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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 26, 1998
REGISTRATION NO. 333-56451
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ALEXANDRIA REAL ESTATE EQUITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MARYLAND 95-4502084
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
135 NORTH LOS ROBLES AVENUE, SUITE 250
PASADENA, CALIFORNIA 91101
(626) 578-0777
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOEL S. MARCUS
CHIEF EXECUTIVE OFFICER
135 NORTH LOS ROBLES AVENUE, SUITE 250
PASADENA, CALIFORNIA 91101
(626) 578-0777
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JEROME L. COBEN, ESQ.
MICHAEL A. WORONOFF, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
300 SOUTH GRAND AVENUE
LOS ANGELES, CALIFORNIA 90071
(213) 687-5000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement as determined
by market conditions.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
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. [_]
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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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EXPLANATORY NOTE
This Registration Statement relates to securities that may be offered from
time to time by the Registrant. This Registration Statement contains a form of
basic prospectus (the "Prospectus") that will be used in connection with an
offering of securities by the Registrant. The specific terms of the securities
to be offered will be set forth in a Prospectus Supplement relating to such
securities.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 25, 1998
PROSPECTUS
$250,000,000
ALEXANDRIA REAL ESTATE EQUITIES, INC.
COMMON STOCK, PREFERRED STOCK AND WARRANTS
-----------
Alexandria Real Estate Equities, Inc. (the "Company") may offer, from time to
time, in one or more series or classes (i) shares of its common stock, par
value $.01 per share (the "Common Stock"), (ii) shares or fractional shares of
its preferred stock, par value $.01 per share (the "Preferred Stock"), and
(iii) warrants to purchase shares of Common Stock or Preferred Stock, as shall
be designated by the Company at the time of any such offering (the "Warrants"),
with an aggregate public offering price of up to $250,000,000, in amounts, at
prices and on terms to be determined at the time of offering. The Common Stock,
Preferred Stock and Warrants (collectively, the "Securities") may be offered,
separately or together, in separate series in amounts, at prices and on terms
to be set forth in one or more supplements to this Prospectus (each such
supplement, a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable (i) in the case of Common Stock, the specific
title and any initial public offering price; (ii) in the case of Preferred
Stock, the specific title and stated value, and any dividend, liquidation,
redemption, conversion, voting and other rights, and any initial public
offering price; and (iii) in the case of Warrants, the duration, offering
price, exercise price and detachability. In addition, such specific terms may
include limitations on actual or constructive ownership and restrictions on
transfer of the Securities, in each case as may be appropriate to preserve the
status of the Company as a real estate investment trust for federal income tax
purposes.
The applicable Prospectus Supplement also will contain information, where
applicable, about certain U.S. federal income tax consequences relating to, and
any listing on a securities exchange of, the Securities covered by such
Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement
with, between or among them, will be set forth, or will be calculable from the
information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of this Prospectus
and the applicable Prospectus Supplement describing the method and terms of the
offering of such series of Securities.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 2 FOR CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE SECURITIES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is June , 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN AN OFFERING OF THE SECURITIES MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
SECURITIES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THOSE ACTIVITIES, SEE "UNDERWRITING" IN THE
ACCOMPANYING PROSPECTUS SUPPLEMENT.
No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in
this Prospectus or any Prospectus Supplement, and, if given or made, such
other information and representations must not be relied upon as having been
authorized by the Company or by any underwriter, agent or dealer. Neither the
delivery of this Prospectus and any Prospectus Supplement nor any sale made
thereunder shall, under any circumstances, create an implication that there
has been no change in the affairs of the Company since the date thereof or
that the information contained therein is correct as of any time subsequent to
the date thereof. This Prospectus and any Prospectus Supplement shall not
constitute an offer to sell or a solicitation of an offer to buy any
securities other than the registered securities to which it relates. This
Prospectus and any Prospectus Supplement shall not constitute an offer to sell
or a solicitation of an offer to buy such securities in any circumstances in
which such offer or solicitation is unlawful.
Unless the context otherwise requires, references herein to the "Company"
mean, collectively, Alexandria Real Estate Equities, Inc. ("Alexandria"), a
Maryland corporation, and its subsidiaries. The Company holds substantially
all of its assets and conducts substantially all of its operations through its
subsidiaries, including property partnerships and limited liability companies.
The Company currently owns, directly or indirectly, all of the interests in
such subsidiaries. The Company may, however, issue operating partnership
interests as consideration for future property acquisitions.
TABLE OF CONTENTS
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PAGE
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Available Information..................................................... iii
Incorporation of Certain Documents by Reference........................... iii
The Company............................................................... 1
Risk Factors.............................................................. 2
Use of Proceeds........................................................... 14
Ratio of Earnings to Fixed Charges........................................ 14
Description of Capital Stock.............................................. 15
Warrants.................................................................. 19
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws................................................................... 20
Federal Income Tax Considerations......................................... 23
Plan of Distribution...................................................... 33
Legal Matters............................................................. 34
Experts................................................................... 34
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement, the exhibits and schedules forming a part thereof, and the reports,
proxy statements and other information filed by the Company with the
Commission in accordance with the Exchange Act can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following
regional offices of the Commission: Seven World Trade Center, 13th Floor, New
York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material can be obtained at
prescribed rates from the Public Reference Room of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. Such material also may be accessed
through the Commission's electronic data gathering, analysis and retrieval
system ("EDGAR") via electronic means, including the Commission's site on the
World Wide Web at http://www.sec.gov. In addition, certain of the Securities
are listed on the New York Stock Exchange, and similar information regarding
the Company may be inspected and copied at the offices of The New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement (No. 333-
56451) on Form S-3 (together with all amendments and exhibits, herein referred
to as the "Registration Statement") (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Securities offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Such additional information is available for inspection and
copying at the offices of the Commission. Statements contained in this
Prospectus, in any Prospectus Supplement or in any document incorporated by
reference herein or therein as to the contents of any contract or other
document referred to herein or therein 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, or incorporated by reference in, the Registration
Statement, each such statement being qualified in all respects by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below previously have been filed by the Company with
the Commission pursuant to the Exchange Act and are incorporated herein by
reference:
(1) The Company's Annual Report on Form 10-K for the year ended December
31, 1997;
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998;
(3) Amendment No. 1 to the Company's Current Report on Form 8-K (dated
November 14, 1997), filed with the Commission on January 29, 1998
(4) The Company's Current Report on Form 8-K (dated March 26, 1998),
filed with the Commission on April 9, 1998;
(5) The Company's Current Report on Form 8-K (dated May 27, 1998), filed
with the Commission on May 27, 1998;
(6) The Company's Current Report on Form 8-K (dated May 27, 1998), filed
with the Commission on June 23, 1998; and
(7) The description of the Common Stock contained in the Registration
Statement on Form 8-A filed by the Company on May 14, 1997, including any
amendment or reports filed for the purpose of updating such description.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Securities to which this Prospectus
relates shall be deemed to be incorporated by reference into this Prospectus
and to be a part hereof from the date of filing such documents.
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Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein (or in the applicable Prospectus Supplement) or in any other
subsequently filed document that is or is deemed to be incorporated by
reference herein modifies or supersedes such previous statement. Any statement
so modified or superseded shall not be deemed to constitute a part of this
Prospectus, except as so modified or superseded.
Copies of all documents that are incorporated herein by reference (other
than the exhibits to such documents, unless such exhibits are specifically
incorporated by reference herein), will be provided upon request without
charge to any person to whom this Prospectus and the applicable Prospectus
Supplement are delivered. Requests for such copies should be directed to
Alexandria Real Estate Equities, Inc., 135 North Los Robles Avenue, Suite 250,
Pasadena, California 91101, Attention: Corporate Secretary, telephone number
(626) 578-0777.
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iv
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THE COMPANY
The Company is a real estate investment trust ("REIT") engaged primarily in
the acquisition, management, expansion and selective development of high
quality, strategically located properties containing office and laboratory
space designed and improved for lease principally to pharmaceutical,
biotechnology, diagnostic, contract research and personal care products
companies, major scientific research institutions and related government
agencies (collectively, the "Life Science Industry"). Properties leased to
tenants in the Life Science Industry typically consist of suburban office
buildings containing scientific research and development laboratories and
other improvements that are generic to tenants operating in the Life Science
Industry (such properties, "Life Science Facilities"). As of April 30, 1998,
the Company owned 37 Life Science Facilities (the "Properties"), located in
California (in the San Diego and San Francisco Bay areas); Seattle,
Washington; suburban Washington, D.C. (including Maryland and Virginia);
Boston/Cambridge, Massachusetts; Raleigh/Durham, North Carolina; and the New
York/New Jersey and suburban Philadelphia areas.
The Common Stock is listed on the New York Stock Exchange under the symbol
"ARE." The Company's principal executive offices are located at 135 North Los
Robles Avenue, Suite 250, Pasadena, California 91101, and the telephone number
is (626) 578-0777. The Company was formed as a Maryland corporation in
October 1994 and completed its initial public offering ("IPO") in June 1997.
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RISK FACTORS
An investment in the Securities involves various risks. Prospective
investors should carefully consider the following information, in addition to
the other information contained in this Prospectus, the applicable Prospectus
Supplement and the documents incorporated herein and therein by reference,
before making a decision to purchase the Securities. When used in this
Prospectus, the words "believes," "expects," "anticipates," "intends" and
similar expressions are intended to identify forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act regarding events, conditions and financial trends that may affect
the Company's future plans of operations, business strategy, results of
operations and financial position. Prospective investors are cautioned that
any forward-looking statements are not guarantees of future performance and
are subject to risks and uncertainties. Actual results may differ materially
from those included within the forward-looking statements as a result of
various factors including, but not limited to, those described below and
elsewhere in this Prospectus, the applicable Prospectus Supplement and the
documents incorporated herein and therein by reference.
LACK OF INDUSTRY DIVERSIFICATION; RELIANCE ON LIFE SCIENCE INDUSTRY TENANTS
The Company's strategy is to invest in Life Science Facilities.
Consequently, the Company is subject to the risks associated with an
investment in real estate in the Life Science Industry, and is subject to the
risks generally associated with investment in a single industry. Accordingly,
the effects on cash available for distribution to the Company's stockholders
may be more pronounced than if the Company had diversified investments.
Although laboratory facilities typically are generic in nature, certain
facilities may be better suited for particular Life Science Industry tenants
and could require modification prior to or at the commencement of a lease term
if the property has to be released to another Life Science Industry tenant.
Further, such facilities may not be suitable for lease to traditional office
tenants.
ENVIRONMENTAL MATTERS. Life Science Industry tenants, including certain of
the Company's tenants, engage in various research and development activities
involving the controlled use of hazardous materials, chemicals and biological
and radioactive compounds. The Company and such tenants are subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials and certain waste products.
Although the Company believes that the activities of its tenants involving
such materials comply in all material respects with applicable laws and
regulations, the risk of contamination or injury from these materials cannot
be completely eliminated. In the event of such contamination or injury, the
Company could be held liable for any damages that result, and any such
liability could exceed the Company's resources and its environmental
remediation coverage. See "--Possible Environmental Liabilities."
UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS AND FUNDING. The products
of certain Life Science Industry tenants, including certain of the Company's
tenants, typically require regulatory approval by domestic or foreign
governmental agencies before they can be marketed and sold. The process of
obtaining such approvals is costly and time-consuming and is subject to
unanticipated delays. There can be no assurance that required approvals for
any of such products will be granted. Any failure to obtain or any delay in
obtaining such approvals could adversely affect the ability of a tenant to
market and sell its products successfully, thereby adversely affecting its
ability to generate revenues and to make lease payments to the Company.
Furthermore, approval of a pharmaceutical product is subject to the
requirement that the manufacturer's quality control and manufacturing
procedures conform to current Good Manufacturing Practices ("GMP"), which must
be followed at all times. The U.S. Food and Drug Administration (the "FDA")
strictly enforces GMP requirements through periodic unannounced inspections,
and there can be no assurance that the FDA will determine that the facilities
and manufacturing procedures of any of the Company's tenants who manufacture
pharmaceutical products will conform to GMP requirements. Additionally, a
manufacturer of pharmaceutical products must pass a preapproval inspection of
its manufacturing facilities by the FDA before obtaining marketing approval.
Failure to comply with applicable regulatory requirements may result in
penalties such as restrictions on a product's marketing or withdrawal of a
product from the market. In addition, many approved products are subject to
continuing regulation. Regulation could result in limitations or restrictions
on a tenant's ability to utilize its technology,
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thereby adversely affecting such tenant's ability to generate revenues and to
make lease payments to the Company. Certain of the Company's tenants are also
subject to regulation under the Occupational Safety and Health Act, federal
restrictions on technology transfer, import, export and customs regulations,
and other federal, state and local regulations. In addition, certain of the
Company's tenants receive significant funding from federal, state and local
governments. If any of such funding were decreased or discontinued, the
affected tenant may experience difficulty meeting its obligations under its
lease. See "--Dependence on Tenants."
DEPENDENCE ON REIMBURSEMENT. The healthcare industry in the United States is
undergoing significant changes, resulting from political, economic and
regulatory influences. Successful commercial sales of the products of certain
of the Company's tenants may depend in part on the availability of
reimbursement to consumers from third-party payors, such as government and
private insurance plans, that may be affected by changes in the healthcare
industry. There can be no assurance that adequate third-party reimbursement
will be available for the products of the Company's tenants. If adequate
reimbursement is not provided by government and third-party payors for the
products or services of the Company's tenants, such tenants' business and
ability to generate revenues and make lease payments to the Company could be
adversely affected. Consequently, the Company's ability to make distributions
to its stockholders could similarly be adversely affected.
DEPENDENCE ON TENANTS
The Company's revenues are derived primarily from rental payments under its
leases. Therefore, if a significant tenant failed to make rental payments
under its lease, the Company's financial condition and its ability to make
distributions to stockholders could be adversely affected. While the Company
evaluates the creditworthiness of its tenants based upon a due diligence
review of available financial and other pertinent information, there can be no
assurance that any such tenant will not default in the payment of rent under
its lease. In addition, U.S. government tenants are subject to annual
appropriations, and defaults under leases with such tenants are governed by
federal statute and not state eviction or rent deficiency laws. As of April
30, 1998, leases with U.S. government tenants at the Properties accounted for
approximately 8.0% of the Company's aggregate Annualized Base Rent.
"Annualized Base Rent" means the annualized fixed base rental amount in effect
as of April 30, 1998 (using rental revenue calculated on a straight-line basis
in accordance with generally accepted accounting principles). In the case of
triple net leases, Annualized Base Rent does not include real estate taxes and
insurance, common area and other operating expenses, substantially all of
which are borne by the tenants. The Company's leases with U.S. government
tenants at each of 1431 Harbor Bay Parkway in Alameda, California and 1401 and
1413 Research Boulevard in Rockville, Maryland provide that the government
tenant may terminate the lease in the event of a default by the Company or the
landlord thereunder that continues for a stated period.
To the extent the Company is dependent on rental payments from a limited
number of tenants, the inability of any single tenant to make its lease
payments could adversely affect the Company and its ability to make
distributions to stockholders. As of April 30, 1998, the Company had
approximately 139 leases with a total of approximately 128 tenants. Twenty-two
of the Properties were single-tenant Properties, although the Company believes
that all such Properties are capable of being converted to use by multiple
tenants. Three of the Company's tenants, American Medical Laboratories, Inc.,
the Fred Hutchinson Cancer Research Center and Agouron Pharmaceuticals, Inc.,
accounted for approximately 20.2% of the Company's aggregate Annualized Base
Rent, or approximately 9.4%, 5.8% and 5.0%, respectively, as of April 30,
1998.
No assurance can be given that a lessee will exercise any option to renew
its lease upon the expiration of the initial term or that upon expiration or
termination of a lease the Company will be able to locate a qualified
replacement tenant. Consequently, the Company could lose the cash flow from
such property, and the Company might be required to divert cash flow generated
by other properties to meet mortgage payments, if any, and pay other expenses
associated with owning the property with respect to which the expiration or
termination occurred. Leases at the Properties representing approximately
10.5%, 12.0% and 11.7% of Annualized Base Rent are scheduled to expire in the
years 1998, 1999 and 2000, respectively. In addition, the Company may acquire
properties that include certain improvements specially suited to the needs of
a particular tenant. Such properties
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may require renovations, tenant improvements or other concessions in order to
lease it to another tenant if the initial lease is terminated or not renewed.
See "--Lack of Industry Diversification; Reliance on Life Science Industry
Tenants."
GEOGRAPHIC CONCENTRATION; DEPENDENCE ON CERTAIN MARKETS
The Properties are located in California (in the San Diego and San Francisco
Bay areas); Seattle, Washington; suburban Washington, D.C. (including Maryland
and Virginia); Boston/Cambridge, Massachusetts; Raleigh/Durham, North
Carolina; and the New York/New Jersey and suburban Philadelphia areas. As a
result of this geographic concentration, the Company's performance, its
ability to make distributions to stockholders and the value of its properties
are dependent upon the performance of the Life Science Industry and on
economic conditions in these markets, including local real estate conditions
and competition. There can be no assurance that these markets will continue to
grow or will remain favorable to the Life Science Industry. The performance of
the Life Science Industry and the economy in general in each geographic market
in which the Company owns or acquires properties may affect occupancy, market
rental rates and expenses and, consequently, may affect the Company's
performance and the value of its properties.
RAPID GROWTH
The Company is currently experiencing a period of rapid growth. As the
Company acquires additional properties, it will be subject to risks associated
with managing new properties, including lease-up and tenant retention. In
addition, the Company's ability to manage its growth effectively will require
it to successfully integrate new acquisitions into its existing management
structure. No assurances can be given that the Company will be able to succeed
with such integration or effectively manage additional properties or that
newly acquired properties will perform as expected. Additionally, there can be
no assurance that the Company will be able to maintain its current rate of
growth in the future.
REAL ESTATE FINANCING
DEBT FINANCING AND EXISTING DEBT MATURITIES. The Company is subject to the
risks normally associated with debt financing, including the risk that the
Company's cash flow from operations will be insufficient to meet required
payments of principal and interest, that existing indebtedness will not be
able to be refinanced or extended, and that the terms of any such refinancing
will not be as favorable as the terms of existing indebtedness. As of March
31, 1998 the Company had outstanding mortgage indebtedness of approximately
$60.2 million, of which approximately $18 million is secured by 3535 and
3565 General Atomics Court; approximately $8.5 million is secured by 1431
Harbor Bay Parkway; approximately $21.1 million is secured by 1102 and 1124
Columbia Street; and approximately $12.6 million is secured by 100 and 800/801
Capitola Drive. In addition, in May 1998, the Company obtained a mortgage loan
of approximately $36.5 million, which is secured by 3000/3018 Western Avenue
and 14225 Newbrook Drive. In the event of a default by the Company, the lender
may be able to foreclose on or otherwise transfer such Properties to the
mortgagee, resulting in a loss of income and asset value to the Company. As a
result, the Company's financial condition and its ability to make
distributions to stockholders may be adversely affected.
The Company's $150 million unsecured revolving credit facility (the "Credit
Facility") contains conditions to borrowing and cross-default provisions. The
conditions to borrowing include compliance with customary financial covenants
and restrictions on certain activities, such as incurring indebtedness, making
investments and distributions to stockholders, as well as a requirement to
maintain a pool of unencumbered assets approved by the lenders. Under the
cross default provisions, a default under the terms of any Company
indebtedness in excess of $5 million, with the exception of non-recourse debt,
could result in a default under the Credit Facility and could lead to
acceleration of the outstanding indebtedness under the Credit Facility. As of
June 9, 1998, the Company had $101.8 million principal amount of indebtedness
outstanding under the Credit Facility.
The Company has financed the acquisition of the Properties in part, and may
finance future investments, with debt obligations that provide for the
repayment of principal in a lump-sum or "balloon" payment at
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maturity. In addition, certain of the Company's lenders may insist on the
right to demand repayment prior to the maturity date of a loan if certain
events of default occur. The ability to repay indebtedness at maturity or
otherwise may depend upon the ability of the Company either to refinance or
extend such indebtedness, to repay such indebtedness with proceeds of other
capital transactions, such as the issuance of equity capital, or to sell
properties. There can be no assurance that such refinancing or extension will
be available on reasonable terms or at all, that additional capital will be
issued, or that a sale of property will occur. The inability to repay such
indebtedness could adversely affect the financial condition of the Company and
its ability to make distributions to stockholders.
REQUIREMENT OF ADDITIONAL FINANCING. The Company's ability to acquire or
develop properties is subject to the Company's ability to obtain debt or
equity financing. The Company could be delayed or prevented from acquiring,
structuring and closing desirable investments by an inability to obtain
financing on acceptable terms. In addition, the issuance of additional shares
of capital stock or interests in subsidiaries to obtain financing for the
acquisition of additional properties could result in a dilution of ownership
for the then existing stockholders. The Company has adopted a policy of
incurring debt only if, upon such incurrence, its debt to total market
capitalization ratio would not exceed 50%. If the Company is unable to obtain
additional equity financing, and the incurrence of additional debt would cause
the Company's debt to total market capitalization ratio to exceed 50%, the
Company may have to revise its existing policy to fund acquisitions of
additional properties. See "--No Limitation on Debt."
RISING INTEREST RATES. Borrowings outstanding under the Credit Facility bear
interest at a variable rate, as may other indebtedness incurred by the Company
in the future. Accordingly, increases in market interest rates could increase
the Company's debt service requirements, which could adversely affect the
financial position of the Company and its ability to make distributions to
stockholders. In addition, the Company may enter into swap agreements or other
hedging transactions to further limit its exposure to rising interest rates as
appropriate and cost effective, although there can be no assurance that it
will be able to do so on terms acceptable to the Company. Swap agreements or
other hedging transactions also may expose the Company to the risk that the
counterparty may not perform, which could cause the Company to lose the
benefits of the hedging transactions.
ACQUISITION AND RENOVATION
The success of the Company is dependent in part upon its ability to acquire
additional properties on satisfactory terms. Moreover, the acquisition of Life
Science Facilities generally involves higher per square foot acquisition
prices than traditional suburban office properties. If debt or equity
financing were not available on acceptable terms, further acquisitions or
development activities may be curtailed, and the Company's ability to make
distributions to its stockholders may be adversely affected. There is also a
risk that the Company will not be able to acquire properties that meet the
Company's acquisition criteria.
In addition, the acquisition of real estate entails risks that investments
may fail to perform in accordance with expectations (including projected
occupancy and rental rates), that the Company may overpay for its properties,
or that the Company may underestimate the cost of improvements required to
bring an acquired property up to standards established for the market position
intended for that property. To the extent that the Company might otherwise
benefit from the conversion of a single tenant facility into a multi-tenant
facility, the cost of such conversion may be substantial, and the Company may
deem such conversion to be impracticable. Moreover, although the costs
associated with tenant-specific improvements are generally borne by the
tenant, such improvements to Life Science Facilities typically involve higher
costs per square foot than similar improvements to office space, and there can
be no assurance that all such costs will be borne by tenants in the future. In
addition, there are general investment risks associated with any new real
estate investment. See "--Real Estate Investment."
REAL ESTATE INVESTMENT
The Company's investments in real property are subject to varying degrees of
risk, including risks common to commercial properties in general and risks
specific to the Company.
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VARIABILITY OF REVENUES AND EXPENSES. The yields the Company receives from
equity investments in real estate depend in large part on the amount of
revenue generated and expenses incurred. If the Company's properties do not
generate revenues sufficient to meet operating expenses, including debt
service and other capital expenditures, the Company may have to borrow
additional amounts to cover fixed costs and cash flow needs, and the Company's
ability to make distributions to its stockholders could be adversely affected.
The revenues from and the value of the Company's properties may be adversely
affected by a number of factors, including the national and local economic
climate; real estate conditions in the Company's markets; the Company's
ability to provide adequate management, maintenance and insurance; and
increased operating costs (including real estate taxes and utilities).
As of April 30, 1998, over 60% of the Company's leases (on a square footage
basis) were triple net leases. To the extent that the Company's lease for a
property is not a triple net lease, the Company will have greater expenses
associated with that property and will bear some or all of the risk of any
increase in such expenses (whether due to inflation or other factors), unless
the lease provides for a rent adjustment based on escalations in operating
expenses. In addition, certain significant expenditures associated with the
Company's investments (such as mortgage payments, if any, real estate taxes,
insurance and maintenance costs) are generally not reduced when circumstances
cause a reduction in income from the investment. If a property is mortgaged to
secure payment of indebtedness, and if the Company is unable to meet its
mortgage payments, a loss could be sustained as a result of foreclosure on the
property or the exercise of other remedies by the mortgagee. Finally, real
estate values are also affected by the cost of compliance with government
regulation, including zoning and tax laws, interest rate levels and the
availability of financing.
COST OF IMPROVEMENTS. The Company's properties contain generic
infrastructure improvements (such as reinforced concrete floors, upgraded roof
loading capacity, heavy-duty HVAC systems and laboratory benches) that are
more capital intensive than other property types. While the Company has
historically been able to reflect the additional investment in generic
infrastructure improvements in higher rental rates, there can be no assurance
that the Company will be able to continue to do so in the future.
BANKRUPTCY OF TENANTS. The financial failure of one of the Company's tenants
could cause the tenant to become subject to a case under Title 11 of the U.S.
Code (the "Bankruptcy Code"). Under the Bankruptcy Code, a tenant has the
option of assuming (continuing) or rejecting (terminating) an unexpired lease.
If the tenant assumes its lease with the Company, the tenant must cure all
defaults under the lease and provide the Company with adequate assurance of
its future performance under the lease. If the tenant rejects the lease, the
Company may experience a reduction in cash flow, and the Company's claim for
breach of the lease would (absent collateral securing the claim) be treated as
a general unsecured claim. The amount of the claim would be capped at the
amount owed for unpaid pre-petition lease payments unrelated to the rejection,
plus the greater of one year's lease payments or 15% of the remaining lease
payments payable under the lease (but not to exceed the amount of three years'
lease payments). Although the Company has not experienced material losses from
tenant bankruptcies, no assurance can be given that tenants will not file for
bankruptcy protection in the future or, if any tenants file, that they will
assume their leases and continue to make rental payments in a timely manner.
If tenant leases are not assumed following bankruptcy, the Company's financial
condition and its ability to make distributions to its stockholders may be
adversely affected.
EXPANSION AND DEVELOPMENT. The Company intends to pursue internal growth
through the expansion of existing facilities that are fully leased and the
conversion of existing office space to higher rent generic laboratory space.
The Company is currently evaluating expansion and conversion opportunities at
several of its Properties. In addition, although the Company currently intends
to emphasize acquisitions over development, the Company intends to pursue
selective build-to-suit and retrofit development projects where it expects to
achieve investment returns that will equal or exceed its returns on
acquisitions. The Company is currently pursuing certain development
opportunities in San Diego and suburban Washington, D.C. and is evaluating
certain other development opportunities.
The Company's expansion and development activities subject the Company to
risks generally related to development and redevelopment projects, including
possible delays in construction, the cost of materials,
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financing availability, volatility in interest rates, labor availability, the
timing of the commencement of rental payments and other property development
uncertainties. In addition, such activities, regardless of whether they are
ultimately successful, typically require a substantial portion of management's
time and attention, and are subject to risks relating to the inability to
obtain, or delays in obtaining, all necessary zoning, land-use, building,
occupancy and other required governmental permits and authorizations.
ILLIQUIDITY OF INVESTMENTS. The illiquidity of the Company's investments
will limit the ability of the Company to vary its portfolio promptly in
response to changes in economic or other conditions. There can be no assurance
that the Company will be able to dispose of an investment when it finds
disposition advantageous or necessary or that the sale price of any
disposition will recoup or exceed the amount of the Company's investment. In
addition, the Internal Revenue Code of 1986, as amended (the "Code") limits
the Company's ability to sell properties held for fewer than four years, which
may affect the Company's ability to sell properties without adversely
affecting distributions to stockholders.
COMPETITION FOR INVESTMENT OPPORTUNITIES. Management believes that the
Company is the only publicly traded entity focusing primarily on the
acquisition, management, expansion and selective development of Life Science
Facilities. However, various entities, including insurance companies, pension
and investment funds, partnerships, developers, investment companies and other
REITs invest in Life Science Facilities and therefore compete for investment
opportunities with the Company. Many of these entities have substantially
greater financial resources than the Company and may be able to accept more
risk than the Company can prudently manage, including risks with respect to
the creditworthiness of a tenant or the geographic proximity of its
investments. Although management believes that it has been able to maximize
returns on acquisitions as a result of its expertise in understanding the real
estate needs of Life Science Industry tenants, its ability to identify and
acquire those properties with generic laboratory infrastructure that appeal to
a wide range of Life Science Industry tenants, and its expertise in
identifying and evaluating Life Science Industry tenants, in the future,
competition from these entities may reduce the number of suitable investment
opportunities offered to the Company or increase the bargaining power of
property owners seeking to sell.
LIMITED OPERATING HISTORY
All of the Properties have been under the Company's management for less than
five years, and a substantial majority of the Properties have been owned for
less than one year. The Properties may have characteristics or deficiencies
unknown to the Company that could affect such Properties' valuation or revenue
potential. There can be no assurance that the operating performance of the
Properties will not decline under the Company's management.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Qualification as a REIT involves the application of highly technical and
complex provisions of the Code, for which there are only limited judicial or
administrative interpretations, and the determination of various factual
matters and circumstances not entirely within the Company's control. Although
the Company believes that it has operated since January 1, 1996 in a manner so
as to qualify as a REIT, no assurance can be given that the Company is or will
remain so qualified. For example, under the REIT provisions of the Code, if
rent attributable to personal property, leased in connection with real
property, is greater than 15% of the total rent received under any particular
lease, then all of the rent attributable to such personal property will
constitute non-qualifying income for purposes of the 75% and 95% gross income
tests. The determination of whether an item of property constitutes real
property or personal property under the REIT provisions of the Code is subject
to both legal and factual considerations and, as such, is subject to differing
interpretations. Counsel has advised the Company with respect to the legal
considerations underlying such determination. After consulting with counsel
and considering such advice, the Company has reviewed its properties and has
determined that rents attributable to personal property do not exceed 15% of
the total rent with respect to any particular lease. Due to the specialized
nature of the Company's properties, there can be no assurance that the
Internal Revenue Service (the "IRS") will not assert that the rent
attributable to personal property with respect to a particular lease is
greater than 15% of the
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total rent with respect to such lease. If the amount of any such non-
qualifying income, together with other non-qualifying income, exceeds 5% of
the Company's taxable income, the Company may fail to qualify as a REIT. See
"Federal Income Tax Considerations--Taxation of the Company--Income Tests." In
addition, although the Company is not aware of any pending tax legislation
that would adversely affect the Company's ability to operate as a REIT, no
assurance can be given that new legislation, regulations, administrative
interpretations or court decisions will not change the tax laws or
interpretations thereof with respect to qualification as a REIT or the federal
income tax consequences of such qualification.
The Company has received an opinion of Skadden, Arps, Slate, Meagher & Flom
LLP, tax counsel to the Company, concerning the qualification of the Company
as a REIT. In rendering this opinion, Skadden, Arps, Slate, Meagher & Flom LLP
has relied on certain assumptions and representations by the Company as to
factual matters (including representations of the Company concerning, among
other things, its business and properties, the amounts of rents attributable
to personal property and other items regarding the Company's ability to meet
the various requirements for qualification as a REIT) and on opinions of local
counsel with respect to matters of local law. The opinion is based upon facts,
representations and assumptions as of its date and Skadden, Arps, Slate,
Meagher & Flom LLP will have no obligation to advise holders of Common Stock
of any subsequent change in the matters stated, represented or assumed or any
subsequent change in applicable law. No assurance can be given that the
Company has met or will continue to meet these requirements in the future, and
a legal opinion is not binding on the IRS.
If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in
computing taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. As a result of the additional tax liability, the
Company might need to borrow funds or liquidate certain investments in order
to pay the applicable tax and the funds available for investment or
distribution to the Company's stockholders would be reduced for each of the
years involved. In addition, the Company would no longer be required by the
Code to make any distributions. Although the Company currently 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 Company to
fail to qualify as a REIT or may cause the Board of Directors to revoke the
REIT election. See "Federal Income Tax Considerations."
Although certain of the Company's officers and directors have extensive
experience in the acquisition, leasing, operation, financing and development
of real properties, prior to commencement of the Company's operations, no
officer had significant experience in operating a business in accordance with
the requirements for maintaining qualification as a REIT under the Code.
ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT AND POWER TO ISSUE ADDITIONAL STOCK
In order for the Company to maintain its qualification as a REIT, not more
than 50% of the value of its outstanding capital stock may be owned, directly
or constructively, by five or fewer individuals or entities (as defined in the
Code). The Company's Articles of Amendment and Restatement (the "Charter")
prohibit, with certain limited exceptions, direct or constructive ownership of
shares of stock representing more than 9.8% of the combined total value of
outstanding shares of the Company's stock by any person (the "Ownership
Limit"). The Board of Directors may also exempt a stockholder from the
Ownership Limit if, prior to such exemption, the Board of Directors receives
such information as it deems necessary to determine or ensure the Company's
status as a REIT. The Board of Directors has exempted certain stockholders of
the Company from the Ownership Limit. The constructive ownership rules are
complex and may cause shares of Common Stock owned directly or constructively
by a group of related individuals or entities to be constructively owned by
one individual or entity. A transfer of shares to a person who, as a result of
the transfer, violates the Ownership Limit may be void or may be transferred
to a trust, for the benefit of one or more qualified charitable organizations
designated by the Company, with the intended transferee having only a right to
share (to the extent of the transferee's original purchase price for such
shares) in proceeds from the trust's sale of such shares. See "Description of
Capital Stock--Restrictions on Ownership and Transfer."
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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 interest of the
stockholders. See "Description of Capital Stock--Restrictions on Ownership and
Transfer."
The Company's Charter authorizes the Board of Directors to cause the Company
to issue additional authorized but unissued shares of Common Stock or
Preferred Stock, and to classify or reclassify any unissued shares of Common
Stock or Preferred Stock and to set the preferences, rights and other terms of
such classified or reclassified shares. See "Description of Capital Stock--
Common Stock" and "--Preferred Stock." Preferred Stock will be available for
possible future financing of, or acquisitions by, the Company and for general
corporate purposes without any legal requirement that further stockholder
authorization for issuance be obtained. The issuance of Preferred Stock could
make more difficult any attempt to gain control of the Company by means of a
merger, tender offer, proxy contest or otherwise. The Board of Directors could
establish a series of Preferred Stock that could, depending on the terms of
such series, delay, defer or prevent a transaction or a change in control of
the Company that might involve a premium price for the Common Stock or
otherwise be in the best interest of the stockholders. Preferred Stock could
also be issued with a preference on dividend payments, which could affect the
ability of the Company to pay dividends or make other distributions to the
holders of Common Stock. The Charter and the Amended and Restated Bylaws of
the Company (the "Bylaws") also contain other provisions that may delay, defer
or prevent a transaction or a change in control of the Company that involves a
premium price for the Common Stock or may otherwise be in the best interest of
the stockholders. See "Certain Provisions of Maryland Law and of the Company's
Charter and Bylaws," "--Control Share Acquisitions" and "--Advance Notice of
Director Nominations and New Business."
UNINSURED LOSS
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance with respect to the Properties, with policy
specifications, insured limits and deductibles that the Company believes are
consistent with those customarily carried for similar properties. The Company
also has obtained environmental remediation insurance for the Properties,
which, subject to certain exclusions and deductibles, covers the cost to
remediate environmental damage caused by unintentional future spills or the
historic presence of previously undiscovered hazardous substances. The Company
intends to carry similar insurance with respect to future acquisitions, as
appropriate. In addition, the Company requires its tenants to maintain
comprehensive insurance, including liability and casualty insurance, that is
customarily obtained for similar properties. There are, however, certain types
of losses that are not generally insured because they are either uninsurable
or not economically insurable. In addition, certain disaster-type insurance
(covering catastrophic events, such as earthquakes) may not be available or
may only be available at rates that, in the opinion of management of the
Company, are prohibitive. Many of the Properties are located in the vicinity
of potentially active earthquake faults. The Company has obtained earthquake
insurance for all of the Properties. Should an uninsured disaster or a loss in
excess of insured limits occur, including losses resulting from earthquake or
other seismic activity, the Company could lose its capital invested in the
affected Properties, as well as the anticipated future revenues from such
Properties, and would continue to be obligated on any mortgage indebtedness or
other obligations related to the Properties. Any such loss could adversely
affect the Company and its ability to make distributions to stockholders.
The Company's existing title insurance policies were originally obtained at
the time the applicable Property was acquired in an amount equal to the
initial purchase price of the Property, and, accordingly, any such policy may
be in an amount less than the current value of the Property. In the event of
an underinsured loss with respect to a Property relating to a title defect,
the Company could lose a portion of its capital invested in, and anticipated
profits from, such Property, which could adversely affect the Company and its
ability to make distributions to stockholders.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws and regulations, a
current or previous owner or operator of real estate, as well as certain other
parties, may be required to investigate and remediate the effects
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of hazardous or toxic substances or petroleum product releases on, under, in
or from such property, and may be held liable to a governmental entity or to
third parties for investigation and cleanup costs and certain damages
resulting from such releases. Such laws and regulations typically impose
responsibility and liability without regard to whether such person knew of or
caused the releases, and the liability under such laws and regulations has
been interpreted to be joint and several unless the harm is divisible and
there is a reasonable basis for allocation of responsibility. The cost of
investigating and remediating such contamination may be substantial, and the
presence of such contamination, or the failure to properly remediate it, may
adversely affect the owner's ability to sell or rent such property or to
borrow using such property as collateral. In addition, the owner of a site may
be subject to governmental fines and common law claims by third parties
seeking to recover damages and costs resulting from such contamination.
Certain other federal, state and local laws and regulations govern the
management and disposal of asbestos-containing materials ("ACMs"). Such laws
and regulations may impose liability for the release of ACMs and may provide
for third parties to seek recovery from owners or operators of such property
for personal injury associated with ACMs. In connection with the ownership and
operation of its properties, the Company may be potentially liable for such
costs. ACMs have been detected at certain of the Properties, but are not
expected to result in material environmental costs or liabilities to the
Company.
Federal, state and local laws and regulations also require the removal or
upgrading of certain underground storage tanks and regulate the discharge of
storm water, wastewater and any water pollutants, the emission of air
pollutants, the generation, management and disposal of hazardous or toxic
chemicals, substances or wastes, and workplace health and safety.
The Company's leases generally provide that (i) the tenant is responsible
for all environmental liabilities relating to the tenant's operations, (ii)
the Company is indemnified for such liabilities and (iii) the tenant must
comply with all environmental laws and regulations. Such a contractual
arrangement, however, does not eliminate the Company's statutory liability or
preclude claims against the Company by governmental authorities or persons who
are not parties to such an arrangement. Noncompliance with environmental or
health and safety requirements may also result in the need to cease or alter
operations at a property, which could affect the financial health of a tenant
and its ability to make lease payments. In addition, if there is a violation
of such a requirement in connection with a tenant's operations, it is possible
that the Company, as the owner of the property, could be held accountable by
governmental authorities for such violation and could be required to correct
the violation and pay related fines.
All of the Properties have been, and it is contemplated that all future
acquisitions will be, subjected to a Phase I or similar environmental
assessment (which generally includes a site inspection, interviews and a
records review, but no subsurface sampling). These assessments and certain
follow-up investigations (including, as appropriate, asbestos, radon and lead
surveys, additional public records review, subsurface sampling and other
testing) of the Properties have not revealed any environmental liability that
the Company believes would have a material adverse effect on the Company's
business or results of operations. Nevertheless, it is possible that the
assessments on the Properties have not revealed, or that the assessments on
future acquisitions will not reveal, all environmental liabilities and that
there may be material environmental liabilities of which the Company is
unaware. No assurances can be given that (i) the Company will not incur
material liability under current or future laws and regulations or (ii) the
current environmental condition of the Properties will not be adversely
affected by tenant operations or by environmental conditions in the vicinity
of such Properties.
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act of 1990 (the "ADA"), places of
public accommodation and/or commercial facilities are required to meet certain
federal requirements related to access and use by disabled persons. Although
management of the Company believes that the Properties are substantially in
compliance with the present requirements of the ADA, the Company may incur
additional costs in connection with such compliance in the future. In
addition, a number of additional federal, state and local laws and regulations
exist
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that may require modifications to the Company's properties, or affect certain
future renovations thereof, with respect to access by disabled persons. Non-
compliance with the ADA could result in the imposition of fines or an award of
damages to private litigants, and also could result in an order to correct any
non-complying feature. Under certain of the Company's leases, the tenant is
responsible for ensuring that the property complies with all laws and
regulations, including the ADA. Notwithstanding the foregoing, the Company may
be required to make substantial capital expenditures to comply with this law.
In addition, provisions of the ADA may impose limitations or restrictions on
the completion of certain renovations and thus may limit the overall returns
on the Company's investments.
CHANGES IN LAWS
The Properties are subject to various federal, state and local regulatory
requirements and to state and local fire and life-safety requirements. Failure
to comply with these requirements could result in the imposition of fines by
governmental authorities or awards of damages to private litigants. The
Company believes that the Properties are currently in compliance with all such
regulatory requirements. However, there can be no assurance that these
requirements will not be changed or that new requirements will not be imposed
which would require significant unanticipated expenditures by the Company and
could have an adverse effect on the Company and its distributions to
stockholders. To the extent increases in taxes are not passed through to
tenants under leases, such increases may adversely affect the Company and its
ability to make distributions to stockholders.
RELIANCE ON KEY PERSONNEL
The Company depends upon the services of its executive officers. The Company
seeks to utilize the extensive personal and business relationships that
members of management have developed over time with owners of Life Science
Facilities and with major Life Science Industry participants to identify
prospective acquisition opportunities and to consummate favorable acquisitions
prior to the active marketing of the subject properties. Consequently, the
loss of the services of any one of these officers could have an adverse effect
on the Company's business, financial condition and prospects. The Company has
employment agreements with each of its key executive officers, including
Messrs. Marcus, Gold, Richardson, Nelson and Kreitzer. Such employment
agreements provide for terms ending on December 31, 2000 with respect to Mr.
Marcus, and on December 31, 1998 with respect to Messrs. Gold, Richardson,
Nelson and Kreitzer, in each case with provision for automatic one-year
extensions until either the executive or the Company notifies the other that
such party does not wish to extend the agreement. The Company and Mr. Gold
have been negotiating with respect to the possibility that Mr. Gold may leave
full-time employment with the Company and subsequently enter into a consulting
arrangement with the Company. In connection with these negotiations, Mr. Gold
has raised certain issues with respect to the Company's performance under his
employment agreement. As these negotiations are ongoing, there can be no
assurance that the Company and Mr. Gold will resolve these issues or that the
Company and Mr. Gold will enter into any consulting arrangement or any other
arrangement pursuant to which Mr. Gold would continue to provide services to
the Company. In the event that Mr. Gold ceases to be a full-time employee of
the Company, the Company expects that other current executives of the Company
will assume Mr. Gold's responsibilities.
CHANGE IN POLICIES WITHOUT STOCKHOLDER APPROVAL
The Company's policies with respect to all activities, including
qualification as a REIT, its investment, growth, debt, financing,
capitalization, distribution and operating policies, will be determined by the
Board of Directors upon the recommendations of management. These policies may
be amended or revised at any time and from time to time without a vote of the
stockholders of the Company. A change in these policies could adversely affect
the Company and its ability to make distributions to stockholders. In
addition, the Company expects to acquire additional real estate assets in the
future. The stockholders of the Company will not be entitled to consider
historical financial statements regarding, or to vote upon, these acquisitions
and, instead, will be required to rely entirely on the decisions of
management.
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NO LIMITATION ON DEBT
Although the Company has adopted a policy to incur debt only if upon such
incurrence the debt to total market capitalization ratio would not exceed 50%,
the Charter does not contain any limitation on the amount of indebtedness the
Company may incur. Accordingly, the Board of Directors could alter or eliminate
this policy. If this policy were changed, the Company could become more highly
leveraged, resulting in an increase in debt service obligations that could
adversely affect the Company's cash flow and, consequently, the amount
available for distribution to stockholders, and could increase the risk of
default on the Company's indebtedness.
The Company has established its debt policy relative to the total market
capitalization of the Company rather than relative to the book value of its
assets because it believes that the book value of its assets (which to a large
extent is the depreciated original cost of real property, the Company's primary
tangible assets) does not accurately reflect its ability to borrow and to meet
debt service requirements. The market capitalization of the Company, however,
is more variable than book value, and does not necessarily reflect the fair
market value of the underlying assets of the Company at all times. The Company
also will consider factors other than market capitalization in making decisions
regarding the incurrence of indebtedness, such as the purchase price of
properties to be acquired with debt financing, the estimated market value of
its properties upon refinancing and the ability of particular properties and
the Company as a whole to generate cash flow to cover expected debt service.
INABILITY TO SUSTAIN DISTRIBUTIONS
Future distributions will be determined by the Board of Directors and will be
dependent on a number of factors, including the amount of the Company's cash
available for distribution, the Company's financial condition, any decision by
the Board of Directors to reinvest funds rather than to distribute such funds,
the Company's capital expenditures, the annual distribution requirements under
the REIT provisions of the Code and such other factors as the Board of
Directors deems relevant. There can be no assurance that the Company will
maintain its current distribution level.
EFFECT OF MARKET INTEREST RATES ON PRICE OF SHARES
One of the factors that may influence the market price of the Common Stock in
public trading markets will be the annual yield on the Common Stock compared to
yields on other financial instruments. Thus, an increase in market interest
rates will result in higher yields on other financial instruments, which may
lead prospective purchasers of the Common Stock to demand a higher annual
distribution rate from the Company. The requirement for a higher distribution
rate may have an adverse effect on the market price of the Common Stock. In
addition, the market for equity securities can be volatile, and the trading
price of the Common Stock could be subject to wide fluctuations in response to
operating results, news announcements, trading volume, general market trends,
governmental regulatory action and changes in tax laws.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, of future sales of shares
of Common Stock or the availability of shares of Common Stock for future sale
on the market price of the Common Stock prevailing from time to time. Sales of
substantial amounts of capital stock (including Common Stock issued upon the
exercise of stock options), or the perception that such sales could occur,
could adversely affect prevailing market prices for the Common Stock. As of May
31, 1998, 1,980,621 shares of Common Stock were owned in the aggregate by
Health Science Properties Holding Corporation ("Holdings"), the sole
stockholder of the Company prior to the IPO, and the Company's officers,
directors and employees. Certain members of management of the Company,
including Messrs. Sudarsky, Marcus, Gold, Nelson, Kreitzer, Stone and Ciruzzi,
have agreed, subject to certain limited exceptions, not to offer, sell,
contract to sell, pledge, or otherwise dispose of any shares of Common Stock
(or any securities convertible into, or exercisable, exchangeable or redeemable
for, shares of Common Stock), including any shares of Common Stock that any
such persons may have the right to receive by
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virtue of their ownership interest in Holdings, until May 27, 1999, without
the prior written consent of PaineWebber Incorporated. After such time, such
shares of Common Stock may be sold in the public market, subject to applicable
securities law restrictions or exemptions from registration, if available. The
Company has granted to Holdings the right to make a total of two written
requests for the registration of its shares of Common Stock prior to June 2,
1999 with respect to the resale of such shares of Common Stock, and has also
granted to Holdings customary "piggyback" registration rights. Holdings'
registration rights are transferrable to its permitted assigns. In addition,
the Company has reserved for issuance to officers, directors and employees of
the Company pursuant to the Company's Amended and Restated 1997 Stock Award
and Incentive Plan (the "1997 Plan") that number of shares of Common Stock
equal to 10% of the number of shares of Common Stock outstanding at any time,
provided that in no event may the number of shares available for issuance
under the 1997 Plan exceed 3,000,000 shares at any time. As of May 31, 1998,
options to purchase 886,000 shares of Common Stock had been granted under the
1997 Plan, of which options to purchase 270,000 shares of Common Stock were
then exercisable. The Company has filed a registration statement with respect
to the issuance of shares of Common Stock by the Company pursuant to grants
under the 1997 Plan. Such shares of Common Stock will be available for sale in
the public market from time to time without restriction by persons who are not
Affiliates (as defined in Rule 144 promulgated under the Securities Act) of
the Company, and by Affiliates pursuant to exemptions from the registration
requirements or upon registration.
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USE OF PROCEEDS
Unless otherwise indicated in the applicable Prospectus Supplement, the net
proceeds from the sale of the Securities will be used for general corporate
purposes, including, without limitation, the acquisition and development of
additional Life Science Facilities, the repayment of outstanding indebtedness
and for working capital and other general corporate purposes.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to combined fixed charges and preferred
stock dividends for the three months ended March 31, 1998, for the years ended
December 31, 1997, 1996, 1995, and for the period October 27, 1994 (inception)
through December 31, 1994, was 2.94x, 0.69x, 1.07x, 1.24x, and 0,
respectively. No preferred stock has been outstanding since completion of the
IPO in June, 1997, at which time all of the previously outstanding shares of
preferred stock were redeemed or converted into shares of Common Stock.
For purposes of computing these ratios, earnings have been calculated by
adding fixed charges (excluding capitalized interest and preferred stock
dividend requirements) to income (loss) from operations. Fixed charges consist
of interest costs, whether expensed or capitalized, the write-off of
unamortized loan costs associated with indebtedness retired in connection with
the IPO, the financing costs incurred by the Company to acquire three Life
Science Facilities in connection with the IPO (the "Acquisition LLC Financing
Costs") and an amount necessary to meet the Company's dividend payment
requirements on its then outstanding preferred stock. As a result of the
incurrence of the Acquisition LLC Financing Costs of approximately $7.0
million and the retirement of indebtedness of approximately $2.3 million, each
in connection with the IPO, the Company's earnings were inadequate to cover
fixed charges for the year ended December 31, 1997 by approximately $5.9
million. In addition, for the period October 27, 1994 through December 31,
1994, the Company's earnings were inadequate to cover fixed charges by
approximately $0.6 million.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the stock of the Company does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Charter and Bylaws. See "Additional Information."
GENERAL
The Charter provides that the Company may issue up to 100,000,000 shares of
Common Stock, 100,000,000 shares of Preferred Stock and 200,000,000 shares of
Excess Stock (as defined below). As of May 31, 1998, 12,554,631 shares of
Common Stock were issued and outstanding and no shares of Preferred Stock were
issued and outstanding. Under Maryland law, stockholders generally are not
liable for a corporation's debts or obligations.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and non-assessable. Subject to the preferential rights of any other class
or series of stock and to the provisions of the Charter regarding the
restrictions on transfer of stock, holders of shares of Common Stock are
entitled to receive dividends on such shares if, as and when authorized and
declared by the Board of Directors out of assets legally available therefor
and to share ratably in the assets of the Company legally available for
distribution to its stockholders in the event of its liquidation, dissolution
or winding up after payment of or adequate provision for all known debts and
liabilities of the Company.
Subject to the provisions of the Charter regarding the restrictions on
transfer of stock, each outstanding share of Common Stock entitles the holder
thereof to one vote on all matters submitted to a vote of stockholders,
including the election of directors, and, except as provided with respect to
any other class or series of stock, the holders of such shares will possess
the exclusive voting power. A plurality of all the votes cast at a meeting at
which a quorum is present is sufficient to elect a director. There is no
cumulative voting in the election of directors, which means that the holders
of a majority of the outstanding shares of Common Stock can elect all of the
directors then standing for election, and the holders of the remaining shares
will not be able to elect any directors.
Holders of shares of Common Stock have no preference, conversion, exchange,
sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any securities of the Company. Subject to the provisions of the
Charter regarding restriction on transfer of stock, shares of Common Stock
will have equal distribution, liquidation and other rights.
Under the Maryland General Corporation Law (the "MGCL"), a Maryland
corporation generally cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, engage in a share exchange or engage in
similar transactions outside the ordinary course of business unless approved
by the affirmative vote of stockholders holding at least two thirds of the
shares entitled to vote on the matter unless a lesser percentage (but not less
than a majority of all of the votes entitled to be cast on the matter) is set
forth in the corporation's charter. The Company's Charter provides for
approval of such matters by the affirmative vote of a majority of all of the
votes entitled to be cast thereon.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of classes of stock and to
establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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PREFERRED STOCK
The Charter authorizes the Board of Directors, without the approval of the
stockholders of the Company, to classify any unissued shares of Preferred
Stock and to reclassify any previously classified but unissued shares of any
series, as authorized by the Board of Directors. Prior to issuance of shares
of each series, the Board of Directors is required by the MGCL and the Charter
of the Company to set, subject to the provisions of the Charter regarding
restrictions on transfer of stock, the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption for each
such series. Thus, the Board of Directors could authorize the issuance of
shares of Preferred Stock with terms and conditions which could 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 holders of
Common Stock or otherwise be in their best interest. There are no shares of
Preferred Stock currently outstanding.
Upon issuance against full payment of the purchase price therefor, shares of
Preferred Stock will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock to be offered pursuant hereto
will be described in the Prospectus Supplement relating to that class or
series, including a Prospectus Supplement providing that Preferred Stock may
be issuable upon the exercise of Warrants issued by the Company. The
description of Preferred Stock set forth below and the description of the
terms of a particular class or series of Preferred Stock set forth in the
applicable Prospectus Supplement do not purport to be complete and are
qualified in their entirety by reference to the articles supplementary
relating to that class or series.
Rank. Unless otherwise specified in the applicable Prospectus Supplement,
the Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to all
classes or series of Common Stock of the Company, and to all equity securities
ranking junior to such Preferred Stock with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Company; (ii) on a
parity with all equity securities issued by the Company, the terms of which
specifically provide that such equity securities rank on a parity with the
Preferred Stock with respect to dividend rights or rights upon liquidation,
dissolution or winding up of the Company; and (iii) junior to all equity
securities issued by the Company, the terms of which specifically provide that
such equity securities rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company.
Conversion Rights. The terms and conditions, if any, upon which any shares
of any class or series of Preferred Stock are convertible into Common Stock
will be set forth in the applicable Prospectus Supplement relating thereto.
Such terms will include the number of shares of Common Stock into which the
shares of Preferred Stock are convertible, the conversion price (or manner of
calculation thereof), the conversion period, provisions as to whether
conversion will be at the option of the holders of such class or series of
Preferred Stock or the Company, the events requiring an adjustment of the
conversion price and provisions affecting conversion in the event of the
redemption of such class or series of Preferred Stock.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock
and to classify or reclassify unissued shares of Common Stock or Preferred
Stock and thereafter to cause the Company to issue such classified or
reclassified shares of stock will provide the Company with increased
flexibility in structuring possible future financing and acquisitions and in
meeting other needs that may arise. The additional classes or series, as well
as the Common Stock, will be available for issuance without further action by
the Company's stockholders, unless such action is required by applicable law
or the rules of any stock exchange or automated quotation system on which the
Company's securities may be listed or traded. Although the Board of Directors
has no present intention to do so, it could authorize the Company to issue a
class or series that could, depending upon the terms of such class or series,
delay, defer or prevent a transaction or a change in control of the Company
that might involve a premium price for holders of Common Stock or otherwise be
in their best interest. See "Risk Factors--Anti-takeover Effect of Ownership
Limit and Power to Issue Additional Stock."
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RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, not more than 50% of
the value of its outstanding stock may be owned, directly or constructively,
by five or fewer individuals or entities (as set forth in the Code) during the
last half of a taxable year (other than the first year for which an election
to be a REIT has been made). Also, shares of its outstanding stock must be
beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months (other than the first year for which an election to
be a REIT has been made) or during a proportionate part of a shorter taxable
year.
In order for the Company to maintain its qualification as a REIT, the
Company's Charter provides for the Ownership Limit, which prohibits, with
certain exceptions, direct or constructive ownership of shares of stock
representing more than 9.8% of the combined total value of outstanding shares
of the Company's stock by any person, as defined in the Charter.
The Board of Directors, in its sole discretion, may waive the Ownership
Limit for any person. However, the Board may not grant such waiver if, after
giving effect to such waiver, five individuals could beneficially own, in the
aggregate, more than 49.9% of the value of the Company's outstanding stock. As
a condition to waiving the Ownership Limit, the Board of Directors may require
a ruling from the IRS or an opinion of counsel in order to determine the
Company's status as a REIT. Notwithstanding the receipt of any such ruling or
opinion, the Board of Directors may impose such conditions or restrictions as
it deems appropriate in connection with granting such waiver. The Charter
excepts Holdings and AEW Partners II, L.P. (together with certain of its
affiliates, "AEW") from the Ownership Limit. Therefore, Holdings and AEW will
be permitted to own in the aggregate, actually or constructively, 17.0% and
16.0% of the Common Stock, respectively. In addition, the Board of Directors
has exempted certain stockholders from the Ownership Limit. See "Risk
Factors--Anti-takeover Effect of Ownership Limit and Power to Issue Additional
Stock."
The Company's Charter further prohibits (a) any person from beneficially or
constructively owning shares of stock of the Company that would result in the
Company being "closely held" under Section 856(h) of the Code and (b) any
person from transferring shares of stock of the Company if such transfer would
result in shares of stock of the Company being owned by fewer than 100
persons. Any transfer in violation of any of such restrictions is void ab
initio. Any person who acquires or attempts to acquire beneficial or
constructive ownership of shares of stock of the Company in violation of the
foregoing restrictions on transferability and ownership is required to give
notice immediately to the Company and provide the Company with such other
information as the Company may request in order to determine the effect of
such transfer on the Company's status as a REIT. The foregoing restrictions on
transferability and ownership will not apply if the Board of Directors
determines that it is no longer in the best interests of the Company to
attempt to qualify, or to continue to qualify, as a REIT.
If any transfer of shares of stock of the Company or other event occurs
that, if effective, would result in any person beneficially or constructively
owning shares of stock of the Company in excess or in violation of the above
transfer or ownership limitations (a "Prohibited Owner"), then that number of
shares of stock of the Company the beneficial or constructive ownership of
which otherwise would cause such person to violate such limitations (rounded
to the nearest whole share) shall be automatically exchanged for an equal
number of shares of excess stock (the "Excess Stock") and such shares of
Excess Stock shall be automatically transferred to a trust (the "Trust") for
the exclusive benefit of one or more charitable beneficiaries (the "Charitable
Beneficiary"), and the Prohibited Owner shall generally not acquire any rights
in such shares. Such automatic exchange shall be deemed to be effective as of
the close of business on the business day prior to the date of such violative
transfer. Shares of Excess Stock held in the Trust shall be issued and
outstanding shares of stock of the Company. The Prohibited Owner shall not
benefit economically from ownership of any shares of Excess Stock held in the
Trust, shall have no rights to distributions and shall not possess any rights
to vote or other rights attributable to the shares of Excess Stock held in the
Trust. The trustee of the Trust (the "Trustee") shall have all voting rights
and rights to dividends or other distributions with respect to shares of stock
held in the Trust, which rights shall be exercised for the exclusive benefit
of the Charitable Beneficiary. Any dividend or other distribution paid prior
to the discovery by the Company that shares of stock have been transferred to
the Trustee
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shall be paid by the recipient of such dividend or distribution to the Company
upon demand, or, at the Company's sole election, shall be offset against any
future dividends or distributions payable to the purported transferee or
holder, and any dividend or distribution authorized but unpaid shall be
rescinded as void ab initio with respect to such shares of stock and promptly
thereafter paid over to the Trustee with respect to such shares of Excess
Stock, as trustee of the Trust for the exclusive benefit of the Charitable
Beneficiary. The Prohibited Owner shall have no voting rights with respect to
shares of Excess Stock held in the Trust and, subject to Maryland law,
effective as of the date that such shares of stock have been transferred to
the Trustee, the Trustee shall have the authority (at the Trustee's sole
discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior
to the discovery by the Company that such shares have been transferred to the
Trustee and (ii) to recast such vote in accordance with the desires of the
Trustee acting for the benefit of the Charitable Beneficiary. However, if the
Company has already taken irreversible corporate action, then the Trustee
shall not have the authority to rescind and recast such vote.
Within 180 days after the date of the event that resulted in shares of
Excess Stock of the Company being transferred to the Trust (or as soon as
possible thereafter if the Trustee did not learn of such event within such
period), the Trustee shall sell the shares of stock held in the Trust to a
person, designated by the Trustee, whose ownership of the shares will not
violate the ownership limitations set forth in the Charter. Upon such sale,
the interest of the Charitable Beneficiary in the shares sold shall terminate
and such shares of Excess Stock shall be automatically exchanged for an equal
number of shares of the same class or series of stock that originally were
exchanged for the Excess Stock. The Trustee shall distribute to the Prohibited
Owner, as appropriate (i) the price paid by the Prohibited Owner for the
shares, (ii) if the Prohibited Owner did not give value for the shares in
connection with the event causing the shares to be held in the Trust (e.g., a
gift, devise or other such transaction), the Market Price (as defined in the
Charter) of such shares on the day of the event causing the shares to be held
in the Trust, or (iii) if the exchange for Excess Stock did not arise as a
result of a purported transfer, the Market Price of such shares on the day of
the other event causing the shares to be held in the Trust. If such shares are
sold by a Prohibited Owner, then to the extent that the Prohibited Owner
received an amount for such shares that exceeds the amount that such
Prohibited Owner was entitled to receive pursuant to the aforementioned
requirement, such excess shall be paid to the Trustee.
All certificates representing shares of Common Stock and Preferred Stock
will bear a legend referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Charter, the Code or the regulations promulgated thereunder) of all classes or
series of the Company's stock, including shares of Common Stock, within 30
days after the end of each taxable year, is required to give written notice to
the Company stating the name and address of such owner, the number of shares
of each class and series of stock of the Company which the owner beneficially
owns and a description of the manner in which such shares are held. Each such
owner shall provide to the Company such additional information as the Company
may reasonably request in order to determine the effect, if any, of such
beneficial ownership on the Company's status as a REIT. In addition, each
stockholder shall upon demand be required to provide to the Company such
information as the Company may reasonably request in order to determine the
Company's status as a REIT, to comply with the requirements of any taxing
authority or governmental authority or to determine such compliance, or to
comply with the REIT provisions of the Code.
These ownership limits could delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interest of the stockholders. See
"Risk Factors--Anti-takeover Effect of Ownership Limit and Power to Issue
Additional Stock."
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WARRANTS
The Company currently has no Warrants outstanding (other than options issued
under the Company's 1997 Plan). The Company may issue Warrants for the
purchase of Preferred Stock or Common Stock. Warrants may be issued
independently or together with any other Securities offered by any Prospectus
Supplement and may be attached to or separate from such Securities. Each
series of Warrants will be issued under a separate warrant agreement (each, a
"Warrant Agreement") to be entered into between the Company and a warrant
agent specified in the applicable Prospectus Supplement (the "Warrant Agent").
The Warrant Agent will act solely as an agent of the Company in connection
with the Warrants of such series and will not assume any obligation or
relationship of agency or trust for or with any provisions of the Warrants
offered hereby. Further terms of the Warrants and the applicable Warrant
Agreements will be set forth in the applicable Prospectus Supplement.
The applicable Prospectus Supplement will describe the terms of the Warrants
in respect of which this Prospectus is being delivered, including, where
applicable, the following: (1) the title of such Warrants; (2) the aggregate
number of such Warrants; (3) the price or prices at which such Warrants will
be issued; (4) the designation, terms and number of shares of Preferred Stock
or Common Stock purchasable upon exercise of such Warrants; (5) the
designation and terms of the Securities, if any, with which such Warrants are
issued and the number of such Warrants issued with each such Security; (6) the
date, if any, on and after which such Warrants and the related Preferred Stock
or Common Stock will be separately transferable, including any limitations on
ownership and transfer of such Warrants as may be appropriate to preserve the
status of the Company as a REIT; (7) the price at which each share of
Preferred Stock or Common Stock purchasable upon exercise of such Warrants may
be purchased; (8) the date on which the right to exercise such Warrants shall
commence and the date on which such right shall expire; (9) the minimum or
maximum amount of such Warrants which may be exercised at any one time; (10)
information with respect to book-entry procedures, if any; (11) a discussion
of certain federal income tax consequences; and (12) any other terms of such
Warrants, including terms, procedures and limitations relating to the exchange
and exercise of such Warrants.
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CERTAIN PROVISIONS OF MARYLAND LAW AND
OF 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. See "Additional Information."
BOARD OF DIRECTORS
The Company's Bylaws provide that the number of directors of the Company may
be established by the Board of Directors, but may not be fewer than the
minimum number required by the MGCL nor more than 15. Any vacancy will be
filled, at any regular meeting or at any special meeting called for that
purpose, by a majority of the remaining directors, except that a vacancy
resulting from an increase in the number of directors must be filled by a
majority of the entire Board of Directors. All directors are elected to hold
office until the next annual meeting of stockholders of the Company and until
their successors are duly elected and qualify.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
of such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative
vote of at least (i) 80% of the votes entitled to be cast by holders of
outstanding shares of voting stock of the corporation and (ii) two thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. Pursuant to an act of the Board of Directors in
accordance with the MGCL, the Company has exempted any business combination
between the Company and AEW from the above-described provisions of the MGCL.
Additionally, the Board of Directors has adopted a resolution providing that
the "business combination" provisions of the MGCL shall not apply to the
Company generally and that such resolution is irrevocable unless revocation,
in whole or in part, is approved by the holders of a majority of the
outstanding shares of Common Stock, but revocation will not affect any
business combination consummated, or any business combination contemplated by
any agreement entered into, prior to the revocation. As a result of the
foregoing, AEW and any person who becomes an Interested Stockholder may be
able to enter into business combinations with the Company that may not be in
the best interest of the stockholders, without compliance by the Company with
the business combination provisions of the MGCL.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control Shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to
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exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third, (ii) one-third
or more but less than a majority, or (iii) a majority or more of all voting
power. Control shares do not include shares the acquiring person is then
entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of control
shares, subject to certain exceptions.
Under Maryland law, a person who has made or proposes to make a control
share acquisition, upon satisfaction of certain conditions (including an
undertaking to pay expenses), may compel the board of directors of the
corporation to call a special meeting of stockholders to be held within 50
days of demand to consider the voting rights of the shares. If no request for
a meeting is made, the corporation may itself present the question at any
meeting of the stockholders.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a meeting of the
stockholders and the acquiror becomes entitled to vote a majority of the
shares entitled to vote, all other stockholders may exercise appraisal rights.
The fair value of the shares as determined for purposes of such appraisal
rights may not be less than the highest price per share paid by the acquiror
in the control share acquisition.
The control share acquisition statute does not apply (i) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (ii) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The Bylaws contain a provision exempting from the control share acquisition
statute any acquisition by any person of the Company's shares of stock. The
Board of Directors has resolved that, subject to Maryland law, the provision
may not be amended or repealed without the approval of holders of at least a
majority of the outstanding shares of Common Stock. There can be no assurance,
however, that such provision will not be amended or eliminated in the future
or that such resolution is enforceable under Maryland law.
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 or at the
direction of 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 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 or at the direction of 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.
AMENDMENT TO THE CHARTER OR BYLAWS
As permitted by the MGCL, the Charter provides that it may be amended by the
affirmative vote of the holders of a majority of votes entitled to be cast on
the matter. The Board of Directors has the exclusive power to adopt, alter,
repeal or amend the Bylaws.
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DISSOLUTION OF THE COMPANY
As permitted by the MGCL, the Charter provides that dissolution of the
Company must be approved by the affirmative vote of the holders of not less
than a majority of all of the votes entitled to be cast on the matter. See
"Description of Capital Stock--Common Stock."
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 such provisions ever become applicable
to the Company, and the advance notice provisions of the Bylaws could delay,
defer or prevent a transaction or a change in control of the Company that
might involve a premium price for holders of Common Stock or otherwise be in
their best interest.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding an investment in the Securities is based on current law, is for
general information only and is not tax advice. This discussion does not
purport to deal with all aspects of taxation that may be relevant to
particular investors in light of their personal investment or tax
circumstances, or, except to the extent discussed under the headings "Taxation
of Tax-Exempt Stockholders" and "Taxation of Non-U.S. Stockholders," to
certain types of investors (including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, foreign corporations
and persons who are not citizens or residents of the U.S.) that are subject to
special treatment under the federal income tax laws. This discussion assumes
that investors will hold the Securities as a "capital asset" (generally,
property held for investment) under the Code.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT WITH ITS TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF THE
SECURITIES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL ESTATE
INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The REIT provisions of the Code are highly technical and complex.
The following sets forth the material aspects of the provisions of the Code
that govern the federal income tax treatment of a REIT and its stockholders.
This summary is qualified in its entirety by the applicable Code provisions,
rules and regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change which may apply
retroactively.
The Company has elected to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with its taxable year ended December 31, 1996, and the
Company intends to continue to operate in a manner consistent with such
election and all rules with which a REIT must comply. Skadden, Arps, Slate,
Meagher & Flom LLP has issued an opinion that, commencing with the Company's
taxable year ending December 31, 1996, the Company was organized in conformity
with the requirements for qualification as a REIT, and its proposed method of
operation, and its actual method of operation since January 1, 1996 through
the date of the opinion, has and will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized
that this opinion was based and conditioned upon certain assumptions and
representations made by the Company as to factual matters (including
representations of the Company concerning, among other things, its business
and properties, the amount of rents attributable to personal property and
other items regarding the Company's ability to meet the various requirements
for qualification as a REIT). The opinion is expressed as of its date, and
Skadden, Arps, Slate, Meagher & Flom LLP will have no obligation to advise
holders of Securities of any subsequent change in the matters stated,
represented or assumed or any subsequent change in the applicable law.
Moreover, such qualification and taxation as a REIT depends upon the Company
having met and continuing to meet, through actual annual operating results,
distribution levels and diversity of stock ownership, the various
qualification tests imposed under the Code as discussed below, the results of
which will not be reviewed by Skadden, Arps, Slate, Meagher & Flom LLP.
Accordingly, no assurance can be given that the actual results of the
Company's operation for any particular taxable year have satisfied or will
satisfy such requirements. See "--Failure to Qualify." An opinion of counsel
is not binding on the IRS, and no assurance can be given that the IRS will not
challenge the Company's eligibility for taxation as a REIT.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is currently
distributed to stockholders. The REIT provisions of the Code generally allow a
REIT to deduct dividends paid to its stockholders. This deduction for
dividends paid substantially eliminates the "double taxation" (at the
corporate and stockholder levels) that generally results from investment in a
corporation. However, the Company will be subject to federal income tax as
follows: First, the Company
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will be taxed at regular corporate rates on any undistributed REIT taxable
income, including undistributed net capital gains. See, however, "Annual
Distribution Requirements" with respect to the Company's ability to elect to
treat as having been distributed to its stockholders certain of its capital
gains upon which the Company has paid taxes, in which event so much of the
taxes as have been paid by the Company with respect to such income would also
be treated as having been distributed to stockholders. 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 described in
Section 1221(1) of the Code (generally, property held primarily for sale to
customers in the ordinary course of the Company's trade or business) 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 held primarily for sale to
customers in the ordinary course of business other than foreclosure property),
such income will be subject to a 100% tax. Fifth, if the Company should fail
to satisfy the 75% gross income test or the 95% gross income test (as
discussed below), but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on an amount equal to (a) the gross income attributable to the greater of
the amount by which the Company fails the 75% or 95% test multiplied by (b) a
fraction intended to reflect the Company's profitability. Sixth, if the
Company should fail to distribute during each calendar year at least the sum
of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain net income for such year (other then capital gain income the
Company elects to retain and pay tax on), and (iii) any undistributed taxable
income from prior periods (other than capital gains from such years which the
Company elected to retain and pay tax on), the Company would be subjected to a
4% excise tax on the excess of such required distribution over the amounts
actually distributed during such year. Seventh, if during the 10-year period
(the "Recognition Period") beginning on the first day on the first taxable
year for which the Company qualified as a REIT, the Company recognizes gain on
the disposition of any asset held by the Company as of the beginning of such
Recognition Period, then, to the extent of the excess of (a) the fair market
value of such asset as of the beginning of such Recognition Period over (b)
the Company's adjusted basis in such asset as of the beginning of such
Recognition Period (the "Built-in Gain"), such gain will be subject to tax at
the highest regular corporate tax rate pursuant to IRS regulations that have
not yet been promulgated. Eighth, if the Company acquires any asset from a C
corporation (i.e., generally a corporation 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 Recognition Period beginning on the date
on which such asset was acquired by the Company, then, to the extent of the
Built-in Gain, such gain will be subject to tax at the highest regular
corporate rate pursuant to IRS regulations that have not yet been promulgated.
The results described above with respect to the recognition of Built-in Gain
upon the acquisition of assets from a C corporation assume that the Company
will make an election pursuant to IRS Notice 88-19 and that the availability
or nature of such election is not modified as proposed in President Clinton's
1999 Federal Budget Proposal. In addition, the Company could also be subject
to tax in certain situations and on certain transactions not presently
contemplated.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (3) that would be taxable
as a domestic corporation, but for the special Code provisions applicable to
REITs; (4) that is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (5) the beneficial ownership of
which is held by 100 or more persons; (6) in which, during the last half of
each taxable year, not more than 50% in value of the outstanding stock is
owned, directly or indirectly through the application of certain attribution
rules, by five or fewer individuals (as defined in the Code to include certain
entities); and (7) that meets certain other tests described below (including
with respect to the nature of its income and assets). The Code provides that
conditions (1) through (4) must be met during the entire taxable year, and
that condition (5) 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.
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The Company believes that it has already issued sufficient shares to allow
it to satisfy conditions (5) and (6) above. In order to comply with the share
ownership tests described in conditions (5) and (6) above, the Company's
Charter provides certain restrictions on the transfer of its capital stock to
prevent concentration of stock ownership. These restrictions may not ensure
that, in all cases, the Company will be able to satisfy the share ownership
tests set forth above. If the Company fails to satisfy such requirements, the
Company's status as a REIT will terminate.
To monitor the Company's compliance with such share ownership requirements,
the Company is required to maintain records regarding the actual ownership of
its shares. To do so, the Company must demand written statements each year
from the record holders of certain percentages of its stock in which the
record holders are to disclose the actual owners of the shares (i.e., the
persons required to include in gross income the REIT dividends). A list of
those persons failing or refusing to comply with this demand must be
maintained as part of the Company's records. A stockholder who fails or
refuses to comply with the demand must submit a statement with its tax return
disclosing the actual ownership of the shares and certain other information.
See "Description of Capital Stock--Restrictions on Transfer."
In the case of a REIT that is a partner in a partnership, regulations
provide that the REIT is deemed to own its proportionate share of the
partnership's assets and to earn its proportionate share of the partnership's
income. In addition, the assets and gross income of the partnership retain the
same character in the hands of the REIT for purposes of the gross income and
asset tests applicable to REITs as described below. Thus, the Company's
proportionate share of the assets, liabilities and items of income of any
partnership will be treated as assets, liabilities and items of income of the
Company for purposes of applying the REIT requirements described below. There
can be no assurance, however, that any partnerships will be organized or
operated in a manner that will enable the Company to continue to satisfy the
REIT requirements of the Code.
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from "prohibited
transactions," i.e., certain sales of property held primarily for sale to
customers in the ordinary course of business) for each taxable year must be
derived directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property" and, in
certain circumstances, interest) or from certain types of temporary
investments. Second, at least 95% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must be
derived from such real property investments, and from other dividends,
interest and gain from the sale or disposition of stock or securities (or from
any combination of the foregoing).
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income tests described above only if several conditions
are met, including the following. First, if rent attributable to personal
property, leased in connection with real property, is greater than 15% of the
total rent received under any particular lease, then all of the rent
attributable to such personal property will not qualify as rents from real
property. The determination of whether an item of property constitutes real
property or personal property under the REIT provisions of the Code is subject
to both legal and factual considerations and, as such, is subject to differing
interpretations. Counsel has advised the Company with respect to the legal
considerations underlying such determination. After consulting with counsel
and considering such advice, the Company has reviewed its properties and has
determined that rents attributable to personal property do not exceed 15% of
the total rent with respect to any particular lease. Due to the specialized
nature of the Company's properties, however, there can be no assurance that
the IRS will not assert that the rent attributable to personal property with
respect to a particular lease is greater than 15% of the total rent with
respect to such lease. If the IRS were successful, and the amount of such non-
qualifying income, together with other non-qualifying income, exceeds 5% of
the Company's taxable income, the Company may fail to qualify as a REIT. See
"Risk Factors--Adverse Consequences of Failure to Qualify as a REIT."
In addition, rents received by the Company will not qualify as rents from
real property in satisfying the gross income tests if the Company, or an
actual or constructive owner of 10% or more of the Company, actually
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or constructively owns 10% or more of such tenant (a "Related Tenant").
Moreover, an amount received or accrued will not qualify as rents from real
property (or as interest income) if it is based in whole or part of the income
or profits of any person. Rent or interest will not be disqualified, however,
solely by reason of being based on a fixed percentage or percentages of
receipts or sales. Finally, for rents received to qualify as rents from real
property, the REIT generally must not operate or manage the property or
furnish or render services to the tenants of such property, other than through
an "independent contractor" from which the REIT derives no revenue. However,
the Company (or its affiliates) is permitted to, and does directly perform
services that are "usually or customarily rendered" in connection with the
rental of space for occupancy only and are not otherwise considered rendered
to the occupant of the property. To the extent that services (other than those
customarily furnished or rendered in connection with the rental of real
property) are rendered to the tenants of the property by an independent
contractor, the cost of the services must be borne by the independent
contractor. However, pursuant to recent legislation, the Company (or its
affiliates) may provide non-customary services to tenants of its properties
without disqualifying all of the rent from the property if the payment for
such services does not exceed 1% of the total gross income from the property.
For purposes of this test, the income received from such non-customary
services is deemed to be at least 150% of the direct cost of providing the
services. Because certain properties are managed by third parties, the ability
to treat amounts from such property as "rents from real property" will be
dependent on the actions of others and will not be within the control of the
Company. In addition, the Company generally may not and will not charge rent
that is based in whole or in part on the income or profits of any person
(except by reason of being based on a percentage of the tenant's gross
receipts or sales). Finally, rents derived from tenants that are at least 10%
owned, directly or constructively, by the Company do not qualify as "rents
from real property" for purposes of the gross income requirements. While the
Company regularly attempts to monitor such requirements, no assurance can be
given that the Company will not realize income that does not qualify as "rents
from real property," and that such amounts, when combined with other
nonqualifying income, may exceed 5% of the Company's taxable income and thus
disqualify the Company as a REIT.
The Company will provide certain services with respect to the Properties and
any newly acquired Properties. The Company believes that the services provided
by the Company with respect to the Properties are usually and customarily
rendered in connection with the rental of space for occupancy only, and
therefore the provision of such services will not cause the rents received
with respect to the Properties to fail to qualify as rents from real property
for purposes of the 75% and the 95% gross income tests.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will be generally available if the Company's failure to meet
such tests was due to reasonable cause and not due to willful neglect, the
Company attaches a schedule of the sources of its income to its 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. If
these relief provisions are inapplicable to a particular set of circumstances
involving the Company, the Company will not qualify as a REIT. As discussed
above in "--General," even where these relief provisions apply, a tax is
imposed with respect to the excess net income.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by
real estate assets, stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company, cash, cash items and U.S. government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the
Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities.
The Company's indirect interests in certain of properties are held through
wholly-owned corporate subsidiaries of the Company organized and operated as
"qualified REIT subsidiaries" within the meaning of the
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Code. Qualified REIT subsidiaries are not treated as separate entities from
their parent REIT for Federal income tax purposes. Instead, all assets,
liabilities and items of income, deduction and credit of each qualified REIT
subsidiary are treated as assets, liabilities and items of the Company. Each
qualified REIT subsidiary therefore will not be subject to federal corporate
income taxation, although it may be subject to state or local taxation.
In addition, the Company's ownership of (i) stock of each qualified REIT
subsidiary and its interest in its operating partnership subsidiary do not
violate either the 5% value restriction or the restriction against ownership
of more than 10% of the voting securities of any issuer. Similarly, the
ownership by the Company of any other REIT will not violate these
restrictions.
If the Company should fail to satisfy the asset test at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar
quarter and (ii) the discrepancy between the value of the Company's assets and
the asset test requirements arose from changes in the market value of its
assets and was not wholly or partly caused by the acquisition of one or more
non-qualifying assets. If the condition described in clause (ii) of the
preceding sentence were not satisfied, the Company still could avoid
disqualification by eliminating any discrepancy within 30 days after the close
of the calendar quarter in which it arose.
The Company intends to monitor closely the purchase, holding and disposition
of its assets in order to comply with the REIT asset tests. In particular, the
Company intends to limit and diversify its ownership of any assets not
qualifying as real estate assets to less than 25% of the value of the
Company's assets and to less than (i) 5%, by value, of any single issuer and
(ii) 10% of the outstanding voting securities of any one issuer. If it is
anticipated that these limits would be exceeded, the Company intends to take
appropriate measures, including the disposition of non-qualifying assets, to
avoid exceeding such limits.
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 Company'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 in the
taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid with or before the first regular dividend payment after such declaration.
To the extent that the Company does not distribute all of its net capital gain
or distributes (or is treated as having distributed) at least 95%, but less
than 100%, of its "REIT taxable income," as adjusted, it will be subject to
tax thereon at the capital gains or ordinary corporate tax rates, as the case
may be. Furthermore, if the Company should fail to distribute during each
calendar year at least the sum of (1) 85% of its REIT ordinary income for such
year, (2) 95% of its REIT capital gain income for such year (other than
capital gain income which the Company elects to retain and pay tax on as
provided for below), and (3) any undistributed taxable income from prior
periods (other than capital gains from such years which the Company elected to
retain and pay tax on) the Company would be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed.
The Company believes that it has made, and intends to make, timely
distributions sufficient to satisfy this annual distribution requirement.
Pursuant to recently enacted legislation, the Company may elect to retain
rather than distribute its net long-term capital gains. The effect of such an
election is that (i) the Company is required to pay the tax on such gains at
regular corporate tax rates, (ii) its shareholders, while required to include
their proportionate share of the undistributed long-term capital gain in
income, will receive a credit or refund for their share of the tax paid by the
Company, and (iii) the basis of a shareholder's stock would be increased by
the amount of the undistributed long-term capital gains (minus the amount of
capital gains tax paid by the Company) included in income by such shareholder.
In addition, if the Company disposes of any Built-in Gain asset during the
applicable Recognition Period, the Company will be required, pursuant to
guidance issued by the Service, to distribute at least 95% of the Built-In
Gain (after tax), if any, recognized on the disposition of such asset.
It is possible 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 (i) the actual receipt of income and
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actual payment of deductible expenses and (ii) the inclusion of such income
and deduction of such expenses in arriving at taxable income of the Company.
In the event that such timing differences occur, in order to meet the 95%
distribution requirement, the Company may find it necessary to arrange for
short-term, or possibly long-term, borrowings (on terms that may not be
favorable to the Company) or to pay dividends in the form of taxable
distributions of property.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based on the amount of
any deduction taken for deficiency dividends.
Absence of Earnings and Profits. The Company, in order to qualify as a REIT,
must not have accumulated earnings and profits attributable to any non-REIT
years. A REIT has until the close of its first taxable year in which it has
non-REIT earnings and profits to distribute any such accumulated earnings and
profits. Unless the "deficiency dividend" procedures described above apply and
the Company complies with those procedures, failure to distribute such
accumulated earnings and profits would result in the disqualification of the
Company as a REIT. The Company believes that the Company had no accumulated
earnings and profits as of December 31, 1995. The determination of accumulated
earnings and profits, however, depends upon a number of factual matters
related to the activities and operations of the Company during its entire
corporate existence and is subject to review and challenge by the IRS. There
can be no assurance that the IRS will not examine the tax returns of the
Company for prior years and propose adjustments to increase its taxable
income. In this regard, the IRS can consider all taxable years of the Company
as open for review for purposes of determining the amount of such earnings and
profits.
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. Distributions to stockholders
in any year in which the Company fails to qualify will not be deductible by
the Company nor will they be required to be made under the Code. In such
event, to the extent of current and accumulated earnings and profits, all
distributions to stockholders will be taxable as ordinary income, and, subject
to certain limitations of the Code, corporate distributees may be eligible for
the dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company will also be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances the Company
would be entitled to such statutory relief. In addition, a recent federal
budget proposal contains language which, if enacted in its present form, would
result in the immediate taxation of all gain inherent in a C corporation's
assets upon an election by the corporation to become a REIT, and thus could
effectively preclude the Company from re-electing REIT status following a
termination of its REIT qualification.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
General. 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 will not be eligible for the
dividends received deduction for corporations. Distributions that are
designated as capital gain dividends will be taxed as long-term capital gains
(to the extent that 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. Stockholders that are corporations may, however, be
required to treat up to 20% of certain capital gain dividends as ordinary
income pursuant to Section 291(d) of the Code. Individuals are generally
subject to differing rates of tax on various transactions giving rise to long-
term capital gains or losses. In general, the long-term capital gains rate is
(i) 28% on capital gain from the sale or exchange of assets held more than one
year but not more than 18 months, (ii) 20% on capital gain from the sale or
exchange of assets held for more than 18 months, and (iii) 25% on capital gain
from the sale or exchange of certain depreciable real estate otherwise
eligible for the 20% rate, up to
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the amount of depreciation deductions previously taken with respect to such
real estate. Subject to certain limitations concerning the classification of
the Company's long-term capital gains, the Company may designate a capital
gain dividend as a 28% rate distribution, a 25% rate distribution or a 20%
rate distribution.
If the Company elects to retain capital gains rather than distribute them, a
U.S. Stockholder will be deemed to receive a capital gain dividend equal to
the amount of such retained capital gains. Such gains are subject to
apportionment among the three rate groups set forth above. In such a case, a
stockholder will receive certain tax credits and basis adjustments reflecting
the deemed distribution and deemed payment of taxes by the stockholder. To the
extent that the Company makes distributions in excess of its current and
accumulated earnings and profits, such distributions will be treated first as
a tax-free return of capital to each stockholder, reducing the adjusted basis
which such stockholder has in its shares for tax purposes by the amount of
such distribution (but not below zero), with distributions in excess of a
stockholder's adjusted basis in its shares taxable as capital gains (provided
that the shares have been held as a capital asset). Dividends declared by the
Company in October, November, or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by the Company on or
before January 31 of the following calendar year. Stockholders may not include
in their own income tax returns any net operating losses or capital losses of
the Company.
Distributions made by the Company and gain arising from the sale or exchange
by a stockholder of shares will not be treated as passive activity income,
and, as a result, stockholders generally will not be able to apply any
"passive losses" against such income or gain. Dividends from the Company (to
the extent they do not constitute a capital gain dividend or a return of
capital) will generally be treated as investment income for purposes of the
investment interest limitation. Net capital gain from the sale or other
disposition of shares and capital gain dividends will generally not be
considered investment income for purposes of the investment interest
limitation.
Upon a sale or other disposition of shares, a stockholder will generally
recognize a capital gain or loss in an amount equal to the difference between
the amount realized and the stockholder's adjusted basis in such shares, which
gain or loss will be long-term if such shares have been held for more than one
year. To the extent of any long-term capital gain dividends received by a
stockholder, any loss on the sale or other disposition of shares held by such
stockholder for six months or less will generally be treated as a long-term
capital loss.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Based upon a published ruling by the IRS, distributions by the Company to a
stockholder that is a tax-exempt entity will not constitute "unrelated
business taxable income" ("UBTI"), provided that the tax-exempt entity has not
financed the acquisition of its shares with "acquisition indebtedness" within
the meaning of the Code and the shares are not otherwise used in an unrelated
trade or business of the tax-exempt entity.
Notwithstanding the preceding paragraph, however, a portion of the dividends
paid by the Company may be treated as UBTI to certain domestic private pension
trusts if the Company is treated as a "pension-held REIT." The Company
believes that it is not, and does not expect to become, a "pension-held REIT."
If the Company were to become a pension-held REIT, these rules generally would
only apply to certain pension trusts that hold more than 10% of the Company's
stock.
TAXATION OF NON-U.S. HOLDERS
The following is a discussion of certain anticipated U.S. federal income and
estate tax consequences of the ownership and disposition of the Company's
stock applicable to Non-U.S. Holders of such stock. A "Non-U.S. Holder" is any
person other than (i) a citizen or resident of the U.S., (ii) an entity which
is a corporation or partnership for United States federal income tax purposes
and which is created or organized un the United States or under the laws of
the United States or any political subdivision thereof (although certain
partnerships so
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created or organized may be treated, under treasury regulations not yet
published, as not a United States person); (iii) any estate whose income is
includible in gross income for United States federal income tax purposes
regardless of its source; or (iv) a "Domestic Trust." A Domestic Trust is any
trust with respect to which a court within the United States is able to
exercise primary supervision over the administration of such trust, and as to
which one or more United States fiduciaries have the authority to control all
substantial decisions of such trust (although certain trusts classified for
United States federal income tax purposes as a United States person prior to
August 20, 1996 may, under treasury regulations not yet published, elect to
retain their classification as a Domestic Trust). The discussion is based on
current law and is for general information only. The discussion addresses only
certain and not all aspects of U.S. federal income and estate taxation.
Ordinary Dividends. The portion of dividends received by Non-U.S. Holders
payable out of the Company's earnings and profits which are not attributable
to capital gains of the Company and which are not effectively connected with a
U.S. trade or business of the Non-U.S. Holder will be subject to U.S.
withholding tax at the rate of 30% (unless reduced by treaty). In general,
Non-U.S. Holders will not be considered engaged in a U.S. trade or business
solely as a result of their ownership of stock of the Company. In cases where
the dividend income from a Non-U.S. Holder's investment in stock of the
Company is (or is treated as) effectively connected with the Non-U.S. Holder's
conduct of a U.S. trade or business, the Non-U.S. Holder generally will be
subject to U.S. 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 in the case of a Non-U.S. Holder that is a
foreign corporation).
Non-Dividend Distributions. Unless the Company's stock constitutes a USRPI
(as defined below), distributions by the Company which are not dividends out
of the earnings and profits of the Company will not be subject to U.S. income
or withholding tax. If it cannot be determined at the time a distribution is
made whether or not 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. Holder
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. If the Company's stock
constitutes a USRPI, such distribution shall be subject to 10% withholding tax
and may be subject to taxation under FIRPTA (as defined below).
Capital Gain Dividends. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-U.S.
Holder, to the extent attributable to gains from dispositions of U.S. Real
Property Interests ("USRPIs") such as the properties beneficially owned by the
Company ("USRPI Capital Gains"), will be considered effectively connected with
a U.S. trade or business of the Non-U.S. Holder and subject to U.S. income tax
at the rate applicable to U.S. individuals or corporations, without regard to
whether such distribution is designated as a capital gain dividend. In
addition, the Company will be required to withhold tax equal to 35% of the
amount of dividends to the extent such dividends constitute USRPI Capital
Gains. Distributions subject to FIRPTA may also be subject to a 30% branch
profits tax in the hands of a foreign corporate stockholder that is not
entitled to treaty exemption.
Disposition of Stock of the Company. Unless the Company's stock constitutes
a USRPI, a sale of such stock by a Non-U.S. Holder generally will not be
subject to U.S. taxation under FIRPTA. The stock will not constitute a USRPI
if the Company is a "domestically controlled REIT." A domestically controlled
REIT is a REIT in which, at all times during a specified testing period, less
than 50% in value of its shares is held directly or indirectly by Non-U.S.
Holders. The Company believes that it is, and it expects to continue to be a
domestically controlled REIT, and therefore that the sale of the Company's
stock will not be subject to taxation under FIRPTA. Because the Company's
stock will be publicly traded, however, no assurance can be given that the
Company will continue to be a domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a Non-
U.S. Holder's sale of stock generally will still not be subject to tax under
FIRPTA as a sale of a USRPI provided that (i) the stock is "regularly traded"
(as defined by applicable Treasury regulations) on an established securities
market (e.g., the
30
<PAGE>
NYSE, on which the Company's Common Stock is listed) and (ii) the selling Non-
U.S. Holder held 5% or less of the Company's outstanding stock at all times
during a specified testing period.
If gain on the sale of stock of the Company were subject to taxation under
FIRPTA, the Non-U.S. Holder would be subject to the same treatment as a U.S.
stockholder with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals) and the purchaser of the stock could be required to
withhold 10% of the purchase price and remit such amount to the IRS.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's
investment in the stock of the Company is effectively connected with a U.S.
trade or business conducted by such Non-U.S. Holder, the Non-U.S. Holder will
be subject to the same treatment as a U.S. stockholder with respect to such
gain, or (ii) if the Non-U.S. Holder is a nonresident alien individual who was
present in the U.S. for 183 days or more during the taxable year and has a
"tax home" in the United States, the nonresident alien individual will be
subject to a 30% tax on the individual's capital gain.
Estate Tax. Stock of the Company owned or treated as owned by an individual
who is not a citizen or resident (as specially defined for U.S. federal estate
tax purposes) of the United States at the time of death will be includible in
the individual's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise. Such individual's estate may
be subject to U.S. federal estate tax on the property includible in the estate
for U.S. federal estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. Shareholders. The Company will report to the U.S. stockholders and the
IRS the amount of distributions paid during each calendar year and the amount
of tax withheld, if any. Under the backup withholding rules, a U.S.
stockholder may be subject to backup withholding at the rate of 31% with
respect to distributions 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, certifies as to no
loss of exemption from backup withholding, and otherwise complies with
applicable requirements of the backup withholding rules. A U.S. stockholder
that does not provide the Company with his correct taxpayer identification
number may also be subject to penalties imposed by the IRS. Any amount paid as
backup withholding will be creditable against the U.S. stockholder's income
tax liability. In addition, the Company may be required to withhold a portion
of capital gain distributions to any U.S. stockholders who fail to certify
their non-foreign status to the Company. See "Federal Income Tax
Considerations--Taxation of Foreign Shareholders."
Non-U.S. Holders. The Company must report annually to the IRS and to each
Non-U.S. Holder the amount of dividends (including any capital gain dividends)
paid to, and the tax withheld with respect to, such Non-U.S. Holder. These
reporting requirements apply regardless of whether withholding was reduced or
eliminated by an applicable tax treaty. Copies of these returns may also be
made available under the provisions of a specific treaty or agreement with the
tax authorities in the country in which the Non-U.S. Holder resides.
U.S. backup withholding (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required
under the U.S. information reporting requirements) and information reporting
generally will not apply to dividends (including any capital gain dividends)
paid on stock of the Company to a Non-U.S. Holder at an address outside the
United States.
The payment of the proceeds from the disposition of stock of the Company to
or through a U.S. office of a broker will be subject to information reporting
and backup withholding unless the owner, under penalties of perjury,
certifies, among other things, its status as a Non-U.S. Holder, or otherwise
establishes an exemption. The payment of the proceeds from the disposition of
stock to or through a non-U.S. office of a non-U.S. broker generally will not
be subject to backup withholding and information reporting.
31
<PAGE>
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-U.S.
Holder's U.S. Federal income tax liability, provided that the required
information is furnished to the IRS.
The IRS has issued final Treasury Regulations regarding the backup
withholding rules as applied to Non-U.S. Holders. Those final Treasury
Regulations alter the current system of backup withholding compliance and will
be effective for payments made after December 31, 1999. Prospective purchasers
should consult their tax advisors regarding the application of the final
Treasury Regulations and the potential effect on their ownership of shares.
OTHER TAX CONSEQUENCES
Possible Legislative or Other Actions Affecting Tax
Consequences. Prospective investors should recognize that the present federal
income tax treatment of an investment in the Company may be modified by
legislative, judicial or administrative action at any time, and that any such
action may affect investments and commitments previously made. The rules
dealing with federal income taxation are constantly under review by persons
involved in the legislative process and by the IRS and the U.S. Treasury
Department, resulting in revisions of regulations and revised interpretations
of established concepts as well as statutory changes. For example, a recent
federal budget proposal contains language which, if enacted in its present
form, would result in the immediate taxation of all gain inherent in a C
corporation's assets upon an election by the corporation to become a REIT, and
thus could effectively preclude the Company from re-electing REIT status
following a termination of its REIT qualification. Revisions in federal tax
laws and interpretations thereof could adversely affect the tax consequences
of an investment in the Company.
State and Local Taxes. The Company and its stockholders may be subject to
state or local taxation in various state or local jurisdictions, including
those in which it or they transact business or reside. The state and local tax
treatment of the Company and its stockholders may not conform to the federal
income tax consequences discussed above. Consequently, prospective
stockholders should consult their tax advisors regarding the effect of state
and local tax laws on an investment in the Company.
32
<PAGE>
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents, which agents may be affiliated with the Company. Any such
underwriter or agent involved in the offer and sale of the Securities will be
named in the applicable Prospectus Supplement.
Sales of Securities offered pursuant to any applicable Prospectus Supplement
may be effected from time to time in one or more transactions at a fixed price
or prices that may be changed, at prices related to the prevailing market
prices at the time of sale, or at negotiated prices. The Company also may,
from time to time, authorize underwriters acting as the Company's agents to
offer and sell the Securities upon the terms and conditions as set forth in
the applicable Prospectus Supplement. In connection with the sale of
Securities, underwriters may be deemed to have received compensation from the
Company in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of Securities for whom they may act as
agent. Underwriters may sell Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Securities, and any discounts, concessions
or commissions allowed by underwriters to participating dealers, will be set
forth in the applicable Prospectus Supplement. Underwriters, dealers and
agents participating in the distribution of the Securities may be deemed to be
underwriters, and any discounts and commissions received by them and any
profit realized by them on resale of the Securities may be deemed to be
underwriting discounts and commissions under the Securities Act. Underwriters,
dealers and agents may be entitled, under agreements entered into with the
Company, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act. Any such
indemnification agreements will be described in the applicable Prospectus
Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Stock which is listed on the New York Stock Exchange.
Any shares of Common Stock sold pursuant to a Prospectus Supplement will be
listed on such exchange, subject to official notice of issuance. The Company
may elect to list any other series of Preferred Stock and any Depository
Shares or Warrants on any exchange, but is not obligated to do so. It is
possible that one or more underwriters may make a market in a series of
Securities, but will not be obligated to do so and may discontinue any market
making at any time without notice. Therefore, no assurance can be given as to
the liquidity of the trading market for the Securities.
If so indicated in the applicable Prospectus Supplement, the Company may
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to Delayed Delivery
Contracts ("Contracts") providing for payment and delivery on the date or
dates stated in such Prospectus Supplement. Each Contract will be for an
amount not less than, and the aggregate principal amount of Securities sold
pursuant to Contracts shall be not less nor more than, the respective amounts
stated in the applicable Prospectus Supplement. Institutions with whom
Contracts, when authorized, may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions, and other institutions but will in all cases be
subject to the approval of the Company. Contracts will not be subject to any
conditions except (i) the purchase by an institution of the Securities covered
by its Contracts shall not at the time of delivery be prohibited under the
laws of any jurisdiction in the United States to which such institution is
subject, and (ii) if the Securities are being sold to underwriters, the
Company shall have sold to such underwriters the total principal amount of the
Securities less the principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of, engage
in transactions with and perform services for, the Company in the ordinary
course of business.
33
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Skadden, Arps,
Slate, Meagher & Flom LLP, Los Angeles, California. The validity of the
Securities will be passed on for the Company by Ballard Spahr Andrews &
Ingersoll, LLP, Baltimore, Maryland.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and
1996 and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1997, 1996 and 1995,
and the consolidated financial statement schedule III, rental properties and
accumulated depreciation appearing in the Company's Annual Report on Form 10-K
dated March 30, 1998; the statements of revenue and certain expenses for the
year ended December 31, 1996, of 940 Clopper Road, 1500 East Gude Drive and
3/3-1/2 Taft Court, and 1401 Research Blvd. appearing in the Company's Form 8-
K/A dated November 14, 1997; the statement of revenue and certain expenses for
the year ended December 31, 1996 of 1201 Harbor Bay Parkway appearing in the
Company's Form 8-K dated and filed on May 27, 1998; the statements of revenue
and certain expenses for the year ended December 31, 1997, of Buildings 79 and
96 Charlestown Navy Yard, 215 College Road, 8000/9000/10000 Virginia Manor
Road, 100 and 800/801 Capitola Drive, 10150 Old Columbia Road, 819-849 Mitten
Road and 863 Mitten Road/866 Malcolm Road, 5100/5110 Campus Drive,
19 Firstfield Road, 280 Pond Street, and 170 Williams Drive appearing in the
Company's Form 8-K dated and filed on May 27, 1998, all incorporated by
reference in this Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon incorporated
by reference in this Registration Statement and are incorporated herein by
reference in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
34
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTIONS.
The estimated expenses, other than underwriting discounts and commissions,
in connection with the offering of the Securities, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................ $ 73,750
New York Stock Exchange Listing Fee................................ 50,000
Printing and Engraving Expenses.................................... 200,000
Legal Fees and Expenses (other than Blue Sky)...................... 250,000
Accounting Fees and Expenses....................................... 125,000
Blue Sky Fees and Expenses (including fees of counsel)............. 15,000
NASD Filing Fee.................................................... 25,500
Miscellaneous...................................................... 110,750
--------
Total............................................................ $850,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (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 of the
Company contains a provision that 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, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or
trustee from and against any claim or liability to which such person may
become subject or to which such person may incur by reason of his or her
serving as a present or former 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,
partnership, joint venture, trust, employee benefit plan or any other
enterprise as a director, officer, partner or trustee and who is made a party
to the proceeding by reason of his service in that capacity. The Charter and
Bylaws also permit the Company, with the approval of the Board of Directors,
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
II-1
<PAGE>
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, under the MGCL, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his good
faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by him or on
his behalf to repay the amount paid or reimbursed by the corporation if it
shall ultimately be determined that the standard of conduct was not met.
Each of the employment agreements with the executive officers of the Company
requires that the Company indemnify such officers to the maximum extent
permitted by Maryland law, and to pay such persons' expenses in defending any
civil or criminal proceeding in advance of final disposition of such
proceeding.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
1.1* Form of Underwriting Agreement
4.1+ Specimen Certificate representing shares of Common Stock
4.2* Form of Warrant Agreement
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding
certain federal income tax matters
12.1** Calculation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (filed with
Exhibit 8.1)
23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP (filed with
Exhibit 5.1)
23.3 Consent of Ernst & Young LLP
24.1** Powers of Attorney (included on the signature page of the
Registration Statement)
</TABLE>
- --------
*To be filed by amendment.
+ Incorporated by reference to the Registrant's Registration Statement on
Form S-11 (No. 333-23545), declared effective by the Commission on May 27,
1997
**Previously filed.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
II-2
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) shall not
apply if the registration statement is on Form S-3, Form S-8 or Form F-
3, and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the Commission by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
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 Act
and will be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
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 this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, 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.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on this Form S-3 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on this 25th day of June, 1998.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
By: /s/ Joel S. Marcus
-------------------------------
Joel S. Marcus
Chief Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
the Registration Statement has been signed below by the following persons in
the capacities indicated on June 25, 1998.
<TABLE>
<S> <C>
SIGNATURES TITLE
---------- -----
*
___________________________________________ Chairman of the Board of Directors
Jerry M. Sudarsky
/s/ Joel S. Marcus Chief Executive Officer (Principal Executive
___________________________________________ Officer) and Director
Joel S. Marcus
*
___________________________________________ President and Director
Alan D. Gold
/s/ Peter J. Nelson Chief Financial Officer, Senior Vice
___________________________________________ President, Treasurer and Secretary
Peter J. Nelson (Principal Financial Officer)
*
___________________________________________ Director
Joseph Elmaleh
*
___________________________________________ Director
Viren Mehta
</TABLE>
S-1
<PAGE>
<TABLE>
<S> <C>
SIGNATURES TITLE
---------- -----
*
___________________________________________ Director
David M. Petrone
*
___________________________________________ Director
Anthony M. Solomon
*
___________________________________________ Director
Richard B. Jennings
</TABLE>
/s/ Peter J. Nelson
*By: ________________________________
Peter J. Nelson
Attorney-in-Fact
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
------- ------- -------------
<C> <S> <C>
1.1* Form of Underwriting Agreement
4.1+ Specimen Certificate representing shares of Common
Stock
4.2* Form of Warrant Agreement
5.1 Opinion of Ballard Spahr Andrews & Ingersoll, LLP
8.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding certain federal income tax matters
12.1** Calculation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(filed with Exhibit 8.1)
23.2 Consent of Ballard Spahr Andrews & Ingersoll, LLP
(filed with Exhibit 5.1)
23.3 Consent of Ernst & Young LLP
24.1** Powers of Attorney (included on the signature page of
the Registration Statement)
</TABLE>
- --------
*To be filed by amendment.
+ Incorporated by reference to the Registrant's Registration Statement on Form
S-11 (No. 333-23545), declared effective by the Commission on May 27, 1997
**Previously filed.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL, LLP]
June 26, 1998
Alexandria Real Estate Equitites, Inc.
135 North Los Robles Avenue, Suite 250
Pasadena, California 91101
Re: Alexandria Real Estate Equities, Inc.
Registration Statement on Form S-3
-------------------------------------
Ladies and Gentlemen:
We have served as Maryland counsel to Alexandria Real Estate Equities,
Inc., a Maryland corporation (the "Company"), in connection with certain matters
of Maryland law arising out of the registration of the following securities
having an aggregate initial offering price not to exceed U.S. $250,000,000
(collectively, the "Securities"): (i) shares of common stock, $.01 par value per
share (the "Common Stock"), (ii) shares or fractional shares of its preferred
stock, $.01 par value per share (the "Preferred Stock"), and (iii) warrants to
purchase shares of Common Stock or Preferred Stock, as shall be designated by
the Company at the time of any such offering (the "Warrants"), each as covered
by the above-referenced Registration Statement, and all amendments thereto (the
"Registration Statement"), under the Securities Act of 1933, as amended (the
"1933 Act"). Capitalized terms used but not defined herein shall have the
meanings assigned to them in the Registration Statement.
In connection with our representation of the Company, and as a basis for
the opinion hereinafter set forth, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of the following
documents (hereinafter collectively referred to as the "Documents"):
<PAGE>
Alexandria Real Estate Equities, Inc.
June 26, 1998
Page 2
1. The Registration Statement, including the related form of
prospectus included therein, in the form in which it was transmitted by the
Company to the Securities and Exchange Commission under the 1933 Act;
2. The charter of the Company (the "Charter"), certified as of a
recent date by the State Department of Assessments and Taxation of Maryland (the
"SDAT");
3. The Amended and Restated Bylaws of the Company, certified as of
the date hereof by the Secretary of the Company;
4. Resolutions adopted by the Board of Directors, or a duly
authorized committee thereof, of the Company relating to the sale, issuance and
registration of the Securities, certified as of the date hereof by the Secretary
of the Company;
5. The form of certificate representing a share of Common Stock,
certified as of the date hereof by the Secretary of the Company;
6. A certificate of the SDAT, dated as of a recent date, as to the
good standing of the Company;
7. A certificate executed by Peter J. Nelson, the Secretary of the
Company, dated the date hereof; and
8. Such other documents and matters as we have deemed necessary or
appropriate to express the opinion set forth in this letter, subject to the
assumptions, limitations and qualifications stated herein.
In expressing the opinion set forth below, we have assumed, and so far
as is known to us there are no facts inconsistent with, the following:
1. Each individual executing any of the Documents, whether on behalf
of such individual or any other person, is legally competent to do so.
2. Each individual executing any of the Documents on behalf of a
party (other than the Company) is duly authorized to do so.
3. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and
<PAGE>
Alexandria Real Estate Equities, Inc.
June 26, 1998
Page 3
delivered each of the Documents to which such party is a signatory, and such
party's obligations set forth therein are legal, valid and binding and are
enforceable in accordance with all stated terms.
4. Any Documents submitted to us as originals are authentic. Any
Documents submitted to us as certified or photostatic copies conform to the
original documents. All signatures on all Documents are genuine. All public
records reviewed or relied upon by us or on our behalf are true and complete.
All statements and information contained in the Documents are true and complete.
There has been no oral or written modification of or amendment to any of the
Documents, and there has been no waiver of any provision of any of the
Documents, by action or omission of the parties or otherwise.
5. The Securities will not be transferred in violation of any
restriction or limitation contained in the Charter.
6. The issuance and certain terms of the Securities to be issued by
the Company from time to time will be approved by the Board of Directors of the
Company, or a duly authorized committee thereof, in accordance with the Maryland
General Corporation Law (with such approval referred to herein as the "Corporate
Proceedings").
7. Articles Supplementary creating and designating Preferred Stock
and otherwise will be filed with and accepted for record by the SDAT prior to
the issuance of the Securities;
8. The form of certificate representing a share of Preferred Stock,
when issued, will be in accordance with the Maryland General Corporation Law.
The phrase "known to us" is limited to the actual knowledge, without
independent inquiry, of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.
Based upon the foregoing, and subject to the assumptions, limitations
and qualifications stated herein, it is our opinion that:
<PAGE>
Alexandria Real Estate Equities, Inc.
June 26, 1998
Page 4
1. The Company is a corporation duly incorporated and existing
under and by virtue of the laws of the State of Maryland and is in good standing
with the SDAT.
2. Upon completion of the Corporate Proceedings relating to any
of the Securities that are Common Stock and upon the due execution,
countersignature and delivery of certificates representing the Common Stock, the
Common Stock will be duly authorized and, when and if delivered in accordance
with the resolutions of the Board of Directors authorizing their issuance, will
be (assuming that, upon issuance, the total number of shares of Common Stock
issued and outstanding will not exceed the total number of shares of Common
Stock that the Company is then authorized to issue) validly issued, fully paid
and nonassessable.
3. Upon completion of the Corporate Proceedings relating to any
of the Securities that are Preferred Stock and upon the due execution,
countersignature and delivery of certificates representing the Preferred Stock,
the Preferred Stock will be duly authorized and, when and if delivered in
accordance with the resolutions of the Board of Directors authorizing their
issuance, will be (assuming that upon issuance, the total number of shares of
Preferred Stock issued and outstanding will not exceed the total number of
shares of Preferred Stock that the Company is then authorized to issue) validly
issued, fully paid and nonassessable.
4. Upon completion of the Corporate Proceedings relating to any
of the Securities that are Warrants, the Warrants will be duly authorized and,
when and if delivered in accordance with the resolutions of the Board of
Directors authorizing their issuance, will be (assuming that upon exercise, the
total number of shares of Common Stock and Preferred Stock issued and
outstanding will not exceed the total number of shares of Common Stock and
Preferred Stock that the Company is then authorized to issue) validly issued,
fully paid and nonassessable.
The foregoing opinion is limited to the substantive laws of the
State of Maryland and we do not express any opinion herein concerning any other
law. We express no opinion as to the applicability or effect of any federal or
state securities laws, including the securities laws of the State of Maryland,
or as to federal or state laws regarding fraudulent transfers. To the extent
that any matter as to which our opinion is expressed
<PAGE>
Alexandria Real Estate Equities, Inc.
June 26, 1998
Page 5
herein would be governed by any jurisdiction other than the State of Maryland,
we do not express any opinion on such matter.
We assume no obligation to supplement this opinion if any applicable law
changes after the date hereof or if we become aware of any fact that might
change the opinion expressed herein after the date hereof.
This opinion is being furnished to you solely for submission to the
Securities and Exchange Commission as an exhibit to the Registration Statement
and, accordingly, may not be relied upon by, quoted in any manner to, or
delivered to any other person or entity (other than Skadden, Arps, Slate,
Meagher & Flom LLP, counsel to the Company) without, in each instance, our prior
written consent.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of the name of our firm in the section entitled "Legal
Matters" in the Registration Statement. In giving this consent, we do not admit
that we are within the category of persons whose consent is required by Section
7 of the 1933 Act.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll, LLP
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP]
June 26, 1998
ALEXANDRIA REAL ESTATE EQUITIES, INC.
135 North Los Robles Avenue
Suite 250
Pasadena, CA 91101
Re: Certain Federal Income Tax Considerations
-----------------------------------------
Ladies and Gentlemen:
You have requested our opinion concerning certain Federal income tax
considerations in connection with the offering for sale by Alexandria Real
Estate Equities, Inc., a Maryland corporation ("ARE," and together with the
subsidiary corporations, partnerships and limited liability companies in which
ARE owns a direct or indirect interest, the "Company"), of shares of its Common
Stock, par value $.01 per share, shares of its Preferred Stock, par value $.01
per share, and Warrants to purchase shares of its Common Stock or shares of its
Preferred Stock, pursuant to the Registration Statement on Form S-3 (No. 333-
56451) filed with the Securities Exchange Commission, as amended (the
"Registration Statement")./1/
ARE has provided to us and we have reviewed certain documents
(collectively, the "Documents") that we have deemed necessary or appropriate as
a basis for our opinion, including, without limitation (i) organizational
documents of
- ----------------------
/1/ Unless otherwise specifically defined herein, all capitalized terms
have the meanings assigned to them in the Registration Statement, as
amended to date.
<PAGE>
Alexandria Real Estate Equities, Inc.
June 26, 1998
Page 2
the entities comprising the Company, (ii) copies of certain leases, management
contracts and other agreements, (iii) a certificate executed by duly appointed
officers of ARE (the "Officer's Certificate") setting forth certain factual
representations, and (iv) certain schedules, memoranda, financial information
and other records.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies, and
the authenticity of the originals of such copies.
Our opinion is based on the correctness of the following specific
assumptions: (i) ARE will continue to be operated in accordance with the laws
of the State of Maryland in the manner described in its organizational
documents; (ii) there will be no changes in the applicable laws of the State of
Maryland; and (iii) each of the representations contained in the Officer's
Certificate is true, correct and complete. For purposes of our opinion, we have
not made an independent investigation of the facts set forth in the Officer's
Certificate and other Documents. No facts have come to our attention, however,
that would cause us to question the accuracy and completeness of such facts or
documents in a material way. We have, consequently, relied on ARE's
representations that the facts and information presented in the Officer's
Certificate and other Documents or otherwise furnished to us are true, correct,
and complete.
In rendering our opinion, we have also considered and relied upon the
Code, the regulations promulgated thereunder by the Treasury Department (the
"Regulations"), administrative rulings and the other interpretations of the Code
and the Regulations by the courts and the Internal Revenue Service, all as they
exist at the date of this letter. With respect to the latter assumption, it
should be noted that statutes, regulations, judicial decisions, and
administrative interpretations are subject to change at any time and, in some
circumstances, with retroactive effect. A material change that is made after
the date hereof in any of the foregoing bases for our opinion could affect our
conclusions.
<PAGE>
Alexandria Real Estate Equities, Inc.
June 26, 1998
Page 3
We express no opinion as to the laws of any jurisdiction other than
the Federal laws of the United States of America to the extent specifically
referred to herein.
Based on the foregoing, we are of the opinion that:
1. Commencing with ARE's taxable year ended December 31, 1996, ARE
has been organized and operated in conformity with the requirements for
qualification as a real estate investment trust ("REIT") under the Code, and its
actual method of operation through the date of this letter and its planned
method of operation as represented in the Officer's Certificate will continue
to enable it to meet the requirements for qualification and taxation as a REIT
for the taxable year ended December 31, 1998 and thereafter.
2. The discussion in the Registration Statement under the heading
"FEDERAL INCOME TAX CONSIDERATIONS" is, in all material respects, a fair and
accurate summary of the Federal income tax consequences of the purchase,
ownership, and disposition of the Common Stock, subject to the qualifications
set forth therein.
Qualification and taxation as a REIT will depend upon ARE's continuing
ability to meet, through actual annual operating results, certain requirements,
including requirements relating to distribution levels and diversity of stock
ownership, and the various qualification tests imposed under the Code, the
results of which will not be reviewed by us. Accordingly, no assurance can be
given that the actual results of ARE's operation for any one taxable year, if
inconsistent with ARE's projected results, will be able to satisfy or will
actually satisfy such requirements. We do not undertake to monitor whether the
Company will, in fact, through actual operating results, satisfy the various
qualification tests, and we express no opinion whether the Company will actually
satisfy these various qualification tests in the future.
Other than as expressly stated above, we express no opinion on any
issue relating to the Company or to any investment therein.
<PAGE>
Alexandria Real Estate Equities, Inc.
June 26, 1998
Page 4
This opinion is intended for the exclusive use of the addressee hereto
and the shareholders of ARE and, except as expressly set forth herein, it may
not be used, circulated, quoted or relied upon for any other purpose without our
prior written consent. We consent to the filing of this opinion as an exhibit
to the Registration Statement and to the references to Skadden, Arps, Slate,
Meagher & Flom LLP in the Registration Statement. In giving this consent, we do
not thereby admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
or regulations of the Securities and Exchange Commission thereunder. This
opinion is expressed as of the date hereof, and we disclaim any undertaking to
advise you of any subsequent changes of the matters stated, represented, or
assumed herein or any subsequent changes in applicable law.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (No. 333-56451) filed on Form S-
3 dated June 26, 1998 of Alexandria Real Estate Equities, Inc. (the Company)
and to the incorporation by reference of our report dated January 30, 1998
with respect to the consolidated balance sheets of the Company as of December
31, 1997 and 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 31, 1997,
1996 and 1995, and the consolidated financial statement schedule III, rental
properties and accumulated depreciation appearing in the Company's Annual
Report on Form 10-K dated March 30, 1998; and the incorporation by reference
therein of our report dated October 27, 1997 with respect to the statement of
revenue and certain expenses of 940 Clopper for the year ended December 31,
1996, and the incorporation by reference therein of our report dated October
27 1997 with respect to the statement of revenue and certain expenses of 1401
Research Boulevard for the year ended December 31, 1996, and the incorporation
by reference therein of our report dated November 7, 1997 with respect to the
statement of revenue and certain expenses of 1500 East Gude Drive and 3/3-1/2
Taft Court for the year ended December 31, 1996, all appearing in the Form 8-
K/A of the Company dated November 14, 1997; and the incorporation by reference
therein of our report dated November 7, 1997 with respect to the statement of
revenue and certain expenses of 1201 Harbor Bay Parkway for the year ended
December 31, 1996, and the incorporation by reference therein of our report
dated January 6, 1998 with respect to the statement of revenue and certain
expenses of Buildings 79 and 96 Charlestown Navy Yard for the year ended
December 31, 1997, and the incorporation by reference therein of our report
dated January 22, 1998 with respect to the statement of revenue and certain
expenses of 8000/9000/10000 Virginia Manor Road for the year ended December
31, 1997, and the incorporation by reference therein of our report dated
February 13, 1998 with respect to the statement of revenue and certain
expenses of 215 College Road for the year ended December 31, 1997, and the
incorporation by reference therein of our report dated January 22, 1998 with
respect to the statement of revenue and certain expenses of 100 and 800/801
Capitola Drive for the year ended December 31, 1997, and the incorporation by
reference therein of our report dated January 15, 1998 with respect to the
statement of revenue and certain expenses of 10150 Old Columbia Road for the
year ended December 31, 1997, and the incorporation by reference therein of
our report dated January 20, 1998 with respect to the statement of revenue and
certain expenses of 819-849 Mitten Road and 863 Mitten Road/866 Malcolm Road
for the year ended December 31, 1997, and the incorporation by reference
therein of our report dated March 9, 1998 with respect to the statement of
revenue and certain expenses of 5100/5110 Campus Drive for the year ended
December 31, 1997, and the incorporation by reference therein of our report
dated April 13, 1998 with respect to the statement of revenue and certain
expenses of 280 Pond Street for the year ended December 31, 1997, and the
incorporation by reference therein of our report dated March 15, 1998 with
respect to the statement of revenue and certain expenses of 19 Firstfield Road
for the year ended December 31, 1997, and the incorporation by reference
therein of our report dated May 15, 1998 with respect to the statement of
revenue and certain expenses of 170 Williams Drive for the year ended December
31, 1997, all appearing in the Form 8-K dated and filed on May 27, 1998, all
filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Los Angeles, California
June 22, 1998
