing buildings or signing long term leases, including
Credit Suisse First Boston Corporation, General Electric, General Motors, MONY,
Morgan Stanley, Travelers, Value Line, and Viacom. The emergence of the new
media industry is another major boon for Manhattan, because these jobs have a
high multiplier effect. In other words, as the new media industry grows, it
generates jobs in related industries, particularly in the services sector, much
of which is concentrated in Midtown. Within Manhattan, the Midtown office market
is poised to capture much of the future job growth, given the strong base of
service, finance and, increasingly, securities firms that are located in
Midtown.
Rosen Consulting Group 1
<PAGE>
Economic Overview
Economic growth in the New York metropolitan statistical area (MSA) is strong,
with private sector employment adding an average of about 39,400 jobs per year
between 1994 and 1996 for a total of 118,300 jobs, representing an annual
employment growth rate of 1.2% to 1.4% (see Figure 1 and Tables 1 and 2). The
New York metropolitan area led the Northeast and ranked 14th in the nation in
terms of the number of jobs created in metropolitan statistical areas with more
than 250,000 jobs during the twelve months ended in September of 1996. The New
York MSA's key competitive advantages--access to talent, customers, partners
and investors--are again driving private sector employment growth in the
metropolitan area. Similar to each of the prior economic cycles, the New York
metropolitan area's economy is undergoing a reengineering, characterized by the
emergence of several dynamic new industries and the streamlining of older
industries, including the public sector. The main industries which are
benefiting from the area's key strengths are knowledge-based industries, such as
the securities industry, the "new media" industry and overall business services.
Growth in these industries, in turn, is fueling expansion in other sectors of
the economy.
- --------------------------------------------------------------------------------
Figure 1.
- --------------------------------------------------------------------------------
Absolute Change in Private Employment
New York MSA
[Bar graph depicting Absolute Change in Private Employment 1972-1995]
Rosen Consulting Group 2
<PAGE>
- --------------------------------------------------------------------------------
Table 1
New York MSA Employment by Sector (000)
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 Sep-96
---- ---- ---- ---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total
Nonagricultural 4,113.6 4,134.8 4,138.0 4,093.8 3,878.8 3,772.5 3,772.6 3,803.2 3,815.6 3,841.4
% Change 1.4% 0.5% 0.1% -1.1% -5.3% -2.7% 0.0% 0.8% 0.3% 0.8%
Construction &
Mining 153.5 152.4 144.3 123.8 107.8 106.4 110.6 111.2 121.0
% Change -0.7% -5.3% -14.2% -12.9% -1.3% 3.9% 0.5% 4.6%
Manufacturing 461.3 450.3 435.6 410.6 377.1 358.1 348.8 337.6 328.5 324.2
% Change -3.0% -2.4% -3.3% -5.7% -8.2% -5.0% -2.6% -3.2% -2.7% -2.6%
Apparel & Oth
Textile 106.2 103.4 102.3 96.4 89.7 86.5 83.9 79.3 75.2 76.6
% Change -2.4% -2.6% -1.1% -5.8% -7.0% -3.6% -3.0% -5.5% -5.2% -1.4%
Printing &
Publishing 103.8 100.5 98.0 94.5 86.9 82.0 81.9 82.2 82.2 80.9
% Change 2.3% -3.2% -2.5% -3.6% -8.0% -5.6% -0.1% 0.4% 0.0% -1.2%
T.C.P.U. 240.5 245.2 242.9 255.9 245.1 230.8 230.0 228.2 229.8 232.1
% Change -0.8% 2.0% -0.9% 5.4% -4.2% 5.8% -0.3% -0.8% 0.7% 0.0%
Communications* 76.3 77.7 23.7 75.8 74.8 70.7 69.6 68.6 69.1 68.6
% Change -2.9% 1.8% -69.5% 219.8% -1.3% -5.5% -1.6% -1.4% 0.7% -1.3%
Trade 758.3 758.1 751.7 726.3 676.2 652.9 645.4 653.6 668.5 680.5
% Change -0.1% -0.0% -0.8% -3.4% -6.9% -3.4% -1.1% 1.3% 2.3% 1.6%
Wholesale Trade 269.3 267.1 262.2 253.0 234.9 225.7 219.2 218.9 223.0 223.9
% Change -1.4% -0.8% -1.8% -3.5% -7.2% -3.9% -2.9% -0.1% 1.9% -0.1%
Retail Trade 489.0 491.0 489.5 473.3 441.3 427.2 426.3 434.7 445.5 456.6
% Change 0.6% 0.4% -0.3% -3.3% -6.8% -3.2% -0.2% 2.0% 2.5% 2.5%
Apparel &
Accessory 52.2 52.5 54.1 53.9 50.0 48.9 50.1 51.0 52.5 53.2
% Change 3.2% 0.6% 3.0% -0.4% -7.2% -2.2% 2.5% 1.8% 2.9% 0.8%
F.I.R.E. 583.0 577.4 566.4 555.6 528.1 508.0 505.0 513.3 506.2 505.2
% Change 4.2% -1.0% -1.9% -1.9% -4.9% -3.8% -0.6% 1.6% -1.4% -0.2%
Depository
Institutions 180.0 185.1 179.7 175.8 163.9 148.3 142.3 139.2 134.1 128.7
% Change 0.7% 2.8% -2.9% -2.2% -6.8% -9.5% -4.0% -2.2% -3.7% -3.2%
Security Brokers 159.9 155.1 147.7 139.5 131.5 133.2 137.8 148.6 147.9 152.2
% Change 12.4% -3.0% -4.8% -5.6% -5.7% 1.3% 3.5% 7.8% -0.5% 2.8%
Services 1,255.8 1,272.7 1,304.8 1,309.6 1,252.9 1,249.0 1,275.1 1,310.5 1,346.8 1,383.1
% Change 3.1% 1.3% 2.5% 0.4% -4.3% -0.3% 2.1% 2.8% 2.8% 2.7%
Business Services 325.2 289.1 292.6 278.6 243 233.9 240.2 248.4 254.1 268.7
% Change 3.2% -11.1% 1.2% -4.8% -12.8% -3.7% 2.7% 3.4% 2.3% 4.6%
Educational
Services 108.1 112.7 114.3 115.0 111.3 109.7 110.6 114.2 116.9 117.4
% Change 2.7% 4.3% 1.4% 0.6% -3.2% -1.4% 0.8% 3.3% 2.4% 4.6%
Hotels & Lodging 36.7 38.2 39.3 38.8 35.7 35.7 35.1 35.7 37.0 37.8
% Change 4.3% 4.1% 2.9% -1.3% -8.0% 0.0% -1.7% 1.7% 3.6% 1.1%
Legal Services 71.9 74.9 79.8 80.9 76.5 74.6 74.4 73.8 72.3 70.3
% Change 6.2% 4.2% 6.5% 1.4% -5.4% -2.5% -0.3% -0.8% -2.0% -1.3%
Motion Pictures 23.7 24.6 25.9 25.2 21.9 25.9 34.2 37.2 44.8
% Change 3.8% 5.3% -2.7% -13.1% 18.3% 32.0% 8.8% 16.1%
Social Services 128.2 130.9 135.7 142.3 146.0 153.3 159.6 166.0 171.0 169.4
% Change 1.2% 2.1% 3.7% 4.9% 2.6% 5.0% 4.1% 4.0% 3.0% -0.7%
Total Private 3,298.9 3,457.2 3,453.8 3,402.3 3,203.2 3,106.6 3,110.7 3,153.8 3,191.0 3,246.1
% Change 1.4% 4.8% -0.1% -1.5% -5.9% -3.0% 0.1% 1.4% 1.2% 1.3%
Total Government 661.5 677.7 684.1 691.5 675.6 665.9 661.9 649.2 624.6 595.5
% Change 1.2% 2.4% 0.9% 1.1% -2.3% -1.4% -0.6% -1.9% -3.8% -2.1%
Local Government 504.1 519.7 528.2 532.5 524.5 516.9 515.9 503.4 481.4 457.7
% Change 1.5% 3.1% 1.6% 0.8% -1.5% -1.4% -0.2% -2.4% -4.4% - 1.8%
</TABLE>
According to the Bureau of Labor Statistics, employment in this sector was
affected by a strike in 1989.
Sources: Bureau of Labor Statistics, Rosen Consulting Group (RCG)
- --------------------------------------------------------------------------------
Rosen Consulting Group 3
<PAGE>
- --------------------------------------------------------------------------------
Table 2
New York MSA Employment by Sector (000)
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 Sep-96
---- ---- ---- ---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total
Nonagricultural 4,113.6 4,134.8 4,138.0 4,093.8 3,878.8 3,772.5 3,772.6 3,803.2 3,815.6 3,841.4
Absolute Change 58.4 21.2 3.2 (44.2) (215.0) (106.3) 0.1 30.6 12.4 30.0
Construction & Mining 153.5 152.4 144.3 123.8 107.8 106.4 110.6 111.2 121.0
Absolute Change (1.1) (8.1) (20.5) (16.0) (1.4) 4.2 0.6 5.3
Manufacturing 461.3 450.3 435.6 410.6 377.1 358.1 348.8 337.6 328.5 324.2
Absolute Change (14.1) (11.0) (14.7) (25.0) (33.5) (19.0) (9.3) (11.2) (9.1) (8.6)
Apparel & 0th
Textile 106.2 103.4 102.3 96.4 89.7 86.5 83.9 79.3 75.2 76.6
Absolute Change (2.6) (2.8) (1.1) (5.9) (6.7) (3.2) (2.6) (4.6) (4.1) (1.1)
Printing &
Publishing 103.8 100.5 98.0 94.5 86.9 82.0 81.9 82.2 82.2 80.9
Absolute Change 2.3 (3.3) (2.5) (3.5) (7.6) (4.9) (0.1) 0.3 0.0 (1.0)
T.C.P.U. 240.5 245.2 242.9 255.9 245.1 230.8 230.0 228.2 229.8 232.1
Absolute Change (2.0) 4.7 (2.3) 13.0 (10.8) (14.3) (0.8) (1.8) 1.6 0.0
Communications* 76.3 77.7 23.7 75.8 74.8 70.7 69.6 68.6 69.1 68.6
Absolute Change (2.3) 1.4 (54.0) 52.1 (1.0) (4.1) (1.1) (1.0) 0.5 (0.9)
Trade 758.3 758.1 751.7 726.3 676.2 652.9 645.4 653.6 668.5 680.5
Absolute Change (0.9) (0.2) (6.4) (25.4) (50.1) (23.3) (7.5) 8.2 14.9 10.9
Wholesale Trade 269.3 267.1 262.2 253.0 234.9 225.7 219.2 218.9 223.0 223.9
Absolute Change (3.9) (2.2) (4.9) (9.2) (18.1) (9.2) (6.5) (0.3) 4.1 (0.3)
Retail Trade 489.0 491.0 489.5 473.3 441.3 427.2 426.3 434.7 445.5 456.6
Absolute Change 3.0 2.0 (1.5) (16.2) (32.0) (14.1) (0.9) 8.4 10.8 11.2
Apparel & Accessory 52.2 52.5 54.1 53.9 50.0 48.9 50.1 51.0 52.5 53.2
Absolute Change 1.6 0.3 1.6 (0.2) (3.9) (1.1) 1.2 0.9 1.5 0.4
F.I.R.E. 583.0 577.4 566.4 555.6 528.1 508.0 505.0 513.3 506.2 505.2
Absolute Change 23.6 (5.6) (11.0) (10.8) (27.5) (20.1) (3.0) 8.3 (7.1) (0.9)
Depository
Institutions 180.0 185.1 179.7 175.8 163.9 148.3 142.3 139.2 134.1 128.7
Absolute Change 1.3 5.1 (5.4) (3.9) (11.9) (15.6) (6.0) (3.1) (5.1) (4.3)
Security Brokers 159.9 155.1 147.7 139.5 131.5 133.2 137.8 148.6 147.9 152.2
Absolute Change 17.7 (4.8) (7.4) (8.2) (8.0) 1.7 4.6 10.8 (0.7) 4.2
Services 1,255.8 1,272.7 1,304.8 1,309.6 1,252.9 1,249.0 1,275.1 1,310.5 1,346.8 1,383.1
Absolute Change 38.0 16.9 32.1 4.8 (56.7) (3.9) 26.1 35.4 36.3 36.1
Business Services 325.2 289.1 292.6 278.6 243 233.9 240.2 248.4 254.1 268.7
Absolute Change 10.2 (36.1) 3.5 (14.0) (35.6) (9.1) 6.3 8.2 5.7 11.7
Educational
Services 108.1 112.7 114.3 115.0 111.3 109.7 110.6 114.2 116.9 117.4
Absolute Change 2.8 4.6 1.6 0.7 (3.7) (1.6) 0.9 3.6 2.7 5.2
Hotels & Lodging 36.7 38.2 39.3 38.8 35.7 35.7 35.1 35.7 37 37.8
Absolute Change 1.5 1.5 1.1 (0.5) (3.1) 0.0 (0.6) 0.6 1.3 0.4
Legal Services 71.9 74.9 79.8 80.9 76.5 74.6 74.4 73.8 72.3 70.3
Absolute Change 4.2 3.0 4.9 1.1 (4.4) (1.9) (0.2) (0.6) (1.5) (0.9)
Motion Pictures 23.7 24.6 25.9 25.2 21.9 25.9 34.2 37.2 44.8
Absolute Change 0.9 1.3 (0.7) (3.3) 4.0 8.3 3.0 6.2
Social Services 128.2 130.9 135.7 142.3 146.0 153.3 159.6 166.0 171.0 169.4
Absolute Change 1.5 2.7 4.8 6.6 3.7 7.3 6.3 6.4 5.0 (1.2)
Total Private 3,298.9 3,457.2 3,453.8 3,402.3 3,203.2 3,106.6 3,110.7 3,153.8 3,191.0 3,246.1
Absolute Change 44.6 158.3 (3.4) (51.5) (199.1) (96.6) 4.1 43.1 37.2 42.8
Total Government 661.5 677.7 684.1 691.5 675.6 665.9 661.9 649.2 624.6 595.5
Absolute Change 7.7 16.2 6.4 7.4 (15.9) (9.7) (4.0) (12.7) (24.6) (12.5)
Local Government 504.1 519.7 528.2 532.5 524.5 516.9 515.9 503.4 481.4 457.7
Absolute Change 7.6 15.6 8.5 4.3 (8.0) (7.6) (1.0) (12.5) (22.0) (8.4)
</TABLE>
*According to the Bureau of Labor Statistics, employment in this sector was
affected by a strike in 1989.
Sources: Bureau of Labor Statistics, Rosen Consulting Group (RCG)
- --------------------------------------------------------------------------------
Rosen Consulting Group 4
<PAGE>
The Services Sector
The single fastest-growing industry in the New York metropolitan area is the
services industry, which grew at a strong rate of 2.7% during the year ended in
September of 1996. With almost 1.4 million jobs, the services sector currently
represents more than 36% of the New York metropolitan area's total employment
base and about 43% of its private sector employment base. Between 1992 and
year-end 1996, about 133,000 new jobs are expected to have been created in this
sector (see Figure 2).
One of the largest components of the services industry is business services,
with more than 265,000 jobs as of September 1996, representing 20% of total
services employment. Business services includes a diverse array of industries,
ranging from advertising to computer programming. Since 1992, growth in this
sector, fueled by the overall health of the local economy, has averaged a robust
3.5% per year.
One very active area of small business creation is a new industry called "new
media". The new media industry is a cross-disciplinary industry combining
elements of computing technology, telecommunications and media content
(information, entertainment, personal/group communications and transactions) to
create products and services which can be used interactively by consumers and
business users. The companies which work in this industry include entertainment
software, online/Internet services, CD-ROM title developers, and web site
designers. In addition, advertising and publishing companies participate in the
industry, although their core businesses remain outside new media in traditional
business lines. Roughly 1,250 firms in Manhattan belong to the new media
industry, and employment growth is expected to be a dramatic 30% per year during
each of the next three years. This industry is expected to become a major growth
sector in the Manhattan economy for several reasons: (i) the focus of
interactive media development is shifting from CD-ROM to the World Wide Web, the
authoring
- --------------------------------------------------------------------------------
Figure 2.
- --------------------------------------------------------------------------------
Absolute Change in Services Employment
New York MSA
[Bar graph depicting Absolute Change in Services Employment 1972-1995]
Rosen Consulting Group 5
<PAGE>
technology of which has been more available to content creators; (ii) Manhattan
is the home for many major media companies (broadcast, cable TV networks,
magazine and book publishing) and these companies are moving the new media
industry from experimentation to a more mainstream role in multiple-media
strategies; and (iii) Manhattan is the center of the advertising industry, and
advertising revenue is increasingly one of the key drivers of the new media
industry. Strong growth in the new media industry will have major multiplier
effects for the overall Manhattan economy. The direct benefits of growth in this
industry will flow to business services and to the broadcast, publishing and
advertising industries, all of which are concentrated in Midtown Manhattan.
Other important components of the service sector are motion pictures, legal,
social, educational, hotels and lodging, and amusement and recreation services.
All are highly concentrated in the metropolitan area and in Manhattan (see Table
3). For example, according to the National Law Journal, 64 of the 100 largest
law firms have a presence in Manhattan, and 27 of those firms are based in
Manhattan. In addition, four of the "Big Six" accounting firms have their
national headquarters in Manhattan. While social and educational services are
mainly population-serving, motion pictures, legal, hotels and lodging, and
amusement and recreation services are export-oriented industries that have a
large multiplier impact on
- --------------------------------------------------------------------------------
Table 3
New York MSA Location Quotients
Sector Location Quotient*
------ ------------------
Security And Commodity Brokers 8.52
Motion Pictures 2.42
Legal Services 2.36
Apparel And Other Textile Products 2.35
Social Services 2.25
Finance, Insurance, And Real Estate 2.24
Local And Interurban Passenger Transit 2.02
Depository Institutions 1.97
Educational Services 1.86
Communications 1.60
Printing And Publishing 1.60
Apparel And Accessory Stores 1.36
Services 1.27
Amusement & Recreation Services 1.23
Total Local Government 1.22
Engineering & Management Services 1.20
Business Services 1.18
Health Services 1.18
Insurance Carriers 1.15
* A location quotient measures the regional concentration of
employment in a particular industry. If employment in an industry
were evenly distributed throughout the U.S., a region's location
quotient would be 1.0. Mathematically, it is defined as the ratio
of the percentage of total employment in industry x in a given
region divided by the percentage of total employment in industry
x nationally.
Sources: U.S. Bureau of Labor Statistics, Rosen Consulting Group
(RCG) Rosen Consulting Group (RCG)
- --------------------------------------------------------------------------------
Rosen Consulting Group 6
<PAGE>
the local economy. Among the largest employers in New York City are several
major media and broadcasting companies, including Time Warner, Westinghouse
Electric, which owns CBS, and Walt Disney Company, which owns Capital Cities/ABC
(see Table 4). The motion picture industry alone has added 22,900 new jobs since
1992 in the New York MSA, representing stunning growth of 19.6% per year.
Other fast-growing service sectors are those that benefit from tourism and
visitor spending. Total visitor volume has increased at an annual rate of 1.5%
to 3.0% during the last three years. Similarly, visitor spending has risen at
moderately strong rates ranging between 3% and 8.5% annually during the same
period, bringing total visitor spending to nearly $12.5 billion as of year-end
1996. This represents roughly 3.4% of the gross city product of $363.8 billion.
Visitor volume and spending has benefited substantially from the dramatic
decline in crime in New York City over the past three years (see Quality of
Life, p. 12). Reflecting the strength of visitor spending, the hotel and lodging
industry is enjoying strong revenue growth. Hotel occupancy is up to 79.6% as of
the third quarter of 1996 and the average daily room rate is up to $162.90 as of
the third quarter of 1996, which represents a robust increase of 6% per year for
the last three years (see Figures 3 and 4). Since 1993, the number of hotel room
nights filled has grown from 14.8 million to 17.1 million, representing a gain
of nearly 5% per year (see Figure 5).
- --------------------------------------------------------------------------------
Table 4
New York City Top Employers
Rank Firm Employees Sector
---- ---- --------- ------
1 Chase Manhattan Corp. 31,000 Banking
2 NYNEX Corp. 25,000 Telecommunications
3 Citicorp 19,000 Banking
4 Columbia University 14,800 Education
5 Consolidated Edison of NY 14,700 Utility
6 New York University 14,000 Education
7 Travelers Group 12,000 Insurance/Financial
8 Time Warner, Inc. 10,400 Media
9 Merrill Lynch & Company 8,900 Financial Services
10 Bank of New York 8,600 Banking
11 New York Times 8,200 Publisher
12 American Airlines 7,900 Airline
13 J.P. Morgan & Company 7,200 Financial Services
14 Bankers Trust New York 7,150 Banking
15 Morgan Stanley 5,800 Financial Services
15 Bear Stearns 5,800 Financial Services
16 Lefrak Organization 5,700 Real Estate Developer
17 Walt Disney Company 5,500 Entertainment
18 Metropolitan Life Insurance Co. 5,150 Insurance
19 American International Group 4,950 Insurance
20 Federated Department Stores 4,900 Retail
20 Equitable Companies 4,900 Insurance/Financial
21 Westinghouse Electric Corp. 4,800 Broadcasting
Source: ND International Trade
- --------------------------------------------------------------------------------
Rosen Consulting Group 7
<PAGE>
- --------------------------------------------------------------------------------
Figures 3 - 5.
- --------------------------------------------------------------------------------
Hotel Occupancy Rate
New York City
[Bar graph depicting Hotel Occupancy Rate 1990-1996]
Average Daily Hotel Rate
New York City
[Bar graph depicting Average Daily Hotel Rate 1990-1996]
Hotel Room Nights Filled
New York City
[Bar graph depicting Hotel Room Nights Filled 1990-1996]
Source: New York Convention and Visotors Bureau
Rosen Consulting Group 8
<PAGE>
The Trade Sector
In absolute numbers, the trade sector is the second largest and fastest growing
part of the metropolitan economy, with an employment gain of 1.6%, during the
past year. About 67% of the metropolitan area's trade jobs are in the retail
sector, where growth was an even stronger 2.5% during the 12 months ended in
September of 1996. The retail industry has benefited from improved city
services, reduced crime and an increase in the number of visitors and their
spending volume. The improved health of the New York economy has stimulated
spending by locals, which when combined with increased visitor spending, has
caused retail sales growth to accelerate from 2.8% in 1994 to 4.3% in 1996.
Further attesting to the strength of the retail trade sector, a number of
retailers are expanding in New York City and are adding new employees. Not only
are big box discount retailers establishing a niche, but upscale designers are
opening outlets. Kmart is already establishing a presence with stores on 34th
Street west of 7th Avenue and at Astor Place in the North of Houston Street
(NoHo) area. Upscale designers and manufacturers, such as Calvin Klein, Armani
and Valentino, are also opening retail stores. Demand from designers has
reportedly caused rents on Madison Avenue to rise 15% during each of the past
three years to more than $300 per square foot per year. In some cases, rents are
$400 per square foot per year on upper Madison Avenue and $500 per square foot
on Fifth Avenue. Retail development is also moving into the downtown and Times
Square areas. Forest City Ratner is developing a 335,000 square-foot project
next to the New Amsterdam Theater, which Disney is renovating. In addition, One
Times Square is being redesigned with plans calling for 15,000 square feet of
retail space. The redevelopment of Times Square is expected to create 20,000
jobs and to generate significant new taxes.
Finance, Insurance and Real Estate Employment
Following several years of acquisitions and mergers in the commercial banking
industry, employment in the metropolitan area's overall finance, insurance and
real estate (FIRE) sector appears to be stabilizing, with a small loss of 0.2%
between September of 1995 and 1996. Despite recent employment losses, half of
New York City's top 23 employers are financial institutions (see Table 4).
According to Pensions and Investments magazine, four of the ten largest money
managers in the U.S., ranked by total assets, are based in Manhattan, and the
Securities Industry Association reports that 23 of the 25 largest U.S.
securities firms are based in Manhattan. In addition, according to The American
Banker, three of the nation's top four commercial banks are based in Manhattan.
Commercial banks have consolidated to be competitive with non-bank institutions
that now offer bank-like depository and lending services. For example, the
merger of Chase Manhattan Bank and Chemical Banking Corporation will result in
the loss of 4,000 jobs in the greater New York area, most of which are retail
banking jobs, such as tellers. The consolidation of commercial banks has created
a much more competitive set of players, many of which are located in Midtown
Manhattan. Other FIRE sector industries are also consolidating, which in some
cases has translated to new jobs for New York City, including the consolidation
of Mutual of New York's operations that resulted in the relocation of 350 jobs
to New York City. Other companies in this sector, specifically international
banks, are increasing their presence in Manhattan. Foreign financial
institutions, such as Deutsche Bank and UBS Securities, have been hiring
aggressively in Manhattan.
Rosen Consulting Group 9
<PAGE>
With approximately 152,200 jobs, the securities industry represents 4% of the
overall employment base in the metropolitan area. Although it represents only a
small part of the economy, this industry is highly concentrated in New York, and
many of the world's most active underwriters are based in New York or have a
strong presence there. For example, San Francisco-based Montgomery Securities
recently established a New York office. Employment in the securities industry
has increased an average of 2.7% per year since 1991, which has helped to turn
the New York metropolitan economy around following the recession in the early
1990s. Because per person wages on Wall Street average $150,000, the multiplier
effect of these jobs on other employment sectors is large.
The number of jobs in the securities and commodities brokers employment sector
in the New York metropolitan area has increased by 15.7% from its recession
trough of 131,500 in 1991. Record volumes of underwriting activity indicate that
additional growth is still possible in this industry. According to the State
Comptroller of New York, during the first three quarters of 1996, the securities
industry earned $9.6 billion in profits, exceeding the previous record of $8.6
billion in 1993. In the long term, both the finance and securities industries
will contribute to local economic growth because of New York's position as an
international center of finance and securities innovation.
The Transportation, Communications, Public Utilities and Manufacturing Sectors
Employment in the New York metropolitan area's transportation, communications
and public utilities (TCPU) sector is stable. The communications part of this
sector has been affected by the merger of several Bell operating companies
across the nation, the merger of cable and entertainment firms, of publishers
and broadcasters and of broadcasters and entertainment firms. Some of the
mergers have resulted in new jobs for the New York metropolitan area as
companies consolidate operations from other cities.
The New York metropolitan area has gradually shed manufacturing jobs. Because it
is an urban center, New York is less appealing for traditional manufacturing,
and many manufacturers have relocated. Many manufacturing firms have returned a
large volume of industrial space to the market, with such space gradually being
converted to office or residential uses. An increasing proportion of the
manufacturing jobs in New York are actually white-collar management or staff
positions.
The Public Sector
New York City's government is reinventing itself. More than three-fourths of the
metropolitan area's total government employment is in local government, and the
remaining 23% is state and federal government employment. As a result of intense
efforts to streamline the government sector and to provide government services
more efficiently, local government employment has declined by about 75,000 jobs,
or 14%, since 1990.
The strong growth in private sector employment, coupled with a much more
disciplined approach to city services and expenditures, have resulted in both a
greatly improved outlook for New York City's budget and higher quality of city
services. Based on tax revenues received during the first five months of the
1997 fiscal year, actual city revenues will be $800 million ahead of budget in
fiscal 1997. This increase in revenues comes in spite of reduced taxes. Among
the taxes which have been reduced or eliminated are the commercial occupancy tax
(on tenants), taxes on proprietorships and partnerships, hotel occupancy taxes,
transfer taxes and gains taxes.
Rosen Consulting Group 10
<PAGE>
The overall business climate in New York has improved significantly as a result
of both private sector initiatives and public sector programs. The most visible
private sector initiatives have been the Business Improvement Districts (BIDs).
A BID is formed by a group of employers in a geographic area with the express
purpose of improving the business environment in the area through heightened
security, improved street cleaning and lighting and other business-enhancing
services. Following on the success of three large BIDs in the Grand Central
Terminal, Penn Station and Times Square areas, approximately 33 additional BIDs
in New York City have been created.
In addition, a number of public sector efforts have been launched to improve New
York City's business environment, specifically to retain the existing base of
employers and attract additional employers. For example, the New York Economic
Development Department has been involved with 23 transactions since mid-1994,
amounting to the retention of 55,482 jobs as of November of 1996. The strong
effort to encourage companies to stay in New York City is in response to the
competitive incentives being offered by Connecticut and New Jersey.
Employment Outlook
The outlook for the New York metropolitan economy is strong. Private sector
employment in the metropolitan area will grow at a 1.2% rate in 1996 and will
continue to increase at close to 1% annually through 1998 (see Table 5). The
strong growth of the national economy will fuel activity in the finance sector,
which includes the securities industry. However, much of the growth will
continue to occur in the services sector, especially in industries such as
advertising, law, software, motion pictures, hotels and tourism. Specifically,
because of the large number of corporate headquarters in New York and the city's
- --------------------------------------------------------------------------------
Table 5
New York MSA Employment Forecast (000)
1994 1995 1996f 1997f 1998f
---- ---- ----- ----- -----
Total Nonagricultural 3,803.2 3,815.6 3,838.5 3,865.4 3,896.3
% Change 0.8% 0.3% 0.6% 0.7% 0.8%
Construction 108.5 110.2 110.0 105.4 103.4
% Change 3.1% 1.6% -0.2% -4.2% -1.9%
Manufacturing 337.6 328.5 321.3 313.1 307.1
% Change -3.2% -2.7% -2.2% -2.6% -1.9%
Trade 653.6 668.5 681.3 682.9 687.0
% Change 1.3% 2.3% 1.9% 0.2% 0.6%
Services 1,310.5 1,346.7 1,382.3 1,416.1 1,450.4
% Change 2.8% 2.8% 2.6% 2.4% 2.4%
T.C.P.U 228.2 229.8 231.6 231.1 229.8
% Change -0.8% 0.7% 0.8% -0.2% -0.6%
F.I.R.E 513.3 506.2 501.5 503.8 506.3
% Change 1.6% -1.4% -0.9% 0.5% 0.5%
Total Private 3,154.0 3,191.1 3,229.0 3,253.6 3,285.3
% Change 1.4% 1.2% 1.2% 0.8% 1.0%
Government 649.2 624.5 609.4 611.7 611.0
% Change -1.9% -3.8% -2.4% 0.4% -0.1%
Sources: Bureau of Labor Statistics, Rosen Consutting Group (RCG)
- --------------------------------------------------------------------------------
Rosen Consulting Group 11
<PAGE>
position as the center for much of the intellectual and creative aspects of
business, local business services such as advertising will benefit
disproportionately from continued strong growth in the national economy. Strong
growth in small businesses, such as those in the "new media" industry, will
further enhance the growth prospects for business services and, generally, other
industries which provide services to businesses.
Quality of Life
The vibrancy of New York City is a function of more than job growth. With about
8.6 million people in 1995, the metropolitan area ranks second only to Los
Angeles in terms of population. Many New Yorkers are highly educated. According
to the 1990 Census, about 42% of the population over the age of 25 in New York
County had a bachelor's degree and almost half of those had a graduate or
professional degree, rates that are well above the national average. New York
City is also a cultural hotspot, with many of the nation's and world's leading
restaurants and a rich concentration of theater and performing arts. Because of
the large number of people living and working in such a small area, activity
occurs around the clock, making New York a 24-hour city.
From a quality of life perspective, Mayor Giuliani's efforts to improve city
services, reduce taxes and crime, and streamline city government are paying off.
Crime is down dramatically in New York City, particularly compared to national
crime trends (see Figure 6). For the first six months of 1996, New York City
ranked 142nd for total crime among the 188 largest U.S. cities. According to the
New York City Police Department, New York City's crime rate decreased 16% during
1996, and the seven felony categories have declined a cumulative 39% since 1993.
This decrease is greater than any other large U.S. city during the last three
years. Several factors are contributing to this decline including increased drug
enforcement efforts and police redeployment to problem areas. The drastic
reduction in crime has been a boon to the tourism industry, which has
experienced strong gains in visitor volume, spending and hotel occupancy. In
turn, reduced crime and more tourism activity has stimulated
after-business-hours activities such as theater, dining and clubs, reinforcing
New York's reputation as a 24-hour city.
- --------------------------------------------------------------------------------
Figure 6.
- --------------------------------------------------------------------------------
New York City Crimes Reported
(per thousand inhabitants)
[Bar graph depicting New York City Crimes Reported 1951-1995]
Rosen Consulting Group 12
<PAGE>
The Office Market
Summary
New York City has the largest office market in the country, with an overall
stock of more than 360 million square feet in Downtown and Midtown. The size of
this market exceeds the combination of the next six largest central business
districts in the nation, those of Chicago, the District of Columbia, Boston, San
Francisco, Philadelphia and Los Angeles. Improved job growth in recent years has
caused office market conditions in New York to strengthen. Most of the office
market improvement is occurring in Midtown, which includes the area from West
30th Street and East 32nd Street in the south to 70th Street in the north, from
the Hudson River to the East River. At year-end 1996, the overall Midtown office
vacancy rate was expected to fall to 11.5% from a peak of 17.2% in 1992 (see
Tables 6 and 7). The overall Class A vacancy rate was expected to drop from a
peak of 17.6% in 1990 to 10.8% at year end 1996, and the direct Class A vacancy
rate (i.e. excluding sublease space) was expected to fall from a peak of 13.3%
in 1990 to 8.5% at year end 1996 (see Tables 6, 8 and 9).
- --------------------------------------------------------------------------------
Table 6
Summary of Midtown Manhattan Vacancy Rate Trends
<TABLE>
<CAPTION>
Cumulative
Calculated/Forecasted
Peak Vacancy Rate Net Absorption
----------------- Percentage Percentage 1991-1996f
Year 1996f Point Change Change SF(000)
---- ----- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Overall (Table 7) 1992 17.2% 11.5% 5.7 33.1% 15,141
Overall Class A (Table 8) 1990 17.6% 10.8% 6.8 38.6% 14,231
Direct Class A (Table 9) 1990 13.3% 8.5% 4.8 36.1% 10,946
</TABLE>
Sources: Historical Data-Cushman & Wakefield of New York; Calculations and
Forecasts-Rosen Consulting Group.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table 7
Midtown Manhattan Overall Office Market Trends
<TABLE>
<CAPTION>
---------
1990 1991 1992 1993 1994 1995 3Q96 1996e 1997f 1998f
---- ---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Stock SF (000) 218,258 218,961 221,252 221,462 221,632 221,632 221,632 221,632 221,632 221,632
New Construction SF (000) 4,188 703 2,290 211 170 0 0 0 0 0
Calculated Net Absorption SF (000) 583 1,677 2,148 6,413 1,727 1,773 2,592 3,888 2,978
Occupied Stock SF (000) 180,936 181,519 183,196 185,345 191,758 193,485 195,258 196,077 199,964 202,943
Vacancy Rate 17.1% 17.1% 17.2% 16.3% 13.5% 12.7% 11.9% 11.5% 9.8% 8.4%
Direct Gross Ask. Rent Per SF $38.07 $35.14 $32.04 $31.20 $31.17 $30.26 $30.63 $31.04 $32.38 $34.38
Rent Growth -7.7% -8.8% -2.6% -0.1% -2.9% -2.6% 4.3% 6.2%
---------
</TABLE>
Sources: Historical data on construction, vacancy & rents-Cushman & Wakefield of
New York; Calculations and forecasts-RCG.
- --------------------------------------------------------------------------------
Rosen Consulting Group 13
<PAGE>
- --------------------------------------------------------------------------------
Table 8
Midtown Manhattan Overall Class A Office Market Trends
<TABLE>
<CAPTION>
---------
1990 1991 1992 1993 1994 1995 3Q96 1996e 1997f 1998f
---- ---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Stock SF (000) 164,930 165,633 167,923 168,134 168,304 168,304 168,304 168,304 168,304 168,304
New Construction SF (000) 4,188 703 2,290 211 170 0 0 0 0 0
Calculated Net Absorp. SF (000) 1,076 2,734 1,586 5,440 1,202 2,020 2,194 2,666 2,234
Occupied Stock SF (000) 135,902 136,978 139,712 141,298 146,737 147,939 149,959 150,133 152,799 155,032
Vacancy Rate 17.6% 17.3% 16.8% 16.0% 12.8% 12.1% 10.9% 10.8% 9.2% 7.9%
---------
</TABLE>
Sources: Historical data on construction, vacancy & rents-Cushman & Wakefield of
New York; Calculations and forecasts-RCG.
- --------------------------------------------------------------------------------
Despite higher asking rents in Midtown, some traditional downtown tenants, such
as banks and securities firms, have moved and are continuing to move to Midtown
locations because they believe that the Midtown amenities and transportation
advantages outweigh the cost savings of Downtown locations. For example,
businesses relocating from Downtown during the 1990s have occupied at least two
million net square feet of space in Midtown. Other tenants generating strong
demand for Midtown office space include those in
- --------------------------------------------------------------------------------
Table 9
Midtown Manhattan Class A Direct Office Market Trends
<TABLE>
<CAPTION>
---------
1990 1991 1992 1993 1994 1995 3Q96 1996e 1997f 1998f
---- ---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Stock SF (000) 164,930 165,633 167,923 168,134 168,304 168,304 168,304 168,304 168,304 168,304
New Construction SF (000) 4,188 703 2,290 211 170 0 0 0 0 0
Calculated Net Absorp. SF (000) 1,113 2,218 (329) 4,610 1,675 1,595 1,659 2,027 1,694
Occupied Stock SF (000) 143,031 144,144 146,362 146,034 150,643 152,318 153,913 153,977 156,004 157,698
Vacancy Rate 13.3% 13.0% 12.8% 13.1% 10.5% 9.5% 8.6% 8.5% 7.3% 6.3%
Dir. Cl. A Gross Ask. Rent Per SF $41.79 $38.94 $35.82 $34.28 $34.84 $34.90 $35.72 $36.16 $37.89 $40.28
Rent Growth -6.8% -8.0% -4.3% 1.6% 0.2% 3.6% 4.8% 6.3%
---------
</TABLE>
Sources: Historical data on construction, vacancy & rents-Cushman & Wakefield of
New York; Calculations and forecasts-RCG.
- --------------------------------------------------------------------------------
the advertising, printing and publishing, legal services, and communications
industries. Compared to other major world business centers, office rents in
Midtown Manhattan are relatively inexpensive, making Midtown attractive to
foreign companies. A July 1996 world survey of office rents by Richard Ellis
Company ranked Midtown Manhattan 14th among major business centers around the
world. Midtown Manhattan was less expensive than Bombay, Tokyo, Hong Kong,
Moscow, London, Singapore, Beijing and Paris. In spite of increased demand,
construction activity is minimal, and even if construction activity were strong,
because of the size of the market, any single development would have little
impact on the market. Additional demand, combined with a lack of new
construction for the near term, leads us to believe that the overall Midtown
vacancy rate will fall to 8.4% by 1998, while the overall Class A vacancy rate
will fall to 7.9% and the direct Class A vacancy rate will fall to 6.3% in 1998.
Rosen Consulting Group 14
<PAGE>
Demand Analysis
In order to capture the actual demand in the Midtown office market, we have
utilized three measures (see Table 10). The first is gross leasing activity,
which involves summing up all the leases signed in the market. This measures all
leases, including renewals of existing leases and moves within the market and,
as a result, may lead to some double counting of space. It also includes
pre-leasing of space in new buildings. However, it is a good measure of the
overall health of the office marketplace. A second measure, derived from the
vacancy rate, is calculated net absorption. Calculated net absorption is a
constructed data series created by examining the change in occupied stock. The
change in occupied stock is, in turn, created by multiplying the occupancy rate
(1- vacancy rate) by the total stock of space. It must be emphasized that this
is a "constructed" data series to approximate historical net absorption. It is
the best measure of net demand for office space. The third measure of office
space demand is constructed from employment growth and is generally used to
forecast office space demand. Specifically, job growth by "office-using sectors"
is multiplied by an office space utilization factor, in this case 200 square
feet per person, to produce a forecasted net absorption of office space. All
three measures of demand, gross leasing activity, calculated net absorption, and
forecasted net absorption, must be viewed as proxies for demand because there
are no "official" numbers to measure demand.
- --------------------------------------------------------------------------------
Table 10
Midtown Manhattan Office Absorption Comparison (SF 000)
<TABLE>
<CAPTION>
Cumulative
Calculated/
Forecasted
------ Net Absorption
1991 1992 1993 1994 1995 9M96 1996e 1997f 1998f 1991-1996f (1)
---- ---- ---- ---- ---- ---- ----- ----- ----- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Leasing Activity 11,754 14,567 15,704 17,359 16,843 13,112
Calculated Overall Net Absorption 583 1,677 2,148 6,413 1,727 1,773
Calculated Cl. A Overall Net Abs. 1,076 2,734 1,586 5,440 1,202 2,020
Calculated Cl. A Direct Net Abs. 1,113 2,218 (329) 4,610 1,675 1,595
Forecasted Overall Net Absorption (2) 2,592 3,888 2,978 15,141
Forecasted Cl. A Overall Net Abs. (2) 2,194 2,666 2,234 14,231
Forecasted Cl. A Direct Net Abs. (2) 1,659 2,027 1,694 10,946
------
</TABLE>
(1) Sum of historical calculated net absorption and forecasted net absorption
from 1991 to 1996f (excluding 9M96).
(2) Assumes 55% of all new office jobs are located in Midtown and each person
occupies 200 square feet.
Sources: Gross Leasing Activity-Cushman & Wakefield of New York; Calculated and
Forecasted Net Absorption-RCG.
- --------------------------------------------------------------------------------
Rosen Consulting Group 15
<PAGE>
As Figure 5 shows, gross leasing activity in Midtown has been strong during the
past several years. In both 1994 and 1995, gross leasing activity exceeded 16.5
million square feet, and activity through the first nine months of 1996
indicates that 1996 will be stronger than 1995 and slightly greater than 1994.
This leasing activity signifies that the overall Midtown Manhattan market is
healthy.
- --------------------------------------------------------------------------------
Figure 5.
- --------------------------------------------------------------------------------
Gross Office Leasing Activity
Midtown Manhattan
------------------------------
[Bar chart depicting gross office leasing activity in Midtown Manhattan from
1986 through an estimate of 1996.]
Sources: Cushman & Wakefield of New York, Forecast-RCG
Strong growth in business services and the stabilization of the commercial
banking industry have fueled net absorption in recent years. As office demand
growth surged in 1994 and 1995, overall calculated net absorption in Midtown
reached 6.4 million and 1.7 million square feet, respectively. Class A overall
calculated net absorption represented approximately 82% of total calculated net
absorption in Midtown during this period, and Class A direct calculated net
absorption was about 77% of the overall total. However, during the first nine
months of 1996, negative calculated net absorption in the Class B market put a
drain on overall calculated net absorption. As a result, Class A overall
calculated net absorption exceeded the market total through the third quarter of
1996, thereby pushing the Midtown Class A overall vacancy rate down further than
the Midtown total.
Rosen Consulting Group 16
<PAGE>
Forecasted net absorption is based on the number of "office occupying" jobs
created. As Table 11 shows, the FIRE sector has been flat to slightly weaker in
recent years. Although mergers continue in the banking industry, many of the
jobs lost are in the retail banking sector and involve employees working at
retail branches, rather than in offices. In addition, other employment sectors,
whose employees typically do not occupy office space, are more likely to occupy
office space in New York. For example, manufacturing, textile and communications
companies in New York frequently have a management presence in the city as
opposed to physical operations. As a result, RCG conservatively estimates that
10% of private sector jobs, excluding FIRE and services, will occupy office
space. Assuming each new employee occupies about 200 square feet and just over
half of the new jobs created are in Midtown, we estimate average overall demand
for about 2.6 million square feet in 1996, increasing to 3.9 million square feet
in 1997 and falling somewhat during 1998 (see Figure 6). Demand for Class A
space will represent about 75% of the Midtown total, and assuming that 15% to
25% of Class A tenants occupy sublease space, we estimate demand for about 1.7
million square feet of direct Class A space during 1996, a figure which will
increase to 2.0 million square feet in 1997 (see Figures 7 and 8).
- --------------------------------------------------------------------------------
Table 11
New York MSA Office Employment Growth (000)
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996e
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Office Occupy. FIRE Jobs 559.4 583.0 577.4 566.4 555.6 528.1 508.0 505.0 513.3 506.2 501.5
Security & Commod. Brok. 142.2 159.9 155.1 147.7 139.5 131.5 133.2 137.8 148.6 147.9 150.3
Depository Institutions 178.7 180.0 185.1 179.7 175.8 163.9 148.3 142.3 139.2 134.1 128.9
Nondepository
Institutions 10.2 10.0 10.7 9.7 9.1 9.3 9.5 9.5 9.0
Office Occupy. Svcs. Jobs 637.8 657.6 720.2 738.3 729.9 674.7 663.3 676.2 693.0 708.2 725.6
Business Services 315.0 325.2 289.1 292.6 278.6 243.0 233.9 240.2 248.4 254.1 262.5
Legal Services 67.7 71.9 74.9 79.8 80.9 76.5 74.6 74.4 73.8 72.3 71.0
Membership Orgs. 61.7 61.1 62.4 63.1 63.5 61.6 61.1 61.7 62.1 62.8 63.3
Engin. & Mgmt Svcs. 109.6 114.0 113.7 100.9 98.4 100.3 102.9 106.1 109.9
Other 193.4 199.4 184.2 188.8 193.2 192.7 195.3 199.6 205.8 212.9 218.9
Other Private Sector Ofc. 536.7 544.8 550.8 556.1 553.9 527.9 517.9 520.5 525.0 528.1 532.9
Total Office Jobs 1,733.9 1,785.4 1,848.4 1,860.8 1,839.5 1,730.7 1,689.2 1,701.7 1,731.3 1,742.5 1,760.0
New Office Jobs Created 58.2 51.5 63.0 12.4 (21.3) (108.7) (41.6) 12.5 29.6 11.2 17.5
</TABLE>
1997f 1998f
----- -----
Office Occupy. FIRE Jobs 503.8 506.3
Security & Commod. Brok.
Depository Institutions
Nondepository
Institutions
Office Occupy. Svcs. Jobs 757.6 776.0
Business Services
Legal Services
Membership Orgs.
Engin. & Mgmt Svcs.
Other
Other Private Sector Ofc. 538.9 545.1
Total Office Jobs 1,800.3 1,827.4
New Office Jobs Created 40.4 27.1
Sources: Bureau of Labor Statistics, Forecast-Rosen Consulting Group (RCG).
- --------------------------------------------------------------------------------
Rosen Consulting Group 17
<PAGE>
- --------------------------------------------------------------------------------
Figures 6 to 8.
- --------------------------------------------------------------------------------
Overall Net Absorption
Midtown Manhattan
----------------------
[Bar graph depicting Overall Net Absorption in Midtown Manhattan from 1991 -
1995 (Calculated) and 1996 - 1998 (Forecasted)]
Source: RCG
Class A Overall Net Absorption
Midtown Manhattan
------------------------------
[Bar graph depicting Class A Overall Net Absorption in Midtown Manhattan from
1991 - 1995 (Calculated) and 1996 - 1998 (Forecasted)]
Source: RCG
Class A Direct Net Absorption
Midtown Manhattan
-----------------------------
[Bar graph depicting Class A Direct Net Absorption in Midtown Manhattan from
1991 - 1995 (Calculated) and 1996 - 1998 (Forecasted)]
Source: RCG
Rosen Consulting Group 18
<PAGE>
Forecasted Supply Analysis
Future improvement in the Manhattan office market will be a function of both
forecasted construction and demand growth. Currently, very little construction
is either planned or proposed, since market rents are well below the level
needed to justify substantial new construction. Other factors limiting new
development are the lack of available sites and the long lead time for new
construction. However, as leasing options diminish and the market anticipates
strong increases in rents, construction activity is returning to the market. A
major project of about 1.5 million square feet recently broke ground. In
addition, build-to-suit projects are underway for LVMH, the parent of Louis
Vuitton, and for the German Mission to the United Nations. Assuming development
costs of approximately $344 per square foot, an expected return of 10%, and no
tax incentives for development, an effective rent of approximately $53.65 is
needed to make construction economically viable (see Table 12).
- --------------------------------------------------------------------------------
Table 12
Midtown Manhattan Office Market
Economic Rents in 1996 ($/SF)
Land $ 85.00
Hard Costs (Core & Shell) 150.00
Soft Costs 46.25
Tenant Improvements 50.00
Leasing Commissions 13.20
Total Development Costs $344.45
NOI Necessary to Achieve 10% Return 34.45
Plus: Stabilized Vacancy (5%) 2.70
Plus: Expenses 16.50
Effective Rent Necessary to Achieve 10% Return $ 53.65
Current Midtown Class A Direct Asking Office Rent $ 35.72
Source: Cushman & Wakefield, Rosen Consulting Group Estimates
- --------------------------------------------------------------------------------
Rent Analysis
Rent growth is inversely related to the vacancy rate. When market conditions
tighten and the market vacancy rate falls below the optimal vacancy rate, rent
growth accelerates. For example, the Midtown Class A direct vacancy rate was at
its highest between 1990 and 1993, during which time asking rents decreased (see
Figures 9 and 10). Since 1993, the Midtown Class A direct vacancy rate has
decreased, and as market conditions have firmed, Class A direct asking rents
have increased.
Rosen Consulting Group 19
<PAGE>
To forecast rent growth, we use a stock-adjustment disequilibrium model in which
we assume that future rent growth will be a function of inflation plus a
coefficient times the difference between the optimal vacancy rate (we assumed
11% overall and 9% direct) and the market vacancy rate. Based on our forecasted
vacancy rates, we believe that, by 1998, the overall Midtown vacancy rate will
fall to 8.4% which will cause asking rents to increase 6.2% (see Table 7). Class
A direct asking rents will accelerate more rapidly because of a forecasted lower
vacancy rate of 6.3% in 1998 (see Table 9).
- --------------------------------------------------------------------------------
Figures 9 and 10
- --------------------------------------------------------------------------------
Office Vacancy Rates and Asking Rents
Midtown Manhattan Class A Direct
-------------------------------------
[Bar/Line graph depicting office vacancy rates and asking rents for Midtown
Manhattan Class A Direct for 1990 - 1995 (Actual), 1996 (Estimated) and 1997 -
1998 (Forecast).]
Sources: Cushman & Wakefield of New York, Forecast-RCG
Chg. in Class A Direct Gross Ask. Rent
Midtown Manhattan
--------------------------------------
[Line graph depicting change in Class A Direct Gross Asking Rent
in Midtown Manhattan for 1991 - 1995 (Actual), 1996 (Estimated)
and 1997 - 1998 (Forecast).]
Sources: Cushman & Wakefield of New York, Forecast-RCG
Rosen Consulting Group 20
<PAGE>
Following is a discussion of office market trends in the three submarkets which
comprise Midtown Manhattan. The analysis compares the performance of the office
buildings in which The Mendik Company ("the Company") owns an interest with the
submarkets in which the buildings are located.
Midtown West Submarket
The Midtown West submarket encompasses the area of Manhattan from 30th Street to
47th Street, west of Fifth Avenue, and the area from 47th Street to 70th Street,
west of Seventh Avenue. It contains the Pennsylvania Station train station and
the Port Authority Bus Terminal. It also contains Times Square, which is
currently undergoing a major redevelopment, and the Garment District.
Conditions in the Midtown West submarket have improved dramatically since 1991.
The Class A direct vacancy rate has fallen almost in half from 16.3% in 1991 to
8.3% in the third quarter of 1996 (see Figure 11). Within the submarket, the
buildings in which the Company has an ownership interest, at Two Penn Plaza,
Eleven Penn Plaza and 1740 Broadway, have historically outperformed the market
in terms of vacancy (see Table 13).
The Midtown West submarket experienced declining asking rents between 1992 and
1994, but rent growth resumed in 1995 and through the first three quarters of
1996 (see Figure 12). Although asking rents have yet to rebound to their peak of
the early 1990s, the improved vacancy rate and rising rents have caused
developers to become more interested in the submarket. In fact, the Midtown West
submarket is the location of the only major office construction project in New
York. The Durst Organization has broken ground on the 1.5 million square-foot
Four Times Square office project with completion slated for 1999. Earlier this
year, Conde Nast pre-leased more than 550,000 square feet with an option for
more space, and the law firm of Skadden, Arps, Slate Meagher & Flom recently
committed to about 660,000 square feet in the new tower.
- --------------------------------------------------------------------------------
Table 13
Comparison of Mendik Properties to Midtown West Submarket
Class A Direct Office Vacancy Rates
1991 1992 1993 1994 1995 3Q96
---- ---- ---- ---- ---- ----
Midtown West 16.3% 14.1% 11.7% 9.2% 8.9% 8.3%
Two Penn Plaza 4.6% 5.3% 4.0% 5.8% 6.3% 3.8%
Eleven Penn Plaza 9.0% 11.4% 11.8% 5.9% 4.1% 5.0%
1740 Broadway 12.0% 2.0% 0.0% 0.0% 0.0% 0.0%
Sources: Cushman & Wakefield of New York, The Mendik Company.
- --------------------------------------------------------------------------------
Rosen Consulting Group 21
<PAGE>
- --------------------------------------------------------------------------------
Figures 11 and 12.
- --------------------------------------------------------------------------------
Office Vacancy Rates and Asking Rents
Midtown West Submarket Class A Direct
-------------------------------------
[Bar/Line graph depicting office vacancy rates and asking rents for Midtown West
Submarket Class A Direct for 1990 - 1995 and third quarter 1996.]
Sources: Cushman & Wakefield of New York, Forecast-RCG
Chg. in Class A Direct Gross Ask. Rent
Midtown West Submarket
--------------------------------------
[Line graph depicting change in Class A Direct Gross Asking Rent in Midtown West
Submarket for 1991 - 1995 and third quarter 1996.]
Sources: Cushman & Wakefield of New York, Forecast-RCG
Rosen Consulting Group 22
<PAGE>
Grand Central Submarket
Midtown's Grand Central submarket is located between 32nd and 47th Streets from
Fifth Avenue to the East River. It is the location of the Grand Central Terminal
train station, which anchors its attractiveness as an office location.
Office market conditions in the Grand Central submarket have improved notably
during the past several years. The direct vacancy rate for Class A space has
fallen from 16.0% in 1993 to just 10.8% in the third quarter of 1996 (see Figure
13). The vacancy rates in the office buildings in which the Company has an
ownership interest at Two Park Avenue and 330 Madison Avenue are significantly
lower than the overall market (see Table 14). As the vacancy rate in the Grand
Central submarket has fallen, Class A direct asking rent growth has accelerated
(see Figure 14).
- --------------------------------------------------------------------------------
Figures 13 and 14.
- --------------------------------------------------------------------------------
Office Vacancy Rates and Asking Rents
Grand Central Submarket Class A Direct
--------------------------------------
[Bar/Line graph depicting office vacancy rates and asking rents for Grand
Central Submarket Class A Direct for 1990 - 1995 and third quarter 1996.]
Sources: Cushman & Wakefield of New York, Forecast-RCG
Chg. in Class A Direct Gross Ask. Rent
Grand Central Submarket
--------------------------------------
[Line graph depicting change in Class A Direct Gross Asking Rent in Grand
Central Submarket for 1991 - 1995 and third quarter 1996.]
Sources: Cushman & Wakefield of New York, Forecast-RCG
Rosen Consulting Group 23
<PAGE>
- --------------------------------------------------------------------------------
Table 14
Comparison of Mendik Properties to Grand Central Submarket
Class A Direct Office Vacancy Rates
1991 1992 1993 1994 1995 3Q96
---- ---- ---- ---- ---- ----
Grand Central Submarket 13.4% 14.6% 16.0% 13.9% 13.0% 10.8%
Two Park Avenue 7.6% 7.9% 10.8% 7.9% 2.7% 2.9%
330 Madison Avenue 14.0% 1.1% 8.1% 2.7% 6.8% 3.7%
Sources: Cushman & Wakefield of New York, The Mendik Company.
- --------------------------------------------------------------------------------
Despite strong rent growth, only one building is proposed in the Grand Central
submarket, an 800,000 square-foot building at 383 Madison Avenue. The building
will not be built until developers receive a commitment from a major tenant.
Given the long lead time for new construction, we do not expect this proposed
building to be completed during the forecast horizon.
Rosen Consulting Group 24
<PAGE>
Plaza Submarket
The Plaza submarket is located on Manhattan's east side between 47th and 65th
Streets from Seventh Avenue to the East River. It is the largest of the Midtown
submarkets. Like Midtown West and the Grand Central submarkets, the Plaza
submarket has experienced marked improvement during the past several years. The
Class A direct vacancy rate fell from 12.6% in 1992 to 7.5% in the third quarter
of 1996 (see Figure 15). As Table 15 shows, the Company's property at 866 United
Nations Plaza has had virtually no vacancy throughout the 1990s. The Company
also has an ownership interest in the property at 570 Lexington Avenue in this
submarket. This building was substantially vacant when acquired in 1994. Since
then, it has been renovated and is currently being leased.
Limited build-to-suit construction is occurring for tenants with specific needs.
For example, LVMH, the parent of Louis Vuitton, is building a 23-story, 103,000
square-foot office building at 17 to 21 East 57th Street between Fifth and
Madison Avenues. The building, scheduled for completion in the fourth quarter of
1997, will contain Louis Vuitton's flagship store on its ground floor. In
addition, the German Mission to the United Nations is building a 23-story,
112,000 square-foot headquarters at 871 United Nations Plaza that will be
completed in mid 1998.
- --------------------------------------------------------------------------------
Figures 15 and 16.
- --------------------------------------------------------------------------------
Office Vacancy Rates and Asking Rents
Plaza Submarket Class A Direct
-------------------------------------
[Bar/Line graph depicting office vacancy rates and asking rents for Plaza
Submarket Class A Direct for 1990 - 1995 and third quarter 1996.]
Sources: Cushman & Wakefield of New York, Forecast-RCG
Chg. in Class A Direct Gross Ask. Rent
Plaza Submarket
--------------------------------------
[Line graph depicting change in Class A Direct Gross Asking Rent in Plaza
Submarket for 1991 - 1995 and third quarter 1996.]
Sources: Cushman & Wakefield of New York, Forecast-RCG
Rosen Consulting Group 25
<PAGE>
- --------------------------------------------------------------------------------
Table 15
Comparison of Mendik Properties to Plaza Submarket
Class A Direct Office Vacancy Rates
1991 1992 1993 1994 1995 3Q96
---- ---- ---- ---- ---- ----
Plaza Submarket 11.1% 11.3% 12.4% 9.3% 8.0% 7.5%
866 United Nations 0.1% 1.4% 5.1% 3.8% 4.4% 1.9%
570 Lexington Avenue 66.5%
Sources: Cushman & Wakefield of New York, The Mendik Company.
- --------------------------------------------------------------------------------
Asking rents in the Plaza submarket are higher than in other Midtown submarkets.
After gaining substantially during 1994, a year in which vacancy dropped 3.5
percentage points, asking rents declined slightly during 1995 (see Figure 16).
However, the Plaza submarket has experienced healthy rent growth during the
first nine months of 1996, and as market conditions tighten, rent growth will
likely accelerate.
Forecasted Office Market Trends
The growth in demand for office space in Midtown Manhattan will be moderately
strong over the next three years. Employment growth in the key office-consuming
sectors such as finance, securities, legal services, and accounting will
accelerate during the next two to three years. When combined with growth in
other "office occupying" sectors, a net total of approximately 17,500 office
space-consuming jobs will be created in the metropolitan area during 1996, and
we anticipate that about 40,400 office space-consuming jobs will be added to New
York's employment base in 1997 and another 27,100 in 1998. Assuming a
coefficient of space used per office employee of 200 square feet, that Midtown
Manhattan absorbs just above half of office demand growth through 1998, and that
15% to 25% of the absorption occurs in sublet space, the forecasted net
absorption for Midtown would be an average of 3.2 million square feet per year.
The forecasted net absorption for Class A overall space would be an average of
2.4 million square feet per year, and the forecasted net absorption for Class A
direct space would be an average of 1.8 million square feet per year.
While demand for office space in Midtown will be strong, no significant new
construction is expected until the Durst project is completed in 1999. As a
result, we expect the overall Midtown vacancy rate to fall to 8.4%, the Class A
overall vacancy rate to fall to 7.9%, and the Class A direct vacancy rate to
fall to 6.3% in 1998 (see Tables 6 to 8). As the vacancy rates fall, Midtown
direct asking rent growth will accelerate to about 6.2% annually by 1998, and
Class A direct asking rent growth will accelerate to about 6.3% annually. Even
the addition of the 1.5 million square-foot Durst project in 1999 will have
little impact on the overall market. The building is largely pre-leased, but
even if it were not, because of the large size of the Midtown market, the
addition of 1.5 million square feet of vacant space would cause very little
change in vacancy.
Rosen Consulting Group 26
<PAGE>
Based on the economic rents needed to justify new construction calculated in
Table 12, we believe that the potential exists for significant revenue growth in
the Midtown marketplace as rental and occupancy rates for office properties
recover to levels that would provide a reasonable return on investment to a
developer of a new Class A multi-tenant office building (see Table 16).
- --------------------------------------------------------------------------------
Table 16
Estimated Economic Rent Analysis
Multi-tenant Office Buildings
(Per Net Rentable Square Foot)
Development Costs $344.45
Estimated Economic Costs $ 53.65
Current Midtown Direct Class A Asking Rental Rates $ 35.72
Increase in Class A Rental Rates Necessary
to Reach Economic Rent $ 17.93
Percentage Increase in Class A Rental Rates Necessary
to Reach Economic Rents 50.2%
Source: Rosen Consulting Group Estimates
- --------------------------------------------------------------------------------
Rosen Consulting Group 27
