<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
TOWER REALTY TRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENTS)
120 WEST 45TH STREET, 24TH FLOOR
NEW YORK, NEW YORK 10036
(212) 768-9010
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
LAWRENCE H. FELDMAN
CHAIRMAN, CHIEF EXECUTIVE OFFICER, AND PRESIDENT
120 WEST 45TH STREET, 24TH FLOOR
NEW YORK, NEW YORK 10036
(212) 768-9010
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copies to:
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PETER M. FASS, ESQ. J. WARREN GORRELL, JR., ESQ.
STEVEN L. LICHTENFELD, ESQ. STEVEN A. MUSELES, ESQ.
BATTLE FOWLER LLP HOGAN & HARTSON L.L.P.
75 EAST 55TH STREET 555 THIRTEENTH STREET, N.W.
NEW YORK, NEW YORK 10022 WASHINGTON, D.C. 20004-1109
(212) 856-7000 (202) 637-5600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF SECURITIES AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $0.01 per share..... $290,375,000 $87,993
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(1) Estimated solely for the purpose of calculating the registration fee.
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.
================================================================================
<PAGE> 2
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
PRELIMINARY PROSPECTUS DATED AUGUST 6, 1997
PROSPECTUS
10,100,000 SHARES
TOWER REALTY TRUST, INC.
COMMON STOCK
------------------------
[TOWER REALTY TRUST, INC. LOGO]
Tower Realty Trust, Inc. (collectively with its subsidiaries, the "Company")
has been formed to continue and expand the commercial real estate business of
Tower Equities & Realty Corp. and its affiliates (collectively, "Tower
Equities"), which since 1985 has been engaged in developing, acquiring, owning,
renovating, managing, and leasing office properties in the Manhattan,
Phoenix/Tucson and Orlando markets. Upon completion of this offering (the
"Offering") and related transactions, the Company will own interests in a
portfolio of 20 office buildings (collectively, the "Properties") encompassing
approximately 2.9 million rentable square feet. The Company also will own or
have options to acquire four parcels of land which can support approximately 2.2
million square feet of development. See "The Properties -- Development Parcels
and -- Land Parcel Options." As of June 30, 1997, the Properties were
approximately 94.7% leased to over 350 tenants. The Company will operate as a
fully integrated, self-administered, and self-managed real estate company and
expects to qualify as a real estate investment trust ("REIT") for federal income
tax purposes.
All of the shares of common stock, par value $.01 per share (the "Common
Stock"), of the Company offered hereby are being sold by the Company. Upon
completion of the Offering, the executive officers and directors of the Company
will beneficially own approximately % of the equity in the Company. Concurrent
with the Offering, and subject to certain conditions, the Company is directly
placing with certain private investment funds and separate accounts advised by
Morgan Stanley Asset Management Inc. $20 million of Common Stock at the price
per share sold in the Offering (the "Concurrent Private Placement"). The
Underwriters will not receive a discount or commission on the sale of Common
Stock in the Concurrent Private Placement. See "The Company -- Concurrent
Private Placement."
Prior to the Offering, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price will be
$25.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company will
apply for listing of the Common Stock on the New York Stock Exchange under the
symbol "TOW." The Company intends to make regular quarterly distributions to its
stockholders, commencing with a pro rata distribution with respect to the
quarter ending December 31, 1997.
SEE "RISK FACTORS" BEGINNING ON PAGE 21 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK, INCLUDING:
- the valuation of the Properties and the other assets to be contributed to
the Company in its formation was not based on third-party appraisals,
thereby increasing the possibility that the consideration to be paid by
the Company for the Properties and such other assets will exceed their
fair market value;
- conflicts of interest relating to the formation and operations of the
Company, including the receipt by officers, directors and affiliates of
the Company of equity interests in the Company;
- real estate investment and property management risks, such as the need to
renew leases or relet space upon expirations, the instability of cash
flows and changes in the value of office properties owned by the Company
due to economic and other conditions;
- limitations on the stockholders' ability to change control of the Company,
including restrictions on the ownership of the Common Stock by any single
person in excess of 9.8% of the number or value of the shares of
outstanding Common Stock of the Company;
- taxation of the Company as a corporation if it fails to qualify as a REIT
and the resulting decrease in cash available for distribution in such
event; and
- risks associated with indebtedness, including the possibility that the
Company may not be able to refinance outstanding indebtedness (initially
expected to be approximately $109 million, excluding its pro rata share of
indebtedness of unconsolidated investments) upon maturity, that
indebtedness might be refinanced on less favorable terms, interest rates
might increase on variable rate indebtedness and the lack of limitations
in the Company's organizational documents on the amount of indebtedness
that the Company may incur.
-----------------------------
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.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share............................................. $ $ $
- ------------------------------------------------------------------------------------------------------------------------------
Total(3).............................................. $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,515,000 additional shares of Common Stock, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as, and if issued to and accepted by them, subject
to approval of certain legal matters by counsel to the Underwriters and to
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify such offer and to reject offers in whole or in part. It is expected
that delivery of the shares of Common Stock offered hereby will be made in New
York, New York on or about , 1997.
------------------------
MERRILL LYNCH & CO.
LEGG MASON WOOD WALKER
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
------------------------
The date of this Prospectus is , 1997.
<PAGE> 3
[MAP, PHOTOGRAPHS AND/OR CHARTS TO BE INCLUDED BY
AMENDMENT TO THIS REGISTRATION STATEMENT]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
TABLE OF CONTENTS
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PROSPECTUS SUMMARY....................... 1
The Company............................ 1
Risk Factors........................... 2
Growth Strategies...................... 4
Market Information..................... 6
The Properties......................... 8
Formation and Structure of the
Company............................. 11
The Offering........................... 15
Distributions.......................... 15
Tax Status of the Company.............. 16
Summary Selected Financial
Information......................... 17
RISK FACTORS............................. 21
No Assurance of Fair Price for
Company's Assets.................... 21
Conflicts of Interest in the Formation
Transactions and the Business of the
Company............................. 21
Real Estate Investment Risks........... 23
Risks of Third-Party Property
Management, Leasing, and Related
Services............................ 26
Limits on Changes in Control........... 27
Tax Risks.............................. 28
Real Estate Financing Risks............ 29
Risk of High Distribution Payout
Ratio............................... 30
Geographic Concentrations in Certain
Markets............................. 30
Risks Associated with Acquisitions;
Lack of Operating History........... 31
Changes in Policies without Stockholder
Approval; No Limitation on Debt..... 31
Dependence on Key Personnel............ 31
Control of Management.................. 31
Absence of Prior Public Market for
Common Stock; Market Conditions..... 32
Immediate and Substantial Dilution..... 32
ERISA Risks............................ 32
Possible Adverse Effect on Common Stock
Price of Shares Available for Future
Sale................................ 33
THE COMPANY.............................. 34
General................................ 34
Operations of the Company.............. 35
Concurrent Private Placement........... 36
OPERATING AND GROWTH STRATEGIES.......... 36
Operating Strategies................... 36
Growth Strategies...................... 37
USE OF PROCEEDS.......................... 41
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DISTRIBUTIONS............................ 42
CAPITALIZATION........................... 46
DILUTION................................. 47
SELECTED COMBINED FINANCIAL AND OPERATING
DATA................................... 49
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................. 54
PROPERTY OFFICE MARKETS AND MARKET
ECONOMIES.............................. 63
Midtown Manhattan Market and Economy... 63
Metropolitan Orlando Market and
Economy............................. 65
Metropolitan Phoenix Market and
Economy............................. 69
Metropolitan Tucson Economy............ 72
THE PROPERTIES........................... 76
General................................ 76
Properties............................. 76
Development Parcels.................... 78
Tenants................................ 78
Tenant Diversification................. 79
Lease Distributions.................... 79
Lease Expirations -- Portfolio Total... 80
Lease Expirations -- Property by
Property............................ 81
Tenant Retention and Expansion......... 86
Historical Lease Renewals.............. 86
Historical Tenant Improvements and
Leasing Commissions................. 87
Historical Capital Expenditures........ 88
Submarket and Property Information..... 89
Development Parcels.................... 96
Land Parcel Options.................... 96
Air Rights and Ground Lease
Agreements.......................... 97
Depreciation of Significant
Properties.......................... 97
Real Estate Taxes on Significant
Properties.......................... 97
Occupancy and Effective Rent at
Significant Properties.............. 98
Excluded Properties.................... 98
Mortgage Indebtedness Remaining
Following the Offering.............. 98
Assumed Deferred Tax Liability......... 99
Line of Credit......................... 99
Insurance.............................. 100
Possible Environmental Liabilities..... 100
Competition............................ 100
Employees.............................. 101
Legal Proceedings...................... 101
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MANAGEMENT............................... 102
Directors and Executive Officers....... 102
Managing Directors and Other Key
Employees........................... 104
Committees of the Board of Directors... 105
Compensation of Directors.............. 105
Board Observation Rights............... 105
Executive Compensation................. 105
Employment Agreements.................. 106
Incentive Compensation................. 107
Stock Option and Restricted Stock
Plans............................... 107
Limitation of Liability and
Indemnification..................... 108
Indemnification Agreements............. 109
FORMATION AND STRUCTURE OF THE COMPANY... 109
Effects of the Formation
Transactions........................ 111
Determination and Valuation of
Ownership Interests................. 111
Certain Estimate of Value.............. 112
Benefits to Related Parties............ 112
Transfer of Properties................. 113
CERTAIN RELATIONSHIPS AND TRANSACTIONS... 113
Formation Transactions................. 113
Exchange Rights........................ 113
Registration Rights.................... 114
Employment Agreements; Award of
Options............................. 114
Excluded Property Management
Agreements.......................... 114
Executive Officer and Director
Distributions and Fees.............. 114
Miscellaneous.......................... 114
PRINCIPAL STOCKHOLDERS................... 115
DESCRIPTION OF CAPITAL STOCK............. 116
General................................ 116
Common Stock........................... 116
Preferred Stock........................ 116
Power to Issue Additional Shares of
Common Stock and Preferred Stock.... 117
Restrictions on Transfer............... 117
Transfer Agent and Registrar........... 119
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS....... 120
Number of Directors; Classification of
the Board of Directors.............. 120
Removal; Filling Vacancies............. 120
Business Combinations.................. 121
Control Share Acquisition Statute...... 121
Amendment to the Charter............... 122
Dissolution of the Company............. 122
Advance Notice of Director Nominations
and New Business.................... 122
PAGE
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Meetings of Stockholders............... 122
Operations............................. 123
Anti-Takeover Effect of Certain
Provisions of Maryland Law and of
the Charter and Bylaws.............. 123
POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES............................. 123
Investment Policies.................... 123
Disposition Policies................... 124
Financing Policies..................... 124
Conflict of Interest Policies.......... 125
Policies with Respect to Other
Activities.......................... 126
Working Capital Reserves............... 126
SHARES AVAILABLE FOR FUTURE SALE......... 127
General................................ 127
Registration Rights.................... 128
PARTNERSHIP AGREEMENT.................... 129
Management............................. 129
Transferability of Interests........... 129
Capital Contribution................... 130
Exchange Rights........................ 130
Registration Rights.................... 131
Operations............................. 131
Distributions and Allocations.......... 131
Term................................... 132
Tax Matters............................ 132
FEDERAL INCOME TAX CONSIDERATIONS........ 132
Requirements for Qualification as a
REIT................................ 133
Failure to Qualify as a REIT........... 138
Taxation of the Company................ 138
Taxation of Stockholders............... 139
Statement of Stock Ownership........... 143
Tax Aspects of the Operating
Partnership......................... 143
Income Taxation of the Operating
Partnership and Its Partners........ 145
Other Tax Considerations............... 146
ERISA CONSIDERATIONS..................... 148
Employee Benefit Plans, Tax-Qualified
Retirement Plans and IRAs........... 148
Status of the Company and the Operating
Partnership (and the Subsidiary
Partnerships) under ERISA........... 149
UNDERWRITING............................. 151
EXPERTS.................................. 153
LEGAL MATTERS............................ 153
ADDITIONAL INFORMATION................... 153
GLOSSARY................................. 154
INDEX TO FINANCIAL STATEMENTS............ F-1
</TABLE>
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus. Unless otherwise indicated,
the information in this Prospectus assumes that (i) the transactions relating to
the formation of the Company (the "Formation Transactions") are consummated,
(ii) the initial public offering price (the "Offering Price") is $25.00 per
share, and (iii) the Underwriters' over-allotment option is not exercised.
Unless the context otherwise requires, as used herein the term (i) "Company"
includes Tower Realty Trust, Inc., a Maryland corporation, and its subsidiaries,
including (a) Tower Realty Operating Partnership, L.P., a Delaware limited
partnership (the "Operating Partnership"), (b) the consolidated subsidiary
partnerships or limited liability companies (the "Subsidiary Partnerships")
through which the Operating Partnership will own interests in certain of the
Properties, and (c) Tower Equities Management, Inc., a Delaware corporation (the
"Management Company"), and (ii) "Tower Equities" includes Tower Equities &
Realty Corp., a Delaware corporation ("Tower"), the companies and partnerships
affiliated with Tower, including Feldman Equities, and the predecessor entities
and affiliates of Tower. Unless otherwise required by the context, all square
footage and occupancy data are approximate. See "Glossary" for the definitions
of certain terms used in this Prospectus.
THE COMPANY
The Company has been formed to continue and expand the commercial real
estate business of Tower Equities, which since 1985 has been engaged in
developing, acquiring, owning, renovating, managing, and leasing office
properties in the Manhattan, Phoenix/Tucson and Orlando markets. Upon completion
of the Offering, the Company will own interests in 20 Properties encompassing
approximately 2.9 million rentable square feet. The Company will also own or
have options to acquire four parcels of land which can support approximately 2.2
million square feet of development. As of June 30, 1997, the Properties were
approximately 94.7% leased to over 350 tenants, and approximately 76% of the
Company's Escalated Rent from its portfolio was derived from Properties located
in central business district locations, including 46% from Properties located in
the Manhattan office market. Substantially all of the Properties are located in
Manhattan, Phoenix, Tucson, and Orlando. See "The Properties." The Company will
operate as a fully integrated, self-administered, and self-managed real estate
company and expects to qualify as a real estate investment trust ("REIT") for
federal income tax purposes.
The Company will continue Tower Equities' turnaround strategy of acquiring
office properties at a significant discount to replacement cost that are
underperforming due to physical, leasing, and/or operational deficiencies.
Consistent with this strategy, the Company will seek to acquire office
properties that present an attractive opportunity to create value and enhance
cash flow through the Company's hands-on approach to property repositioning,
including the implementation of property specific renovation and refurbishment
programs for underperforming assets. The Company believes that the significant
experience of its management in property development, redevelopment,
construction, management, and leasing provide it with the expertise necessary to
identify, acquire, upgrade, renovate, and reposition underperforming office
properties.
The Company initially intends to focus its turnaround strategy in Manhattan
because the Company believes that the current supply/demand fundamentals in that
office market provide an attractive environment for owning and operating office
properties. As a result of increasing demand for office space in Manhattan and
limited new supply of such space, vacancy rates in Manhattan have declined
during the last five years and the Company believes that effective rental rates
(i.e., rental rates after taking into account tenant improvement costs and
leasing concessions) for office properties in Manhattan have increased. See
"Property Office Markets and Market Economies." The Company believes that demand
for office space in the Manhattan office market has increased recently because
of consistent net private sector job growth, a strengthening New York City
metropolitan economy, and an improving business environment and quality of life
offered by New York City. At the same time, the supply of office space in
Manhattan has remained virtually unchanged since 1992, and the Company believes
that supply is unlikely to increase substantially over the near term primarily
because (i) there are relatively few sites available for land assemblage and
construction, (ii) the lead time
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<PAGE> 7
required for assemblage and construction typically exceeds three years and (iii)
new construction generally is not economically feasible given current market
rental rates.
The Company believes that opportunities exist to acquire interests in
office properties in Manhattan on attractive terms, including at prices
significantly below replacement cost. Notwithstanding the current favorable
supply/demand fundamentals in the Manhattan office market, the Company believes
that, in order to justify new construction in this market, asking rents
generally would have to increase at least 40% over current asking rents for
Class A office space in Manhattan, as estimated by Landauer Associates, Inc.
("Landauer").
The Company will also pursue the strategic acquisition of office properties
located in the Phoenix and Orlando markets that are consistent with its
turnaround strategy, as well as the development of the Company's development
parcels in those markets. The Company believes these office markets generally
have significant rent growth potential due to employment growth, declining
vacancies, and limited new construction activity. According to the 1997 Landauer
Market Forecast, Phoenix and Orlando ranked first and second, respectively, with
respect to momentum in the national office market, based on a supply/demand
projection for 60 office markets in the United States. The improved economic
fundamentals in these markets have resulted in a decline in direct vacancy rates
from December 31, 1992 to March 31, 1997 from 16.8% to 10.2% in the Metropolitan
Orlando office market and 25.1% to 8.6% in the Metropolitan Phoenix office
market.
Tower Equities was formed in 1985 by Lawrence H. Feldman, the Company's
Chairman, Chief Executive Officer and President, and Edward Feldman, his father
(who has since retired), and traces its origins to a predecessor family-owned
general contracting business that was founded at the beginning of the twentieth
century by Lawrence H. Feldman's grandfather, the late H.J. Feldman. Tower
Equities has acquired and/or developed many of the Properties owned by the
Company with institutional joint venture partners, including affiliates of
General Electric Capital Corp., DRA Advisors, Inc., the Carlyle Group, and the
Quantum Realty Fund (an entity affiliated with George Soros). Certain of these
investment partners, including affiliates of General Electric Capital Corp. and
DRA Advisors, Inc. will continue as stockholders in the Company following the
Offering.
The Company operates from its midtown Manhattan headquarters and its two
full service regional offices (Orlando and Phoenix), and is a fully integrated
real estate company with in-house expertise in acquisition, development,
construction, property management, and leasing. The five executive officers of
the Company and the two managing directors of the Company's Orlando and Phoenix
regional offices have an average of 17 years experience in the real estate
industry (including an average of over eight years with the Company). Upon
completion of the Offering, the Company's officers and directors will, in the
aggregate, own approximately % of the Company's equity. See
"Management -- Directors and Executive Officers."
RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK INVOLVES VARIOUS RISKS, AND
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER
"RISK FACTORS" PRIOR TO MAKING AN INVESTMENT IN THE COMPANY. SUCH RISKS INCLUDE:
- the valuation of the Properties and the other assets to be contributed to
the Company in the Formation Transactions was not based on third-party
negotiations or third-party appraisals (except with respect to the
valuation of the Maitland Forum Property as described in "Formation and
Structure of the Company -- Certain Estimate of Value"), thereby
increasing the possibility that the consideration to be paid by the
Company for the Properties and such other assets will exceed their fair
market value;
- conflicts of interest in connection with the Formation Transactions and
certain business decisions regarding the future operations of the
Company, including conflicts related to material benefits to officers,
directors, and other affiliates of the Company that will result in, among
other benefits, receipt of equity interests in the Company with an
aggregate value of approximately $ million based on
2
<PAGE> 8
the Offering Price, and conflicts of interest associated with the adverse
tax consequences to certain officers and directors of sales and
refinancings of certain Properties;
- risks associated with real estate investments, such as the need to renew
leases or relet space upon lease expirations and to pay renovation and
re-leasing costs in connection therewith, the effect of economic and
other conditions on office property cash flows and values, the ability of
tenants to make lease payments, the ability of a property to generate
revenue sufficient to meet operating expenses (including future debt
service), potential liability for costs of removal or remediation of
hazardous or toxic substances on a property, the illiquidity of real
estate investments, and the possibility that acquired properties fail to
perform as expected;
- limitations on the stockholders' ability to change control of the
Company, including restrictions on the ownership of the Common Stock by
any single person in excess of 9.8% of the number or value of the shares
of outstanding Common Stock of the Company, and certain other provisions
contained in the organizational documents of the Company and the
Operating Partnership, which could have the effect of delaying, deferring
or preventing a transaction or change in control of the Company that
might involve a premium price for shares of Common Stock or otherwise
would be in the best interests of the Company's stockholders;
- taxation of the Company as a regular corporation if it fails to qualify
as a REIT and the resulting Company liability for Federal, state and
local income taxes and the related decrease in cash available for
distribution in such event;
- risks associated with indebtedness, including the possibility that the
Company may not be able to refinance outstanding indebtedness (initially
expected to be approximately $109 million, excluding its pro rata share
of indebtedness of unconsolidated investments) upon maturity, that
indebtedness might be refinanced on less favorable terms, interest rates
might increase on variable rate indebtedness and the lack of limitations
in the Company's organizational documents on the amount of indebtedness
which the Company may incur;
- risks associated with the business and ownership of the Management
Company, which conducts the Company's property management and leasing
business, including potential tax liabilities, lack of control over the
Management Company, and the risk that the board of directors and
management of the Management Company may implement business policies or
decisions that would not have been implemented by persons controlled by
the Company and that are adverse to the interests of the Company or that
lead to adverse financial results, which would adversely affect the
Company's ability to pay distributions to stockholders;
- risks associated with distributing 94.6% of estimated cash available for
distribution, including the risk that actual cash available for
distribution will be insufficient to permit the Company to maintain its
proposed initial distribution rate of $1.75 per share of Common Stock, or
to sustain such distribution rate in the future;
- risks associated with the ownership of the 2800 North Central Property
through a partnership in which the Company does not have the ability to
control decisions with respect to this Property (such as decisions
regarding sale, refinancing, and the timing and amount of distributions),
and risks not otherwise present in property ownership, including (i)
buy/sell rights that exist with respect to such Property, (ii) the risk
that the Company will be exposed to liability as a general partner of
such venture even though the Company will not have sole control over the
property, and (iii) the risk that Company's partner might at any time
have economic or other business interests or goals that are inconsistent
with the business interests or goals of the Company, and that such
partner may be in a position to veto actions which may be consistent with
the Company's objectives or policies;
- the risks that, given the Company's recent acquisition of many of the
Properties and the lack of operating history of such Properties under the
Company's management (two years or less for 13 of the Properties), newly
acquired properties may have characteristics or deficiencies unknown to
the
3
<PAGE> 9
Company affecting value or revenue potential thereof, may fail to perform as
expected or may be difficult to integrate into the Company's existing management
operations;
- risks arising from the ability of the Company's Board of Directors to
change the Company's investment, financing, borrowing, distribution, and
other policies at any time without stockholder approval;
- concentration, based on Escalated Rent, of approximately 46% of the
Company's portfolio in the midtown Manhattan office market, 29.1% of the
Company's portfolio in the Phoenix/Tucson office market, and 20.9% of the
Company's portfolio in the Orlando office market.
- risks associated with the ownership, acquisition, development,
construction, and management of office properties, including the risks of
abandonment of development, unexpected construction costs or delays,
newly developed or acquired properties' failure to perform as expected,
and failure to obtain or delays in obtaining governmental permits and
authorizations and termination of management contracts;
- absence of a prior public market for the shares of Common Stock, lack of
assurances that an active trading market will develop or that shares of
Common Stock will trade at or above the Offering Price, and potential
negative effect of rising market interest rates on the market price of
the Common Stock;
- effect of shares available for future sale on the price of the Common
Stock; and
- immediate and substantial dilution of $2.25 per share in the net tangible
book value of the shares of Common Stock.
GROWTH STRATEGIES
The Company's primary business objective is to maximize stockholder value
through increases in cash available for distribution and appreciation in the
value of the Common Stock. The Company plans to achieve this objective by
implementing the internal and external growth strategies described below.
Internal Growth
The Company believes that opportunities to increase cash flow from its
existing portfolio will be realized as the Company begins to achieve the
benefits of its property repositioning strategy. The Company intends to increase
cash available for distribution per share and the value of the Common Stock from
the following sources:
- Contractual Rental Rate Increases: As of June 30, 1997, 251 leases,
representing approximately 70% of the total leases and 56% of the
rentable square feet at the Properties, included built-in contractual
rate increases over the remainder of the lease term. Between July 1, 1997
and June 30, 1998 the contractual base rents received by the Company
under such leases are expected to increase by an aggregate of $1.25
million (exclusive of increases attributable to the transition from free
or partial rent to full rent or rent increases tied to indices such as
the consumer price index (the "CPI")).
- Tenant Rollover: The Company expects to experience cash flow growth
through the releasing of 247,067 rentable square feet under 50 leases
that expire at the Properties between July 1, 1997 and June 30, 1998 with
a weighted average Escalated Rent of $16.81 per square foot, as compared
to a weighted average market rental rate within its primary markets of
$18.64 per square foot.
- Leasing of Vacant Space: The Company expects to realize additional cash
flow through the leasing or occupancy of approximately 155,000 rentable
square feet of vacant space at the Properties as of June 30, 1997
(approximately 5.3% of the Company's total rentable square feet).
4
<PAGE> 10
External Growth
The Company intends to pursue an external growth strategy to enable
stockholders to benefit from potential value to be realized from acquisitions,
product repositioning, development, and opportunities generated by the Company's
property management operations. The Company's external growth strategy, which
initially will focus in the Manhattan office market, includes (i) acquiring at a
significant discount to replacement cost office properties that are
underperforming due to physical, leasing, and/or operational deficiencies, and
redeveloping those assets; (ii) property repositioning through property specific
renovation and refurbishment programs for underperforming assets; and (iii)
exploring the opportunistic development of office properties on the Company's
development land within the Phoenix/Tucson and Orlando markets, as well as the
development of other office properties in these markets where such development
will result in a favorable risk-adjusted return.
Acquisition Strategies. The Company believes it has certain competitive
advantages which enhance its ability to identify and capitalize on acquisition
opportunities, including: (i) management's strong local market expertise and
experience and knowledge of properties, submarkets and potential tenants within
its primary markets; (ii) management's long-standing relationships with tenants,
real estate brokers, and institutional and other owners of commercial real
estate; (iii) its fully integrated real estate operations which allow the
Company to respond quickly to acquisition opportunities; (iv) its access to
capital as a public company, including the Company's proposed $200 million line
of credit (the "Line of Credit"); and (v) its ability to acquire properties in
exchange for units of limited partnership interest ("OP Units") in the Operating
Partnership or Common Stock if the sellers so desire. As evidence of the
Company's ability to grow its portfolio, the Company successfully acquired in
excess of 2.0 million square feet of office properties between January 1, 1994
and December 31, 1996. The Company intends to fund future acquisitions and
property development with proceeds from credit facilities, including the Line of
Credit, long-term secured and unsecured indebtedness, and the issuance of
additional debt and equity securities.
In evaluating potential acquisition opportunities, the Company will
consider whether the property possesses physical, leasing, and/or operational
deficiencies and, therefore, can be purchased at a significant discount to
comparable properties located in its submarket. Examples of underperforming
properties with physical, leasing or operational deficiencies include (i)
properties that are in need of a remarketing effort due to vacancy rates that
are substantially higher than the vacancy rates in the property's submarket
generally; (ii) properties that require physical improvements in order to
attract creditworthy tenants at market rents; and (iii) properties that are in
need of mechanical system upgrades.
An example of this turnaround strategy is an acquisition the Company made
in November, 1994 in a joint venture with the Quantum Realty Fund (an entity
affiliated with George Soros). The Company acquired 5151 East Broadway in
Tucson, Arizona for approximately $10 million or approximately $40 per square
foot which the Company believes represented a 75% discount to replacement cost.
At the time the Company acquired the Property, it was only 40% leased and in
need of capital improvements. Shortly after the acquisition, the Company
implemented a major renovation program of the common areas coupled with an
aggressive marketing and leasing effort. The Company's repositioning program
resulted in an increase in Escalated Rent from approximately $1.7 million as of
November 30, 1994 to approximately $3.8 million as of June 30, 1997 (a 153%
increase), and an increase in Annualized Net Operating Income from $353,000 at
acquisition to approximately $2.0 million as of June 30, 1997, which generated
an Adjusted Investment Yield of 13.3% (calculated by dividing net operating
income by the acquisition cost of the Property). There can be no assurance that
the Company will be able to achieve similar results with respect to the
Properties or other office properties acquired in the future.
Another example of how the Company executes its turnaround acquisition
strategy is its purchase through a joint venture with an affiliate of the
Carlyle Group of the 2800 North Central Property. The Property was acquired in
May 1996 for $30.7 million, which the Company believes represented a 47%
discount to replacement cost, with 32% of the rentable square feet under leases
scheduled to expire within seven months. The Company implemented an aggressive
leasing program that resulted in an occupancy rate of 91%
5
<PAGE> 11
by June 30, 1997. There can be no assurance that the Company will be able to
achieve similar results with respect to the Properties or other office
properties acquired in the future.
The Company initially intends to pursue acquisitions in the recovering
downtown Manhattan office market where it can pursue purchases of well
positioned office properties at substantial discounts to replacement costs.
Development and Redevelopment. The Company intends to explore the
development of its land within the Phoenix/Tucson and Orlando markets when
market fundamentals support a favorable risk-adjusted return on such
development. The Company's executive officers average approximately 17 years of
experience in the development of office properties. Since 1985, the Company's
executive officers have been integrally involved in the development of more than
1.0 million square feet of office properties (including the approximately
440,000 square foot Tower 45 Property). The Company expects that it will
undertake development if (i) it receives pre-development leasing commitments
from creditworthy tenants representing not less than 50% of the square footage
at the property and (ii) it believes it can achieve an unleveraged investment
yield (calculated by dividing net operating income upon stabilized occupancy by
the investment cost of the property (including all development expenses and
capitalized interest and leasing costs and expenses)) of not less than 12%.
Management's development expertise provides the Company with the capability
to purchase properties that are in need of significant capital improvements and
to redevelop and reposition such properties to make them competitive in their
respective markets. An example of this strategy includes the Company's
redevelopment of an approximately 93,000 rentable square foot office building at
5750 Major Boulevard in Orlando, Florida. The Company acquired the Property in a
joint venture with General Electric Capital Corp. in October 1996 for a purchase
price of $3.8 million, or approximately $45 per square foot (a 50% discount to
the Company's estimate of replacement cost). The Company is currently
redeveloping the Property through a $1.8 million capital improvement program
designed to reposition this Property into a Class A property, attracting higher
quality tenants and corresponding market rental rates. The Property was only 33%
leased as of December 31, 1996 and after the Company implemented an aggressive
marketing and leasing program, the Property will be 74.5% leased as of December
31, 1997 (based on leases signed as of July 31, 1997). This strategy will
encompass the future redevelopment of the Company's Madison Avenue properties.
See "The Properties -- Submarket and Property Information -- Development of
Grand Central North Submarket Properties."
Financing Strategy
The Company has entered into negotiations with Merrill Lynch & Co.
("Merrill Lynch") to obtain the $200 million Line of Credit. See "The
Properties -- Line of Credit." The Line of Credit is expected to be used
primarily to finance the Company's acquisition and development activities and
for working capital purposes. The Company believes that its access to capital
through the Line of Credit and other sources of private financing, as well as
its access to the public capital markets, will provide it with a competitive
advantage in acquisitions and developments over certain competitive bidders
which may have to qualify their bids with financing contingencies or which have
less access to capital. At the closing of the Offering, the Company will have
outstanding consolidated indebtedness (excluding its pro rata share of
indebtedness of unconsolidated investments) of $109.0 million or 23.8% of its
Total Market Capitalization.
MARKET INFORMATION
All market information not specifically attributed to the Company is based
on information supplied by Landauer and unless otherwise noted historical data
are presented as of December 31 of the specified year.
Manhattan
The Company initially intends to focus its turnaround acquisition strategy
in Manhattan. Manhattan represents the core of the Metropolitan New York City
office market, which is the largest office market in the
6
<PAGE> 12
United States, containing more rentable square feet than the next six largest
United States office markets combined. The Metropolitan New York City economy is
larger than the economies of the next two largest metropolitan areas combined
(Los Angeles and Chicago) and is larger than the economy of any individual state
except California, based on personal income. In addition, Manhattan is
headquarters to many of the major corporations and service firms in the United
States, including more Fortune 500 companies than any other city in the United
States and 23 of the 25 largest United States securities firms.
Led by significant growth in the services sector of the economy,
particularly the entertainment and business services subsectors, New York City
has experienced employment growth during each of the past three years. As a
result of steady growth in New York City's economy, the New York State
Department of Labor reports that the local unemployment rate has fallen from
11.0% in 1992 to 8.8% in 1996.
Midtown Manhattan
In the past four years the underlying fundamentals of supply and demand in
the midtown Manhattan office market have improved. According to Landauer,
between 1992 and 1996 the direct vacancy rate in the midtown Manhattan office
market declined from 15.5% to 11.5%. During this period there was net absorption
of 13.0 million square feet, with 6.2 million square feet being absorbed in 1996
alone. As a result of this substantial absorption, average asking rental rates
in midtown Manhattan have increased from $32.84 per square foot in 1992 to
$35.39 per square foot in 1996. In addition, there have been virtually no new
additions to the supply of office space in midtown Manhattan since 1992. As of
June 30, 1997, the direct vacancy rate in midtown Manhattan continued to decline
to 8.1%. In addition, during the first six months of 1997 there was net
absorption of 3.9 million square feet in this market.
Metropolitan Orlando, Florida
Metropolitan Orlando has been rated by Landauer at the top of its annual
United States Office Market Quality ratings during four of the past five years.
Economic growth during the 1990s was fueled by Metropolitan Orlando's tourism
service-based economy. Orlando's status as a world class tourist destination has
created significant demand for businesses that provide support services to the
tourism industry. In addition, recent growth in the Metropolitan Orlando market
has been driven by an expanding film production industry led by the Walt Disney
Company and Universal Studios, a thriving high technology industry, and the
nation's largest military and aerospace simulation and training industry. Total
non-agricultural employment in Metropolitan Orlando was estimated at
approximately 750,000 persons in 1996, following five years of growth at an
annual compounded rate of 3.5%. Metropolitan Orlando's employment growth rate
during that period was one of the highest among all metropolitan areas in the
United States.
In the past four years, the underlying fundamentals of supply and demand in
the Metropolitan Orlando office market have improved. The peak in available
supply occurred in 1992. Since that time, the growth in the Orlando economy and
the relationship between supply and demand has resulted in declining direct
vacancy rates and positive net absorption in the market. As of December 31, 1996
the direct vacancy rate in the Orlando office market was 9.5% as compared to
16.8% as of December 31, 1992. During the same 1992-1996 period there was net
absorption of approximately 2.6 million square feet. The net absorption was
particularly strong in 1995 and 1996, with approximately 1.3 million square feet
of net absorption and an increase in average asking rent rates from $16.25 per
square foot to $17.19 per square foot. In addition, there has been little growth
in the supply of new office space in the Orlando market. Since 1991, office
space in the Orlando market has grown by only 5.9% (approximately 1.24 million
square feet). As of March 31, 1997, the direct vacancy rate in the market was
10.2%; in addition, during the three-month period ended March 31, 1997 net
absorption was 51,000 square feet.
Metropolitan Phoenix and Tucson, Arizona
The city of Phoenix has grown to become the sixth largest city in the
United States. Total non-agricultural employment in Metropolitan Phoenix was
estimated at approximately 1.24 million persons in 1996, which represents a
compounded annual increase of 5.2% since 1992. Landauer reports that in
measuring
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<PAGE> 13
non-agricultural employment gains since 1994, Metropolitan Phoenix ranked third
among the 130 largest metropolitan areas in the United States.
In the past four years the underlying fundamentals of supply and demand in
the Metropolitan Phoenix office market have improved. Since 1992, the growth in
the Phoenix economy and the relationship between supply and demand have resulted
in declining direct vacancy rates and positive net absorption in the market. As
of December 31, 1996, the direct vacancy rate in the Phoenix office market was
9.1% as compared to 25.1% as of December 31, 1992, and average asking rents
increased from $13.20 per square foot to $15.40 per square foot. In addition,
since 1992, new office space in the Phoenix market grew by only 1.4% (600,000
square feet), which compares to 4.8 million square feet of positive absorption
during the same period. As of March 31, 1997, the direct vacancy rate in the
Phoenix office market decreased to 8.6%. In addition, during the three months
ended March 31, 1997, these positive fundamentals in the Phoenix office market
resulted in positive net absorption of over 420,000 square feet.
Metropolitan Tucson, which is located approximately 120 miles southeast of
Phoenix near the Mexican border, consists of Pima County and, as of December 31,
1996, included approximately 18% of Arizona's population. After a period of
sustained growth from 1991 to 1994 the local economy slowed in 1995 (primarily
due to the peso devaluation) and then rebounded significantly in 1996. Growth in
the 1990's was precipitated by significant employment gains in the
high-technology, service and trade sectors of the economy. Total non-
agricultural employment in the Tucson metropolitan area was estimated at
approximately 305,000 persons in 1996, following compounded annual growth at the
rate of approximately 3.9% per year since 1992. As a result of the significant
growth in the Tucson economy, the average non-agricultural unemployment rate in
Metropolitan Tucson was only 3.4% as of December 31, 1996 (more than 1.5
percentage points below the Arizona average).
The underlying fundamentals of supply and demand in the Tucson office
market have improved significantly over the past four years. Since 1992, the
growth in the Tucson economy and the favorable relationship between supply and
demand have resulted in declining vacancy rates and positive net absorption in
this market. As of December 31, 1996, the direct vacancy rate in the Tucson
office market was 9.6% as compared to 20.9% as of December 31, 1992. During this
period there was net absorption of approximately 600,000 square feet while
average asking rents increased from $12.50 per square foot in 1992 to $18.00 per
square foot in 1996. From 1992 to 1996 office space in the Tucson office market
grew by only 3.4% (approximately 335,000 square feet). The positive fundamentals
in the Tucson office market continued to improve during the first quarter of
1997 which resulted in a decrease in the direct vacancy rate to 8.1% and
additional net absorption of approximately 71,500 square feet while average
asking rental rates remained level.
THE PROPERTIES
Upon completion of the Offering, the Company will own interests in the 20
Properties, which contain 2.9 million rentable square feet. The Company also
owns or has options to acquire four parcels of land which can support an
aggregate of approximately 2.2 million square feet of development. Substantially
all of the Properties are located in eight submarkets in the midtown Manhattan,
Phoenix/Tucson, and Orlando office markets and individually range from
approximately 10,300 to 443,000 rentable square feet. Certain of the Properties
include a small amount of retail space on their lower floors. All of the
Properties are wholly owned by the Company, except for the 2800 North Central
Property which is owned in a joint venture with an affiliate of Carlyle Group in
which the Company owns a 10% general and limited partner interest (which
economic interest increases to up to 27.5% if certain performance criteria are
achieved). See "The Properties -- Submarket and Property
Information -- Description of Uptown Phoenix Submarket Property." As of June 30,
1997, approximately 76% of the Company's Escalated Rent from the portfolio was
derived from Properties located in central business district locations,
including approximately 46% from Properties located in the midtown Manhattan
office market. Generally, the Company believes that all the Properties have
desirable locations within established business communities and are well
maintained.
Management believes that the location, quality of construction and building
amenities, as well as the Company's reputation for providing a high level of
tenant service, have enabled the Company to attract and
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<PAGE> 14
retain a diverse tenant base. As of June 30, 1997, the Properties had a weighted
average occupancy rate of approximately 94.7% and were leased to over 350
tenants. As of June 30, 1997, no single tenant represented more than
approximately 5.9% of the aggregate Escalated Rent of the Company's portfolio
and only 17 tenants individually represented more than 1% of such Escalated
Rent.
The following table sets forth certain information, as of June 30, 1997, with
respect to the Properties:
<TABLE>
<CAPTION>
PERCENT
ESCALATED OF ANNUALIZED NET
RENT PER PORTFOLIO EFFECTIVE RENT
PERCENT YEAR BUILT/ RENTABLE PERCENT ESCALATED LEASED ESCALATED PER LEASED
MARKET/PROPERTY OWNED RENOVATED(1) SQUARE FEET LEASED RENT(2) SQUARE FOOT RENT SQUARE FOOT(3)
- ----------------------- ------- ------------ ----------- ------- ------------ ----------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
METROPOLITAN NEW YORK
CITY MARKETS
MIDTOWN MANHATTAN
MARKET
Tower 45........... 100% 1989 443,114 100.0% $ 20,447,000 $ 46.14 31.9% $40.12
286 Madison
Avenue........... 100% 1918(4) 111,977 96.4 2,625,000 24.33 4.1 23.30
290 Madison
Avenue........... 100% 1950(4) 38,512 100.0 1,113,000 28.89 1.7 29.60
292 Madison
Avenue........... 100% 1920/86 186,901 98.9 5,203,000 28.14 8.1 28.43
LONG ISLAND MARKET
120 Mineola
Boulevard........ 100% 1984/92 100,810 91.2 2,704,000 29.43 4.2 24.61
--------- ----- ----------- ----- -----
Market
Subtotal/Weighted
Average........ 881,314 98.3% $ 32,092,000 $ 37.04 50.0% $33.27
--------- ----- ----------- ----- -----
METROPOLITAN ARIZONA
MARKETS
METROPOLITAN PHOENIX
MARKET
Corporate Center
Building
10010-30......... 100% 1976/86 188,614 100.0% $ 2,639,000 $ 13.99 4.1 $14.37
Corporate Center
Building 10040... 100% 1976/86 23,155 96.3 343,000 15.39 0.5 15.20
Corporate Center
Building 10050... 100% 1976/86 42,398 100.0 704,000 16.62 1.1 14.46
Corporate Center
Building 10210... 100% 1976/86 45,100 100.0 704,000 15.62 1.1 15.99
Corporate Center
Building 10220... 100% 1976/86 24,128 100.0 422,000 17.47 0.7 17.87
Corporate Center
Building
9630(5).......... 100% 1976/86 130,164 100.0 2,330,000 17.91 3.6 18.28
2800 North
Central(6)....... 10% 1987 357,923 90.6 5,245,000 16.17 8.2 15.11
Century Plaza...... 100% 1974/90 219,769 85.1 2,422,000 12.96 3.8 11.03
--------- ----- ----------- ----- -----
METROPOLITAN TUCSON
MARKET
5151 E. Broadway... 100% 1975/89/96 246,699 100.0% $ 3,836,000 $ 15.54 6.0 $14.21
--------- ----- ----------- ----- -----
Market
Subtotal/Weighted
Average........ 1,278,064 94.7% $ 18,646,000 $ 15.40 29.1 $14.51
--------- ----- ----------- ----- -----
METROPOLITAN ORLANDO
MARKET
One Orlando
Center........... 100% 1989 357,378 99.3% $ 8,098,000 $ 22.82 12.6% $22.62
5750 Major
Boulevard........ 100% 1973/97 92,828 29.7(7) 377,000 13.69 0.6 4.00
Maitland Forum..... 100% 1985/96 266,060 99.1 4,130,000 15.66 6.4 16.35
2601 Maitland
Center Parkway... 100% 1982 10,342 100.0 158,000 15.23 0.2 14.60
2603 Maitland
Center Parkway... 100% 1982 10,704 81.7 114,000 13.04 0.2 9.98
2605 Maitland
Center Parkway... 100% 1982 38,564 100.0 536,000 13.90 0.8 13.22
--------- ----- ----------- ----- -----
Market
Subtotal/Weighted
Average........ 775,876 90.7% $ 13,413,000 $ 19.06 20.9% $17.50
--------- ----- ----------- ----- -----
Consolidated
Total/Weighted
Average.............. 2,935,254 94.7% $ 64,151,000 $ 23.07 100.0% $20.93
========= ===== =========== =====
</TABLE>
- ---------------
(1) Data do not include years in which tenant improvements were made to the
Properties.
(2) Escalated Rent represents the annualized monthly Base Rent in effect (after
giving effect to any contractual increases in monthly Base Rent that have
occurred up to June 30, 1997) plus annualized monthly tenant pass-throughs
of increases in operating and other expenses (but excluding electricity
costs paid by tenants) under each lease executed as of June 30, 1997, or,
if such monthly rent has been reduced by a rent concession, the monthly
rent that would have been in effect at such date in the absence of such
concession. Base Rent represents the fixed base rental amount paid by a
tenant under
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<PAGE> 15
the terms of the related lease agreement, which amount generally does not
include payments on account of real estate taxes, operating expense
escalations and utility charges.
(3) Annualized Net Effective Rent Per Leased Square Foot represents the Base
Rent for the month of June 1997, plus tenant pass-throughs of increases in
operating and other expenses (but excluding electricity costs paid by
tenants), under each lease executed as of June 30, 1997, presented on a
straight-line basis in accordance with GAAP, taking into account the
amortization of tenant improvement costs and leasing commissions, if any
paid or payable by the Company during such period, annualized.
(4) In 1996 the Company completed certain mechanical upgrades with respect to
this Property.
(5) Includes two free-standing restaurants adjacent to the Property which
account for, in the aggregate, 17,000 rentable square feet (100% of which
is leased).
(6) Data are presented without proration on account of the Company's partial
ownership interest. The Company's interest in the cash flow from this
Property increases to up to 27.5% if certain performance criteria are
achieved. See "The Properties -- Submarket and Property
Information -- Description of Uptown Phoenix Submarket Property."
(7) Such percentage would have been 74.5% if all space that was leased as of
July 31, 1997, but was not yet occupied, had been included in that
percentage.
DEVELOPMENT PARCELS
At the completion of the Offering, the Company will own or have an option
to acquire four parcels of land which can support an aggregate of approximately
2.2 million square feet of development. Some of this land requires zoning or
other regulatory approvals prior to development. The following chart provides
additional information with respect to undeveloped land parcels.
<TABLE>
<CAPTION>
DEVELOPABLE
LAND/LOCATION ACREAGE OWNERSHIP STATUS SQUARE FEET
- ------------------------------------------------------------ ------- ---------------- ------------
<S> <C> <C> <C>
One Orlando Center Land Parcel
Orlando, Florida.......................................... 3.8 optioned(1) 800,000(2)
5151 East Broadway Land Parcel
Tucson, Arizona........................................... (3) owned 220,000
Corporate Center Land Parcel
Phoenix, Arizona.......................................... (3) owned 150,000
Phoenix Land Parcel
Phoenix, Arizona.......................................... 43.2 optioned(4) 1,000,000
---- ---------
Total....................................................... 47.0 2,170,000
==== =========
</TABLE>
- ---------------
(1) Certain Primary Contributors have granted to the Company an option (at no
cost) to acquire from such Primary Contributors this development parcel for
approximately $3.8 million (75% of the appraised value of the land as of
May 9, 1997), which equates to approximately $4.75 per buildable square
foot. Pursuant to the terms of the option, the Company is authorized to
exercise this option only if (i)(a) a majority of Independent Directors
approve the exercise of such option and (b) the individual building(s) to
be built on the property is at least 50% preleased prior to commencement of
construction, or (ii) in the event the individual building(s) to be built
on the property is less than 50% preleased, the Board of Directors
unanimously approves the exercise of such option. See "The
Properties -- Land Parcel Options."
(2) Includes 395,000 square feet currently zoned and approved for retail and
hotel development.
(3) These parcels are currently part of the parking lot relating to this
Property. In the event these parcels are developed by the Company,
additional parking spaces would need to be constructed.
(4) The Company will have the right to acquire this option from certain Primary
Contributors at their cost (approximately $250,000 as of July 31, 1997).
Pursuant to the option, the Company will directly or indirectly acquire the
right to purchase this land for approximately $10.4 million from an
unaffiliated third party. Pursuant to the terms of the option, the Company
is authorized to exercise this option only if
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<PAGE> 16
the Independent Directors unanimously approve the exercise thereof. The
right to acquire the land expires on September 30, 1997, subject to two
one-month extensions that each require the payment of a $100,000 extension
fee. See "The Properties -- Land Parcel Options."
FORMATION AND STRUCTURE OF THE COMPANY
FORMATION TRANSACTIONS
The Company was formed to continue and expand the commercial real estate
business of Tower Equities and to acquire the interests in the 20 Properties.
Prior to or simultaneously with the closing of the Offering, the Company will
engage in the Formation Transactions described below which are designed to
consolidate the ownership of the Properties, Tower Equities' property management
and leasing business, and Properties Atlantic Inc.'s ("Properties Atlantic")
tenant/landlord representation business (which, prior to the Offering, was
controlled and operated by Clifford L. Stein, Managing Director-Southeast
Region, of the Company) in the Company, to facilitate the Offering and the
Concurrent Private Placement, and to enable the Company to qualify as a REIT
commencing with the taxable year ending December 31, 1997. The Formation
Transactions are as follows:
- The Company will sell 10,100,000 shares of Common Stock in the Offering
and 800,000 shares of Common Stock in the Concurrent Private Placement to
certain private investment funds and separate accounts (the "Morgan
Stanley Investors") advised by Morgan Stanley Asset Management Inc.
("MSAM"). All the net proceeds to the Company from the Offering and the
Concurrent Private Placement will be contributed to the Operating
Partnership. Following such contributions and the other contributions set
forth below, the Company's interest in the Operating Partnership will be
approximately 89.9%. The Company is the sole general partner of the
Operating Partnership and will own a 1% general partner interest in the
Operating Partnership and an approximate 88.9% limited partnership
interest in the Operating Partnership.
- The Company has acquired or will acquire, directly or indirectly, a 100%
interest in each of the Properties (other than the 2800 North Central
Property) and the ground lease encumbering the Maitland Forum Property
for an aggregate of shares of restricted Common Stock, OP
Units, approximately $57.2 million in cash, the assumption of
approximately $239.5 million in mortgage and Property Partnership
indebtedness and approximately $13 million of non-interest bearing
deferred tax liabilities payable over 10 years, as follows:
- The Operating Partnership has acquired or will acquire directly or
indirectly from the Primary Contributors (as defined below under
"Benefits to Related Parties") interests in each of the Properties
(including an interest in the Maitland Forum ground lease), two
parcels of land adjacent to two of the Properties which can support
370,000 square feet of development, and substantially all the assets
of the Tower Equities and Properties Atlantic management and leasing
companies in exchange for OP Units (valued at approximately
$ million based on the Offering Price); and
- The Company will acquire from persons other than the Primary
Contributors debt and equity interests in the Properties (including an
interest in the Maitland Forum ground lease) in exchange for
shares of restricted Common Stock (valued at approximately $
based on the Offering Price), OP Units (valued at approximately
$ based on the Offering Price) and $57.2 million in cash to
third parties.
- The Operating Partnership is expected to enter into an $87 million
seven-year term loan facility (the "Term Loan") and will borrow
approximately $52 million under such facility at the closing of the
Offering.
- The Operating Partnership will utilize $241.3 million of the net proceeds
of the Term Loan, the Offering, and the Concurrent Private Placement to
repay indebtedness (including $1.9 million of prepayment penalties)
encumbering the Properties and the Property Partnerships concurrent with
the
11
<PAGE> 17
closing of the Offering. See "The Properties -- Mortgage Indebtedness
Remaining Following the Offering."
- The Tower Equities and Properties Atlantic management and leasing
companies (that are owned entirely by the Primary Contributors) have
contributed or will contribute substantially all of the assets of such
companies to the Operating Partnership and the Operating Partnership
will, in turn, recontribute such assets to the Management Company in
exchange for 100% of the non-voting stock and 5% of the voting stock in
the Management Company (which collectively is entitled to receive
approximately 95% of the dividends). This structure is designed to assist
the Company in maintaining its status as a REIT. Lawrence H. Feldman will
own the remaining 95% of the voting common stock of the Management
Company and will be the sole director.
- The Company will issue approximately $ million of restricted Common
Stock in exchange for the cancellation of indebtedness outstanding under
certain convertible notes held by the Morgan Stanley Investors.
- The Management Company and certain Primary Contributors that hold
interests in seven retail properties after the consummation of the
Formation Transactions (the "Excluded Properties") will enter into
management agreements with respect to each of the Excluded Properties.
Four out of seven of the Excluded Properties are controlled by certain
Primary Contributors and have non-cancellable management contracts. The
remaining three properties are under management contracts which may be
terminated upon payment of two years of management fees or upon a sale of
such property. In consideration for the services to be provided under the
management agreements, the Management Company will receive market rate
property and construction management fees, as well as applicable leasing
commissions.
- The Operating Partnership will have the right to acquire an option held
by certain Primary Contributors at their cost ($250,000 at July 31, 1997)
that will provide the Operating Partnership with the right to (i) acquire
from an unaffiliated third party for approximately $10.4 million
approximately 43 acres of undeveloped land in Phoenix that can support
1.0 million square feet of development (the "Phoenix Land Parcel"). In
addition, the Operating Partnership will acquire from certain Primary
Contributors for no additional consideration an option to acquire for
approximately $3.8 million (75% of the appraised value of the land as of
May 9, 1997) approximately 3.8 acres of undeveloped land adjacent to the
One Orlando Center Property that can support approximately 800,000 square
feet of development (the "One Orlando Center Land Parcel"). See "The
Properties -- Land Parcel Options."
- The Operating Partnership expects to enter into the proposed $200 million
Line of Credit at or shortly after the consummation of the Formation
Transactions.
- As part of the Formation Transactions, the Company acquired certain
interests in the Property Partnerships from the Primary Contributors and
certain third parties. Certain of the interests in three of the Property
Partnerships were acquired from Edward Feldman pursuant to a bankruptcy
proceeding under Chapter 7 of United States Bankruptcy Code. In
conjunction with the transfer of those interests to the Company, the
Company entered into a court-approved settlement agreement whereby the
Company has obtained a release of all potential claims of the bankruptcy
trustee and any creditor of the bankruptcy estate relating directly or
indirectly to the Company in exchange for a cash payment of $2.0 million.
Accordingly, the Company believes that this bankruptcy proceeding will
have no impact on Company operations. Edward Feldman, the father of
Lawrence H. Feldman, served as President of Tower Equities until December
1990, at which time he retired at age 70. Edward Feldman served as a
consultant to Tower Equities from the date of his retirement until March
1997.
Additional information regarding the Formation Transactions is set forth
under "Formation and Structure of the Company."
12
<PAGE> 18
BENEFITS TO RELATED PARTIES
Certain affiliates of the Company, including the Primary Contributors, will
realize certain material benefits as a result of the Offering and the Formation
Transactions. The Primary Contributors consist of Lawrence H. Feldman (Chairman,
Chief Executive Officer and President of the Company), Robert L. Cox (Executive
Vice President and Chief Operating Officer of the Company), Joseph D. Kasman
(Senior Vice President and Chief Financial Officer of the Company), Clifford L.
Stein (Managing Director of the Company's Southeast Region), Robert M. Adams (a
nominee for director of the Company), Richard Wisely (a significant investor in
certain Tower Equities entities), Eric S. Reimer (Vice President -- Leasing of
the Company), Reuben Friedberg (Vice President -- Finance of the Company), and
Reid Berman (Southeast Regional Director of Leasing for the Company), and their
respective controlled affiliates.
- The Primary Contributors will receive a total of OP Units
(including their pro rata share of the OP Units that will be issued to
certain Property Partnerships) in consideration for their interests in
the Properties, certain development parcels, and the Tower Equities and
Properties Atlantic management and leasing businesses, in connection with
the Formation Transactions. These OP Units (representing approximately
% of the equity interests in the Company on a consolidated basis)
will have a total value of approximately $ million based on the
Offering Price, compared to a net tangible book value of the assets
contributed to the Operating Partnership by the Primary Contributors of
approximately $ million) and will be exchangeable, commencing one
year following completion of the Offering, for cash or, at the Company's
option, shares of Common Stock on a one-for-one basis. These OP Units
will be subject to certain restrictions on transfer for a two-year period
following the consummation of the Offering without the consent of the
Representatives. See "Underwriting." The Company believes that the net
tangible book value of the individual assets contributed to the Operating
Partnership by the Primary Contributors (which reflects the historical
cost of such assets less accumulated depreciation) is less than the
aggregate current market value of such assets. In addition, the Primary
Contributors will be reimbursed their costs associated with the Phoenix
Land Parcel Option ($250,000 at July 31, 1997).
- Messrs. Feldman and Cox will each serve as a director and officer of the
Company, Mr. Adams will serve as a director of the Company, and Messrs.
Feldman, Cox, and Kasman will enter into employment agreements with the
Company. See "Management -- Employment Agreements."
- The Company will grant to Messrs. Feldman, Cox, Kasman, Reimer, Friedberg
and the five members of the Board of Directors of the Company who are not
employees or affiliates of the Company, including Mr. Adams, options to
purchase an aggregate of 632,000 shares of Common Stock under the
Company's 1997 Plan and Directors' Plan at the Offering Price, subject to
certain vesting requirements. See "Management -- Stock Option and
Restricted Stock Plans -- 1997 Plan."
- The Formation Transactions may provide the Primary Contributors with
increased liquidity and, until the disposition of certain assets (or the
repayment of liabilities with respect thereto) contributed to the
Company, with continued deferral of the taxable gain associated with
those assets.
Additional information concerning benefits to executive officers, directors
and significant stockholders of the Company is set forth under "Formation and
Structure of the Company" and "Certain Relationships and Transactions."
STRUCTURE OF THE COMPANY
The Company will be the sole general partner of the Operating Partnership.
The Company will conduct substantially all of its business, and will hold all of
its interests in the Properties, through the Operating Partnership. As the sole
general partner of, and 89.9% partner in, the Operating Partnership, the Company
will have exclusive power to manage and conduct the business of the Operating
Partnership, subject to certain limited exceptions. See "Partnership Agreement."
13
<PAGE> 19
The following diagram depicts the ownership structure of the Company, the
Operating Partnership and the Management Company upon completion of the Offering
and the Formation Transactions:
Ownership Structure Chart
- ---------------
(1) The Operating Partnership holds 99.99% of the interests in each of the
Subsidiary Partnerships; the remaining .01% is held directly or indirectly
by the Company.
(2) The Operating Partnership owns 100% of the non-voting common stock and 5% of
the voting common stock of the Management Company and is entitled to receive
approximately 95% of the dividends payable by the Management Company on its
capital stock. Lawrence H. Feldman will own the remaining 95% of the voting
common stock of the Management Company and will be the sole director.
Ownership of the Management Company was structured in a manner intended to
assist the Company in maintaining its status as a REIT.
14
<PAGE> 20
THE OFFERING
All of the shares of Common Stock offered hereby are being offered by the
Company. None of the Company's stockholders are selling any shares of Common
Stock in the Offering or the Concurrent Private Placement.
Common Stock offered by the
Company in the
Offering................. 10,100,000 shares
Common Stock and OP Units
Outstanding after the
Offering and the
Concurrent Private
Placement................ 13,961,743 shares and OP Units(1)
Use of Proceeds............ Prepayment of mortgage indebtedness and certain
expenses related thereto; acquisition of interests
in the Properties; payment of certain expenses
incurred in connection with the Offering and the
Formation Transactions; and initial working capital
needs. See "Use of Proceeds."
Proposed NYSE symbol....... TOW
- ---------------
(1) Includes (i) 1,408,943 OP Units expected to be issued in connection with the
Formation Transactions that may be exchanged for cash or, at the option of
the Company, shares of Common Stock on a one-for-one basis commencing one
year after completion of the Offering, (ii) 1,652,800 shares of Common Stock
to be issued in the Formation Transactions in connection with the
acquisition of interests in certain of the Properties and the repayment of
certain loans, and (iii) 800,000 shares of Common Stock to be issued in the
Concurrent Private Placement. Excludes 938,000 shares of Common Stock
reserved for issuance upon the exercise of options to be granted pursuant to
the Company's option plans concurrent with the Offering. See
"Management -- Stock Option and Restricted Stock Plans," "Formation and
Structure of the Company" and "Partnership Agreement -- Exchange Rights."
DISTRIBUTIONS
The Company and the Operating Partnership intend to make regular quarterly
distributions to holders of Common Stock and OP Units. The initial distribution,
covering a partial quarter commencing on the date of the closing of the Offering
and ending on December 31, 1997, is expected to be approximately $ per
share, which represents a pro rata distribution based upon a full quarterly
distribution of $.4375 per share and an annual distribution of $1.75 per share
(or an annual distribution rate of approximately 7.0%, based upon the Offering
Price). See "Distributions."
The Company intends initially to distribute annually approximately 94.6% of
estimated cash available for distribution. The Company's estimate of the cash
available for distribution after the Offering is based upon estimated pro forma
Funds from Operations (as defined below) for the 12 months ending June 30, 1998,
with certain adjustments as described in "Distributions." The actual
distributions made by the Company will be affected by a number of factors,
including the gross revenues received from its Properties, the operating
expenses of the Company, the interest expense incurred in borrowing, and
unanticipated capital expenditures. No assurance can be given that the Company's
estimates will prove accurate or that any level of distributions will be made or
sustained. The Company anticipates that distributions will exceed net income
determined in accordance with generally accepted accounting principles ("GAAP")
due to non-cash expenses, primarily depreciation and amortization.
Distributions by the Company to the extent of its current and accumulated
earnings and profits for Federal income tax purposes generally will be taxable
to stockholders as ordinary dividend income (except to the extent designated as
"capital gain" dividends). Distributions in excess of such earnings and profits
generally will be treated as first a non-taxable reduction of the stockholder's
basis in the Common Stock to the extent thereof (which may have the effect of
increasing the gain or decreasing the loss recognized on such
15
<PAGE> 21
stockholder's sale of the Common Stock), and thereafter as taxable gain. The
Company anticipates that approximately % (or $ per share) of the
distributions intended to be paid by the Company for the 12-month period
following the Offering will represent a return of capital for federal income tax
purposes.
For a discussion of the annual distribution requirements applicable to
REITs, see "Federal Income Tax Considerations -- Taxation of the
Company -- Annual Distribution Requirements." For a discussion of the tax
treatment of distributions to the holders of Common Stock, see "Federal Income
Tax Considerations -- Taxation of Stockholders."
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with
its taxable year ending December 31, 1997. In order to maintain REIT status, an
entity must meet a number of organizational and operational requirements. The
Company believes its organization and proposed method of operation will enable
it to meet the requirements for qualification as a REIT. In addition, in order
to maintain its qualification as a REIT under the Code, the Company generally
will be required each year to distribute at least 95% of its REIT taxable
income. See "Federal Income Tax Consequences -- Requirements for Qualification
as a REIT -- Annual Distribution Requirements." As a REIT, the Company generally
will not be subject to Federal income tax on any net income it distributes
currently to its stockholders. If the Company fails to qualify as a REIT in any
taxable year, it will be subject to Federal income tax at regular corporate
rates. See "Federal Income Tax Consequences -- Taxation of the
Company -- Failure to Qualify as a REIT" and "Risk Factors -- Tax
Risks -- Failure to Qualify as a REIT." Even if the Company qualifies for
taxation as a REIT, the Company may be subject to certain Federal, state and
local taxes on its income and property.
16
<PAGE> 22
SUMMARY SELECTED FINANCIAL INFORMATION
The following tables set forth summary selected combined operating, balance
sheet and other data for the Tower Predecessor (as defined below) on a
historical basis and the Company on a pro forma basis. The following data have
been derived from and should be read in conjunction with the combined financial
statements and notes thereto of the Tower Predecessor, DRA Joint Ventures, the
pro forma financial statements and notes thereto of the Company, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
The combined historical balance sheet data as of December 31, 1996 and 1995
and the combined historical operating data for the years ended December 31,
1996, 1995 and 1994 of the Tower Predecessor have been derived from the
historical combined financial statements audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report with respect thereto is included elsewhere
in this Prospectus.
The selected financial data at March 31, 1997 and for the three months
ended March 31, 1997 and 1996 are derived from unaudited financial statements.
The unaudited financial information includes all adjustments (consisting of
normal recurring adjustments) that management considers necessary for a fair
presentation of the combined financial position and results of operations for
these periods. Combined operating results for the three months ended March 31,
1997 are not necessarily indicative of the results to be expected for the entire
year ended December 31, 1997.
The Tower Predecessor is comprised of the following entities controlled or
managed by Tower Equities: Tower 45 Associates Limited Partnership (the Tower 45
Property), CXX Mineola Limited Partnership (the 120 Mineola Boulevard Property),
Maitland Property Investors, Ltd. (the Maitland Forum Property), Maitland West
Associates Limited Partnership (the three Maitland Center Parkway Properties),
5750 Associates Limited Partnership (the 5750 Major Boulevard Property), and the
predecessor management companies, including Tower Equities and Realty Corp., CXX
Mineola Management Corp., Forum Realty and Management Corp., and Tower Equities
of Arizona L.L.C. The Tower Predecessor includes 100% of the assets, liabilities
and operations of such entities and the respective Properties owned by them. In
addition, the Primary Contributors, including Lawrence H. Feldman, hold
non-controlling interests in the partnership controlling the 2800 North Central
Property and the partnerships that own the following Properties (collectively,
the "DRA Joint Ventures"): 286 Madison Avenue, 290 Madison Avenue, 292 Madison
Avenue, the six Corporate Center Properties, 5151 East Broadway, and One Orlando
Center. The Tower Predecessor includes these investments in the 2800 North
Central Property and the DRA Joint Ventures using the equity method of
accounting.
Pro forma information is presented as if (i) the transfer of the
Properties, certain development parcels, and other assets of Tower Equities to
be contributed to the Company, (ii) the completion of the Offering, the
Concurrent Private Placement, the issuance of convertible notes by the Company
to the Morgan Stanley Investors in the aggregate principal amount of
approximately $ million for the purpose of funding certain pre-Offering
transaction expenses and the acquisition of certain interests of third parties
in certain Properties (the "MSAM Notes"), and the Term Loan and the application
of the net proceeds therefrom as described under "Use of Proceeds," and (iii)
the issuance of $ million of restricted Common Stock by the Company to the
Morgan Stanley Investors in exchange for the cancellation of indebtedness under
the MSAM Notes, had occurred on January 1, 1996 with respect to the pro forma
operating and other data and on March 31, 1997 with respect to the pro forma
balance sheet data. The pro forma information is based upon certain assumptions
that are included in the notes to the pro forma financial statements included
elsewhere in this Prospectus. The pro forma financial information is unaudited
and is not necessarily indicative of what the financial position or results of
operations of the Company would have been as of the dates and for the periods
indicated, nor does it purport to represent or project the financial position or
results of operations for future periods.
17
<PAGE> 23
THE COMPANY (PRO FORMA) AND THE TOWER PREDECESSOR (HISTORICAL)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
------------------------------ ----------------------------------------------------------------
PRO HISTORICAL PRO HISTORICAL
FORMA ------------------ FORMA ----------------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
--------- -------- ------- --------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental income........... $ 15,095 $ 6,945 $ 7,110 $61,203 $ 26,138 $ 25,202 $ 25,994 $ 23,496 $ 22,949
Management fees......... 257 369 1,261 961 82 221 183
Construction, leasing
and other fees........ 203 498 278 742 1,335 1,041 320 604 737
--------- -------- ------- --------- -------- -------- -------- -------- --------
Total revenues.......... 15,298 7,700 7,757 61,945 28,734 27,204 26,396 24,321 23,869
--------- -------- ------- --------- -------- -------- -------- -------- --------
Expenses:
Property operating and
maintenance........... 3,192 1,350 1,251 14,115 5,134 4,992 5,014 5,608 5,055
Real estate taxes....... 2,089 1,196 1,177 8,295 4,569 4,570 3,969 4,407 4,918
General office and
administrative........ 858 1,095 983 3,359 3,994 3,838 2,778 2,923 2,921
Interest expense........ 1,957 3,485 3,883 7,835 15,511 15,150 12,751 12,756 14,390
Depreciation and
amortization.......... 3,035 1,698 1,690 12,289 6,853 6,897 7,415 7,982 6,775
Ground rent and air
rights expense........ 150 150 150 599 599 599 599 599 561
--------- -------- ------- --------- -------- -------- -------- -------- --------
Total expenses.......... 11,281 8,974 9,134 46,492 36,660 36,046 32,526 34,275 34,620
--------- -------- ------- --------- -------- -------- -------- -------- --------
Income (loss) from
operations.............. 4,017 (1,274) (1,377) 15,453 (7,926) (8,842) (6,130) (9,954) (10,751)
Equity in joint
ventures(1)............. 9 34 45 314 461 193 1
--------- -------- ------- --------- -------- -------- -------- -------- --------
Income (loss) before
minority interest....... 4,026 (1,240) (1,332) 15,767 (7,465) (8,649) (6,129) (9,954) (10,751)
Minority interest(2)...... 407 1,592
--------- -------- ------- --------- -------- -------- -------- -------- --------
Net income (loss)......... $ 3,619 $ (1,240) $(1,332) $14,175 $ (7,465) $ (8,649) $ (6,129) $ (9,954) $(10,751)
========== ======== ======= ========== ======== ======== ======== ======== ========
Net income per common
share................... $ 0.29 $ 1.13
========== ==========
Weighted average number of
common shares
outstanding............. 12,553 12,553
Weighted average number of
common shares and OP
Units outstanding....... 13,962 13,962
BALANCE SHEET DATA (at
period end):
Real estate investments
net of accumulated
depreciation............ $388,360 $128,352 -- -- $129,064 $128,138 $132,904 $137,662 $140,916
Total assets.............. 409,195 174,092 -- -- 172,987 173,889 184,174 188,742 193,363
Long-term debt............ 109,000 200,097 -- -- 202,892 199,962 202,454 204,853 177,145
Total liabilities......... 121,951 236,037 -- -- 234,857 230,977 235,343 236,211 231,110
Owners'/stockholders'
equity (deficit)........ 258,232 (61,945) -- -- (61,870) (57,088) (51,169) (47,469) (37,747)
OTHER DATA:
EBITDA (Company's pro
forma 89.9% share)(3)... $ 8,098 $ 4,123 $ 4,385 $32,183 $ 15,496 $ 13,695 $ 13,834 $ 10,268 $ 9,895
Funds from operations
(Company's pro forma
89.9% share)(4)......... 6,360 661 528 25,269 129 (1,449) 1,292 (1,972) (3,976)
Cash flow from operating
activities.............. -- 1,877 537 -- 951 1,762 4,118 -- --
Cash flow from investing
activities.............. -- (389) (1,169) -- (6,787) (3,440) (3,137) -- --
Cash flow from financing
activities.............. -- (1,630) (255) -- 5,613 238 30 -- --
Number of properties (at
period end)............. 20 7 7 20 7 6 6 3 3
</TABLE>
- ---------------
(1) The pro forma information accounts for the Management Company's operations
under the equity method of accounting; therefore, the net operations are
reported in one line item titled "Equity in Joint Ventures." The historical
information includes the Tower Predecessor management companies' operations
fully consolidated; therefore, the revenues and expenses are reported on a
gross basis for income and expense line items. See "The
Company -- Operations of the Company -- The Management Company."
18
<PAGE> 24
Equity in Joint Ventures includes the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------------------ ------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
1997 1997 1996 1996
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
2800 North Central Property................ $ (13) $ (4) $ (12) $ (3)
DRA Joint Ventures......................... -- 38 464
Management Company......................... 22 -- 326
--- --- ---- ----
$ 9 $ 34 $ 314 $461
=== === ==== ====
</TABLE>
On a pro forma basis, the Company will own 10% (subject to an increase to
up to 27.5% if certain performance criteria are achieved) of 2800 North
Central Property and 95% of the Management Company. On a historical basis,
the Tower Predecessor owned, at December 31, 1996, 3.8% of 2800 North
Central Property and approximately 18% of the DRA Joint Ventures (which
represents Lawrence H. Feldman's effective ownership interest).
(2) Represents the approximate 10.1% interest in the Operating Partnership that
will be owned by management and certain other Continuing Investors in the
Company.
(3) EBITDA is defined as operating income before mortgage and other interest,
income taxes, depreciation and amortization. The Company believes EBITDA is
useful to investors as an indicator of the Company's ability to service debt
or pay cash distributions. EBITDA, as calculated by the Company, may not be
comparable to EBITDA reported by other REITs that do not define EBITDA
exactly as the Company defines that term. EBITDA does not represent cash
generated from operating activities determined in accordance with GAAP and
should not be considered as an alternative to operating income or net income
determined in accordance with GAAP as an indicator of performance or as an
alternative to cash flows from operating activities as an indicator of
liquidity.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------------------------
PRO HISTORICAL PRO HISTORICAL
FORMA ----------------- FORMA ------------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
------ ------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)..................... $3,619 $(1,240) $(1,332) $14,175 $(7,465) $(8,649) $(6,129) $(9,954) $(10,751)
Add:
Interest expense...................... 1,957 3,485 3,883 7,835 15,511 15,150 12,751 12,756 14,390
Real estate depreciation and
amortization........................ 3,035 1,698 1,690 12,289 6,853 6,897 7,415 7,982 6,775
Real estate depreciation and
amortization of unconsolidated joint
ventures............................ 13 203 170 52 741 303 6 -- --
Minority interest..................... 407 -- -- 1,592 -- -- -- -- --
Less:
Interest income....................... (23) (23) (26) (144) (144) (6) (209) (516) (519)
------ ------- ------- ------- ------- ------- ------- ------
EBITDA................................ $9,008 $ 4,123 $ 4,385 $35,799 $15,496 $13,695 $13,834 $10,268 $ 9,895
====== ======= ======= ======= ======= ======= ======= ======
Company's 89.9% share................. $8,098 $32,183
====== =======
</TABLE>
(4) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 defines Funds from Operations as net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring
and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along
with cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes Funds from Operations in accordance
with standards established by NAREIT which may not be comparable to Funds
from Operations reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret
19
<PAGE> 25
the current NAREIT definition differently than the Company. Funds from
Operations does not represent cash generated from operating activities
determined in accordance with GAAP and should not be considered as an
alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flow from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make cash distributions.
The following is a reconciliation of net income to Funds from Operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------------------------
PRO HISTORICAL PRO HISTORICAL
FORMA ----------------- FORMA ------------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
------ ------- ------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)..................... $3,619 $(1,240) $(1,332) $14,175 $(7,465) $(8,649) $(6,129) $(9,954) $(10,751)
Add:
Real estate depreciation and
amortization........................ 3,035 1,698 1,690 12,289 6,853 6,897 7,415 7,982 6,775
Real estate depreciation and
amortization of unconsolidated joint
ventures............................ 13 203 170 52 741 303 6 -- --
Minority interest..................... 407 -- -- 1,592 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------
Funds From Operations................. $7,074 $ 661 $ 528 $28,108 $ 129 $(1,449) $ 1,292 $(1,972) $ (3,976)
======= ======= ======= ======= ======= ======= ======= ======
Funds From Operations
(Company's 89.9% share)............... $6,360 $25,269
======= =======
</TABLE>
20
<PAGE> 26
RISK FACTORS
An investment in the Common Stock involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus before making a decision
to purchase Common Stock in the Offering.
NO ASSURANCE OF FAIR PRICE FOR COMPANY'S ASSETS
Except with respect to the appraisal of the Maitland Forum Property as
described in "Formation and Structure of the Company -- Certain Estimate of
Value", no independent third-party appraisals were obtained by the Company in
connection with the Formation Transactions. Accordingly, there can be no
assurance that the combined value of the consideration (consisting of cash, OP
Units, shares of restricted Common Stock and assumed debt) paid by the Company
in the Formation Transactions will not exceed the fair market value of the
Properties and other assets acquired by the Company in the Formation
Transactions. In addition, the valuation of the Company will not be determined
by a valuation of its assets based on historical cost or fair market value, but
instead will be determined based upon a capitalization of the Company's
estimated pro forma Funds from Operations, estimated cash available for
distribution and potential for growth, and the other factors discussed under
"Underwriting." There can be no assurance that there will not be discrepancies
between assumed results and actual results which could lead to a reduction in
actual distributions compared to assumed distributions or that the price paid by
the Company for its interests in the Properties and for its other assets will
not exceed the fair market value of such assets. It is possible that the
Offering Price per share of Common Stock may exceed the per share market value
of the Company's assets.
CONFLICTS OF INTEREST IN THE FORMATION TRANSACTIONS AND THE BUSINESS OF THE
COMPANY
Substantial Benefits to Related Parties. The Formation Transactions are
not the result of arm's-length negotiations. The Primary Contributors (including
Lawrence H. Feldman (Chief Executive Officer and President of the Company),
Robert L. Cox (Executive Vice President and Chief Operating Officer of the
Company), Joseph D. Kasman (Senior Vice President and Chief Financial Officer of
the Company), Robert M. Adams (a nominee for director of the Company), Richard
Wisely (a significant investor in certain Tower Equities entities), Eric S.
Reimer (Vice President -- Leasing of the Company), Reuben Friedberg (Vice
President -- Finance of the Company), Clifford L. Stein (Managing Director of
the Company's Southeast Region), and Reid Berman (Southeast Regional Director of
Leasing for the Company)) have preexisting ownership interests in certain
Properties and certain of the other assets to be acquired by the Company through
their direct or indirect interests in Tower Equities, and will receive, directly
or indirectly, OP Units in exchange for such interests in the Formation
Transactions, and other material benefits from the Formation Transactions that
will not generally be received by other persons participating in the formation
of the Company. Because the Primary Contributors were involved in structuring
the Formation Transactions they had the ability to influence the type and level
of benefits they received. As such, the Primary Contributors may have interests
that conflict with the interests of others participating in the Formation
Transactions and with the interests of persons acquiring Common Stock in the
Offering. The type and level of benefits the Primary Contributors will receive
may have been different if they had not participated in structuring the
Formation Transactions. These benefits include, but are not limited to, the
following: (i) receipt of an aggregate of
OP Units including their pro rata share of any OP Units that will be issued to
certain Property Partnerships (valued at approximately $ million based on
the Offering Price); (ii) receipt by the five executive officers of the Company
and members of the Board of Directors of options to purchase an aggregate of
632,000 shares of Common Stock under the Company's 1997 Option Plans at the
Offering Price, subject to certain vesting requirements, which will have an
aggregate purchase price of approximately $15.8 million based on the Offering
Price; (iii) deferral of certain tax consequences resulting from the conveyances
of their interests in the Properties to the Operating Partnership; and (iv)
entry by Messrs. Feldman, Cox, and Kasman into employment agreements with the
Company. See "Formation and Structure of the Company -- Benefits to Related
Parties" and "Management -- Stock Option and Restricted Stock Plans -- Executive
Compensation and -- Employment Agreements."
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Leasing Services Provided to Other Properties. After the completion of the
Offering and the Formation Transactions, the Management Company (which will be
controlled by Lawrence H. Feldman, its sole stockholder and director, and not by
the Company) will provide leasing services to other properties (including the
Excluded Properties). Certain conflicts of interest may result from the
Management Company's providing management and leasing services both to
Properties in which the Company has an interest and other properties in which
some or all of the Primary Contributors have an interest.
Risk of Less Vigorous Enforcement of Terms of Contribution and Other
Agreements. The Primary Contributors each, directly or indirectly, have
ownership interests in certain of the Properties and in the other assets to be
acquired by the Company. Following the consummation of the Offering and the
Formation Transactions, the Company, under certain agreements relating to the
contribution of such interests, will be entitled to indemnification and damages
in the event of breaches of representations or warranties made by certain of the
contributors of such interests (including certain of the Primary Contributors).
In addition, each of Messrs. Feldman, Cox, and Kasman has entered into an
employment agreement with the Company pursuant to which they have agreed not to
engage in certain business activities in competition with the Company. See
"Management -- Employment Agreements." To the extent that the Company chooses to
enforce its rights under any of these contribution or employment agreements, it
may determine to pursue available remedies, such as actions for damages or
injunctive relief, less vigorously than it otherwise might because of its desire
to maintain its ongoing relationship with the individual involved. In addition,
the aggregate liability of the Primary Contributors including Messrs. Feldman,
Cox and Kasman, to the Company under the contribution agreement is limited to
the initial value of the OP Units received by them in the Formation Transactions
based on the Offering Price. The Company, therefore, will have no right of
recovery as to any damages in excess of such aggregate amount against such
persons.
Risk of Differing Objectives Between Primary Contributors and Company Upon
Sale, Refinancing or Prepayment of Indebtedness of Properties. As holders of OP
Units, the Primary Contributors may have unrealized taxable gain associated with
their interests in certain Properties contributed to the Operating Partnership.
Because the Primary Contributors may suffer different and more adverse tax
consequences than the Company upon the sale or refinancing of those Properties,
the Primary Contributors and the Company may have different objectives regarding
the appropriate pricing and timing of any sale or refinancing of such
Properties. While the Company (as the general partner of the Operating
Partnership) has the exclusive authority as to whether and on what terms to sell
or refinance each individual Property, the Primary Contributors through their
status as executive officers and/or directors of the Company may influence the
Company not to sell, refinance or prepay the indebtedness associated with the
Properties even though such event might otherwise be financially advantageous to
the Company, or may influence the Company to refinance Properties with a high
level of debt. See "Policies with Respect to Certain Activities -- Conflict of
Interest Policies."
Outside Interests of Officers and Directors. Certain officers and
directors of the Company who are affiliated with Tower Equities will continue to
own direct and indirect interests in the Excluded Properties, which consist
entirely of interests in seven retail shopping center properties containing an
aggregate of 800,000 rentable square feet (the "Excluded Properties"). See "The
Properties -- Excluded Properties." Four out of seven of the Excluded Properties
are controlled by the Primary Contributors and have non-cancellable management
contracts. The remaining three properties are under management contracts which
may be terminated upon payment of two years of management fees or upon a sale of
such property. In addition, the Company has adopted certain policies relating to
conflicts of interest. These policies include a bylaw provision requiring all
transactions in which executive officers or directors have a conflicting
interest to that of the Company to be approved by a majority of the
disinterested directors or by the holders of a majority of the shares of Common
Stock held by disinterested stockholders. There can be no assurance, however,
that the Company's policies will be successful in eliminating the influence of
such conflicts, and if they are not successful, decisions could be made that
might fail to reflect fully the interests of all stockholders. See "Policies
with Respect to Certain Activities -- Conflict of Interest Policies."
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REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend in
large part on the amount of income generated and expenses incurred. If the
Properties do not generate revenues sufficient to meet operating expenses,
including debt service, tenant improvements, leasing commissions and other
capital expenditures, the Company may have to borrow additional amounts to cover
fixed costs which could cause the Company's cash flow and ability to make
distributions to its stockholders to be adversely affected.
The Company's revenues and the value of its properties may be adversely
affected by a number of factors, including the national, state and local
economic climate and real estate conditions (such as oversupply of or reduced
demand for space and changes in market rental rates); the perceptions of
prospective tenants of the safety, convenience and attractiveness of the
properties; the ability of the owner to provide adequate management, maintenance
and insurance; the ability to collect on a timely basis all rents from tenants;
the expense of periodically renovating, repairing and reletting spaces; and
increasing operating costs (including real estate taxes and utilities) which may
not be passed through to tenants. Certain significant expenditures associated
with investments in real estate (such as mortgage payments, real estate taxes,
insurance and maintenance costs) are generally not reduced when circumstances
cause a reduction in rental revenues from the property. In addition, real estate
values and income from properties are also affected by such factors as
compliance with laws, including tax laws, interest rate levels and the
availability of financing. Also, the amount of available rentable square feet of
commercial property is often affected by market conditions and may therefore
fluctuate over time. If any of the above occurred, the Company's ability to make
expected distributions to its stockholders could be adversely affected.
Tenant Defaults and Bankruptcy. Substantially all of the Company's income
will be derived from rental income on the Properties and, consequently, the
Company's distributable cash flow and ability to make expected distributions to
stockholders would be adversely affected if a significant number of tenants of
the Properties failed to meet their lease obligations. At any time, a tenant of
the Properties may seek the protection of the bankruptcy laws, which could
result in delays in rental payments or in the rejection and termination of such
tenant's lease and thereby cause a reduction in the Company's cash flow and,
possibly, the amount of cash available for distribution to its stockholders. No
assurance can be given that tenants will not file for bankruptcy protection in
the future or, if any tenants file, that they will affirm their leases and
continue to make rental payments in a timely manner. In addition, a tenant from
time to time may experience a downturn in its business which may weaken its
financial condition and result in the failure to make rental payments when due.
If tenant leases are not affirmed following bankruptcy or if a tenant's
financial condition weakens, the Company's cash flow and the amount of cash
available for distribution to its stockholders may be adversely affected.
Operating Risks. The Properties are subject to operating risks common to
commercial real estate in general, any and all of which may adversely affect
occupancy or rental rates. The Properties are subject to increases in operating
expenses such as cleaning; electricity; heating, ventilation and air
conditioning; elevator repair and maintenance; insurance and administrative
costs; and other general costs associated with security, landscaping, repairs
and maintenance. While the Company's tenants generally are obligated to pay a
portion of these escalating costs, there can be no assurance that tenants will
agree to pay such costs upon renewal or that new tenants will agree to pay such
costs. If operating expenses increase, the local rental market may limit the
extent to which rents may be increased to meet increased expenses without
decreasing occupancy rates. While the Company implements cost-saving incentive
measures at each of its Properties, the Company's ability to make distributions
to stockholders could be adversely affected if operating expenses increase
without a corresponding increase in revenues.
Risk Related to Lease Renewals and Reletting. The Company will be subject
to the risk that upon expiration of leases for space located in the Properties,
the leases may not be renewed, the space may not be relet or the terms of
renewal or reletting (including the cost of required renovations) may be less
favorable than current lease terms. Leases relating to an aggregate of
approximately 5.4% and 13.2% of the total rentable square feet in the Properties
will expire in the 12-month period ending June 30, 1998 and June 30, 1999,
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respectively. Furthermore, because Tower Equities has managed 13 of the
Properties for less than two years, the Company's estimate of projected leasing
commissions and tenant improvement costs for renewing leases at these Properties
may be understated. If the Company were unable to renew the leases or relet
promptly for all or a substantial portion of this space, if the rental rates
upon such renewal or reletting were significantly lower than expected rates or
if its reserves for these purposes proved inadequate, then the Company's cash
flow and ability to make expected distributions to stockholders may be adversely
affected. See "The Properties -- Lease Expirations -- Portfolio Total."
Reliance on Major Tenants. As of June 30, 1997, the Company's largest
tenant, American Express Financial Advisors Inc. and its affiliates ("American
Express"), accounted for approximately 5.9% of the Company's total Escalated
Rent. In addition, the Company's 10 largest tenants at the Properties (based on
Escalated Rent as of June 30, 1997) collectively accounted for approximately
27.5% of the Company's total portfolio Escalated Rent and 30.9% of the Company's
rentable square feet, and have a weighted average remaining lease term of
approximately five years. If the Company were to lose any one or more of such
tenants, or any one or more of such tenants were to declare bankruptcy,
experience a downturn in its business or fail to make rental payments when due,
there could be a material adverse affect on the Company's ability to make
distributions to stockholders. See "The Properties -- Tenant Diversification."
Competition. All of the Properties are located in highly developed areas
that include a large number of other office properties, including the four
Properties located in New York City, which is by far the largest office market
in the United States. The number of competitive office properties in such
locations could have a material adverse effect on the Company's ability to lease
office space at its Properties, and on the effective rents the Company is able
to charge. These competing properties may be newer or better located. In
addition, the Company may compete with other property owners that have greater
resources than the Company or that are willing to acquire properties in
transactions which are more highly leveraged than the Company is willing to
undertake. In particular, the Company may compete with other REITs that own,
operate and acquire office properties in the same locations as the Company. The
Company also will face competition from other real estate companies that provide
management, leasing and other services similar to those to be provided by the
Management Company.
Possible Environmental Liabilities. Under various federal, state, and
local environmental laws, ordinances and regulations, a current or previous
owner or operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances on, under or in such property. Such
laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances, or the failure to
remediate such property properly, may adversely affect the owner's ability to
lease such property or to borrow using such real property as collateral. Persons
who arrange for the disposal or treatment of hazardous or toxic substances may
also be liable for the costs of removal or remediation of hazardous substances
at the disposal or treatment facility, whether or not such facility is or ever
was owned or operated by such person. In connection with the ownership (direct
or indirect), operation, management and development of real properties, the
Company may be considered an owner or operator of such properties or as having
arranged for the disposal or treatment of hazardous or toxic substances and,
therefore, potentially liable for removal or remediation costs, as well as
certain other related costs, including governmental fines and injuries to
persons and property. Certain environmental laws and common law principles could
be used to impose liability for release of and exposure to hazardous substances,
including asbestos-containing materials ("ACMs") into the air, and third parties
may seek recovery from owners or operators of real properties for personal
injury or property damage associated with exposure to released hazardous
substances, including ACMs. As the owner of the Properties, the Company may be
potentially liable for any such costs. No assurances can be given that (i) a
prior owner, operator or occupant, such as a tenant, did not create a material
environmental condition not known to the Company or Tower Equities, (ii) a
material environmental condition with respect to any Property does not exist, or
(iii) future uses or conditions (including, without limitation, changes in
applicable environmental laws and regulations) will not result in the imposition
of environmental liability.
The Company engaged an independent consulting firm to perform Phase I
environmental site assessments ("ESAs"), or updates on ESAs performed within the
last 12 months, on all of the Properties. The
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purpose of Phase I ESAs is to identify potential sources of contamination for
which the Company may be responsible and to assess the status of environmental
regulatory compliance. For a number of the Properties, the Phase I ESAs
referenced prior Phase II ESAs obtained on such Properties. Phase II ESAs
generally involve more invasive procedures than Phase I ESAs, such as soil
sampling and testing or the installation and monitoring of groundwater wells.
The ESAs have not revealed any environmental condition, liability or compliance
concern that the Company believes would have a material adverse affect on the
Company's business, assets or results of operations, nor is the Company aware of
any such condition, liability or concern. It is possible that the ESAs relating
to any one of the Properties do not reveal all environmental conditions,
liabilities or compliance concerns or that there are material environmental
conditions, liabilities or compliance concerns that arose at a Property after
the related ESA report was completed of which the Company is otherwise unaware.
Moreover, no assurance can be given that: (i) future laws, ordinances or
regulations will not impose any material environmental liability; or (ii) the
current environmental condition of the Properties will not be affected by
tenants and occupants of the Properties, by the condition of properties in the
vicinity of the Properties (such as the presence of underground storage tanks)
or by third parties unrelated to the Company.
Effect of Americans with Disabilities Act Compliance on Cash Flow and
Distributions. Under the Americans with Disabilities Act of 1990 (the "ADA"),
all public accommodations and commercial facilities are required to meet certain
federal requirements related to access and use by disabled persons. Compliance
with the ADA requirements could require removal of access barriers and
non-compliance could result in imposition of fines by the U.S. government or an
award of damages to private litigants. Although the Company believes that the
Properties are in material compliance with these requirements, a determination
that the Company is not in compliance with the ADA could result in the
imposition of fines or an award of damages to private litigants. If the Company
were required to make unanticipated expenditures to comply with the ADA, the
Company's cash flow and the amounts available for distributions to its
stockholders may be adversely affected.
Changes in Laws. Because increases in income, service or transfer taxes
are generally not passed through to tenants under leases, such increases may
adversely affect the Company's cash flow and its ability to make distributions
to stockholders. The Properties also 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 material
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's cash flow and
expected distributions.
Uninsured Loss. The Company will initially carry comprehensive liability,
fire, flood (where appropriate), extended coverage, rental loss insurance with
respect to the Properties with policy specifications and insured limits
customarily carried for similar properties. There are, however, certain types of
losses (such as from wars, nuclear accidents, civil disturbances and
environmental matters) that may be either uninsurable or not economically
insurable. Should an uninsured loss or a loss in excess of insured limits occur,
the Company could lose both its capital invested in, and anticipated profits
from, one or more of its Properties, and may continue to be obligated on any
mortgage indebtedness or other obligations related to the Property. Any such
loss may adversely affect the business of the Company and its financial
condition and results of operations.
Risks Involved in Property Ownership through Partnerships and Joint
Ventures. After completion of the Offering, the Company will own a 10% interest
(subject to increase to up to 27.5% if certain performance criteria are
achieved) in the partnership that owns the 2800 North Central Property. As a
result, the Company will not have sole control over the Property or the ability
to control decisions with respect to this Property (such as decisions regarding
sale, refinancing, and the timing and amount of distributions). In addition, the
Company's investment in this partnership may, under certain circumstances,
involve risks not otherwise present in property ownership, including (i)
buy/sell rights that exist with respect to such Property; (ii) the risk that the
Company may be exposed to liability as a general partner of the partnership that
owns the 2800 North Central Property even though the Company does not have total
control over major decisions relating to
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the Property; and (iii) the risk that the Company's partner in the partnership
might at any time have economic or other business interests or goals that are
inconsistent with the business interests or goals of the Company, and that such
partners may be in a position to veto actions which may be consistent with the
Company's objectives or policies. See "The Properties -- Submarket and Property
Information -- Description of Uptown Phoenix Submarket Property."
In addition, the Company may participate with other entities in property
ownership through joint ventures or partnerships. Partnership or joint venture
investments may, under certain circumstances, involve risks not otherwise
present, including the possibility that the Company's partners or co-venturers
might become bankrupt, that such partners or co-venturers might at any time have
economic or other business interests or goals that are inconsistent with the
business interests or goals of the Company, and that such partners or
co-venturers may be in a position to take action contrary to the instructions or
the requests of the Company or contrary to the Company's policies or objectives,
including the Company's policy with respect to maintaining its qualification as
a REIT. The Company will, however, seek to maintain sufficient control of such
partnerships or joint ventures to permit the Company's business objectives to be
achieved. There is no limitation under the Company's organizational documents as
to the amount of available funds that may be invested in partnerships or joint
ventures. In addition, the Company may in the future acquire either a limited
partnership interest in a property partnership without partnership management
responsibility or a co-venturer interest or co-general partnership interest in a
property partnership with shared responsibility for managing the affairs of a
property partnership or joint venture and, therefore, will not be in a position
to exercise sole decision-making authority regarding the property partnership or
joint venture.
Risks Associated with Illiquidity of Real Estate. Equity real estate
investments are relatively illiquid. Such illiquidity will tend to limit the
ability of the Company to sell and purchase properties promptly in response to
changes in economic or other conditions. In addition, the Code may limit the
ability of a REIT to sell properties held for fewer than four years, which may
affect the Company's ability to sell properties even if a sale were in the best
interests of the Company's stockholders.
Acquisition, Redevelopment, and Development Risks. In the future, the
Company expects to acquire additional office properties. See "Operating and
Growth Strategies -- Growth Strategies." Acquisitions of office properties
entail the risk that investments will fail to perform in accordance with
expectations, including operating and leasing expectations. Redevelopment and
new project development are subject to numerous risks, including risks of
construction delays, cost overruns or force majeure that may increase project
costs, new project commencement risks such as the receipt of zoning, occupancy
and other required governmental approvals and permits and the incurrence of
development costs in connection with projects that are not pursued to
completion. The Company anticipates that certain of its acquisitions,
redevelopments, and developments will be financed using the proceeds of periodic
equity or debt offerings, lines of credit or other forms of secured or unsecured
financing that will result in a risk that permanent financing for newly acquired
projects might not be available or would be available only on disadvantageous
terms. If permanent debt or equity financing is not available on acceptable
terms to refinance acquisitions undertaken without permanent financing, further
acquisitions may be curtailed or cash available for distribution may be
adversely affected. In addition, it is anticipated that acquisition risks may be
heightened for acquisitions of Manhattan office properties due to the large size
of many Manhattan office properties and the complexity of acquisition
transactions in the Manhattan office market.
RISKS OF THIRD-PARTY PROPERTY MANAGEMENT, LEASING, AND RELATED SERVICES
Risks Associated with Termination of Management and Leasing Contracts. The
Company, through the Operating Partnership and the Management Company, intends
to pursue the management, leasing, development and construction of properties
owned by third parties. Risks associated with these activities include the risk
that the related contracts (which are typically cancelable upon 30 days' notice
or upon certain events, including sale of the property) will be terminated by
the property owner or will be lost in connection with a sale of such property,
that contracts may not be renewed upon expiration or may not be renewed on terms
consistent with current terms and that the rental revenues upon which
management, leasing, and development fees are based will decline as a result of
general real estate market conditions or specific market factors
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affecting properties managed, leased or developed by the Company, resulting in
decreased management or leasing fee income.
Adverse Consequences of Lack of Control Over the Business of the Management
Company. The capital stock of the Management Company will be divided into two
classes: voting common stock, 95% of which will be owned by Lawrence H. Feldman,
the Company's Chairman, Chief Executive Officer, and President, and 5% of which
will be owned by the Company, and non-voting common stock, all of which will be
owned by the Company, through the Operating Partnership. The voting common stock
and the non-voting common stock represent 5% and 95%, respectively, of the
economic interests in the Management Company. Lawrence H. Feldman is the holder
of 95% of the voting common stock of the Management Company and is currently the
sole director of the Management Company. The Company will not be able to elect
directors of the Management Company and, therefore, will not be able to
influence the day-to-day management decisions of such entity. As a result, the
board of directors and management of the Management Company may implement
business policies or decisions that would not have been implemented by persons
controlled by the Company and that are adverse to the interests of the Company
or that lead to adverse financial results, which could adversely impact the
Company's net operating income and cash flow. In addition, certain requirements
for REIT qualification may in the future limit the Company's ability to increase
the third-party management, leasing, development and construction operations
conducted, and related services offered, by the Operating Partnership and the
Management Company without jeopardizing the Company's qualification as a REIT.
See "Federal Income Tax Considerations -- Failure to Qualify as a REIT."
LIMITS ON CHANGES IN CONTROL
Potential Effects of Ownership Limitation. For the Company to maintain its
qualification as a REIT under the Code, not more than 50% in value of the
outstanding shares of equity securities of the Company may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of the Company's taxable year
(other than the first taxable year for which the election to be treated as a
REIT has been made). To assist the Company in qualifying as a REIT under this
and other provisions under the Code, the Company's Charter, subject to certain
exceptions, prohibits ownership, directly or indirectly by virtue of certain
attribution provisions of the Code, of more than (i) 9.8% of the number or value
of the outstanding shares of Common Stock or (ii) 9.8% of the number or value of
the outstanding shares of any class of preferred stock of the Company, par value
$0.01 per share (the "Preferred Stock"), or any series of Preferred Stock
(collectively, the "Ownership Limitation"). Generally, the stock owned by
affiliated owners will be aggregated for purposes of the Ownership Limitation.
The Company's Board of Directors may, under certain circumstances (upon receipt
of a ruling from the Internal Revenue Service (the "IRS"), an opinion of counsel
or other evidence satisfactory to the Board and upon such other conditions as
the Board may establish), exempt a proposed transferee from the Ownership Limit.
However, the Board may not grant an exemption from the Ownership Limit to any
proposed transferee whose ownership, direct or indirect, of shares of capital
stock of the Company in excess of the Ownership Limit would result in the
termination of the Company's status as a REIT. See "Description of Common
Stock -- Restrictions on Transfer." Absent any such exemption, shares of capital
stock acquired in violation of the Ownership Limit will be transferred to a
trust for the benefit of a designated charitable beneficiary, with the person
who acquired such shares in violation of the Ownership Limit not entitled to
receive any distributions thereon, to vote such shares, or to receive any
proceeds from the subsequent sales thereof in excess of the lesser of the price
paid therefor or the amount realized from such sale. A transfer of shares to a
person who, as the result of the transfer, violates the Ownership Limit may be
void under certain circumstances. The foregoing restrictions on transferability
and ownership will continue to apply until (i) 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 and (ii) there is an affirmative vote of a
majority of the votes entitled to be cast on such matter at a regular or special
meeting of the stockholders of the Company. The Ownership Limit may have the
effect of delaying, deferring, or preventing a transaction or a change in
control of the Company that might involve a premium price for the Common Stock
or otherwise be in the best interest of the stockholders. See "Description of
Capital Stock -- Restrictions on Transfer."
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Potential Effects of Staggered Board. The Company's Board of Directors is
divided into three classes. The initial terms of the first, second and third
classes will expire in 1998, 1999, and 2000, respectively. Beginning in 1998,
directors of each class will be chosen for three-year terms upon the expiration
of their existing terms and each year one class of directors will be elected by
the stockholders. The staggered terms of directors may reduce the possibility of
a tender offer or an attempt to change control of the Company, even if a tender
offer or change in control would be in the best interest of the stockholders.
See "Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws -- Number of Directors; Classification of the Board of Directors."
Potential Effects of Issuance of Additional Shares. The Company's Charter
authorizes the Board of Directors 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 unclassified shares. See
"Description of Capital Stock." Although the Board of Directors has no such
intention to do so at the present time, it could establish a class or series of
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. The Charter and Bylaws of the Company also contain
other provisions that 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 "Certain Provisions of Maryland Law and of the Company's
Charter and Bylaws -- Removal; Filling Vacancies, -- Control Share Acquisition
Statute -- Advance Notice of Director Nominations and New Business."
Limitations on Acquisition of and Changes in Control Pursuant to Maryland
Law. Certain provisions of the Maryland General Corporation Law (the "MGCL")
may have the effect of inhibiting a third party from making an acquisition
proposal for the Company or of impeding a change in control of the Company under
circumstances that otherwise could provide the holders of shares of Common Stock
with the opportunity to realize a premium over the then-prevailing market price
of such shares. In particular, the MGCL provides that, unless exempted by action
of the Board of Directors, certain "business combinations" between a Maryland
corporation, such as the Company, and a stockholder holding 10% or more of the
corporation's voting securities (an "Interested Stockholder") may not occur for
a period of five years after such stockholder becomes an Interested Stockholder.
Therefore, a business combination may be impeded or prohibited, even if such a
combination were in the best interest of the Company's stockholders. The MGCL
also provides that so-called "control shares" may be voted only upon the
approval of two-thirds of the outstanding stock of the corporation exclusive of
the control shares. Control shares are shares which, if aggregated with all
other shares previously acquired by the acquiror, would entitle the acquiror to
vote certain statutorily determined percentages of outstanding shares. Under
certain circumstances, a Maryland corporation also may redeem the control shares
and, in the event the control shares are permitted to vote, the other
stockholders of the corporation are entitled to appraisal rights. Therefore, a
control share acquisition could be impeded and the attempt of any such
transaction could be discouraged, even if it were in the best interest of the
Company's stockholders. The Company has opted out of the business combination
and control share provisions of the MGCL, but the Board of Directors may elect
to adopt these provisions of the MGCL in the future.
TAX RISKS
Failure to Qualify as a REIT. The Company intends to operate so as to
qualify as a REIT for federal income tax purposes, commencing with its taxable
year ending December 31, 1997. The Company expects to qualify initially as a
REIT, but no assurance can be given that it will so qualify or be able to remain
so qualified. Although the Company has not requested, and does not expect to
request, a ruling from the IRS that it qualifies as a REIT, it will receive at
the closing of the Offering an opinion of its tax counsel that, based on certain
assumptions and representations, the Company is organized in conformity with the
requirements for qualification as a REIT under the Code, and that the Company's
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT. No assurance can be given, however, that
new legislation, Treasury Regulations, administrative interpretations or court
decisions will not significantly
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change the tax laws with respect to the Company's qualification as a REIT or the
federal income tax consequences of such qualification. Investors should be
aware, however, that opinions of counsel are not binding on the IRS or any
court. Furthermore, Counsel's opinion is based on an analysis of the facts,
including the proposed method of operation of the Company, as they exist at the
Closing. Moreover, the qualification of the Company as a REIT will depend on the
Company's continuing ability to meet various requirements concerning, among
other things, the ownership of its outstanding stock, the nature of its assets,
the sources of its income, and the amount of its distributions to its
stockholders. Because the Company has no history of operating so as to qualify
as a REIT, there can be no assurance that the Company will do so successfully.
See "Federal Income Tax Considerations -- Taxation of the Company -- Failure to
Qualify as a REIT." If the Company were to fail to qualify as a REIT for any
taxable year, the Company would not be allowed a deduction for distributions to
its stockholders in computing its taxable income and would be subject to federal
income tax (including any applicable minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain Code
provisions, the Company also would be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification was lost.
As a result, cash available for distribution would be reduced for each of the
years involved. In addition, although the Company intends to operate in a manner
designed to qualify as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause the Board of Directors, with the
consent of stockholders by a majority of the vote entitled to be cast on such
matter at a regular or special meeting of stockholders, to revoke the REIT
election. See "Federal Income Tax Considerations."
REIT Minimum Distribution Requirements. In order to qualify as a REIT, the
Company generally will be required each year to distribute to its stockholders
at least 95% of its net taxable income (excluding any net capital gain). In
addition, the Company will be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
calendar year are less than the sum of (i) 85% of its ordinary income for that
year, (ii) 95% of its capital gain net income for that year, and (iii) 100% of
its undistributed taxable income from prior years. See "Federal Income Tax
Considerations -- Taxation of the Company -- Requirements for Qualification as a
REIT." The Company intends to make distributions to its stockholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise tax.
The Company's income will consist primarily of its share of the income of the
Operating Partnership, and the cash available for distribution by the Company to
its stockholders will consist of its share of cash distributions from the
Operating Partnership. Differences in timing between (i) the actual receipt of
income and actual payment of deductible expenses and (ii) the inclusion of such
income and deduction of such expenses in arriving at taxable income of the
Company could require the Company, through the Operating Partnership, to borrow
funds on a short-term basis to meet the 95% distribution requirement and to
avoid the nondeductible excise tax. The requirement to distribute a substantial
portion of the Company's net taxable income could cause the Company to
distribute amounts that otherwise would be spent on future acquisitions,
unanticipated capital expenditures or repayment of debt, which would require the
Company to borrow funds or to sell assets to fund the costs of such items.
Other Tax Liabilities. Even if the Company qualifies as a REIT, it will be
subject to certain federal, state and local taxes on its income and property. In
addition, the net taxable income, if any, of the Management Company will be
subject to federal and state income tax. See "Federal Income Tax
Considerations -- Other Tax Considerations."
REAL ESTATE FINANCING RISKS
Rising Interest Rates. Initially, the $35.0 million loan encumbering the
Tower 45 Property will bear interest at a variable rate. See "The
Properties -- Mortgage Indebtedness Remaining Following the Offering." In
addition, the Company anticipates that advances under the Line of Credit will
bear interest at a variable per annum rate which will depend on the Company's
overall leverage. The Company may incur additional indebtedness in the future
that also bears interest at variable rates. Variable rate debt creates higher
debt service requirements if market interest rates increase, which would
adversely affect the Company's cash flow and the amounts available for
distributions to its stockholders. The Company may in the future engage in
transactions to limit its exposure to rising interest rates as appropriate and
cost effective. See "Management's
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Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Debt Financing and Potential Adverse Effects on Cash Flows and
Distributions. The Company will be subject to risks normally associated with
debt financing, including the risk that the Company's cash flow will be
insufficient to pay distributions at expected levels and meet required payments
of principal and interest, the risk that indebtedness on the Properties (which
will not have been fully amortized at maturity in all cases) will not be able to
be refinanced or that the terms of such refinancing will not be as favorable as
the terms of existing indebtedness. Upon consummation of the Offering and the
Formation Transactions, the Company expects to have outstanding consolidated
indebtedness of approximately $109 million, with maturities ranging from 1998 to
2006. The Company has the right to prepay, prior to maturity, the $35.0 million
of mortgage indebtedness that will be secured by the Tower 45 Property following
the consummation of the Offering. If the Board of Directors determines that it
is in the best interests of the Company to cause the Company to prepay the loan
prior to maturity, the Company is poised to finance such prepayment by drawing
upon the Company's Term Loan. If the Company does not repay the indebtedness
relating to the Tower 45 Property in full or prior to December 31, 1997, the
Company will be required to apply all net cash flow from the Tower 45 Property
and certain escrowed amounts toward the reduction of outstanding principal of
such loan. Such required prepayments would have a material adverse impact on,
among other things, the amount of cash available for distribution by the Company
to its stockholders.
In addition, the Company expects to enter into the Line of Credit to fund
the acquisition and development of additional office properties, tenant and
capital improvements to office properties and working capital. The Line of
Credit will be recourse to the Company and the Operating Partnership and is
expected to mature two years following the closing of the loan. If principal
payments due at maturity cannot be refinanced, extended or paid with proceeds of
other capital transactions, such as the issuance of new equity capital, the
Company expects that its cash flow will not be sufficient in all years to pay
distributions at expected levels and to repay all maturing debt. Furthermore, if
prevailing interest rates or other factors at the time of refinancing result in
higher interest rates upon refinancing, the interest expense relating to such
refinanced indebtedness would increase, which would adversely affect the
Company's cash flow and the amounts available for distributions to its
stockholders. If a property or properties are mortgaged to secure payment of
indebtedness and the Company is unable to meet mortgage payments, the property
could be foreclosed upon by or otherwise transferred to the mortgagee with a
consequent loss of income and asset value to the Company.
Construction Loans and Risks Associated with Sale or Foreclosure. If new
developments are financed through construction loans, there is a risk that upon
completion of construction, permanent financing for newly developed properties
may not be available or may be available only on disadvantageous terms. In the
event that the Company is unable to obtain permanent financing for a developed
property on favorable terms, it could be forced to sell such property at a loss
or the property could be foreclosed upon by the lender and result in loss of
income and asset value to the Company. On July 15, 1997, an affiliate of Tower
Equities transferred to a lender its ownership interest in a medical office
property pursuant to a deed in lieu of foreclosure in favor of such lender in
respect of mortgage indebtedness of approximately $11.5 million.
RISK OF HIGH DISTRIBUTION PAYOUT RATIO
The Company's estimated annual distribution rate is 94.6% of the Company's
estimated cash available for distribution for the 12 months ending June 30,
1998. See "Distributions." Should actual cash available for distribution be less
than estimated cash available for distribution, the Company may not be able to
achieve and maintain its proposed initial distribution rate. Any such failure to
make expected distributions could result in a decrease in the market price of
the Common Stock.
GEOGRAPHIC CONCENTRATIONS IN CERTAIN MARKETS
Nine of the Company's 20 Properties are located in Arizona, including seven
Properties located in the Metropolitan Phoenix office market, four Properties
are located in the midtown Manhattan office market, and six Properties located
in the Metropolitan Orlando office market. In addition, the Company initially
intends to
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concentrate its future acquisitions in its primary markets. Like other real
estate markets, these commercial real estate markets have experienced economic
downturns in the past, and future declines in any of these economies or real
estate markets could adversely affect the Company's cash available for
distribution. The Company's financial performance and its ability to make
distributions to stockholders are therefore dependent on the economic conditions
in the midtown Manhattan, Metropolitan Phoenix and Metropolitan Orlando office
markets. The Company's revenues and the value of its Properties may be affected
by a number of factors, including the local economic climate (which may be
adversely impacted by business layoffs or downsizing, industry slowdowns,
changing demographics and other factors) and local real estate conditions (such
as oversupply of or reduced demand for office, industrial and other competing
commercial properties). There can be no assurance as to the continued growth of
the economies in the Metropolitan Phoenix, midtown Manhattan or Metropolitan
Orlando office markets, or the future growth rate of the Company.
RISKS ASSOCIATED WITH ACQUISITIONS; LACK OF OPERATING HISTORY
Thirteen of the Properties have been under the Company's management for two
years or less. The most recently acquired Properties may have characteristics or
deficiencies unknown to the Company affecting their value or revenue potential,
and it is also possible that the operating performance of the most recently
acquired Properties may decline under the Company's management. As the Company
acquires additional properties, the Company will be subject to risks associated
with managing new properties, including lease-up and tenant retention. In
addition, the Company's ability to manage growth effectively will require it to
successfully integrate its new acquisitions into its management structure. No
assurance 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.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL; NO LIMITATION ON DEBT
The investment, financing, borrowing and distribution policies, including
the Debt Policy, of the Company and its policies with respect to all other
activities, including growth, capitalization and operations, will be determined
by the Board of Directors. The Company's Debt Policy limits the Company's total
consolidated indebtedness plus its pro rata share of indebtedness of
unconsolidated investments ("Joint Venture Debt") to 50% or less of the
Company's total equity market capitalization plus its consolidated indebtedness
and pro rata share of Joint Venture Debt ("Total Market Capitalization"), but
the organizational documents of the Company do not contain any limitation on the
amount of indebtedness the Company may incur. Although the Company's Board of
Directors has no present intention to do so, these policies may be amended or
revised at any time and from time to time at the discretion of the Board of
Directors without a vote of the stockholders of the Company. A change in these
policies could adversely affect the Company's financial condition, results of
operations or the market price of the Common Stock. See "Policies with Respect
to Certain Activities."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers,
particularly Lawrence H. Feldman, the Company's Chairman, Chief Executive
Officer, and President. The loss of any of their services could have an adverse
effect on the operations of the Company. Prior to the consummation of the
Offering, each of Messrs. Feldman, Cox, and Kasman will enter into an employment
agreement with the Company. See "Management -- Employment Agreements." Certain
assets of the Primary Contributors, including the Excluded Properties, are not
being contributed to the Company and certain of the executive officers of the
Company, including Mr. Feldman, may devote some of their management time towards
those excluded assets. See "Management -- Employment Agreements" and "The
Properties -- Excluded Properties."
CONTROL OF MANAGEMENT
None of the directors or officers of the Company is selling any Common
Stock in the Offering. Upon completion of the Offering and the Formation
Transactions, all directors and executive officers of the Company as a group
will beneficially own approximately % of the total issued and outstanding
Common
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Stock and OP Units (which will be exchangeable by the holders for cash or, at
the election of the Company, shares of Common Stock on a one-for-one basis after
one year). See "Principal Stockholders." Management currently expects that the
Company will elect to exchange such OP Units for Common Stock. Mr. Feldman will
serve as Chairman, Chief Executive Officer and President of the Company. Mr. Cox
will serve as Executive Vice President and Chief Operating Officer of the
Company and Mr. Kasman will serve as Senior Vice President and Chief Financial
Officer of the Company. In addition, Messrs. Feldman and Cox serve as two of the
five directors of the Company. Accordingly, such persons will have substantial
influence over the Company, which influence might not be consistent with the
interests of other stockholders, and may in the future have a substantial
influence on the outcome of any matters submitted to the Company's stockholders
for approval if all of their OP Units are exchanged for Common Stock. See
"-- Conflicts of Interests in the Formation Transactions and the Business of the
Company."
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK; MARKET CONDITIONS
Prior to the Offering there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or be
sustained or that Common Stock will be resold at or above the Offering Price.
The Company will apply for listing of the Common Stock on the New York Stock
Exchange (the "NYSE"). The Offering Price of the Common Stock has been
determined by agreement among the Company and the Underwriters and may not be
indicative of the market price for the Common Stock after the Offering. See
"Formation and Structure of the Company -- Determination and Valuation of
Ownership Interests" and "Underwriting." The market value of the Common Stock
could be substantially affected by general market conditions, which could change
from time to time, including (i) changes in interest rates; (ii) the extent to
which a secondary market develops for the Common Stock following the Offering;
(iii) the extent of institutional investor interest in the Company; (iv) the
general reputation of REITs and the attractiveness of their equity securities in
comparison to other equity securities (including securities issued by other real
estate-based companies); (v) the Company's financial performance; and (vi)
general stock and bond market conditions. Moreover, numerous other factors, such
as regulatory action and changes in tax laws, could have a significant impact on
the future market price of the Common Stock. One of the factors that will
influence the market price of the Common Stock in public markets will be the
annual distribution rate on the Common Stock. In addition, an increase in market
interest rates may lead prospective purchasers of the Common Stock to expect a
higher annual distribution rate from future distributions, which would adversely
affect the market price of the Common Stock. There also can be no assurances
that, upon listing, the Company will continue to meet the criteria for continued
listing of the Common Stock on the NYSE.
IMMEDIATE AND SUBSTANTIAL DILUTION
As set forth more fully under "Dilution," the pro forma net tangible book
value per share of the assets of the Company after the Offering will be
substantially less than the Offering Price. Accordingly, purchasers of the
Common Stock offered hereby will experience immediate and substantial dilution
of $2.25 per share in the net tangible book value of the Common Stock from the
Offering Price. See "Dilution."
ERISA RISKS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and section 4975 of the Code prohibit certain transactions that involve (i)
certain pension, profit-sharing, employee benefit, or retirement plans or
individual retirement accounts (each, a "Plan") and (ii) the assets of a Plan. A
"party in interest" or "disqualified person" with respect to a Plan will be
subject to (x) an initial 10% excise tax on the amount involved in any
prohibited transaction involving the assets of the Plan and (y) an excise tax
equal to 100% of the amount involved if any prohibited transaction is not
corrected. Consequently, the fiduciary of a Plan contemplating an investment in
the Common Stock should consider whether the Company, any other person
associated with the issuance of the Common Stock, or any affiliate of the
foregoing is or might become a "party in interest" or "disqualified person" with
respect to the Plan. In such a case, the acquisition or holding of Common Stock
by or on behalf of the Plan could be considered to give rise to a prohibited
transaction under ERISA and the Code. See "ERISA Considerations -- Employee
Benefit Plans, Tax Qualified
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Retirement Plans, and IRAs." Regulations of the Department of Labor that define
"plan assets" (the "Plan Asset Regulations") provide that in some situations,
when a Plan acquires an equity interest in an entity, the Plan's assets include
both the equity interest and an undivided interest in each of the underlying
assets of the entity, unless one or more exceptions specified in the Plan Asset
Regulations are satisfied. In such a case, certain transactions that the Company
might enter into in the ordinary course of its business and operations might
constitute "prohibited transactions" under ERISA and the Code. The assets of the
Company should not be deemed to be "plan assets" of any Plan that invests in the
Common Stock. See "ERISA Considerations -- Status of the Company and the
Partnership (and the Subsidiary Partnerships) under ERISA."
POSSIBLE ADVERSE EFFECT ON COMMON STOCK PRICE OF SHARES AVAILABLE FOR FUTURE
SALE
Sales of a substantial number of shares of Common Stock, or the perception
that such sales could occur, could adversely affect prevailing market prices of
the Common Stock. The Operating Partnership, in connection with the Formation
Transactions, will issue to persons other than the Company an aggregate of
1,408,943 OP Units, and the Company will issue 2,452,800 shares of restricted
Common Stock in connection with the Formation Transactions and the Concurrent
Private Placement and the cancellation of the MSAM Notes. These OP Units may be
exchanged for cash based on their fair market value or, at the Company's option,
for shares of Common Stock on a one-for-one basis. In certain circumstances, the
Company may not be able to exercise its option to satisfy such partners'
exchange rights with Common Stock because of tax or securities law limitations.
An exercise of exchange rights in such circumstances could adversely affect the
Operating Partnership's liquidity because it would then be required to satisfy
such rights with cash. The Exchange Agreement (as defined in "Partnership
Agreement -- Exchange Rights") prohibits the exchange of OP Units for a period
of one year following the closing of the Offering. In addition, the officers and
directors of the Company have agreed, subject to certain limited exceptions, not
to offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock (or any securities convertible into or exercisable for shares of Common
Stock) for a two-year period after the date of this Prospectus without the prior
written consent of the Representatives. The purchasers of the shares of Common
Stock in the Concurrent Private Placement and the recipients of shares of Common
Stock in the Formation Transaction have agreed not to offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock for at least a one-year
period after the date of this Prospectus without the prior written consent of
the Representatives. See "Underwriting." The Registration Rights Agreement (as
defined in "Partnership Agreement -- Registration Rights") requires the Company
to register all restricted shares of Common Stock under the Act, including
shares issuable upon the exchange of OP Units. As a result, at the conclusion of
the one-year restriction period and the applicable Lock-up Period, all shares of
Common Stock issued in connection with the Formation Transactions or acquired
upon exchange of OP Units may be sold in the public market. In addition, up to a
number of shares of Common Stock equal to 9.5% of the total number of issued and
outstanding shares of Common Stock (on a fully diluted basis assuming the
exchange of all OP Units for shares of Common Stock) will be reserved for
issuance pursuant to the 1997 Plan and 200,000 shares also will be reserved for
issuance to non-employee directors pursuant to the Directors' Plan. Options to
purchase 838,000 shares of Common Stock at the Offering Price will be granted to
the Company's executive officers and employees under the 1997 Plan and the
Company's directors under the Directors' Plan in connection with the Formation
Transactions. See "Management -- Stock Option and Restricted Stock
Plans -- Compensation of Directors, -- Executive Compensation and -- 1997 Plan."
No prediction can be made about the effect that future sales of Common Stock
will have on the market prices of shares. See "Shares Available for Future
Sale."
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THE COMPANY
GENERAL
The Company has been formed to continue and expand the commercial real
estate business of Tower Equities which since 1985 has been engaged in
developing, acquiring, owning, renovating, managing, and leasing office
properties in the Manhattan, Phoenix/Tucson and Orlando markets. Upon completion
of the Offering, the Company will own interests in the 20 Properties
encompassing approximately 2.9 million rentable square feet. The Company will
also own or have options to acquire four parcels of land which can support an
aggregate of approximately 2.2 million square feet of development. See "The
Properties -- Development Parcels and -- Phoenix Land Parcel." As of June 30,
1997, the Properties were approximately 94.7% leased to over 350 tenants, and
approximately 76% of the Company's Escalated Rent from its portfolio was derived
from Properties located in central business district locations, including
approximately 46% from Properties located in the Manhattan office market.
Substantially all of the Properties are located in midtown Manhattan, Phoenix,
Tucson, and Orlando. The Company will operate as a fully integrated,
self-administered, and self-managed real estate company and expects to qualify
as a REIT for federal income tax purposes.
The Company will continue Tower Equities' turnaround strategy of acquiring
these properties at a significant discount to replacement cost that are
underperforming due to physical, leasing, and/or operational deficiencies.
Consistent with this strategy, the Company will seek to acquire office
properties that present an attractive opportunity to create value and enhance
cash flow through the Company's hands-on approach to property repositioning,
including the implementation of property-specific renovation and refurbishment
programs for underperforming assets. The Company believes that the significant
experience of its management in property development, redevelopment,
construction, management, and leasing provide it with the expertise necessary to
identify, acquire, upgrade, renovate, and reposition underperforming office
properties.
The Company initially intends to focus its turnaround strategy in Manhattan
because the Company believes that the current supply/demand fundamentals in that
office market provide an attractive environment for owning and operating office
properties. As a result of increasing demand for office space in Manhattan, and
limited new supply of such space, vacancy rates in Manhattan have declined
during the last five years and the Company believes that effective rental rates
(i.e., rental rates after taking into account tenant improvement costs and
leasing concessions) for office properties in Manhattan have increased. See
"Property Office Markets and Market Economies." The Company believes that demand
for office space in the Manhattan office market has increased recently because
of consistent net private sector job growth, a strengthening New York City
metropolitan economy, and an improving business environment and quality of life
offered by New York City. At the same time, the supply of office space in
Manhattan has remained virtually unchanged since 1992, and the Company believes
that supply is unlikely to increase substantially over the near term primarily
because there are relatively few sites available for land assemblage and
construction, the lead time required for assemblage and construction typically
exceeds three years, and new construction generally is not economically feasible
given current market rental rates.
The Company believes that opportunities exist to acquire interests in
office properties in Manhattan on attractive terms, including at prices
significantly below replacement cost. Notwithstanding the current favorable
supply/demand fundamentals in the Manhattan office market, the Company believes
that, in order to justify new construction in this market, asking rents
generally would have to increase at least 40% over current asking rents for
Class A office space in Manhattan (as estimated by Landauer), not taking into
account any tax benefits which may apply.
The Company will also pursue the strategic acquisition of office properties
located in the Phoenix and Orlando markets that are consistent with its
turnaround strategy, as well as the development of the Company's development
parcels located in those markets. The Company believes these office markets
generally have significant rent growth potential due to employment growth,
declining vacancies, and limited new construction activity. According to the
1997 Landauer Market Forecast, Phoenix and Orlando ranked first and second,
respectively, with respect to momentum in the national office market, based on a
supply/demand projection
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for 60 office markets in the United States. The improved economic fundamentals
in these markets have resulted in a decline in direct vacancy rates from
December 31, 1992 to March 31, 1997 from 16.8% to 10.2% in the Metropolitan
Orlando office market and 25.1% to 8.6% in the Metropolitan Phoenix office
market.
Tower Equities was formed in 1985 by Lawrence H. Feldman, the Company's
Chairman, Chief Executive Officer, and President, and Edward Feldman, his father
(who has since retired), and traces its origins to a predecessor family-owned
general contracting business that was founded at the beginning of the twentieth
century by Lawrence H. Feldman's grandfather, the late H.J. Feldman. Tower
Equities has acquired and/or developed many of the Properties owned by the
Company with institutional joint venture partners, including affiliates of
General Electric Capital Corp., DRA Advisors, Inc., the Carlyle Group, and the
Quantum Realty Fund (an entity affiliated with George Soros). Certain of these
investment partners, including affiliates of General Electric Capital Corp., and
DRA Advisors, Inc. will continue as stockholders in the Company following the
Offering.
The Company operates from its midtown Manhattan headquarters and its two
full service regional offices (Orlando and Phoenix), and is a fully integrated
real estate company with approximately 65 employees with in-house expertise in
acquisition, development, construction, property management, and leasing. The
five executive officers of the Company and the two managing directors of the
Company's Orlando and Phoenix regional offices have an average of 17 years
experience in the real estate industry (including an average of over eight years
with the Company). Upon completion of the Offering, management will, in the
aggregate, own approximately % of the Company's equity. See
"Management -- Directors and Executive Officers."
OPERATIONS OF THE COMPANY
The Company's operations will be carried out through subsidiaries which
consist primarily of the Operating Partnership, the Subsidiary Partnerships and
the Management Company. The Company will form additional subsidiaries or
affiliates in cases where the Company determines that the use of a separate
entity is advisable.
The Operating Partnership. Upon completion of the Offering, the Company
will acquire an approximately 89.9% interest in the Operating Partnership, a
recently formed Delaware limited partnership. The Company will be the sole
general partner of the Operating Partnership and will own a 1.0% general partner
interest in the Operating Partnership. Through the ownership of this general
partner interest, the Company will control the Operating Partnership and its
assets. The Company also will be one of the Operating Partnership's limited
partners (the "Limited Partners") and will initially own an approximately 88.9%
limited partnership interest in the Operating Partnership. Other initial limited
partners will be the Primary Contributors and other holders of interests in the
Properties who have elected to receive OP Units in exchange for all or a portion
of their interests in the Properties. In their capacity as such, the Limited
Partners will have no authority to transact business for, or participate in the
management, activities or decisions of, the Operating Partnership. The Operating
Partnership will own, directly or through one or more Subsidiary Partnerships,
interests in all of the Properties. The Operating Partnership will own, directly
or indirectly, a 99.9% interest in each Subsidiary Partnership with the
remaining 0.1% interest held by the Company.
The Management Company. The Company conducts its real estate management
and leasing and tenant/landlord representation businesses, through the
Management Company. The Management Company manages all of the Properties, as
well the Excluded Properties. See "The Properties -- Excluded Properties." As of
June 30, 1997, the Management Company was managing properties containing an
aggregate of 3.6 million rentable square feet, of which 2.7 million rentable
square feet related to the Properties and 866,000 rentable square feet related
to the Excluded Properties. For the years ended December 31, 1994, 1995 and
1996, the Management Company's tenant/landlord representation business (formerly
conducted by Properties Atlantic) had revenues of $512,400, $430,000, and
$930,000, respectively. Through its ownership of 100% of the non-voting common
stock and 5% of the common stock of the Management Company, the Operating
Partnership is entitled to receive approximately 95% of the amounts paid as
dividends by the Management Company. Additionally, the certificate of
incorporation of the Management Company requires the quarterly distribution of
all the net operating cash flow after working capital to its stockholders as
dividends.
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Lawrence H. Feldman is the sole director of the Management Company and owns 95%
of the voting common stock thereof.
CONCURRENT PRIVATE PLACEMENT
Concurrent with the closing of the Offering, the Morgan Stanley Investors
advised by MSAM have agreed to purchase $20.0 million in Common Stock directly
from the Company in a private placement at the Offering Price. The Underwriters
will not receive a discount or commission on the sale of Common Stock in the
Concurrent Private Placement. The closing of the Concurrent Private Placement is
subject to the closing of the Offering and the satisfaction of other customary
conditions. In addition, in connection with the Formation Transactions, the
Company will repay the outstanding balance of the MSAM Notes ($7.7 million as of
July 31, 1997) by issuing to the Morgan Stanley Investors approximately
shares of restricted Common Stock (valued at approximately $
million based on the Offering Price) in complete satisfaction of the MSAM Notes.
The Company has granted to the Morgan Stanley Investors certain registration
rights with respect to sales of Common Stock received by the Morgan Stanley
Investors or any affiliates in connection with the Concurrent Private Placement
and the Formation Transactions, including the right to include such shares in a
shelf registration statement the Company has agreed to file within 15 days after
the expiration of the one-year period following completion of this Offering. In
addition, in connection with the Offering, the Morgan Stanley Investors have
agreed, subject to certain exceptions, not to sell, offer or contract to sell,
grant any option for the sale of, or otherwise dispose of any shares of Common
Stock or any securities convertible in to or exchangeable for Common Stock for a
period of one year from the date of this Prospectus, without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. Also, the Company
has granted to the Morgan Stanley Investors the right to have a representative
observe the meetings of the Board of Directors and its committees. These Board
observation rights terminate at any time the Morgan Stanley Investors hold less
than 60% of the shares of Common Stock acquired by them at the closing of the
Offering. See "Underwriting" and "Shares Available for Future Sale."
The Company is a Maryland corporation incorporated on March 21, 1997. The
Company's executive offices are located at 120 West 45th Street, 24th Floor, New
York, New York 10036 and its telephone number is (212) 768-9010.
OPERATING AND GROWTH STRATEGIES
The Company's primary business objective is to maximize stockholder value
through increases in cash available for distribution per share and appreciation
in the value of the Common Stock. The Company plans to achieve this objective by
continuing Tower Equities' operating strategies and implementing the internal
and external growth strategies described below.
OPERATING STRATEGIES
Through its midtown Manhattan headquarters and its two full service
regional offices (Orlando and Phoenix), the Company applies a vertically
integrated approach to acquisition, management, leasing, and renovation
activities that is designed to facilitate decision-making and enhance
responsiveness to market opportunities and tenant needs. The Company's operating
strategies include (i) emphasizing tenant satisfaction, and thereby promoting
tenant retention, through activities such as quarterly tenant satisfaction
surveys, property newsletters, and Company/tenant special events, all of which
are designed to keep the Company highly attuned to the needs of its tenants;
(ii) employing intensive property marketing within the commercial brokerage
communities, including regular promotional presentations at broker offices,
Company-sponsored sporting events, such as golf outings, and the distribution of
monthly mailers, property videos, and other Company marketing materials, all of
which foster long-standing relationships with brokers; and (iii) implementing
cost control management and systems that capitalize on economies of scale
arising from the size and location of the Company's portfolio. The Company
believes that these operating practices have, over time, increased occupancy
rates and rental revenue of its existing portfolio, which was 94.7% occupied as
of June 30, 1997.
36
<PAGE> 42
In addition, the Company uses cost control management and systems that
capitalize on economies of scale arising from the size and location of the
Company's portfolio. Upon the acquisition of a property, the Company implements
a standard expense reduction program that is designed to assimilate the new
property into its portfolio with the objective of capitalizing on cost reduction
opportunities. Each expense item is compared to a standard measure of
performance and from this data a plan is implemented to reduce operating costs.
The program typically includes the upgrade of energy delivery systems through
the retrofitting of light fixtures, the improvement of heating, ventilation and
air conditioning systems, and the termination of above market service contracts.
This program has resulted in the achievement of an average investment yield
(calculated by dividing the reduction in operating expenses of the Company by
the cost of implementing the expense reduction program) at each Property (other
than development Properties) of approximately 33% following the first 12 months
of the Company's implementation of its standard expense reduction program for
that Property.
GROWTH STRATEGIES
Internal Growth
The Company believes that opportunities to increase cash flow from its
existing portfolio will be realized as the Company begins to achieve the
benefits of its product repositioning strategy. The Company intends to increase
cash available for distribution per share and the value of the Common Stock from
the following sources:
- Contractual Rental Rate Increases: As of June 30, 1997, 251 leases,
representing approximately 70.0% of the total leases and 56.0% of the
rentable square feet at the Properties, included built-in contractual
rate increases over the remainder of the lease term. Between July 1, 1997
and June 30, 1998 the contractual base rents received by the Company
under such leases are expected to increase by an aggregate of $1.25
million (exclusive of increases attributable to the transition from free
or partial rent to full rent or rent increases tied to indices such as
the CPI).
- Tenant Rollover: The Company expects to experience cash flow growth
through the releasing of approximately 247,067 rentable square feet under
50 leases that expire at the Properties between July 1, 1997 and June 30,
1998, with a weighted average Escalated Rent of $16.81 per square foot,
as compared to a weighted average market rental rate within its primary
markets of $18.64 per square foot. The following table sets forth certain
information regarding leases expiring between July 1, 1997 and December
31, 1997 in the Company's primary markets:
<TABLE>
<CAPTION>
COMPANY
QUOTED
PERCENTAGE ESCALATED ESCALATED RENTAL RATE
NUMBER OF RENTABLE OF RENTABLE RENT AS OF RENT PER PER SQUARE
MARKET LEASES EXPIRING SQUARE FEET SQUARE FEET JUNE 30, 1997 SQUARE FOOT FOOT
-------------------- ---------------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Metropolitan New
York City......... 9 17.22% 42,556 $ 1,137,024 $ 26.72 $ 23.48
Metropolitan
Orlando........... 39 35.40 87,461 1,362,456 15.58 18.66
Metropolitan
Phoenix/Tucson.... 29 47.38 117,050 1,683,960 14.13 16.87
--
------- ---------- ------- ------ ------
Total/Weighted
Average... 77 100.00% 247,067 $ 4,153,440 $ 16.81 $ 18.64
== ======= ========== ======= ====== ======
</TABLE>
- Leasing of Vacant Space: The Company expects to realize additional cash
flow through the leasing or occupancy of approximately 155,000 rentable
square feet of vacant space at the Properties as of June 30, 1997
(approximately 5.3% of the Company's total rentable square feet).
External Growth
The Company intends to pursue an external growth strategy to enable
stockholders to benefit from potential value to be realized from acquisitions,
product repositioning, development, and opportunities
37
<PAGE> 43
generated by the Company's property management operations. The Company's
external growth strategy, which initially will focus in the Manhattan office
market, includes (i) acquiring at a significant discount to replacement cost
office properties that are underperforming due to physical, leasing, and/or
operational deficiencies, and redeveloping those assets; (ii) property
repositioning through property-specific renovation and refurbishment programs
for underperforming assets; and (iii) exploring the opportunistic development of
office properties on its development land within the Phoenix/Tucson and Orlando
markets, as well as the development of other office properties in these markets
where such development will result in a favorable risk-adjusted return.
Acquisition Strategies. The Company believes it has certain competitive
advantages which enhance its ability to identify and capitalize on acquisition
opportunities, including: (i) management's strong local market expertise and
experience and knowledge of properties, submarkets and potential tenants within
its primary markets; (ii) management's long-standing relationships with tenants,
real estate brokers, and institutional and other owners of commercial real
estate; (iii) its fully integrated real estate operations which allow the
Company to respond quickly to acquisition opportunities; (iv) its access to
capital as a public company, including the Company's proposed $200 million Line
of Credit; and (v) its ability to acquire properties in exchange for OP Units or
Common Stock if the sellers so desire. In addition, the Company may, under
certain circumstances, be able to structure acquisitions in Manhattan in a
manner that qualifies for reduced rates under New York State and New York City
transfer tax laws, which reduced rates (from 3.025% to 1.5125%) are applicable
only to certain REIT transactions through October 1999. As evidence of the
Company's ability to grow its portfolio, the Company successfully acquired in
excess of 2.0 million square feet of office properties between January 1, 1994
and December 31, 1996. The Company intends to fund future acquisitions and
property development with proceeds from credit facilities, including the Line of
Credit, long-term secured and unsecured indebtedness, and the issuance of
additional debt and equity securities.
In evaluating potential acquisition opportunities, the Company will
consider whether the property possesses physical, leasing, and/or operational
deficiencies and, therefore, can be purchased at a significant discount to
competitive properties located in its submarket. Examples of underperforming
properties with physical, leasing or operational deficiencies include (i)
properties that are in need of a remarketing effort due to vacancy rates that
are substantially higher than the vacancy rates in the property's submarket
generally; (ii) properties where a substantial portion of the space is scheduled
to become available within 24 months and where rents under existing leases are
at or above market; (iii) properties that possess a high percentage of problem
or non-creditworthy tenants; (iv) properties that require physical capital
improvements in order to attract creditworthy tenants at market rents; and (v)
properties that are in need of mechanical system upgrades.
An example of how the Company executes its turnaround acquisition strategy
is the purchase through a joint venture with an affiliate of the Carlyle Group
of 2800 North Central Property. The Property was acquired in May 1996 for $30.7
million, which the Company believes represented a 47% discount to replacement
cost with leases representing 32% of the net rentable square feet scheduled to
expire within seven months. Within 10 months of the acquisition, the Company's
leasing division completed lease renewals with creditworthy tenants for a total
of 95,520 rentable square feet (representing approximately 82% of the rentable
square feet scheduled to expire during 1996), which stabilized the leasing
exposure at the Property (which was 91% leased as of June 30, 1997). In addition
to the successful renewal campaign, the Company signed new leases with
creditworthy tenants for over 22,000 square feet by the end of 1996. The
Company's aggressive leasing program increased the Escalated Rent per leased
square foot at the Property from approximately $15.06 at the time of acquisition
to $16.96 as of June 30, 1997. In addition, the Annualized Net Operating Income
at Acquisition of the Property was approximately $2.5 million. As a result of
the Company's activities, the Property's Annualized Net Operating Income at June
30, 1997 was approximately $3.2 million. There can be no assurance that the
Company will be able to achieve similar results with respect to the Properties
or other properties acquired in the future. There can be no assurance that the
Company will be able to achieve similar results with respect to the Properties
or other office properties acquired in the future.
38
<PAGE> 44
Repositioning Strategies. As discussed above, the Company intends to
acquire office properties that are performing at levels substantially below
their potential due to physical, leasing, and/or operational challenges. The
Company believes that a property-specific program of renovating and improving
underperforming properties will help the Company capture long-term growth
potential and will enhance and maintain the competitiveness of these properties.
From January 1, 1995 until June 30, 1997, the Company spent approximately $4.3
million on revenue-enhancing capital improvements at newly acquired Properties.
These improvements included lobby and elevator renovations, and the installation
of updated mechanical equipment and building systems, such as new chillers. The
Company's objective was to improve the Properties in order to attract
creditworthy tenants at increased rental rates.
An example of this repositioning strategy is an acquisition the Company
made in November 1994 in a joint venture with Quantum Realty Fund (an entity
affiliated with George Soros). The Company acquired 5151 East Broadway in Tucson
for approximately $10 million or approximately $40 per square foot which the
Company believes represented a 75% discount to replacement cost. At the time the
Company acquired the Property, it was only 40% leased and in need of capital
improvements. Shortly after the acquisition, the Company implemented a major
renovation program of the common areas coupled with an aggressive marketing and
leasing effort. The Company's repositioning program resulted in an increase in
Escalated Rent from approximately $1.7 million as of November 30, 1994 to
approximately $3.8 million as of June 30, 1997 (a 153% increase), and an
increase in Annualized Net Operating Income from $353,000 at acquisition to
approximately $2.0 million as of June 30, 1997, which generated an Adjusted
Investment Yield of 13.3%.
The Company initially intends to pursue acquisitions in the recovering
downtown Manhattan office market where it can pursue purchases at substantial
discounts to replacement costs.
Development and Redevelopment. The Company intends to explore the
development of its development land within the Phoenix/Tucson and Orlando
markets when market fundamentals support a favorable risk-adjusted return on
such development. See "The Properties -- Development Parcels and -- Land Parcel
Options." The Company's executive officers average approximately 17 years of
experience in the development of office properties. Since 1985, the Company's
executive officers have been integrally involved in the development of more than
1.0 million square feet of office properties (including the approximately
450,000 square foot Tower 45 Property). The Company expects that it will
undertake development if (i) it receives pre-development leasing commitments
from creditworthy tenants representing not less than 50% of the square footage
at the property and (ii) it believes it can achieve an unleveraged investment
yield (calculated by dividing net operating income upon stabilized occupancy by
the investment cost of the property (including all development expenses and
capitalized interest and leasing costs and expenses)) of not less than 12%.
Management's development expertise provides the Company with the capability
to purchase properties that are in need of significant capital improvements and
to redevelop and reposition such properties to make them competitive in their
respective markets. An example of this strategy includes the Company's
redevelopment of an approximately 93,000 rentable square foot office building at
5750 Major Boulevard in Orlando. The Company acquired the Property in a joint
venture with General Electric Capital Corp. in October 1996 for a purchase price
of $3.8 million, or approximately $45 per square foot (a 50% discount to the
Company's estimate of replacement cost). The Company is currently redeveloping
the Property through a $1.8 million capital improvement program designed to
reposition this Property into a Class A property, attracting higher quality
tenants and corresponding increase in market rental rates. The Property was only
33% leased as of December 31, 1996 and, after the Company implemented an
aggressive marketing and leasing program, the building will be 74.5% leased as
of December 31, 1997 (based on leases signed as of July 31, 1997). There can be
no assurance however that the Company will meet any of the foregoing
expectations. This strategy will also encompass the future development of the
Company's Madison Avenue properties. See "The Properties -- Submarket and
Property Information -- Development of Grand Central North Submarket
Properties."
39
<PAGE> 45
Financing Strategy
The Company intends to maintain the Debt Policy limiting the Company's
total consolidated indebtedness plus its pro rata share of Joint Venture Debt to
50% of the Company's Total Market Capitalization. The Company's organizational
documents, however, do not limit the amount of indebtedness that the Company may
incur. At the closing of the Offering, the Company will have outstanding
consolidated indebtedness of approximately $109.0 million or 23.8% of its Total
Market Capitalization (excluding its pro rata share of Joint Venture Debt). See
"The Properties -- Mortgage Indebtedness Remaining Following the Offering." The
Company has entered into negotiations with Merrill Lynch to obtain the $200
million Line of Credit that the Company intends to close concurrent with, or
shortly after, the consummation of the Offering. See "The Properties -- Line of
Credit." The Line of Credit is expected to be used primarily to finance the
Company's acquisition and development activities and for working capital
purposes. The Company believes that its access to capital through the Line of
Credit and other sources of private financing, as well as its access to the
public capital markets, will provide it with a competitive advantage in
acquisitions and developments over certain competitive bidders which may have to
qualify their bids with financing contingencies or which have less access to
capital.
40
<PAGE> 46
USE OF PROCEEDS
The net cash proceeds to the Company from the Offering and the Concurrent
Private Placement, after deducting the estimated underwriting discount and
estimated expenses of the Offering, are expected to be approximately $244.2
million (approximately $279.7 million if the Underwriters' overallotment option
is exercised in full), based on the Offering Price. Such net cash proceeds will
be contributed to the Operating Partnership in exchange, in part, for the
Company's approximate 89.9% interest therein. The Operating Partnership will
subsequently use the proceeds received from the Company, the $52.0 million net
cash proceeds from the Term Loan borrowed concurrent with the Offering, and
approximately $10.4 million of proceeds received in exchange for the MSAM Notes
as follows: (i) approximately $241.3 million for repayment of certain
indebtedness (including associated prepayment penalties) relating to the
Properties and the Property Partnerships; (ii) approximately $57.2 million to
acquire certain interests in the Properties; (iii) approximately $0.7 million to
pay for commitment fees and expenses relating to the Term Loan; (iv)
approximately $3.3 million to pay transfer taxes and other expenses associated
with the acquisitions of the Properties; and (v) the remaining approximately
$4.1 million for working capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Underwriting."
If the Underwriter's overallotment option to purchase 1,515,000 shares of
Common Stock is exercised in full, the Company expects to use the additional net
proceeds (which will be approximately $35.5 million, based on the Offering
Price) to acquire interests in additional office properties and for general
corporate purposes.
Pending application of the net proceeds of the Offering, the Concurrent
Private Placement, the MSAM Notes and the Term Loan, the Company will invest
such portion of the net proceeds in interest-bearing accounts and short-term,
interest-bearing securities, which are consistent with the Company's intention
to qualify for taxation as a REIT.
The following table sets forth certain information regarding the debt to be
repaid upon completion of the Offering, the Concurrent Private Placement, the
MSAM Notes and the Term Loan, which consists of mortgage or secured debt
encumbering five of the Properties. The mortgages and other indebtedness to be
repaid upon completion of the Offering has a weighted average interest rate of
approximately 8.0% and a weighted average remaining term to maturity of
approximately 3.5 years as of June 30, 1997.
MORTGAGE DEBT TO BE REPAID
<TABLE>
<CAPTION>
PREPAYMENT
PENALTIES
AND EXPENSES INTEREST RATE AT MATURITY
PROPERTY -------------- MARCH 31, 1997(2) DATE
- ---------------------------- AMOUNT TO (IN THOUSANDS) ----------------- -------------
BE REPAID(1)
--------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Tower 45.................... $ 86,700 $1,250 7.6%(3) December 1998
Maitland Forum.............. 29,882 -- 8.9%(4) January 2001
Maitland West............... 3,235 -- 9.2%(5) August 1998
120 Mineola Boulevard....... 11,260(6) 630(6) 8.7% May 1998
5750 Major Boulevard........ 2,538 -- 9.5% October 2001
One Orlando Center.......... 105,864 8.13% July 2002
5151 East Broadway
286, 290 and 292 Madison
Avenue Properties
-------- ------
Total/Weighted
Average.............. $239,479 $1,880 8.00%
======== ======
</TABLE>
- ---------------
(1) Represents the mortgage balances as of March 31, 1997 expected to be repaid
with the proceeds of the Offering. Exact repayment amounts may differ due to
amortization.
(2) Represents the weighted average rate as of March 31, 1997; for purposes of
these calculations for floating rate debt, as of March 31, 1997, LIBOR is
5.8% and GECC Commercial Paper is 5.6%.
(3) Interest rate is based on LIBOR plus 1.75%.
(4) Interest rate is based on the GECC Commercial Paper Rate plus 3.25%.
(5) Interest rate is based on the GECC Commercial Paper Rate plus 3.5%.
(6) 120 Mineola Boulevard indebtedness was incurred in May 1997, the proceeds of
which were used to refinance existing indebtedness encumbering that
Property. The prepayment penalty relates to this prior indebtedness.
41
<PAGE> 47
DISTRIBUTIONS
Subsequent to the Offering, the Company intends to make regular quarterly
distributions to the holders of its Common Stock. The initial distribution,
covering a partial quarter commencing on the date of the closing of Offering and
ending on December 31, 1997, is expected to be $ per share, which
represents a pro rata distribution based on a full quarterly distribution of
$0.4375 per share. On an annualized basis, this would be $1.75 per share, or an
annual distribution rate of approximately 7.0% based on the Offering Price. The
Company does not intend to reduce the expected distribution per share if the
Underwriters' overallotment option is exercised. The following discussion and
the information set forth in the table and footnotes below should be read in
conjunction with the financial statements and notes thereto, the pro forma
financial information and notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" included elsewhere in this Prospectus.
The Company's initial intended annual distribution rate after the Offering
is based on an estimate of Cash Available for Distribution. The Company's
estimate of Cash Available for Distribution after the Offering is based on
estimated pro forma Funds from Operations for the twelve months ending March 31,
1998, with certain adjustments based on the items described below. To estimate
Cash Available for Distribution for the twelve months ending June 30, 1998, pro
forma Funds from Operations for the twelve months ended March 31, 1997 was
adjusted (i) for certain known events and/or contractual commitments that either
occurred subsequent to March 31, 1997 or during the twelve months ended March
31, 1997, but were not effective for the full twelve months, and (ii) for
certain non-GAAP adjustments consisting of (A) revising historical rent
estimates from a straight-line GAAP basis to amounts currently being paid or due
from tenants based on contractual rents, (B) pro forma amortization of financing
costs, (C) an estimate of amounts anticipated for recurring tenant improvements,
leasing commissions and capital expenditures and (D) scheduled debt principal
payments. The Company anticipates that, except as reflected in the following
table and the notes thereto, investing and financing activities will not have a
material effect on estimated Cash Available for Distribution. The Company's
estimated pro forma Funds from Operations, as adjusted in clause A above and
without giving effect to any changes in working capital, is substantially
equivalent to the Company's estimated pro forma cash flows from operating
activities determined in accordance with GAAP. The estimate of Cash Available
for Distribution is being made solely for the purpose of setting the initial
distribution rate and is not intended to be a projection or forecast of the
Company's results of operations or its liquidity, nor is the methodology upon
which such adjustments were made necessarily intended to be a basis for
determining future distributions. Future distributions by the Company will be at
the discretion of the Board of Directors. There can be no assurance that any
distributions will be made or that the estimated level of distributions will be
maintained by the Company.
The Company anticipates that its distributions will exceed earnings and
profits for income tax reporting purposes due to non-cash expenses, primarily
depreciation and amortization, to be incurred by the Company. Therefore,
approximately % (or $ per share) of the distributions anticipated to
be paid by the Company for the first twelve months subsequent to the Offering
are expected to represent a return of capital for Federal income tax purposes
and in such event will not be subject to Federal income tax under current law to
the extent such distributions do not exceed a stockholder's basis in his Common
Stock. The nontaxable distributions will reduce the stockholder's tax basis in
the Common Stock and, therefore, the gain (or loss) recognized on the sale of
such Common Stock or upon liquidation of the Company will be increased (or
decreased) accordingly. The percentage of stockholder distributions that
represents a nontaxable return of capital may vary substantially from year to
year.
Federal income tax law requires that a REIT distribute annually at least
95% of its taxable income. See "Federal Income Tax Considerations -- Taxation of
the Company." The amount of distributions on an annual basis necessary to
maintain the Company's REIT status based on pro forma taxable income of the
Company for the year ended June 30, 1997, as adjusted for certain items in the
following table, would have been approximately $ million. The estimated Cash
Available for Distribution is anticipated to be in excess of the annual
distribution requirements applicable to REITs. Under certain circumstances, the
Company may be required to make distributions in excess of Cash Available for
Distribution in order to meet such distribution
42
<PAGE> 48
requirements. For a discussion of the tax treatment of distributions to holders
of Common Stock, see "Federal Income Tax Considerations."
The Company believes that its estimate of Cash Available for Distribution
constitutes a reasonable basis for setting the initial distribution rate, and
the Company expects to maintain its initial distribution rate for the twelve
months subsequent to the Offering unless actual results of operations, economic
conditions or other factors differ from the assumptions used in the estimate.
The Company's actual results of operations will be affected by a number of
factors, including the revenue received from the Properties, the operating
expenses of the Company, interest expense, the ability of tenants of the
Properties to meet their obligations and unanticipated capital expenditures.
Variations in the net proceeds from the Offering and the Concurrent Private
Placement as a result of a change in the Offering Price or the exercise of the
Underwriters' overallotment option may affect the Cash Available for
Distribution and the payout ratio of Cash Available for Distribution and
available reserves. No assurance can be given that the Company's estimate will
prove accurate. Actual results may vary substantially from the estimate.
The following table describes the calculation of pro forma Funds from
Operations for the twelve months ended March 31, 1997 and the adjustments to pro
forma Funds from Operations for the twelve months ended March 31, 1997 in
estimating initial Cash Available for Distribution for the twelve months ending
June 30, 1998:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS,
EXCEPT PER
SHARE DATA)
-----------
<S> <C>
Pro forma net income before minority interest of $1,592 for the year ended
December 31, 1996............................................................... $15,767
Plus: Pro forma real estate depreciation and amortization....................... 12,289
Pro forma real estate depreciation and amortization from unconsolidated
partnership............................................................... 52
-------
Pro forma Funds from Operations for the year ended December 31, 1996(1)........... 28,108
Less: Pro forma Funds from Operations for the three months ended March 31,
1996......................................................................... (6,271)
Plus: Pro forma Funds from Operations for the three months ended March 31,
1997......................................................................... 7,074
-------
Pro forma Funds from Operations for the twelve months ended March 31, 1997........ 28,911
Net increases in contractual rental income(2)................................ 6,000
Provision for lease expirations, assuming no renewals(3)..................... (3,403)
-------
Estimated pro forma Funds from Operations for the twelve months ending June 30,
1998............................................................................ 31,508
Net effect of straight-line rents(4)......................................... (2,981)
Pro forma amortization of financing costs(5)................................. 93
-------
Estimated pro forma Cash Flows from Operating Activities for the twelve months
ending June 30, 1998............................................................ 28,620
-------
Estimated annual provision for recurring tenant improvements and leasing
commissions(6).............................................................. (2,256)
Estimated recurring capital expenditures(7).................................. (392)
Scheduled debt principal payments(8)......................................... (133)
Estimated Cash Available for Distribution for the twelve months ending June 30,
1998............................................................................ $25,839
=======
Company's share of estimated Cash Available for Distribution(9)................. $23,229
=======
Minority interest's share of estimated Cash Available for Distribution.......... $ 2,610
=======
Estimated initial annual cash distributions to stockholders of the Company(10).... $21,967
=======
Estimated initial annual distribution per share................................... $ 1.75
=======
Payout ratio based on Estimated Cash Available for Distribution (11).............. 94.6%
</TABLE>
- ---------------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 defines Funds from
43
<PAGE> 49
Operations as net income (loss) (computed in accordance with GAAP),
excluding gains (or losses) from debt restructuring and sales of
properties, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures. The
Company believes that Funds from Operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flow
from operating activities, financing activities and investing activities,
it provides investors with an indication of the ability of the Company to
incur and service debt, to make capital expenditures and to fund other cash
needs. The Company computes Funds from Operations in accordance with
standards established by NAREIT which may not be comparable to Funds from
Operations reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than the Company. Funds from Operations does
not represent cash generated from operating activities in accordance with
GAAP and should not be considered as an alternative to net income
(determined in accordance with GAAP) as an indication of the Company's
financial performance or to cash flow from operating activities (determined
in accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs, including
its ability to make cash distributions.
(2) The net increases in contractual rental revenues represent the difference
between the contractual rental revenues due (i) under existing leases and
renewals in effect on June 30, 1997 for the twelve months ending June 30,
1998 and the pro forma rental revenues for the twelve months ended March
31, 1997 ($2,851), (ii) under new leases and renewals in effect between
July 1, 1997 through July 31, 1997 for the twelve months ending June 30,
1998 and the pro forma rental revenues for the twelve months ended March
31, 1997 ($1,436) and (iii) under new leases and renewals executed from
August 1, 1997 through August 31, 1997 ($1,713). All calculations assume
that no extension options were exercised.
(3) Represents the elimination of rental revenue for the year ended June 30,
1997 from: (i) leases which expired in the twelve months ended June 30,
1997 ($1,783) and (ii) leases which will expire between July 1, 1997 and
June 30, 1998 for that portion of the year ending June 30, 1998 that such
leases are no longer in effect ($1,620). This table assumes that leases
which expire prior to June 30, 1998 will not be renewed or re-leased during
the period. As a result of this assumption and the assumption in footnote 2
above, the effective average occupancy rate of the Properties for the year
ending June 30, 1998 would equal approximately 91.2%, versus the actual
occupancy rate for the Properties of approximately 94.7% as of June 30,
1997. The Company's weighted average tenant retention rate for expiring
leases for the period 1994 through June 30, 1997 was approximately 58.5%.
(4) Represents the effect of adjusting straight-line rental income included in
pro forma Funds from Operations from the straight-line accrual basis under
GAAP to amounts currently being paid or due from tenants.
(5) Represents the amortization of deferred financing costs which is reflected
as an expense in the pro forma financial statements of the Company.
(6) Reflects estimated recurring tenant improvements ("TI") and leasing
commissions ("LC") for the Properties for the twelve months ending June 30,
1998 based on the weighted average TI and LC expenditures per square foot
for renewed and retenanted space at the Properties since 1993 multiplied by
the average annual square feet of leased space for which leases expire
during the three-year period
44
<PAGE> 50
ending December 31, 2000. The weighted average annual per square foot cost
of TI and LC expenditures is presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------ ENDED
1994 1995 1996 JUNE 30, 1997 WEIGHTED AVERAGE
------ ------ ------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Renewals:
Recurring TI and LC, per square
foot -- renewals................... $ 0.00 $ 8.79 $10.89 $ 0.15 $ 10.13
Average annual square feet for which
leases expire during the three-year
period ending December 31,
2000(i)............................ 199,620
2,022,151
Rate of Renewals (ii)................. x 70%
$1,415,505
Retenanted:
Recurring TI and LC per square foot --
retenanted......................... $16.83 $19.47 $12.40 $12.46 $ 14.04
Average annual square feet for which
leases expire during the three-year
period ending December 31, 2000
(i)................................ 199,620
2,802,665
Rate of Retenanting (ii)................ x 30%
$ 840,799
Total TI and LC cost.......... $2,256,304
</TABLE>
- ---------------
(i) Includes the Company's pro forma 10% ownership share of 2800 North Central
Avenue Property.
(ii) Assumes that 70% of expiring leases will be renewed and 30% will be
retenanted. See footnote (2) under "The Properties -- Historical Lease
Renewals."
(7) The Company's historical average annual cost per square foot for recurring
capital expenditures during the three-year period 1994 through 1996 was
$0.10. The Company has calculated this based upon replacement or renovation
costs and actual useful lives of: parking lots, roofs, heating, ventilation
and air conditioning systems, elevators and mechanical systems, lobbies,
restrooms, and corridors. The Company believes its future annual cost per
square foot for recurring capital expenditures will be approximately $0.15
as Company's portfolio matures.
(8) Represents scheduled payments of mortgage loan principal on the Corporate
Center debt due during the twelve months ending June 30, 1998.
(9) The Company's share of estimated Cash Available for Distribution and
estimated initial annual cash distributions to stockholders of the Company
is based on its approximately 89.9% aggregate partnership interest in the
Operating Partnership.
(10) Based on a total of 12,552,800 shares of Common Stock to be outstanding
after the Offering and the Concurrent Private Placement multiplied by an
anticipated distribution per share of $1.75. The Company estimates that
approximately % of the estimated initial annual cash distributions with
respect to the twelve months ending June 30, 1998 will represent a return
of capital for Federal income tax purposes.
(11) Calculated as estimated initial annual cash distributions to stockholders
of the Company divided by the Company's share of estimated Cash Available
for Distribution for the twelve months ending June 30, 1998. The payout
ratio based on the Company's share of estimated pro forma Funds from
Operations for the twelve months ending June 30, 1998 is 77.6%.
45
<PAGE> 51
CAPITALIZATION
The following table sets forth the combined historical capitalization of
the Company and Tower Predecessor and the pro forma combined capitalization of
the Company as of March 31, 1997, as adjusted to give effect to the Offering,
the Concurrent Private Placement, the MSAM Notes and the Formation Transactions
and the use of the net proceeds therefrom as set forth under "Use of Proceeds."
The information set forth in the table should be read in conjunction with the
financial statements and notes thereto, the pro forma financial information and
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
------------------------
COMBINED
HISTORICAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Debt(1)............................................................... $204,097 $ 109,000
Minority interest in Operating Partnership............................ 29,012
Shareholders' equity:
Preferred Stock, par value $.01 per share, 100,000,000 shares
authorized; none issued and outstanding..........................
Common Stock, par value $.01 per share, 250,000,000 shares
authorized; 1,000 shares issued and outstanding historical, and
12,552,800 shares issued and outstanding, as adjusted(2)......... 1 126
Additional paid-in capital.......................................... 258,106
Owners' equity (deficit)............................................ (61,945)
-------- --------
Total Owners'/Shareholders' equity (deficit)..................... (61,944) 258,232
-------- --------
Total Capitalization........................................ $142,153 $ 396,244
======== ========
</TABLE>
- ---------------
(1) See Note 6 of Notes to Combined Financial Statements of Tower Predecessor
for information relating to the indebtedness.
(2) Includes (i) 10,100,000 shares of Common Stock to be issued in the Offering,
(ii) 800,000 shares of Common Stock to be issued in the Concurrent Private
Placement and (iii) 1,652,800 shares of Common Stock to be issued in the
Formation Transactions in connection with the acquisition of interests in
certain of the Properties and the repayment of certain loans. Excludes (i)
1,408,943 shares of Common Stock that may be issued upon the exchange of OP
Units issued in connection with the Formation Transactions, (ii) 1,515,000
shares of Common Stock subject to the Underwriters' overallotment option and
(iii) 938,000 shares of Common Stock subject to options being granted
concurrent with the Offering under the Company's stock option plans. See
"Management -- Stock Option and Restricted Stock Plans," "Formation and
Structure of the Company," and "Partnership Agreement -- Exchange Rights."
46
<PAGE> 52
DILUTION
At March 31, 1997, the Company and the Tower Predecessor had a net tangible
book value of approximately $32.7 million. After giving effect to (i) the sale
of the shares of Common Stock offered hereby at the Offering Price, (ii) the
sale of shares of Common Stock in connection with the Concurrent Private
Placement, (iii) the issuance of shares of Common Stock in exchange for the
cancellation of indebtedness under the MSAM Notes, (iv) the application of the
net proceeds from the Offering, the Concurrent Private Placement, the MSAM Notes
and the Term Loan, and (v) the Formation Transactions, the pro forma net
tangible book value at March 31, 1997 would have been $247.9 million, or $22.75
per share of Common Stock. This amount represents an immediate increase in net
tangible book value of $12.07 per share to the Continuing Investors and an
immediate dilution in pro forma net tangible book value of $2.25 per share of
Common Stock to new investors. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $25.00
Net tangible book value per share prior to the
Offering and Concurrent Private Placement(1)....... $ 10.68
Increase in net tangible book value per share
attributable to the Offering(2).................... $ 12.07
Pro forma net tangible book value after the Offering(3)... $22.75
------
Dilution in net tangible book value per share of Common
Stock to purchasers in the Offering(4).................. $ 2.25
======
</TABLE>
- ---------------
(1) Net tangible book value per share prior to the Offering and the Concurrent
Private Placement attributable to Continuing Investors is determined by
dividing net tangible book value of the Company (based on the March 31, 1997
net book value of the assets less deferred charges to be contributed in
connection with the Formation Transactions, net of liabilities to be
assumed) by the number of shares of Common Stock (i) issued and outstanding
and (ii) issuable upon the exchange of all OP Units to be issued to the
Continuing Investors in connection with the Formation Transactions.
(2) Based on the Offering Price and after deducting the Underwriters' discount
and estimated Offering expenses.
(3) Based on total pro forma net tangible book value of $247.9 million divided
by the total number of shares of Common Stock issued to new investors and
outstanding after the Offering (10,900,000). There is no impact on dilution
attributable to the issuance of Common Stock in exchange for OP Units to be
issued to Continuing Investors in the Formation Transactions because such OP
Units would be exchanged for Common Stock on a one-for-one basis.
(4) Dilution is determined by subtracting net tangible book value per share of
Common Stock after the Offering from the Offering Price.
The following table summarizes, on a pro forma basis giving effect to the
Offering, the Concurrent Private Placement and the Formation Transactions, the
number of shares of Common Stock to be sold by the Company in the Offering, the
Concurrent Private Placement and the number of shares of Common Stock and OP
Units to be issued in connection with the Formation Transactions (including
shares of Common Stock issued in satisfaction of the MSAM Notes), the net
tangible book value as of March 31, 1997 of the assets
47
<PAGE> 53
contributed in the Formation Transactions and the net tangible book value of the
average contribution per share based on total contributions.
<TABLE>
<CAPTION>
COMMON STOCK/
OP UNITS ISSUED CASH/BOOK VALUE OF BOOK VALUE
-------------------- CONTRIBUTIONS OF AVERAGE
SHARES/ --------------------- CONTRIBUTION
OP UNITS PERCENT $ PERCENT PER SHARE/OP UNIT
--------- ------- --------- ------- -----------------
(IN THOUSANDS EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C>
New investors in the Offering.... 10,100 72% $ 224,240 81% $ 25(1)
Concurrent Private Placement..... 800 6% $ 20,000 7% $ 25
OP Units and Common Stock issued
to Continuing Investors........ 3,062 22% $ 32,694(2) 12% $ 10.68
-------- ------ -------- ------
Total.................. 13,962 100.00% $ 276,934 100.00%
======== ====== ======== ======
</TABLE>
- ---------------
(1) Before deducting the underwriting discount and other estimated expenses of
the Offering.
(2) Based on the March 31, 1997 net book value of the assets less deferred
charges to be contributed in connection with the Formation Transaction, net
of liabilities assumed and adjusted for the Formation Transactions.
48
<PAGE> 54
SELECTED COMBINED FINANCIAL AND OPERATING DATA
The following tables set forth selected combined operating, balance sheet
and other data for the Tower Predecessor on a historical basis and the Company
on a pro forma basis. The following data has been derived from and should be
read in conjunction with the combined financial statements and notes thereto of
the Tower Predecessor, DRA Joint Ventures, the pro forma financial statements
and notes thereto of the Company, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
The combined historical balance sheet data as of December 31, 1996 and 1995
and the combined historical operating data for the years ended December 31,
1996, 1995 and 1994 of the Tower Predecessor have been derived from the
historical combined financial statements audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report with respect thereto is included elsewhere
in this Prospectus.
The selected financial data at March 31, 1997 and for the three months
ended March 31, 1997 and 1996 are derived from unaudited financial statements.
The unaudited financial information includes all adjustments (consisting of
normal recurring adjustments) that management considers necessary for a fair
presentation of the combined financial position and results of operations for
these periods. Combined operating results for the three months ended March 31,
1997 are not necessarily indicative of the results to be expected for the entire
year ended December 31, 1997.
The Tower Predecessor is comprised of the following entities controlled or
managed by Tower Equities: Tower 45 Associated Limited Partnership (the Tower 45
Property), CXX Mineola Limited Partnership (the 120 Mineola Boulevard Property),
Maitland Property Investors, Ltd. (the Maitland Forum Property), Maitland West
Associates Limited Partnership (the three Maitland Center Parkway Properties),
5750 Associates Limited Partnership (the 5750 Major Boulevard Property), and the
predecessor management companies, including Tower Equities and Realty Corp., CXX
Mineola Management Corp., Forum Realty and Management Corp., and Tower Equities
of Arizona L.L.C. The Tower Predecessor includes 100% of the assets, liabilities
and operations of such entities and the respective Properties owned by them. In
addition, the Primary Contributors, including Lawrence H. Feldman, hold
non-controlling interests in the partnership controlling the 2800 North Central
Property and the partnerships that own the following Properties (collectively,
the "DRA Joint Ventures"): 286 Madison Avenue, 290 Madison Avenue, 292 Madison
Avenue, the six Corporate Center Properties, 5151 East Broadway, and One Orlando
Center. The Tower Predecessor includes these investment in the 2800 North
Central Property and the DRA Joint Ventures using the equity method of
accounting.
Pro forma information is presented as if (i) the transfer of the
Properties, certain development parcels, and other assets of Tower Equities to
be contributed to the Company and (ii) the completion of the Offering, the
Concurrent Private Placement, the MSAM Notes, and the Term Loan and the
application of the net proceeds therefrom as described under "Use of Proceeds"
had occurred on January 1, 1996 with respect to the pro forma operating data and
on March 31, 1997 with respect to the pro forma balance sheet data. The pro
forma information is based upon certain assumptions that are included in the
notes to the pro forma financial statements included elsewhere in this
Prospectus. The pro forma financial information is unaudited and is not
necessarily indicative of what the financial position or results of operations
of the Company would have been as of the dates and for the periods indicated,
nor does it purport to represent or project the financial position or results of
operations for future periods.
In addition, the following tables set forth selected combined operating,
balance sheet and other data for the DRA Joint Ventures on a historical basis.
The following data has been derived from and should be read in conjunction with
the Combined Statements of Revenues and Certain Operating Expenses of the DRA
Joint Ventures and notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
49
<PAGE> 55
THE COMPANY (PRO FORMA) AND THE TOWER PREDECESSOR COMPANY (HISTORICAL)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------------- ----------------------------------------------------------------
HISTORICAL HISTORICAL
PRO FORMA --------------------- PRO FORMA ----------------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
--------- -------- ---------- --------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental income............... $ 15,095 $ 6,945 $ 7,110 $61,203 $ 26,138 $ 25,202 $ 25,994 $ 23,496 $ 22,949
Management fees............. 257 369 1,261 961 82 221 183
Construction, leasing and
other fees................ 203 498 278 742 1,335 1,041 320 604 737
-------- -------- ------- ------- -------- -------- -------- -------- --------
Total revenues.............. 15,298 7,700 7,757 61,945 28,734 27,204 26,396 24,321 23,869
-------- -------- ------- ------- -------- -------- -------- -------- --------
Expenses:
Property operating and
maintenance............... 3,192 1,350 1,251 14,115 5,134 4,992 5,014 5,608 5,055
Real estate taxes........... 2,089 1,196 1,177 8,295 4,569 4,570 3,969 4,407 4,918
General office and
administrative............ 858 1,095 983 3,359 3,994 3,838 2,778 2,923 2,921
Interest expense............ 1,957 3,485 3,883 7,835 15,511 15,150 12,751 12,756 14,390
Depreciation and
amortization.............. 3,035 1,698 1,690 12,289 6,853 6,897 7,415 7,982 6,775
Ground rent and air rights
expense................... 150 150 150 599 599 599 599 599 561
-------- -------- ------- ------- -------- -------- -------- -------- --------
Total expenses.............. 11,281 8,974 9,134 46,492 36,660 36,046 32,526 34,275 34,620
-------- -------- ------- ------- -------- -------- -------- -------- --------
Income (loss) from
operations.................. 4,017 (1,274) (1,377) 15,453 (7,926) (8,842) (6,130) (9,954) (10,751)
Equity in joint ventures(1)... 9 34 45 314 461 193 1
-------- -------- ------- ------- -------- -------- -------- -------- --------
Income (loss) before minority
interest.................... 4,026 (1,240) (1,332) 15,767 (7,465) (8,649) (6,129) (9,954) (10,751)
Minority interest (2)......... 407 1,592
-------- -------- ------- ------- -------- -------- -------- -------- --------
Net income (loss)............. $ 3,619 $ (1,240) $ (1,332) $14,175 $ (7,465) $ (8,649) $ (6,129) $ (9,954) $(10,751)
======== ======== ======= ======= ======== ======== ======== ======== ========
Net income per common share... $ 0.29 $ 1.13
======== =======
Weighted average number of
common shares outstanding... 12,553 12,553
Weighted average number of
common shares and OP Units
outstanding................. 13,962 13,962
BALANCE SHEET DATA (at period
end):
Real estate investments net of
accumulated depreciation.... $388,360 $128,352 -- -- $129,064 $128,138 $132,904 $137,662 $140,916
Total assets.................. 409,195 174,092 -- -- 172,987 173,889 184,174 188,742 193,363
Long-term debt................ 109,000 200,097 -- -- 202,892 199,962 202,454 204,853 177,145
Total liabilities............. 121,951 236,037 -- -- 234,857 230,977 235,343 236,211 231,110
Owners'/stockholders' equity
(deficit)................... 258,232 (61,945) -- -- (61,870) (57,088) (51,169) (47,469) (37,747)
OTHER DATA:
EBITDA (Company's pro forma
89.9% share)(3)............. $ 8,098 $ 4,123 $ 4,385 $32,183 $ 15,496 $ 13,695 $ 13,834 $ 10,268 $ 9,895
Funds from operations
(Company's pro forma 89.9%
share)(4)................... 6,360 661 528 25,269 129 (1,449) 1,292 (1,972) (3,976)
Cash flow from operating
activities.................. -- 1,877 537 -- 951 1,762 4,118 -- --
Cash flow from investing
activities.................. -- (389) (1,169) -- (6,787) (3,440) (3,137) -- --
Cash flow from financing
activities.................. -- (1,630) (255) -- 5,613 238 30 -- --
Number of properties (at
period end)................. 20 7 7 20 7 6 6 3 3
</TABLE>
50
<PAGE> 56
DRA JOINT VENTURES (5)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------- ----------------------------------
1997 1996 1996 1995 1994
--------- -------- --------- --------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE AND PROPERTY DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues:
Rental income................................. $ 7,151 $ 6,736 $ 29,010 $ 12,629 $ 207
Other income.................................. 41 62 288 224
--------- -------- --------- --------- --------
Total revenues................................ 7,192 6,798 29,298 12,853 207
--------- -------- --------- --------- --------
Expenses
Property operating and maintenance............ 1,943 1,967 8,592 4,236 96
Real estate taxes............................. 893 943 3,533 1,544 38
General office and administrative............. 212 305 321 503 36
Interest expense.............................. 2,824 2,392 10,176 3,814
Depreciation and amortization................. 1,130 943 4,118 1,684 31
--------- -------- --------- --------- --------
Total expenses................................ 7,002 6,550 26,740 11,781 201
--------- -------- --------- --------- --------
Net income...................................... $ 190 $ 248 $ 2,558 $ 1,072 $ 6
======== ======= ======== ======== =======
BALANCE SHEET DATA (at period end):
Real estate investments net of accumulated
depreciation.................................. $ 140,136 -- $ 140,759 $ 139,169 $ 10,503
Total assets.................................... 159,392 -- 160,008 149,928 11,001
Long-term debt.................................. 127,861 -- 126,517 119,288 --
Total liabilities............................... 131,546 -- 130,473 124,716 768
Owners' equity (deficit)........................ 27,846 -- 29,535 25,212 10,233
OTHER DATA:
EBITDA (6)...................................... $ 4,120 $ 3,560 $ 16,759 $ 6,532 $ 37
Funds from Operations (6)....................... 1,320 1,191 6,676 2,756 37
</TABLE>
- ---------------
(1) The pro forma information includes the Management Company's operations under
the equity method of accounting; therefore, the net operations are reported
in one line item titled "Equity in Joint Ventures." The historical
information includes the Tower Predecessor management companies' operations
fully consolidated; therefore, the revenues and expenses are reported on a
gross basis for income and expense line items. See "The
Company -- Operations of the Company -- The Management Company."
Equity in Joint Ventures includes the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
---------------------- ----------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
1997 1997 1996 1996
--------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
2800 North Central Property...................... $ (13) $ (4) $ (12) $ (3)
DRA Joint Ventures............................... -- 38 464
Management Company............................... 22 -- 326
---- ---- ---- ----
$ 9 $ 34 $ 314 $461
==== ==== ==== ====
</TABLE>
On a pro forma basis, the Company will own 10% (subject to an increase to up to
27.5% if certain performance criteria are achieved) of 2800 North Central
Property and 95% of the Management Company. On a historical basis, the Tower
Predecessor owned, at December 31, 1996, 3.8% of 2800 North Central Property and
approximately 18% of the DRA Joint Ventures (which represents Lawrence H.
Feldman's effective ownership interest).
51
<PAGE> 57
(2) Represents the approximate 10.1% interest in the Operating Partnership that
will be owned by management and certain other Continuing Investors in the
Company.
(3) EBITDA is defined as operating income before mortgage and other interest,
income taxes, depreciation and amortization. The Company believes EBITDA is
useful to investors as an indicator of the Company's ability to service debt
or pay cash distributions. EBITDA, as calculated by the Company, may not be
comparable to EBITDA reported by other REITs that do not define EBITDA
exactly as the Company defines that term. EBITDA does not represent cash
generated from operating activities determined in accordance with GAAP and
should not be considered as an alternative to operating income or net income
determined in accordance with GAAP as an indicator of performance or as an
alternative to cash flows from operating activities as an indicator of
liquidity.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------------------------
PRO HISTORICAL PRO HISTORICAL
FORMA ----------------- FORMA ------------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
------ ------- ------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)........................ $3,619 $(1,240) $(1,332) $14,175 $(7,465) $(8,649) $(6,129) $(9,954) $(10,751)
Add:
Interest expense......................... 1,957 3,485 3,883 7,835 15,511 15,150 12,751 12,756 14,390
Real estate depreciation and
amortization........................... 3,035 1,698 1,690 12,289 6,853 6,897 7,415 7,982 6,775
Real estate depreciation and amortization
of unconsolidated joint ventures....... 13 203 170 52 741 303 6 -- --
Minority interest........................ 407 -- -- 1,592 -- -- -- -- --
Less:
Interest income.......................... (23) (23) (26) (144) (144) (6) (209) (516) (519)
------ ------- ------- ------- ------- ------- ------- ------- --------
EBITDA................................... $9,008 $ 4,123 $ 4,385 $35,799 $15,496 $13,695 $13,834 $10,268 $ 9,895
====== ======= ======= ======= ======= ======= ======= ======= ========
Company's 89.9% share.................... $8,098 $32,183
====== =======
</TABLE>
(4) The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 defines Funds from Operations as net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring
and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. The Company believes that Funds from Operations is helpful to
investors as a measure of the performance of an equity REIT because, along
with cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes Funds from Operations in accordance
with standards established by NAREIT which may not be comparable to Funds
from Operations reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than the Company. Funds from Operations does
not represent cash generated from operating activities determined in
accordance with GAAP and should not be considered as an alternative to net
income (determined in accordance with GAAP) as an indication of the
Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it indicative of funds available to fund the Company's
cash needs, including its ability to make cash distributions.
52
<PAGE> 58
The following is a reconciliation of net income to Funds from Operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------------- ----------------------------------------------------------
PRO HISTORICAL PRO HISTORICAL
FORMA ----------------- FORMA ------------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
------ ------- ------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)........................ $3,619 $(1,240) $(1,332) $14,175 $(7,465) $(8,649) (6,129) $(9,954) $(10,751)
Add:
Real estate depreciation and
amortization........................... 3,035 1,698 1,690 12,289 6,853 6,897 7,415 7,982 6,775
Real estate depreciation and amortization
of unconsolidated joint ventures....... 13 203 170 52 741 303 6 -- --
Minority interest........................ 407 -- -- 1,592 -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- ------- ------
Funds from Operations.................... $7,074 $ 661 $ 528 $28,108 $ 129 ($1,449) $ 1,292 ($1,972) ($ 3,976)
====== ======= ======= ======= ======= ======= ======= ======= ======
Funds from Operations
(Company's 89.9% share).................. $6,360 $25,269
====== =======
</TABLE>
(5) EBITDA and Funds from Operations for the DRA Joint Ventures are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- -----------------------------
1997 1996 1996 1995 1994
------ ------ ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EBITDA:
Net income.................................................... $ 190 $ 248 $ 2,558 $1,072 $ 6
Interest expense.............................................. 2,824 2,392 10,176 3,814
Real estate depreciation and amortization..................... 1,130 943 4,118 1,684 31
Interest income............................................... (24) (23) (93) (38)
------ ------ ------- ------ ---
EBITDA.......................................................... $4,120 $3,560 $16,759 $6,532 $ 37
====== ====== ======= ====== ===
Funds from Operations:
Net income.................................................... 190 248 $ 2,558 $1,072 $ 6
Real estate depreciation and amortization..................... 1,130 943 4,118 1,684 31
------ ------ ------- ------ ---
Funds from Operations....................................... $1,320 $1,191 $ 6,676 $2,756 $ 37
====== ====== ======= ====== ===
</TABLE>
53
<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Combined Financial and Operating Data" and the historical and pro forma
financial statements appearing elsewhere in this Prospectus. The following
discussion is based primarily on the combined financial statements of Tower
Predecessor for periods prior to the completion of the Offering and related
Formation Transactions. The pro forma condensed consolidated balance sheet is
presented as if the Offering and the Formation Transactions had occurred on
March 31, 1997. The pro forma results of operations is presented as if the
Offering and the Formation Transactions had occurred on January 1, 1996. The
combined financial statements include the assets, liabilities and operations of
the properties and predecessor management companies to be acquired by the
Company in the Formation Transactions from entities controlled and managed by
Tower Equities as follows: Tower 45, 120 Mineola Boulevard, Maitland Forum, the
three Maitland Center Parkway Properties, 5750 Major Boulevard and the
predecessor management companies, including Tower Equities and Realty Corp., CXX
Mineola Management Corp., Forum Realty and Management Corp., and Tower Equities
of Arizona L.L.C.
The Company owns and operates office properties in its primary markets of
Midtown Manhattan, Orlando, Phoenix and Tucson. The Company will generally
receive real estate operating revenues from wholly owned properties from
interests in certain real estate joint ventures. The Company will also receive
service revenues from its property management, leasing, and construction
management business for owned properties, as well as for real estate owned by
certain affiliates and third parties.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 1997 to the Three Months Ended
March 31, 1996
Total revenues for the three months ended March 31, 1997 decreased by $0.1
million, or 0.7%, to $7.7 million as compared to $7.8 million for three months
ended March 31, 1996. Rental income decreased by $0.2 million, or 2.3%, to $6.9
million for the three months ended March 31, 1997 as compared to $7.1 million
for the three months ended March 31, 1996 due to base rents decreasing by $0.3
million, or 6.1%, to $5.4 million for the three months ended March 31, 1997 as
compared to $5.7 million for the three months ended March 31, 1996. Base rents
decreased primarily due to a decrease at Tower 45 of $0.4 million as a result of
certain older leases expiring and being replaced with new leases at lower rates,
which is partially offset by the purchase of 5750 Boulevard in October 1996
which increased base rents by $0.1 million. Escalation income (primarily for
common area maintenance and real estate taxes) increased $0.1 million, or 6.1%,
to $1.4 million for the three months ended March 31, 1997 as compared to $1.3
million for the three months ended March 31, 1996 due to a general increase in
reimbursable operating expenses. Miscellaneous rental revenues increased by $0.1
million to $0.2 million for the three months ended March 31, 1997 due to an
increase in additional services performed for tenants.
Management fee income decreased $0.1 million to $0.3 million for the three
months ended March 31, 1997 as compared to $0.4 million for the three months
ended March 31, 1996 due to the management contract on Tower 45 being terminated
and a decrease in the management fees for the DRA Joint Ventures. Construction,
leasing, and other fees relating to one office and seven retail properties as
well as the DRA Joint Ventures and 2800 North Central Property remained constant
for the three months ended March 31, 1997 and 1996 at $0.3 million. See
"--Management and Construction, Leasing and Other Fees."
Total expenses for the three months ended March 31, 1997 decreased by $0.1
million, or 1.8%, to $9.0 million as compared to $9.1 million for the three
months ended March 31, 1996. Expenses excluding interest and depreciation and
amortization increased from $3.6 million for the three months ended March 31,
1996 to $3.8 million for the three months ended March 31, 1997 due to an
increase in occupancy and the purchase of 5750 Major Boulevard. Expenses,
excluding interest and depreciation and amortization, as a percentage of total
revenue increased from 45.9% for the three months ended March 31, 1996 to 49.1%
for the three months ended March 31, 1997 due to (i) the revenue decreases in
1997 previously described and
54
<PAGE> 60
(ii) increases in repairs and maintenance and general office and administrative
expenses. The increases in repairs and maintanence and general office and
administrative expenses are primarily due to the timing of those expenses.
Management believes that those expenses as a percentage of revenues will
decrease for the remainder of 1997. Each component of expenses excluding
interest and depreciation and amortization changed as a percentage of total
revenue as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
1997 1996
----- -----
<S> <C> <C>
Property operating and maintenance........................ 17.5% 16.1%
Real estate taxes......................................... 15.5% 15.2%
General office and administration......................... 14.2% 12.7%
Ground rent and air rights................................ 1.9% 1.9%
----- -----
49.1% 45.9%
===== =====
</TABLE>
Interest expense decreased by $0.4 million, or 10.2%, to $3.5 million for
the three months ended March 31, 1997 as compared to $3.9 million for the three
months ended March 31, 1996 due to a decrease in interest rates associated with
debt related to one property.
Equity in joint ventures remained relatively constant for the three months
ended March 31, 1997 and 1996.
Net loss decreased by $0.1 million, or 6.9%, to $1.2 million for the three
months ended March 31, 1997 as compared to $1.3 million primarily due to the
decrease in interest expense offset by the decrease in management fee income and
increase in certain operating expenses discussed previously.
Comparison of Year Ended December 31, 1996 Compared to Year Ended December 31,
1995
Total revenues increased by $1.5 million, or 5.6%, to $28.7 million in 1996
as compared to $27.2 million in 1995. Rental income increased by $0.9 million,
or 3.7%, to $26.1 million in 1996 as compared to $25.2 million in 1995 due to
the following: base rents increased $0.5 million, or 2.5%, to $19.9 million in
1996 as compared to $19.4 million in 1995, primarily due to (i) the resolution
of a tenant dispute that reduced 1995 base rent by approximately $0.9 million as
described below, (ii) the purchase of 5750 Major Boulevard in October 1996 which
increased base rents by $0.1 million, and (iii) a decrease of approximately $0.4
million related to tenant turnover at Maitland Forum. Escalation income
(primarily for common area maintenance and real estate taxes) remained constant
from 1995 to 1996 at $5.4 million for each year. Miscellaneous rental revenues
increased $0.5 million to $0.8 million in 1996 as compared to $0.3 million in
1995 due to early lease termination fees received in 1995 from tenants.
Management fee income increased $0.3 million, or 31.2%, to $1.3 million in
1996 as compared to $1.0 million in 1995 due to a full year of management fees
in 1996 from the DRA Joint Ventures versus a partial year of management fees in
1995. Construction, leasing, and other fees relating to one office and seven
retail properties as well as the DRA Joint Ventures and 2800 North Central
Property increased $0.3 million, or 28.2%, to $1.3 million in 1996 as compared
to $1.0 million in 1995. The increase is attributable to fees received from the
DRA Joint Ventures. See "--Management and Construction, Leasing and Other Fees."
Total expenses in 1996 increased by $0.6 million, or 1.7%, to $36.7 million
as compared to $36.0 million in 1995. Expenses excluding interest and
depreciation and amortization increased from $14.0 million in 1995 to $14.3
million in 1996 due to an increase in occupancy and the purchase of 5750 Major
Boulevard. Expenses, excluding interest and depreciation and amortization as a
percentage of total revenue decreased from 51.5% in 1995 to 49.8% in 1996
reflecting economies realized through spreading fixed costs over larger total
revenues.
55
<PAGE> 61
Each component of expenses excluding interest and depreciation and amortization
decreased as a percentage of total revenue as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Property operating and maintenance............................. 17.9% 18.4%
Real estate taxes.............................................. 15.9 16.8
General office and administration.............................. 13.9 14.1
Ground rent and air rights..................................... 2.1 2.2
---- ----
49.8% 51.5%
==== ====
</TABLE>
Interest expense increased by $0.4 million, or 2.4%, to $15.5 million in
1996 as compared to $15.1 million in 1995 due to additional borrowings in 1996
of $1.5 million related to the three Maitland Center Parkway Properties, $2.4
million related to Maitland Forum and $2.5 million related to the purchase of
5750 Major Boulevard.
Equity in joint ventures increased $0.3 million primarily due to a full
year of ownership in 1996 of the DRA Joint Ventures versus a partial year of
ownership in 1995.
Net loss decreased by $1.2 million, or 13.7%, to $7.4 million in 1996 as
compared to $8.6 million in 1995 primarily reflecting economies realized through
the spreading of fixed costs over the larger total revenues as discussed
previously.
Comparison of Year Ended December 31, 1995 Compared to Year Ended December 31,
1994
Total revenues decreased by $0.8 million, or 3.1%, to $27.2 million in 1995
as compared to $26.4 million in 1994. Rental income decreased by $0.8 million,
or 3.0%, to $25.2 million in 1995 as compared to $26.0 million in 1994 due to
the following: base rents decreased by $0.5 million, or 2.3%, to $19.4 million
in 1995 as compared to $19.9 million for 1994, due primarily to the resolution
of a dispute in 1995 with a tenant in Tower 45 which resulted in a decrease of
base rent of approximately $0.8 million which is partially offset by an increase
in base rent on all other Properties. In resolution of the dispute, Tower
Predecessor agreed to restructure a tenant's lease by reducing the square
footage under the lease by approximately 12,000 and increasing the rent per
square foot. A portion of the previously recognized straight line rent was
reduced in 1995. The higher rent per square foot to be received through 2004
aggregates approximately $1.1 million and will be recognized as revenue in the
periods received. Escalation income (primarily for common area maintenance and
real estate tax bill backs) increased $0.3 million, or 5.1%, to $5.5 million in
1995 from $5.2 million in 1994 due to an increase in reimbursable operating
expenses on all Properties. Miscellaneous rental revenues decreased $0.6 million
to $0.3 million in 1995 as compared to $0.9 million in 1994 due to a reduced
number of early lease termination fees received from tenants.
Management fee income increased $0.9 million in 1995. During 1995, Tower
Predecessor entered into management contracts with one office and seven retail
properties as well as the DRA Joint Ventures, thereby increasing management fee
revenue by $0.9 million. Prior to 1995, Tower Predecessor provided property
management services to fewer properties. Construction, leasing, and other fees
increased $0.7 million to $1.0 million in 1995 as compared to $0.3 million in
1994, primarily due to construction and leasing fees earned from the DRA Joint
Ventures and certain Excluded Properties. See "--Management and Construction,
Leasing and Other Fees."
Total expenses in 1995 increased by $3.5 million, or 10.8%, to $36.0
million in 1995 as compared to $32.5 million in 1994. Expenses excluding
interest and depreciation and amortization increased from $12.4 million in 1994
to $14.0 million in 1995 due primarily to the following: (i) real estate taxes
increased $0.6 million in 1995 over 1994 from successful appeals of prior year
real estate tax assessments and (ii) general office and administrative expenses
increased $1.1 million in 1995 over 1994 due primarily to expenses associated
with the new property management contracts previously described and general
inflation. Expenses excluding interest and depreciation and amortization as a
percentage of total revenue increased from 46.8% in 1994 to 51.5% in 1995 due to
(i) the base rent decrease previously described and (ii) expenses as a
56
<PAGE> 62
percentage of management fee revenues relating to management contracts being
higher than expenses as a percentage of total revenues related to leasing
operations. Each component of expenses excluding interest and depreciation and
amortization changed as a percentage of total revenue as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Property operating and maintenance............................. 18.4% 19.0%
Real estate taxes.............................................. 16.8 15.0
General office and administration.............................. 14.1 10.5
Ground rent and air rights..................................... 2.2 2.3
---- ----
51.5% 46.8%
==== ====
</TABLE>
Interest expense increased $2.4 million or 18.8% due primarily to interest
rate increases on borrowings related to Tower 45 of $2.1 million (9.1% and 7.7%
weighted average interest rates in 1995 and 1994, respectively) and 120 Mineola
Boulevard of $0.3 million (7.13% and 6.15% weighted average interest rates in
1995 and 1994, respectively). This increase was offset slightly by a net
reduction in weighted average borrowings of approximately $2.5 million (debt on
real estate at December 31, 1995 and 1994 of $202.5 million and $200.0 million,
respectively.)
During 1995, the Tower Predecessor increased its investment in the DRA
Joint Ventures from an interest in one property to interests in eleven
properties. As a result, the equity in joint ventures increased by $0.2 million.
Net loss increased $2.5 million, or 41.1%, to $8.6 million in 1995 as
compared to $6.1 million in 1994 primarily due to the increased interest expense
and other operating expenses discussed previously.
Management and Construction, Leasing and Other Fees
Tower Predecessor's management and construction, leasing and other fees are
summarized as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31, YEAR ENDED DECEMBER 31,
------------------------- --------------------------
1997 1996 1996 1995 1994
---------- ---------- ------ ------ ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Management fees from Excluded Properties.... $ 107 $ 169 $ 460 $ 590 $ 76
Construction, leasing and other fees from
Excluded Properties....................... 247 135 847 835 320
Management fees from joint ventures......... 150 200 801 371 6
Construction, leasing and other fees from
joint ventures............................ 251 143 488 206 --
-----
-
------ ------ ------ ------
Total management fees and construction,
leasing and other fees.................... $ 755 $ 647 $2,596 $2,002 $402
====== ====== ====== ====== ======
</TABLE>
Following the Offering and Formation Transactions, Tower Predecessor's
third-party management and other activities will be conducted through the
Management Company. Tower Predecessor's management and other activities from
joint ventures relate to the Properties which will be or have been acquired by
the Company in the Offering and Formation Transactions.
A portion of the related expenses of development and management services
are fixed in nature and have not fluctuated significantly, while the majority of
the related expenses are variable in nature and fluctuate with the level of
development and management activities.
57
<PAGE> 63
PRO FORMA OPERATING RESULTS
Three Months Ended March 31, 1997.
For the three months ended March 31, 1997, pro forma net income would have
been $3.6 million compared to a historical net loss of $1.2 million for the same
period. The pro forma operating results for the three months ended March 31,
1997 include rental revenues and property expenses (operating, maintenance, real
estate taxes and depreciation) on a gross basis from the DRA Joint Ventures
whereas the historical financial statements of Tower Predecessor include the
equity in earnings of the DRA Joint Ventures. Likewise, pro forma operating
results include the acquisition of Century Plaza, the results of which are not
included in the historical statement of operations.
The decrease in the pro forma management, construction, leasing and other
fees by $0.6 million primarily resulted from the Company's transfer of certain
management contracts and predecessor management companies and personnel to the
Management Company for the pro forma statement of operations. General and
administrative expenses decreased $0.2 million, or 4.6%, due to the
aforementioned contribution of certain management contracts and personnel to the
Management Company offset by additional expenses associated with being a public
company. See "Formation and Structure of the Company -- Effects of the Formation
Transactions."
Interest expense decreased $1.5 million, or 43.8%, in the pro forma
statement of operations due to mortgage loans repaid concurrent with the
Offering and lower interest rates on the $87.0 million Term Loan that will be
entered into concurrent with the Offering.
Year Ended December 31, 1996.
For the year ended December 31, 1996, pro forma net income would have been
$14.2 million compared to a historical net loss of $7.5 million for the same
period. The pro forma operating results for the year ended December 31, 1996
include rental revenues and property expenses (operating, maintenance, real
estate taxes and depreciation) on a gross basis from the DRA Joint Ventures
whereas the historical financial statements of Tower Predecessor include the
equity in earnings of the DRA Joint Ventures. Likewise, pro forma operating
results include the acquisition of Century Plaza, the results of which are not
included in the historical statement of operations.
The decrease in the pro forma management, construction, leasing and other
fees by $1.9 million primarily resulted from the Company's transfer of certain
management contracts and predecessor management companies and personnel to the
Management Company for the pro forma statement of operations. General and
administrative expenses decreased $0.6 million, or 0.6%, due to the
aforementioned contribution of certain management contracts and personnel to the
Management Company offset by additional expenses associated with being a public
company. See "Formation and Structure of the Company -- Effects of the Formation
Transactions."
Interest expense decreased $7.7 million, or 49.5%, in the pro forma
statement of operations due to mortgage loans repaid concurrent with the
Offering and lower interest rates on the $87.0 million Term Loan that will be
entered into concurrent with the Offering.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), No.
129 "Disclosure of Information About Capital Structure" ("SFAS 129"), No. 130
"Reporting Comprehensive Income" ("SFAS 130"), and No. 131 "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"), all of which
are effective for fiscal years beginning after December 15, 1997.
SFAS 128 specifies the computation, presentation and disclosure
requirements for earnings per share. SFAS 129 establishes standards for
disclosing information about an entity's capital structure such as information
about securities, liquidation preference of preferred stock and redeemable
stock. SFAS 130
58
<PAGE> 64
specifies the presentation and disclosure requirements for reporting
comprehensive income which includes those items which have been formerly
reported as a component of shareholders' equity. SFAS 131 establishes the
disclosure requirements for reporting segment information.
Management believes that, when adopted, SFAS 128, 129, 130 and 131 will not
have a significant impact on the Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Historically, property operations, long-term mortgage financing and partner
equity contributions were the principal sources of capital used by the Tower
Predecessor to acquire, renovate and develop office properties. In connection
with the Formation Transactions, the Company obtained approximately $
million from MSAM to fund costs relating to the Offering and the formation of
the Company. Upon consummation of the Offering and Formation Transactions, MSAM
is expected to convert the notes into approximately 594,040 shares of restricted
Common Stock, and to purchase an additional $20 million of shares of restricted
Common Stock in the Concurrent Private Placement. Proceeds from these
transactions and the Offering will be used to repay and modify the terms of
certain indebtedness, to acquire interests in the Properties, reduce its total
indebtedness to approximately $109.0 million, and establish working capital cash
reserves of approximately $4.1 million. In the future, the Company intends to
rely upon Funds from Operations and debt and equity financing as its sources of
funding for developing, acquiring, and renovating properties. The Company
expects that, after the Offering and related Formation Transactions, Funds from
Operations will be significantly greater than it has been historically because
of the repayment and modification of certain debt in connection with the
Offering and the acquisitions of additional properties.
Mortgage Financing. Upon completion of the Offering, the Concurrent
Private Placement, and the Formation Transactions and the application of the net
proceeds therefrom as described in "Use of Proceeds," the Company expects to
have reduced total consolidated indebtedness to $109.0 million, which is
collateralized by 10 of the Properties, with a weighted average interest rate of
7.16%. There will be a total of approximately $0.1 million of scheduled loan
principal payments due during the year ending December 31, 1998. The mortgage
indebtedness will represent approximately 23.8% of the Company's Total Market
Capitalization.
59
<PAGE> 65
Mortgage Indebtedness. Upon the consummation of the Offering, the Company
expects to have outstanding approximately $109.0 million of total consolidated
mortgage indebtedness, and approximately $2.5 million of unconsolidated
investment indebtedness, as follows:
<TABLE>
<CAPTION>
ESTIMATED
PRINCIPAL INTEREST ANNUAL DEBT MATURITY BALANCE AT
PROPERTY(IES) AMOUNT RATE SERVICE DATE MATURITY
- -------------------- -------------- ---------- -------------- ----------------- --------------
(IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Corporate Center
Properties........ $ 21,000 7.55% $1,586 January 1, 2006 $ 17,926
Corporate Center
Properties........ 1,000 8.37% 96 January 1, 2006 843
2800 North Central
Property(1)....... 2,548 9.41% 240 May 31, 1999(2) 2,548
Term Loan(3)........ $ 87,000 6.98% 6,073 (4) 87,000
-------- ----- ---- -------
Total/Weighted
Average...... $111,548 7.16% $7,995 $108,317
======== ===== ==== =======
</TABLE>
In addition, the Company has assumed a liability for deferred real estate
taxes of $12.9 million which accrued from 1988 through 1995 for Tower 45. This
deferred real estate tax liability is to be repaid commencing on July 1, 1998 in
payments of approximately $1.3 million per year. Approximately $2.5 million is
expected to be recovered from tenants and accordingly is recorded as a
receivable which is also assumed by the Company.
- ---------------
(1) Represents the Company's share of Joint Venture Debt relating to this
property, in which the Company holds a 10% unconsolidated equity interest.
The lender holds a right to certain participation payments upon the
occurrence of certain events, including certain sales, maturity, refinancing
or other disposition of the underlying property.
(2) Subject to certain conditions, the borrower under this loan may extend the
maturity date to May 31, 2000.
(3) At the consummation of the Offering, the principal balance of the Term Loan
will be $52.0 million and $35.0 million of mortgage indebtedness will be
encumbered by the Tower 45 Property. It has been assumed for pro forma
purposes that the indebtedness encumbering the Tower 45 Property will be
repaid with an additional $35.0 million borrowing under the Term Loan.
(4) The Term Loan is expected to bear interest at a fixed rate equal to 90 basis
points in excess of 7-year United States Treasury Notes at the closing of
the Offering. The 7-year Treasury note rate of 6.08% as of July 31, 1997 was
used for the calculation of the interest rate in the table above. The Term
Loan will mature seven years after the consummation of the Offering.
The Line of Credit. The Company is currently negotiating the terms of the
two year $200 million secured Line of Credit. The Line of Credit will be used to
fund future acquisitions and property development. The Company intends to close
on the Line of Credit contemporaneously or shortly after with the closing of the
Offering.
Analysis of Liquidity and Capital Resources. Upon completion of the
Offering, the Concurrent Private Placement, and the Formation Transactions and
the application of the net proceeds therefrom, the Company will have reduced its
total indebtedness to $109.0 million.
The Company believes that the Offering, the Concurrent Private Placement,
and the Formation Transactions will improve its financial performance through
changes in its capital structure, principally the substantial reduction in its
overall debt and its debt to equity ratio. The Company anticipates that
distributions will be paid from Cash Available for Distribution, which is
expected to exceed cash historically available for distribution as a result of
the reduction in debt service resulting from the repayment of indebtedness.
Following the closing of the Offering, the Company will have approximately
$4.1 million in working capital. The Company believes that its principal
short-term liquidity needs are to fund normal recurring expenses, debt service
requirements, deferred real estate taxes, and the distribution requirements to
maintain the Company's REIT qualification under the Code. The Properties require
periodic investment of capital for tenant-related capital expenditures and for
general capital improvements. For the years ending December 31, 1994 through
December 31, 1996 and the six months ended June 30, 1997, the Company's
recurring tenant improvements and leasing commissions averaged $12.42 per square
foot of leased space per year. The Company expects that the average annual costs
of recurring tenant improvements and leasing commissions
60
<PAGE> 66
will be approximately $2.3 million based upon average annual square footage of
leases which expire during the years ending December 31, 1997 through December
31, 2000 of 199,620 square feet. The Company expects the cost of general capital
improvements to the Properties to average approximately $0.4 million annually
based upon an estimate of $0.15 per square foot.
CASH FLOWS
Overview. Tower Predecessor incurred net losses in each of the last five
years. However, after adding back interest, depreciation and amortization, the
Tower Predecessor generated positive EBITDA (as defined herein).
Comparison for the Three Months Ended March 31, 1997 to the Three Months Ended
March 31, 1996
Tower Predecessor's cash and cash equivalents were $4.8 million and $4.3
million at March 31, 1997 and 1996, respectively. Cash and cash equivalents
decreased $0.1 million during the three months ended March 31, 1997 due to $1.9
million of cash flow provided by operating activities, $0.4 million of cash flow
used in investing activities and $1.6 million of cash flow used in financing
activities. The increase in cash from operating activities is primarily due to
increases in payables and amounts due to affiliates. The decrease in cash from
financing activities results primarily from repayment of real estate debt.
Comparison for the Year Ended December 31, 1996 to Year Ended December 31,
1995
Tower Predecessor's cash and cash equivalents were $5.0 million and $5.2
million at December 31, 1996 and 1995, respectively. Cash and cash equivalents
decreased $0.2 million during 1996 due to $1.0 million of cash flow provided by
operating activities, $6.8 million of cash flow used in investing activities,
and $5.6 million of cash flow provided by financing activities. The increase in
cash from operating activities is primarily due to increases in payables and
rental income from the properties. The decrease in cash used in investing
activities is primarily due to acquisitions (5750 Major Boulevard) and
improvements to real estate which were primarily financed from proceeds of real
estate debt and partners' contributions.
FUNDS FROM OPERATIONS AND EBITDA
The Company calculates Funds from Operations based upon guidance from
NAREIT. Funds from Operations is defined as net income (computed in accordance
with GAAP), excluding gains or losses from debt restructuring and sales of
property, plus depreciation and amortization on real estate, and after
adjustments for unconsolidated partnerships and joint ventures.
The White Paper on Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in March
1995 defines Funds from Operations as net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales of
properties, plus real estate related depreciation and amortization and after
adjustments for unconsolidated partnerships and joint ventures. The Company
believes that Funds from Operations is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flow from operating
activities, financing activities and investing activities, it provides investors
with an indication of the ability of the Company to incur and service debt, to
make capital expenditures and to fund other cash needs. The Company computes
Funds from Operations in accordance with standards established by NAREIT which
may not be comparable to Funds from Operations reported by other REITs that do
not define the term in accordance with the current NAREIT definition or that
interpret the current NAREIT definition differently than the Company. Funds from
Operations does not represent cash generated from operating activities
determined in accordance with GAAP and should not be considered as an
alternative to net income (determined in accordance with GAAP) as an indication
of the Company's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make cash distributions.
61
<PAGE> 67
EBITDA is defined as operating income before mortgage and other interest,
income taxes, depreciation and amortization. The Company believes EBITDA is also
useful to investors as an indicator of the Company's ability to service debt or
pay cash distributions. EBITDA, as calculated by the Company, may not be
comparable to EBITDA reported by other REITs that do not define EBITDA exactly
as the Company defines that term. EBITDA does not represent cash generated from
operating activities in accordance with GAAP and should not be considered as an
alternative to operating income or net income as an indicator of performance or
as an alternative to cash flows from operating activities as an indicator of
liquidity.
The Company's share (Pro forma) and Tower Predecessor's (historical) Funds
from Operations and EBITDA are as follows (in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -------------------------------------
---------------------- HISTORICAL
PRO FORMA HISTORICAL PRO FORMA -------------------------
1997 1997 1996 1996 1995 1994
--------- ---------- --------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Funds from Operations........... $ 6.4 $0.7 $25.3 $ 0.1 $(1.4) $ 1.3
EBITDA.......................... $ 8.1 $4.1 $32.2 $15.5 $13.7 $13.8
</TABLE>
Funds from Operations and EBITDA for the three months ended March 31 (pro
forma) increased over Funds from Operations and EBITDA (historical) for the same
time period by $5.7 million and $4.1 million, respectively. The increases are
primarily attributable to the acquisition of the DRA Joint Ventures and the
Century Plaza property in connection with the Formation Transactions.
Funds from Operations and EBITDA (pro forma) for the year ended December
31, 1996 increased over Funds from Operations and EBITDA (historical) for the
same period by $25.2 million and $16.7 million, respectively. The increases are
primarily attributable to the acquisition of the DRA Joint Ventures and the
Century Plaza property in connection with the Formation Transactions.
Historical Funds from Operations and EBITDA increased in 1996 over 1995 by
$1.5 million and $1.8 million, respectively. The increases are primarily
attributable to the improved operating performance of the properties including
increased leasing as previously described. The net loss improved by $1.2 million
for the same period.
Historical Funds from Operations and EBITDA decreased in 1995 over 1994 by
$2.7 million and $0.1 million respectively. The decrease in Funds from
Operations is primarily attributable to an increase in interest expenses
associated with two of Tower Predecessor's borrowings ($2.4 million) as
previously described. The remaining decrease in Funds from Operations and the
total decrease in EBITDA is primarily attributable to the reduction in base rent
due to the tenant dispute previously described.
INFLATION
The Company's leases with the majority of its tenants reserve the tenants
to pay most operating expenses, including real estate taxes and insurance, and
increases in common area maintenance expenditures, which reduce the Company's
exposure to increase in costs and operating expenses resulting from inflation.
62
<PAGE> 68
PROPERTY OFFICE MARKETS AND MARKET ECONOMIES
All market information not specifically attributed to the Company is based
on information supplied by Landauer and unless otherwise noted historical data
are presented as of December 31 of the specified year.
MIDTOWN MANHATTAN MARKET AND ECONOMY
Manhattan Market and Economy
The Company intends to focus its turnaround acquisition strategy in
Manhattan. Manhattan represents the core of the Metropolitan New York City
office market, which is the largest office market in the United States,
containing more rentable square feet than the next six largest United States
office markets combined. The economy of the New York metropolitan area is larger
than the economies of the next two largest metropolitan areas combined (Los
Angeles and Chicago) and larger than the economy of any individual state except
California, based on aggregate personal income. In addition, Manhattan is the
headquarters to many of the major corporations and service firms in the United
States, including more Fortune 500 companies than any other city in the United
States and 23 of the 25 largest U.S. securities firms.
The Company believes that the strength of the New York City metropolitan
area economy and the current supply/demand fundamentals in the Manhattan office
market provide an attractive environment for owning, operating, and acquiring
office properties because of consistent net private sector job growth, a
strengthening New York City metropolitan economy, and an improving business
environment and quality of life offered in New York City. Led by significant
growth in the services sector of the economy, particularly the entertainment and
other business service sectors, New York City has experienced employment growth
during each of the past three years. Landauer reports that the mix of service
sector businesses in the midtown Manhattan office market stabilizes this market
during economic cycles.
Data from the New York State Department of Labor indicates that the
unemployment rate in New York City peaked in 1992 during the height of the
recessionary period in New York City during the early 1990s. Since that time,
New York City has experienced an economic recovery marked by a fall in
unemployment rates that was coupled with gains in non-agricultural employment
commencing in 1994. New York City's unemployment rate has fallen from 11.0% in
1992 to 8.8% in 1996. This illustrates employment trends and service sector
growth in New York City.
HISTORICAL NON-AGRICULTURAL EMPLOYMENT AND SERVICES GROWTH
NEW YORK, NY
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) NYC EMPLOYMENT NYC SERVICES
<S> <C> <C>
1992 -3 0.00
1993 -4 2.00
1994 1.00 3.00
1995 0.80 3.00
1996 1.00 4.00
</TABLE>
The strength of New York City services industry is evidenced by an
employment gain of 4.1%, or 48,900 net new jobs, in 1996 alone. This increase
broke all previous records for services employment in New York
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<PAGE> 69
City. This growth in the service industry sector was fueled by significant
increases in the motion picture, media, and business services subsectors.
Landauer reports that the services sector of the local economy is highly
concentrated in the Manhattan office market. Landauer predicts that the services
sector of the local economy will increase at a rate of 1.95% per year, or over
191,000 service jobs through 2006.
Data Resources Inc. has forecasted a total increase in non-agricultural
employment for the period from 1996 to 2006 of 7.6%, including 17.6% in the
services sector. A significant factor for primary office employment growth in
the Manhattan office market is the significant growth in the services sector of
the New York City economy. Data from the New York Department of Labor indicates
a trend over the past four years of the New York City economy of becoming more
services oriented. The employment base of this sector has increased by
approximately 12.6%, or approximately 138,000 net new jobs, since 1992.
Midtown Manhattan Market Overview
The Company believes that midtown Manhattan represents an attractive market
in which to own and operate office properties. Specifically, the midtown
Manhattan office market has the following favorable characteristics: (i) the
Class A midtown Manhattan office market has experienced five consecutive years
of positive net absorption and declining vacancy rates, (ii) there have been
virtually no new additions to supply in midtown Manhattan since 1992, and (iii)
significant new construction is unlikely at the current time because (a) there
are relatively few sites available for construction, (b) the lead time for
construction typically exceeds three years and (c) new construction generally is
not economically feasible given current market rental rates.
Increasing Demand for Office Space
Due to the significant primary office growth in the midtown Manhattan
office market and little or no new development, the underlying fundamentals of
supply and demand in the midtown Manhattan office market have improved. Between
1992 and 1996, according to Landauer, the Class A direct vacancy rate in the
midtown Manhattan office market declined from 15.4% to 12.0% During this period
there was net absorption of approximately 6.8 million square feet. According to
Landauer, between 1992 and 1996 the entire direct vacancy rate in the midtown
Manhattan office market declined from 15.5% to 11.5%. During this period, there
was net absorption of 13 million square feet, with 6.2 million square feet being
absorbed in 1996 alone. During the first six months of 1997, the class A direct
vacancy rate in this market declined from 12.0% to 10.1%. And the overall direct
vacancy rate in this market declined from 11.5% to 8.15%.
HISTORICAL DIRECT VACANCY RATES
MIDTOWN MANHATTAN, NEW YORK
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) VACANCY RATE
<S> <C>
1992 15.46
1993 13.96
1994 12.89
1995 13.69
1996 11.45
1Q97 8.96
2Q97 7.82
</TABLE>
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<PAGE> 70
Increasing Rental Rates
As a result of substantial absorption and a decreasing direct vacancy rate,
the midtown Manhattan office market has experienced a significant rise in asking
rents. According to Landauer, asking rental rates have increased from $32.84 per
square foot in 1992 to $35.39 per square foot in 1996, including a more than
$2.00 per square foot increase in asking rents during the most recent 12-month
period. Notwithstanding the current favorable supply/demand fundamentals in the
Manhattan office market, the Company believes that, in order to justify new
construction in this market, asking rents generally would have to increase 40%
over current asking rents for Class A office space in midtown Manhattan (as
estimated by Landauer), not taking into account any tax benefits which may
apply. In addition, the Company believes, based on its experience in the midtown
Manhattan office market, that effective rental rates (i.e., rental rates after
taking into account tenant improvement costs and leasing concessions) for office
properties in midtown Manhattan have increased more significantly, especially
when taking into account such factors as the reduction in concessions to tenants
(such as free rent, tenant construction allowances, etc.).
NET ABSORPTION AND ASKING RENTAL RATES
MIDTOWN MANHATTAN, NEW YORK
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) ASKING RATES NET ABSORPTION
<S> <C> <C>
1992 33.000 3.800
1993 32.000 3.500
1994 34.000 4.500
1995 35.000 -1.4
1996 36.000 6.800
1Q97 33.000 5.800
2Q97 35.000 0.365
</TABLE>
Supply of Office Space
The Company expects the supply of office space in the midtown Manhattan
market to remain stable for the foreseeable future because there are relatively
few sites available for construction. The lead time required for land assemblage
construction typically exceeds three years and new construction generally is not
economically feasible at current market rental rates. Only one new development
in midtown Manhattan is anticipated in the near term, containing approximately
1.5 million square feet, scheduled to be completed in 1999, which has
substantial grandfathered tax benefits. The Company does not believe that this
property will have a material impact on the market because it represents less
than 1% of the total Class A midtown Manhattan office space and the building is
already substantially pre-leased to two tenants. In the absence of tax
incentives, the Company believes that rents generally would have to increase
significantly to justify the cost of new construction. Assuming total land and
development costs of $400-450 per square foot (as estimated by Landauer), a
market base rent of at least $55 per square foot would be needed to make
construction economically viable.
METROPOLITAN ORLANDO MARKET AND ECONOMY
Market Economy Overview
The Company believes that the current and forecast trends have created and
will continue to create a favorable economic environment for the ownership of
office properties in the Orlando office market. Metropolitan Orlando has been
rated by Landauer at the top of its annual United States Office Market Quality
ratings during four of the past five years. Economic growth during the 1990s was
fueled by Orlando's
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<PAGE> 71
tourism service-based economy. Orlando's status as a world class tourist
destination has created significant demand for businesses that provide support
services to the tourism industry. In addition, recent growth in the Metropolitan
Orlando market has been driven by an expanding film production industry led by
the Walt Disney Company and Universal Studios, a thriving high technology
industry, and the nation's largest military and aerospace simulation and
training industry.
Total non-agricultural employment in the Orlando metropolitan area was
estimated at approximately 750,000 persons in 1996, following five years of
growth at an annual compounded rate of 3.5%. Landauer reports that Orlando's
employment growth rate was one of the highest among all metropolitan areas in
the United States. The graph below illustrates employment trends and service
sector growth in the Metropolitan Orlando area.
HISTORICAL NON-AGRICULTURAL EMPLOYMENT AND SERVICES GROWTH
ORLANDO, FL
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) ORLANDO EMPLOYMENT ORLANDO SERVICES
<S> <C> <C>
1992 3.00 6.30
1993 5.00 8.50
1994 5.00 8.70
1995 5.00 8.60
1996 5.00 4.70
</TABLE>
Data Resources, Inc. has forecast for the Metropolitan Orlando area a total
increase in non-agricultural employment for the period from 1996 to 2001 of
approximately 14.5%, representing an average annual growth rate of approximately
2.7%. In addition, the population of metropolitan Orlando had a median age of
34.4 years in 1996, which is among the youngest among all metropolitan areas in
Florida, and almost 32% of the population was between the ages 25 and 44,
translating into a strong and sizeable work force, which continues to grow at a
rapid rate.
A driving factor in the forecasted employment growth in Metropolitan
Orlando is a strong population growth rate, which, over the next five years is
expected to significantly outpace the population growth rates in both Florida
and the United States as shown below:
<TABLE>
<CAPTION>
POPULATION GROWTH POPULATION GROWTH
1990-1996 1996-2001
AREA ESTIMATED PROJECTED
------------------------------------------- ----------------- -----------------
<S> <C> <C>
Orlando Metropolitan Area.................. 15.9% 10.6%
Florida.................................... 11.1% 7.6%
United States.............................. 6.7% 4.4%
</TABLE>
- ---------------
Source: Urban Decisions Systems.
As primary office employment grows, office demand is expected to increase.
Landauer estimates that a total of approximately 18,150 new office jobs will be
generated over the next five years, requiring approximately 3 million square
feet of new office space.
A significant factor in the demand for office space is the overall growth
in the regional economy, including the tourism sector. According to Data
Resources, Inc. employment in the tourism-based service sector is
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<PAGE> 72
expected to grow by more than 58,000 jobs by the year 2001 (representing an
annual compounded growth rate of 3.5%) as new entertainment and vacation venues
open, and existing ones, including Disney World and Universal Studios, add new
attractions and theme areas. Landauer expects that as this economic sector
grows, it will require additional support services, including lawyers, financial
advisors, management consultants, insurance and real estate brokers that, in
turn, will create demand for office space for these professional services. In
addition, Landauer reports that growth in the film and television production
industries will fuel growth in the service sector of Metropolitan Orlando's
economy.
An additional significant factor for demand for office space in Orlando has
been growth in the trade and transport sectors of the economy. Orlando has
evolved into a major distribution center for all of Florida due to its central
location which, unlike south Florida, provides greater access and closer
proximity to most Florida cities. According to Data Resources, Inc., Orlando's
trade-related employment is expected to increase at a compounded growth rate of
2.8% through the year 2001, generating an estimated 27,000 new jobs.
The finance, insurance and real estate (FIRE) sector continues to show
strength in the Metropolitan Orlando economy. According to Landauer this sector
of the economy grew at an annual rate of 4.8% from 1992 through 1996 and is
expected to increase at a rate of approximately 11.6% per annum through the year
2001, generating an estimated 5,100 new jobs. Landauer reports that this
increase in the FIRE sector of the economy is expected to result in an increase
in demand for approximately 835,000 square feet of office space over the same
time period.
A thriving high-technology industry is another indicator of the strength of
the local market. AT&T Technologies, Inc. operates a microchip assembly plant in
Orlando. In addition, Martin Marietta Corporation operates several manufacturing
plants in the Orlando metropolitan area, and its presence has spawned a number
of smaller high-tech companies that manufacture laser-based weapons and medical
equipment. In addition, Metropolitan Orlando's simulation and training industry
has grown to become the largest in the United States with more than 150
companies.
Market Overview
Because of the growth in employment sectors that utilize office space, the
Company believes that the Metropolitan Orlando area represents an attractive
market in which to own and operate office properties. Specifically, the
Metropolitan Orlando office market, in which 20.9% of the Company's portfolio is
located (based on Escalated Rent as of June 30, 1997), has the following
favorable market characteristics according to Landauer: (i) the Orlando office
market has experienced declining direct vacancy rates in four out of the last
five years and more than five years of positive net absorption, (ii) since 1991
there has been only a minor increase in the supply of office space in the
Orlando metropolitan area, and (iii) average rental rates in the Orlando office
market have experienced increases in each of the past four years. The increase
in average rental rates is even more pronounced when taking into account such
factors as the reduction in concessions to tenants (such as free rent, tenant
construction allowances, etc.).
Increasing Demand for Office Space
In the past four years the underlying fundamentals of supply and demand in
the Metropolitan Orlando office market have improved. The peak in available
supply occurred in 1992. Since that time, the growth in the Orlando economy and
the relationship between supply and demand has resulted in declining direct
vacancy rates and positive net absorption in the market. According to Landauer,
as of December 31, 1996 the direct vacancy rate in the Metropolitan Orlando
office market was 9.5% as compared to 16.8% as of December 31, 1992. During the
same 1992-1996 period there was net absorption of approximately 2.6 million
square feet. As of March 31, 1997, the direct vacancy rate in the market was
10.2% and the average rental rate was $16.22 per square foot with 800,000 square
feet under construction. This compares to a 1996 annual absorption of
approximately 1.1 million square feet.
LOGO
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<PAGE> 73
HISTORICAL DIRECT VACANCY RATES
ORLANDO, FL
<TABLE>
<S> <C>
1992 17
1993 13
1994 14
1995 11
1996 10
1Q97 11
</TABLE>
Increasing
Rental
Rates
In addition to the substantial absorption of available office space coupled
with a decreasing direct vacancy rate, the Orlando office market has experienced
an increase in rental rates from $16.24 per square foot in 1992 to $17.19 per
square foot in 1996.
NET ABSORPTION AND ASKING RENTAL RATES
ORLANDO, FL
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) ASKING RATES ($/S.F.) NET ABSORPTION
<S> <C> <C>
1992 16.00 25.00
1993 15.00 1150.00
1994 15.50 200.00
1995 16.00 200.00
1996 16.50 1100.00
1Q97 16.00 50.00
</TABLE>
Supply of Office Space
According to Landauer there has been little growth in the supply of new
office space in the Metropolitan Orlando market. Since 1992, office space in the
Orlando market grew by only 3.3% (approximately 700,000 square feet). In the
opinion of Landauer, the addition of any new speculative office space in this
market will continue to be limited due to the lack of available construction
financing. Landauer reports that construction lenders have remained cautious and
have continued to require at least 50% pre-leasing activity as a prerequisite
for financing speculative developments.
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<PAGE> 74
METROPOLITAN PHOENIX MARKET AND ECONOMY
Market Economy Overview
The Company believes the underlying fundamentals of the Metropolitan
Phoenix economy and office market have created a favorable environment for the
ownership of office properties in that market. The city of Phoenix has grown to
become the sixth largest city in the United States. Landauer reports that over
the last five years, Phoenix has experienced growth far in excess of the
national average in terms of population, employment and income. This has
translated into an unemployment rate of 5.0% or less since 1992. In addition,
Metropolitan Phoenix has exceeded the national non-agricultural employment
growth rate since 1992. Urban Decision Systems predicts that employment growth
in the Metropolitan Phoenix area during the next five years will exceed the
national growth rate by more than 50%. Recent growth in the Metropolitan Phoenix
market was fueled by a thriving high technology industry together with many
service industries.
Total non-agricultural employment in the Metropolitan Phoenix Area was
estimated at approximately 1.24 million persons in 1996, which represents a
compound annual increase of 5.2% since 1992. Landauer reports that in measuring
employment gains since 1994, the Phoenix Metropolitan Area ranked third among
the 130 largest metropolitan areas in the United States. The graph below
illustrates employment trends and service sector growth in the Metropolitan
Phoenix Area.
HISTORICAL NON-AGRICULTURAL EMPLOYMENT AND SERVICES GROWTH
PHOENIX, AZ
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) PHOENIX SERVICES PHOENIX EMPLOYMENT
<S> <C> <C>
1992 3 1
1993 6 5
1994 9 7
1995 9 7
1996 10 7
</TABLE>
Data Resources, Inc. has forecast for the Phoenix metropolitan area a total
increase in non-agricultural employment for the period from 1996 to 2001 of
approximately 9.1%, representing an average annual growth rate of approximately
1.8%.
A driving factor in the forecasted employment growth is a strong population
growth rate, which, over the next five years is expected to significantly
outpace the population growth rate in the United States as shown below:
<TABLE>
<CAPTION>
POPULATION GROWTH POPULATION GROWTH
1990-1996 1996-2001
AREA ESTIMATED PROJECTED
------------------------------------------- ----------------- -----------------
<S> <C> <C>
Phoenix Metropolitan Area.................. 18.2% 12.1%
Arizona.................................... 18.9% 12.4%
United States.............................. 6.7% 4.4%
</TABLE>
69
<PAGE> 75
An important factor in the demand for office space in the Metropolitan
Phoenix office market has been the strength of the local economy which has been
propelled by expansions in high-tech manufacturing, tourism and service
industries. According to Grubb & Ellis, almost 15,000 high technology jobs were
created in Arizona in 1996 with more than three-fourths of those in the
metropolitan Phoenix area. Intel has recently completed a $1.6 billion
technology plant in Metropolitan Phoenix. In addition, Motorola and Sumitomo are
major high-tech employers in the area. The region has become known as the "call
center" capital of the United States, and Landauer reports that more than 70
credit card centers, data centers, customer service stations and call centers
employ more than 40,000 people in the market. Overall, Landauer reports that in
the greater Phoenix area, nearly 700 high technology companies employ over
74,000 people.
An additional significant factor for demand for office space has been
growth in the services sector of the economy, including the tourism sector.
Grubb & Ellis predicts that tourism will continue to inject approximately $7.2
billion into the local economy annually and will continue to generate more than
103,000 jobs and support another 100,000 indirectly. According to Data
Resources, Inc. the services sector of the Phoenix economy increased by 33.7%
from 1990 through 1996, representing an annual compounded growth rate of 5%.
Data Resources, Inc. predicts that the services sector of the Phoenix economy
will grow by more than 20% through the year 2001 generating in excess of 75,000
new jobs.
Landauer reports that as the Phoenix market evolves, it is less dependent
on employment sectors which historically have shown the greatest volatility.
After the defense cutbacks of the early 1990s, government employment now
contributes a smaller percentage of the workforce in Phoenix than it does in
Arizona or the nation as a whole. The finance, insurance and real estate sector
comprise only 8.9% of the local workforce. Consistent with a maturing city,
services and manufacturing are the largest employers. According to Landauer, a
recent survey reveals 60% of companies relocating to Phoenix are office users,
8% are distributors and one-third are manufacturers.
Market Overview
The Company believes that the current and forecast trends have created and
will continue to create a favorable economic environment for the ownership of
office properties in the Metropolitan Phoenix office market. Specifically, the
Metropolitan Phoenix office market, in which 23.1% of the Company's portfolio is
located (based on Escalated Rent as of June 30, 1997), has the following
favorable market characteristics according to Landauer: (i) the Metropolitan
Phoenix office market has experienced five years of declining direct vacancy
rates and more than 10 years of positive net absorption, (ii) since 1990 there
has only been a minor increase in the supply of office space in the Metropolitan
Phoenix area, and (iii) average rental asking rates have experienced significant
increase since 1993.
Increasing Demand for Office Space
In the past four years the underlying fundamentals of supply and demand in
the Metropolitan Phoenix office have improved. The peak in available supply
occurred in 1992. Since that time, the growth in the Metropolitan Phoenix
economy and the relationship between supply and demand has resulted in declining
direct vacancy rates and positive net absorption in the market. According to
Landauer, as of December 31, 1996, the direct vacancy rate in the Metropolitan
Phoenix office market was 9.1% as compared to 25.1% as of December 31, 1992.
During this period there was net absorption of 4.8 million square feet. As of
June 30, 1997, the direct vacancy rate in the Phoenix office market decreased to
8.6% and the market had positive net absorption of over 120,000 square feet.
These positive fundamentals in the Phoenix office market resulted in an increase
in average asking rents to $16.02 per square foot.
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<PAGE> 76
HISTORICAL DIRECT VACANCY RATES
PHOENIX, AZ
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) VACANCY RATE
<S> <C>
1992 23
1993 17
1994 13
1995 11
1996 9
1Q97 8
</TABLE>
The Greater Phoenix Blue Chip Economic Forecast (the "Greater Phoenix
Forecast") predicts that total net absorption in the Metropolitan Phoenix office
market will be approximately 1.0 million square feet in 1997, representing an
increase of over 130% from 1996 net absorption totals. In addition, the Greater
Phoenix Forecast projects that available space in the Metropolitan Phoenix
office market will decrease to approximately 3.0 million square feet by December
31, 1997 from approximately 3.5 million square feet as of December 31, 1996. The
Greater Phoenix Forecast anticipates that direct vacancies in the market will
remain in 9.0 to 9.5 percent range during 1997 in spite of an increase in
supply. There can be no assurance that the Greater Phoenix Forecast's
projections will be consistent with actual results in the market.
Increasing Rental Rates
In addition to the substantial absorption of available office space coupled
with a decreasing direct vacancy rate, the Metropolitan Phoenix office market
has experienced a substantial increase in landlord average asking rents.
Landauer reports that average asking rents in the Metropolitan Phoenix office
market have increased from $15.00 per square foot in 1993 to $15.50 per square
in 1996. During the first quarter of 1997, asking rents increased from $15.50 at
year-end 1996 to $16.00, representing a 3.3% increase in the three-month period.
NET ABSORPTION AND ASKING RENTAL RATES
PHOENIX, ARIZONA
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) NET ABSORPTION ASKING RENT ($/S.F.)
<S> <C> <C>
1992 1188.00 13.20
1993 1658.00 15.50
1994 1681.00 13.60
1995 1074.00 14.53
1996 433.00 15.40
1Q97 420.00 16.02
</TABLE>
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Supply of Office Space
According to Landauer, there has been little growth in the supply of new
office space in the Metropolitan Phoenix market. Since 1991, office space in the
Metropolitan Phoenix market grew by only approximately 600,000 square feet in an
overall market that, as of December 31, 1996, consisted of 42 million square
feet. Landauer reports that three new office buildings containing approximately
500,000 square feet will be added to the market during 1997. This compares to an
average annual absorption of 1.2 million square feet during the period from 1992
to 1996
METROPOLITAN TUCSON ECONOMY
The Company believes that the office market in Metropolitan Tucson has
improved and will be an excellent market to own and operate office properties in
the future. The Tucson metropolitan area, which is located approximately 120
miles southeast of Phoenix near the Mexican border, consists of Pima County and,
as of December 31, 1996, included approximately 18% of Arizona's population.
After a period of sustained growth from 1991 to 1994 the local economy slowed in
1995 (primarily due to the peso devaluation) and then rebounded significantly in
1996. Growth in the 1990s was precipitated by significant employment gains in
the high-technology, service and trade sectors of the economy.
Total non-agricultural employment in the Metropolitan Tucson area was
estimated at approximately 310,000 persons in 1996, following compounded annual
growth at the rate of approximately 3.9% per year since 1992. The graph below
illustrates employment trends and service sector growth in the Tucson
Metropolitan area.
HISTORICAL NON-AGRICULTURAL EMPLOYMENT AND SERVICES GROWTH
TUCSON, AZ
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) TUCSON SERVICES TUCSON EMPLOYMENT
<S> <C> <C>
1992 3 1
1993 7 5
1994 6 7
1995 3 7
1996 6 7
</TABLE>
A significant factor in the forecasted employment growth in Metropolitan
Tucson is a strong population growth rate. Since 1990 the local population has
grown at a compounded rate of 2.5%. According to Urban Decision Systems, by 2001
the Tucson population is expected to grow at an annual compounded growth rate of
2.1% compared to .9% in the United States.
The strength of the Tucson economy is also evidenced by a low unemployment
rate. According to the Arizona Department of Economic Security, the average
unemployment rate in the Metropolitan Tucson area during 1996 was 3.4%, more
than 1.5 percentage points below the Arizona average.
The growth in the Metropolitan Tucson economy has been driven by
significant improvements in the services and government sectors, which combined
for over one-half of the area's employment base. According
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<PAGE> 78
to CBC/Torto Wheaton Records, the services sector of the economy increased by an
average of 4.5% per year for the past 10 years, led by significant improvements
in the computer and data processing subsectors. CBC/Torto Wheaton Research
projects that the services sector of the economy will continue to grow at the
rate of 3.8% per year over the next 10 years.
Manufacturing is another major component of the Metropolitan Tucson economy
that is an indication of the general strength of the market. Although
manufacturing experienced market declines in the past year, according to
CBC/Torto Wheaton Research this sector of the economy is expected to grow at the
annual compounded rate of 1.6% during the next 10 years. According to Landauer,
most of the growth in this sector can be attributed to growth in the
biotechnology and high technology areas. The Greater Tucson Economic Counsel
1995/1996 Annual Report documents 14 new companies recently recruited to Tucson,
largely in the high technology and telecommunications industries that have
resulted in the creation of 3,700 new jobs. In addition, according to Data
Resources, Inc., the government sector of the economy has increased by
approximately 18.7% since 1990 and is expected to increase at a compounded
annual growth rate of 2.8% from 1996 to 2001.
Market Overview
The Company believes that the Metropolitan Tucson area represents an
attractive market to own and operate office properties. Specifically, according
to Landauer, the Metropolitan Tucson office market, in which 6.0% of the
Company's portfolio is located (based on Escalated Rent as of June 30, 1997, has
the following favorable market characteristics: (i) the Metropolitan Tucson
office market has experienced nine years of declining direct vacancy rates and
seven years of positive net absorption, (ii) average rental rates in the
Metropolitan Tucson office market have steadily increased since 1994, and (iii)
since 1988 there has only been a minor increase in the supply of office space in
the Tucson metropolitan area.
Increasing Demand for Office Space
The growth in demand for office space since 1987, combined with relatively
limited increases in supply, is directly reflected in vacancy reductions. As of
December 31, 1996, the direct vacancy rate in the Tucson office market was 9.0%
as compared to 16.9% as of December 31, 1992. During this period, there was net
absorption of approximately 690,000 square feet. Since 1992, office space in the
Metropolitan Tucson market grew by only 14.1% (approximately 335,000 square
feet). The positive fundamentals in the Tucson office market continued to
improve during the first quarter of 1997 which resulted in a decrease in the
direct vacancy rate to 8.1% and additional net absorption of approximately
71,000 square feet.
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HISTORICAL DIRECT VACANCY RATES
TUCSON, AZ
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) DIRECT VACANCY RATE
<S> <C>
1991 23.40
1992 20.90
1993 15.90
1994 12.80
1995 10.20
1996 9.60
1Q97 8.10
</TABLE>
Increasing Rental Rates
According to CBC/Torto Wheaton Research, rental rates, as quoted by local
landlords, have risen to approximately $18.00 per square foot in 1996 from
approximately $12.50 in 1992, an increase of approximately 44%. The increase
does not reflect the concomitant reduction in concessions to tenants. CBC/Torto
Research projects that rents will continue to increase at healthy rates through
1999 and then slowly plateau, reaching approximately $25.00 per square foot in
2001. As of March 31, 1997, average asking rents in this market have remained at
$18.00 per square foot. There can be no assurance such increases in rental rates
will be achieved.
NET ABSORPTION AND ASKING RENTAL RATES
TUCSON, AZ
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) NET ABSORPTION ASKING RENT ($/S.F.)
<S> <C> <C>
1992 120.00 13.00
1993 240.00 14.00
1994 198.00 13.50
1995 138.00 16.00
1996 60.00 17.00
1997 75.00 17.00
</TABLE>
74
<PAGE> 80
Supply of Office Space
At year-end 1992, the Tucson office market consisted of 5.98 million square
feet of non-owner occupied space, plus another 2.25 million square feet of
owner-occupied space. Since 1992, only 334,870 square feet have been added to
the supply, or approximately 84,000 square feet per year. Largely because
certain submarket vacancies are currently below 5% CBC/Torto Research estimates
that approximately 1.2 million square feet will be added to the market over the
next five years. CBC/Torto Wheaton Research projects that little or no space
will be added to the market in 1997, 130,000 square feet will be added in 1998
and the balance will be divided evenly over the following three years.
75
<PAGE> 81
THE PROPERTIES
GENERAL
Upon completion of the Offering, the Company will own interests in the 20
Properties, which contain 2.9 million rentable square feet. Substantially all of
the Properties are located in nine submarkets in the Metropolitan New York City,
Phoenix/Tucson, and Orlando office markets and individually range from 10,300 to
443,000 rentable square feet. Certain of the Properties include a small amount
of retail space on their lower floors. All of the Properties are wholly owned by
the Company, except for the 2800 North Central Property which is owned in a
joint venture with an affiliate of Carlyle Group in which the Company owns a 10%
general and limited partner interest (which economic interest increases to up to
27.5% if certain performance criteria are achieved). As of June 30, 1997,
approximately 71% of the Company's Escalated Rent from the portfolio was derived
from Properties located in central business district locations, including
approximately 46% from Properties located in the Manhattan office market.
Generally, the Company believes that all the Properties have desirable locations
within established business communities and are well-maintained. The Company
also owns or has options to acquire four parcels of land which can support an
aggregate of approximately 2.2 million square feet of development. See
"-- Submarket and Property Information."
Management believes that the location, quality of construction and building
amenities, as well as the Company's reputation for providing a high level of
tenant service, have enabled the Company to attract and retain a diverse tenant
base. As of June 30, 1997, the Properties had a weighted average occupancy rate
of 94.7% and were leased to over 350 tenants. As of June 30, 1997, no single
tenant represented more than approximately 5.9% of the aggregate Escalated Rent
of the Company's portfolio and only 17 tenants individually represented more
than 1% of such Escalated Rent.
PROPERTIES
The following tables set forth certain information, as of June 30, 1997,
with respect to the Properties.
76
<PAGE> 82
<TABLE>
<CAPTION>
PERCENT YEAR BUILT/ RENTABLE PERCENT NUMBER
MARKET/PROPERTY OWNED RENOVATED(1) SQUARE FEET LEASED OF LEASES
-------------------------------------------------------------- ------- ------------ ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
METROPOLITAN NEW YORK CITY MARKET
Midtown Manhattan Market
Tower 45................................................... 100% 1989 443,114 100.0% 34
286 Madison Avenue......................................... 100% 1918 (4) 111,977 96.4 38
290 Madison Avenue......................................... 100% 1950 (4) 38,512 100.0 5
292 Madison Avenue......................................... 100% 1920/86 186,901 98.9 20
Long Island Market
120 Mineola Boulevard...................................... 100% 1984/92 100,810 91.2 15
--------- ----- ---
Market Subtotal/Weighted Average............................................... 881,314 98.3% 112
--------- ----- ---
ARIZONA MARKETS
Metropolitan Phoenix Market
Corporate Center Building 10010-30......................... 100% 1976/86 188,614 100.0% 3
Corporate Center Building 10040............................ 100% 1976/86 23,155 96.3 9
Corporate Center Building 10050............................ 100% 1976/86 42,398 100.0 12
Corporate Center Building 10210............................ 100% 1976/86 45,100 100.0 4
Corporate Center Building 10220............................ 100% 1976/86 24,128 100.0 1
Corporate Center Building 9630(5).......................... 100% 1976/86 130,164 100.0 13
2800 North Central(6)...................................... 10% 1987 357,923 90.6 36
Century Plaza.............................................. 100% 1974/90 219,769 85.1 31
Metropolitan Tucson, Arizona
5151 East Broadway......................................... 100% 1975/96 246,813 100.0% 47
--------- ----- ---
Market Subtotal/Weighted Average............................................... 1,278,064 94.7% 156
--------- ----- ---
METROPOLITAN ORLANDO MARKET
One Orlando Center......................................... 100% 1989 357,378 99.3% 35
5750 Major Boulevard....................................... 100% 1973/97 92,828 29.7(7) 29
Maitland Forum............................................. 100% 1985/96 266,060 99.1 18
2601 Maitland Center Parkway............................... 100% 1982 10,342 100.0 1
2603 Maitland Center Parkway............................... 100% 1982 10,704 81.7 2
2605 Maitland Center Parkway............................... 100% 1982 38,564 100.0 5
--------- ----- ---
Market Subtotal/Weighted Average............................................... 775,876 90.7% 90
--------- ----- ---
Consolidated Total/Weighted Average for all Properties................................ 2,935,254 94.7% 358
========= ===
<CAPTION>
PERCENTAGE OF ESCALATED RENT
ESCALATED PORTFOLIO PER LEASED
MARKET/PROPERTY RENT(2) ESCALATED RENT(2) SQUARE FOOT(2)
-------------------------------------------------------------- ----------- ----------------- --------------
<S> <C>
METROPOLITAN NEW YORK CITY MARKET
Midtown Manhattan Market
Tower 45................................................... $20,447,000 31.9% $46.14
286 Madison Avenue......................................... 2,625,000 4.1 24.33
290 Madison Avenue......................................... 1,113,000 1.7 28.89
292 Madison Avenue......................................... 5,203,000 8.1 28.14
Long Island Market
120 Mineola Boulevard...................................... 2,704,000 4.2 29.43
----------- ----- ------
Market Subtotal/Weighted Average....................... $32,092,000 50.0% $37.04
----------- ----- ------
ARIZONA MARKETS
Metropolitan Phoenix Market
Corporate Center Building 10010-30......................... $ 2,639,000 4.1% $13.99
Corporate Center Building 10040............................ 343,000 0.5 15.39
Corporate Center Building 10050............................ 704,000 1.1 16.62
Corporate Center Building 10210............................ 704,000 1.1 15.62
Corporate Center Building 10220............................ 422,000 0.7 17.47
Corporate Center Building 9630(5).......................... 2,330,000 3.6 17.90
2800 North Central(6)...................................... 5,245,000 8.2 16.17
Century Plaza.............................................. 2,422,000 3.8 12.96
Metropolitan Tucson, Arizona
5151 East Broadway......................................... $ 3,836,000 6.0% $15.54
----------- ----- ------
Market Subtotal/Weighted Average....................... $18,646,000 29.1% $15.40
----------- ----- ------
METROPOLITAN ORLANDO MARKET
One Orlando Center......................................... $ 8,098,000 12.6% $22.82
5750 Major Boulevard....................................... 377,000 0.6 13.69
Maitland Forum............................................. 4,130,000 6.4 15.66
2601 Maitland Center Parkway............................... 158,000 0.2 15.23
2603 Maitland Center Parkway............................... 114,000 0.2 13.04
2605 Maitland Center Parkway............................... 536,000 0.8 13.90
----------- ----- ------
Market Subtotal/Weighted Average....................... $13,413,000 20.9% $19.06
----------- ----- ------
Consolidated Total/Weighted Average for all Properties........ $64,151,000 100.0% $23.07
=========== =====
<CAPTION>
ANNUALIZED NET
EFFECTIVE RENT
PER LEASED
MARKET/PROPERTY SQUARE FOOT(3)
-------------------------------------------------------------- --------------
METROPOLITAN NEW YORK CITY MARKET
Midtown Manhattan Market
Tower 45................................................... $40.12
286 Madison Avenue......................................... 23.30
290 Madison Avenue......................................... 29.60
292 Madison Avenue......................................... 28.43
Long Island Market
120 Mineola Boulevard...................................... 24.61
------
Market Subtotal/Weighted Average....................... $33.27
------
ARIZONA MARKETS
Metropolitan Phoenix Market
Corporate Center Building 10010-30......................... $14.37
Corporate Center Building 10040............................ 15.20
Corporate Center Building 10050............................ 14.46
Corporate Center Building 10210............................ 15.99
Corporate Center Building 10220............................ 17.87
Corporate Center Building 9630(5).......................... 18.28
2800 North Central(6)...................................... 15.11
Century Plaza.............................................. 11.03
Metropolitan Tucson, Arizona
5151 East Broadway......................................... $14.21
------
Market Subtotal/Weighted Average....................... $14.51
------
METROPOLITAN ORLANDO MARKET
One Orlando Center......................................... $22.62
5750 Major Boulevard....................................... 4.00
Maitland Forum............................................. 16.35
2601 Maitland Center Parkway............................... 14.60
2603 Maitland Center Parkway............................... 9.98
2605 Maitland Center Parkway............................... 13.22
------
Market Subtotal/Weighted Average....................... $17.50
------
Consolidated Total/Weighted Average for all Properties........ $20.93
</TABLE>
------------------
(1) Data do not include years in which tenant improvements were made to the
Properties.
(2) Escalated Rent represents the annualized monthly Base Rent in effect
(after giving effect to any contractual increases in monthly Base Rent
that have occurred up to June 30, 1997) plus annualized monthly tenant
pass-throughs of increases in operating and other expenses (but excluding
electricity costs paid by tenants) under each lease executed as of June
30, 1997, or, if such monthly rent has been reduced by a rent concession,
the monthly rent that would have been in effect at such date in the
absence of such concession. Base Rent represents the fixed base rental
amount paid by a tenant under the terms of the related lease agreement,
which amount generally does not include payments on account of real
estate taxes, operating expense escalations and utility charges.
(3) Annualized Net Effective Rent per Leased Square Foot represents the Base
Rent for the month of June 1997, plus tenant pass-throughs of increases
in operating and other expenses (but excluding electricity costs paid by
tenants), under each lease executed as of June 30, 1997, presented on a
straight-line basis in accordance with GAAP, taking into account the
amortization of tenant improvement costs and leasing commissions, if any
paid or payable by the Company during such period, annualized.
(4) In 1996 the Company completed certain mechanical upgrades with respect to
this Property.
(5) Includes two free-standing restaurants adjacent to this Property which
account for, in the aggregate, 17,000 rentable square feet (100% of which
is leased).
(6) Data are presented without proration on account of the Company's partial
ownership interest. The Company's interest in the cash flow increases to
up to 27.5% if certain performance criteria are achieved. See "The
Properties -- Submarket and Property Information -- Description of Uptown
Phoenix Submarket Property."
(7) Such percentage would have been 74.5% if all space that was leased as of
July 31, 1997, but was not yet occupied, was included in that percentage.
77
<PAGE> 83
DEVELOPMENT PARCELS
At the completion of the Offering, the Company will own or have an option
to acquire four parcels of land which can support an aggregate of approximately
2.2 million square feet of development. Some of this land requires zoning or
other regulatory approvals prior to development. The following chart provides
additional information with respect to undeveloped land parcels.
<TABLE>
<CAPTION>
DEVELOPABLE
OWNERSHIP SQUARE
LAND/LOCATION ACREAGE STATUS FEET
- --------------------------------------------------- ------- -------------- -----------
<S> <C> <C> <C>
One Orlando Center Land Parcel
Orlando, Florida................................. 3.8 optioned(1) 800,000(2)
5151 East Broadway Land Parcel
Tucson, Arizona.................................. (2) owned 220,000
Corporate Center Land Parcel
Phoenix, Arizona................................. (3) owned 150,000
Phoenix Land Parcel
Phoenix, Arizona(4).............................. 43.2 optioned 1,000,000
---- ---------
Total.............................................. 47.0 2,170,000
==== =========
</TABLE>
- ---------------
(1) Certain Primary Contributors have granted to the Company an option (at no
cost) to acquire from such Primary Contributors this development parcel for
approximately $3.8 million (75% of the appraised value of the land as of May
9, 1997), which equates to approximately $4.75 per buildable square foot.
Pursuant to the terms of the option, the Company is authorized to exercise
this option only if (i)(a) a majority of Independent Directors approve the
exercise of such option and (b) the individual building(s) to be built on
property is at least 50% preleased prior to commencement of construction, or
(ii) in the event the individual building(s) to be built on property is less
than 50% preleased, the Board of Directors unanimously approves the exercise
of such option. See "The Properties -- Land Parcel Options."
(2) Includes 395,000 square feet currently zoned and approved for retail and
hotel development.
(3) These parcels are currently part of the parking lot relating to this
Property. In the event these parcels are developed by the Company,
additional parking spaces would need to be constructed.
(4) The Company will acquire this option from certain Primary Contributors at
their cost (approximately $250,000 as of July 31, 1997). Pursuant to the
option, the Company will directly or indirectly acquire the right to
purchase this land for $10.4 million from an unaffiliated third party.
Pursuant to the terms of the option, the Company is authorized to execute
this option only if the independent directors unanimously approve the
exercise thereof. See "The Properties -- Land Parcel Options."
TENANTS
The Properties are leased to over 350 tenants which are engaged in a
variety of businesses, including financial services, health care services,
accounting, law, education, architecture, engineering, electronics, and precious
metals. The following table sets forth information regarding the Company's
leases with its 20 largest tenants, based on Escalated Rent as of June 30, 1997.
78
<PAGE> 84
TENANT DIVERSIFICATION
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF AGGREGATE
REMAINING AGGREGATE AGGREGATE PORTFOLIO
NUMBER LEASE TERM RENTABLE LEASED ANNUAL ANNUAL
TENANT(1) OF LEASES IN MONTHS SQUARE FEET SQUARE FEET ESCALATED RENT ESCALATED RENT
- --------------------------------------- --------- ---------- ----------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
American Express....................... 8 57 252,626 9.10% $ 3,778,000 5.89%
Veterans Administration -- GSA......... 5 33 102,259 3.68 1,551,000 2.42
TBWA Advertising, Inc. ................ 2 89 70,791 2.55 2,106,000 3.28
First Union Bank....................... 2 67 69,364 2.50 2,388,000 3.72
U.S. West Communications, Inc. ........ 3 35 65,583 2.36 1,174,000 1.83
D.E. Shaw & Co., L.P. ................. 1 116 63,871 2.30 2,309,000 3.60
Honor Technologies, Inc. .............. 1 72 59,609 2.15 944,000 1.47
Arizona Department of Economic
Security............................. 7 43 58,240 2.10 758 1.18
The Equitable Life Assurance Society of
the United States.................... 3 45 56,815 2.05 1,683,000 2.62
United Healthcare Services, Inc. ...... 2 57 58,649 2.04 984,000 1.53
ITT Educational Services, Inc. ........ 2 70 56,437 2.03 899,000 1.40
Florida Power Corporation.............. 1 52 52,622 1.90 816,000 1.27
Jewelway International, Inc. .......... 1 1 42,089 1.52 523,000 0.81
Brown, Raysman & Millstein............. 1 96 38,237 1.38 1,987,000 3.10
King & Spalding........................ 2 103 35,874 1.29 1,671,000 2.60
Southwest Catholic Health Network,
Inc. ................................ 1 44 35,648 1.28 473,000 0.74
Bryan Cave, McPheeters & McRoberts..... 1 88 31,954 1.15 669,000 1.04
Insurers Administration Company........ 2 23 30,250 1.09 426,000 0.66
Hansen Lind Meyer, Inc. ............... 1 67 30,000 1.08 644,000 1.00
Berlack, Israels & Liberman............ 1 96 26,380 .95 1,429,000 2.23
--
--- --------- ----- ----------- -----
Total/Weighted Average(2)...... 47 59 1,235,298 44.51% $ 27,211,000 42.42%
== ========= ===== =========== =====
</TABLE>
- ---------------
(1) Actual tenant may be an affiliate or subsidiary of specified tenant.
(2) Weighted average calculation with respect to remaining lease term is based
on aggregate rentable square footage leased by each tenant.
LEASE DISTRIBUTIONS
The following table sets forth information relating to the distribution of
the Company's leases, based on rentable square feet under lease, as of June 30,
1997:
<TABLE>
<CAPTION>
PERCENT OF PERCENTAGE OF
AGGREGATE AGGREGATE
PERCENT PORTFOLIO ANNUAL PORTFOLIO
SQUARE FEET NUMBER OF ALL TOTAL LEASED LEASED ESCALATED ANNUAL
UNDER LEASE OF LEASES LEASES SQUARE FEET SQUARE FEET RENT ESCALATED RENT
- ----------------------------------------- --------- ------- ------------ ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
2,500 or less............................ 143 39.94% 214.010 7.71% $ 4,256,000 6.63%
2,501-5,000.............................. 62 17.32 245,429 8.84 5,463,000 8.52
5,001-7,500.............................. 50 13.97 325,402 11.75 7,464,000 11.63
7,501-10,000............................. 19 5.31 175,062 6.31 4,835,000 7.54
10,001-20,000............................ 34 9.50 497,878 17.94 12,106,000 18.87
20,001-40,000............................ 12 3.35 310,463 11.19 10,114,000 15.77
40,001+.................................. 38 10.61 1,006,955 36.28 19,913,000 31.04
--- ------ --------- ------ ----------- ------
Tota1(1)........................ 358 100.00% 2,775,199 100.00% $ 64,151,000 100.00%
=== ====== ========= ====== =========== ======
</TABLE>
- ---------------
(1) Excludes 5,704 square feet (or .21% of portfolio leased square feet) with
respect to the leases in place as compared to the net rentable area at the
Properties.
79
<PAGE> 85
LEASE EXPIRATIONS -- PORTFOLIO TOTAL
The following table sets forth a summary schedule of the lease expirations
for the Properties for leases in place as of June 30,1997, assuming that none of
the tenants exercise renewal options or termination rights, if any, at or prior
to the scheduled expirations:
<TABLE>
<CAPTION>
PERCENTAGE OF
ANNUAL ANNUAL
SQUARE ESCALATED ESCALATED
NUMBER OF FOOTAGE OF PERCENTAGE OF RENT OF RENT OF
YEAR OF LEASES EXPIRING TOTAL LEASED EXPIRING EXPIRING
LEASE EXPIRATION EXPIRING LEASES SQUARE FEET LEASES LEASES
- --------------------------------------- --------- ---------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
1997................................... 50 172,218 6.19% $ 2,922 4.55%
1998................................... 46 150,011 5.39 2,664 4.15
1999................................... 54 367,762 13.22 7,418 11.56
2000................................... 43 169,620 6.10 3,788 5.90
2001................................... 48 425,677 15.31 8,972 13.99
2002................................... 50 637,182 22.91 13,034 20.32
2003................................... 15 225,354 8.10 4,194 6.54
2004................................... 19 227,282 8.17 7,423 11.57
2005................................... 16 201,451 7.24 8,307 12.95
2006................................... 5 71,206 2.56 1,413 2.20
2007................................... 4 96,260 3.46 3,220 5.02
2008................................... 1 3,250 0.12 142 0.22
2009................................... 1 2,600 0.09 54 0.08
2010................................... 6 25,326 0.91 602 0.94
--- --------- ----- ------- ------
Total........................ 358 2,775,199(1) 99.79%(1) $64,151 100.00%
=== ========= ===== ======= ======
</TABLE>
- ---------------
(1) Excludes an aggregate of 5,704 square feet (or .21% of total leased square
feet) with respect to four management offices occupied by the Company.
80
<PAGE> 86
LEASE EXPIRATIONS -- PROPERTY BY PROPERTY
The following table sets forth detailed lease expiration information for
each of the Properties for leases in place as of June 30, 1997, for each of the
10 years beginning January 1, 1997, assuming that none of the tenants exercise
renewal options or termination rights, if any, at or prior to the scheduled
expirations and excluding an aggregate of 5,704 square feet of rentable space.
As of June 30, 1997, the weighted average remaining lease term (based on square
footage) for the portfolio was 4.82 years:
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1997 1998 1999 2000 2001 2002
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
TOWER 45
Square Footage of Expiring Leases.............. 0 -- 35,407 11,858 69,859 46,429
Percentage of Total Leased Sq. Ft.............. -- 0.0% 8.0% 2.7% 15.8% 10.5%
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ -- $1,744,104 $ 682,512 $2,723,028 $ 2,115,048
Percentage of Total Annual Escalated Rent(1)... -- 0.0% 1.1% 0.4% 1.7% 1.4%
Number of Leases Expiring...................... 0 0 6 1 4 7
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 0.00 $ -- $ 49.26 $ 57.56 $ 38.98 $ 45.55
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 38.00
286 MADISON AVENUE
Square Footage of Expiring Leases.............. 6,214 5,119 8,468 1,670 27,386 23,821
Percentage of Total Leased Sq. Ft.............. 5.8% 4.7% 7.8% 1.5% 25.4% 22.1%
Annual Escalated Rent of Expiring Leases(1).... $ 158,460 $ 149,808 $ 277,968 $ 34,644 $ 609,864 $ 578,160
Percentage of Total Annual Escalated Rent(1)... 1.1% 1.0% 1.9% 0.2% 4.1% 3.9%
Number of Leases Expiring...................... 3 3 3 1 10 8
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 25.50 $ 29.27 $ 32.83 $ 20.74 $ 22.27 $ 24.27
Company Quoted Rental Rate Per Sq. Ft.......... $ 23.00
290 MADISON AVENUE
Square Footage of Expiring Leases.............. 15,966 0 0 5,322 0 5,322
Percentage of Total Leased Sq. Ft.............. 41.5% -- -- 13.8% -- 13.8%
Annual Escalated Rent of Expiring Leases(1).... $ 495,552 $ 0 $ 0 $ 170,364 $ 0 $ 121,836
Percentage of Total Annual Escalated Rent(1)... 11% -- -- 3.8% -- 2.7%
Number of Leases Expiring...................... 2 0 0 1 0 1
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 31.04 -- -- $ 32.01 -- $ 22.89
Company Quoted Rental Rate Per Sq. Ft.......... $ 23.00
292 MADISON AVENUE
Square Footage of Expiring Leases.............. 10,113 14,484 0 24,597 15,765 13,503
Percentage of Total Leased Sq. Ft.............. 5.5% 7.8% -- 13.3% 8.5% 7.3%
Annual Escalated Rent of Expiring Leases(1).... $ 225,828 $ 424,716 $ 0 $ 713,448 $ 411,780 $ 182,220
Percentage of Total Annual Escalated Rent(1)... 0.6% 1.2% -- 2.0% 1.1% 0.5%
Number of Leases Expiring...................... 1 3 0 4 2 2
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 22.33 $ 29.32 -- $ 29.01 $ 26.12 $ 13.49
Company Quoted Rental Rate Per Sq. Ft.......... $ 25.00
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 BEYOND TOTAL
- ----------------------------------------------- ---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
TOWER 45
Square Footage of Expiring Leases.............. 6,756 76,888 108,219 0 87,697 443,114
Percentage of Total Leased Sq. Ft.............. 1.5% 17.4% 24.4% -- 19.8% 100%
Annual Escalated Rent of Expiring Leases(1).... $ 222,828 $4,242,072 $5,553,732 $ 0 $3,134,592 --
Percentage of Total Annual Escalated Rent(1)... 0.1% 2.7% 3.6% -- 2.0% --
Number of Leases Expiring...................... 1 5 6 0 4 34
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 32.98 $ 55.17 $ 51.32 $ 0.00 $ 35.74 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
286 MADISON AVENUE
Square Footage of Expiring Leases.............. 10,116 9,366 13,149 0 2,600 107,909
Percentage of Total Leased Sq. Ft.............. 9.4% 8.7% 12.2% -- 2.4% 100%
Annual Escalated Rent of Expiring Leases(1).... $ 242,004 $ 199,704 $ 320,568 $ 0 $ 53,952 --
Percentage of Total Annual Escalated Rent(1)... 1.6% 1.3% 2.2% -- 0.4% --
Number of Leases Expiring...................... 2 3 4 0 1 38
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 23.92 $ 21.32 $ 24.38 -- $ 20.75 --
Company Quoted Rental Rate Per Sq. Ft..........
290 MADISON AVENUE
Square Footage of Expiring Leases.............. 0 11,902 0 0 0 38,512
Percentage of Total Leased Sq. Ft.............. -- 30.9% -- -- -- 100%
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ 324,840 $ 0 $ 0 $ 0 --
Percentage of Total Annual Escalated Rent(1)... -- 7.2% -- -- -- --
Number of Leases Expiring...................... 0 1 0 0 0 5
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 27.29 -- -- -- --
Company Quoted Rental Rate Per Sq. Ft..........
292 MADISON AVENUE
Square Footage of Expiring Leases.............. 18,325 10,113 71,714 -- 6,307 184,921
Percentage of Total Leased Sq. Ft.............. 9.9% 5.5% 38.8% -- 3.4% 100%
Annual Escalated Rent of Expiring Leases(1).... $ 562,572 $ 220,872 $2,211,444 $ 0 $ 250,080 --
Percentage of Total Annual Escalated Rent(1)... 1.6% 0.6% 6.2% -- 0.7% --
Number of Leases Expiring...................... 3 1 2 0 2 20
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 30.70 $ 21.84 $ 30.84 -- $ 39.65 --
Company Quoted Rental Rate Per Sq. Ft..........
</TABLE>
81
<PAGE> 87
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1997 1998 1999 2000 2001 2002
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 BEYOND TOTAL
- ----------------------------------------------- ---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
120 MINEOLA WAY
Square Footage of Expiring Leases.............. -- 6,786 34,950 5,470 4,401 4,439
Percentage of Total Leased Sq. Ft. ............ -- 7.4% 38.0% 6.0% 4.8% 4.8%
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ 152,388 $1,183,032 $ 133,692 $ 125,244 $ 108,132
Percentage of Total Annual Escalated Rent(1)... -- 1.1% 8.8% 1.0% 0.9% 0.8%
Number of Leases Expiring...................... -- 1 6 1 2 1
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 22.46 $ 33.85 $ 24.44 $ 28.46 $ 24.36
Company Quoted Rental Rate Per Sq. Ft. ........ $ 23.00
CORPORATE CENTER BUILDING 10010-30
Square Footage of Expiring Leases.............. 0 0 0 15,069 0 168,896
Percentage of Total Leased Sq. Ft. ............ -- -- -- 8.0% -- 89.5%
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ 0 $ 0 $ 254,016 $ 0 $ 2,377,644
Percentage of Total Annual Escalated Rent(1)... -- -- -- 1.7% -- 15.5%
Number of Leases Expiring...................... 0 0 0 1 0 1
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- $ 16.86 -- $ 14.08
Company Quoted Rental Rate Per Sq. Ft. ........ $ 17.75
CORPORATE CENTER BUILDING 10040
Square Footage of Expiring Leases.............. 1,305 11,865 3,255 0 1,919 0
Percentage of Total Leased Sq. Ft. ............ 5.9% 53.2% 14.6% -- 8.6% --
Annual Escalated Rent of Expiring Leases(1).... $ 20,280 $ 204,468 $ 49,476 $ 0 $ 34,980 $ 0
Percentage of Total Annual Escalated Rent(1)... 2.0% 19.9% 4.8% -- 3.4% --
Number of Leases Expiring...................... 1 3 3 0 1 0
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 15.54 $ 17.23 $ 15.20 -- $ 18.23 --
Company Quoted Rental Rate Per Sq. Ft. ........ $ 17.75
CORPORATE CENTER BUILDING 10050
Square Footage of Expiring Leases.............. 3,426 10,027 14,132 6,619 5,383 2,811
Percentage of Total Leased Sq. Ft. ............ 8.1% 23.6% 33.3% 15.6% 12.7% 6.6%
Annual Escalated Rent of Expiring Leases(1).... $ 51,516 $ 154,092 $ 234,336 $ 118,152 $ 97,200 $ 49,188
Percentage of Total Annual Escalated Rent(1)... 2.2% 6.7% 10.1% 5.1% 4.2% 2.1%
Number of Leases Expiring...................... 2 3 3 2 1 1
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 15.04 $ 15.37 $ 16.58 $ 17.85 $ 18.06 $ 17.50
Company Quoted Rental Rate Per Sq. Ft. ........ $ 17.75
CORPORATE CENTER BUILDING 10210
Square Footage of Expiring Leases.............. 0 0 21,454 0 16,826 6,820
Percentage of Total Leased Sq. Ft. ............ -- -- 47.6% -- 37.3% 15.1%
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ 0 $ 288,948 $ 0 $ 294,324 $ 121,056
Percentage of Total Annual Escalated Rent(1)... -- -- 9.4% -- 9.6% 3.9%
Number of Leases Expiring...................... 0 0 1 0 2 1
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- $ 13.47 -- $ 17.49 $ 17.75
Company Quoted Rental Rate Per Sq. Ft. ........ $ 17.75
<CAPTION>
120 MINEOLA WAY
Square Footage of Expiring Leases.............. 15,943 12,086 7,819 -- -- 91,894
Percentage of Total Leased Sq. Ft. ............ 17.3% 13.2% 8.5% -- -- 100%
Annual Escalated Rent of Expiring Leases(1).... $ 433,704 $ 352,248 $ 215,916 -- -- --
Percentage of Total Annual Escalated Rent(1)... 3.2% 2.6% 1.6% -- -- --
Number of Leases Expiring...................... 1 1 2 -- -- 15
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 27.20 $ 29.15 $ 27.61 -- -- --
Company Quoted Rental Rate Per Sq. Ft. ........
CORPORATE CENTER BUILDING 10010-30
Square Footage of Expiring Leases.............. 0 0 0 0 4,649 188,614
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- 2.5% 100%
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ 0 $ 0 $ 0 $ 6,972 --
Percentage of Total Annual Escalated Rent(1)... -- -- -- -- 0.0% --
Number of Leases Expiring...................... 0 0 0 0 1 3
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- $ 1.50 --
Company Quoted Rental Rate Per Sq. Ft. ........
CORPORATE CENTER BUILDING 10040
Square Footage of Expiring Leases.............. 0 2,404 0 0 0 20,748
Percentage of Total Leased Sq. Ft. ............ -- 10.8% -- -- -- 93.0%
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ 34,104 $ 0 $ 0 $ 0 --
Percentage of Total Annual Escalated Rent(1)... -- 3.3% -- -- -- --
Number of Leases Expiring...................... 0 1 0 0 0 9
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 14.19 -- -- -- --
Company Quoted Rental Rate Per Sq. Ft. ........
CORPORATE CENTER BUILDING 10050
Square Footage of Expiring Leases.............. 0 0 0 0 0 42,398
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ 0 $ 0 $ 0 $ 0 --
Percentage of Total Annual Escalated Rent(1)... -- -- -- -- -- --
Number of Leases Expiring...................... -- -- -- -- -- 12
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft. ........
CORPORATE CENTER BUILDING 10210
Square Footage of Expiring Leases.............. 0 0 0 0 0 45,100
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ 0 $ 0 $ 0 $ 0 --
Percentage of Total Annual Escalated Rent(1)... -- -- -- -- -- --
Number of Leases Expiring...................... 0 0 0 0 0 4
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft. ........
</TABLE>
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<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1997 1998 1999 2000 2001 2002
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 BEYOND TOTAL
- ----------------------------------------------- ---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
CORPORATE CENTER BUILDING 10220
Square Footage of Expiring Leases.............. 0 0 0 0 24,128 0
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- 100.0% --
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ 0 $ 0 $ 0 $ 421,536 $ 0
Percentage of Total Annual Escalated Rent(1)... -- -- -- -- 20% --
Number of Leases Expiring...................... 0 0 0 0 1 0
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- $ 17.47 --
Company Quoted Rental Rate Per Sq. Ft.......... $ 17.75
CORPORATE CENTER BUILDING 9630(4)
Square Footage of Expiring Leases.............. -- 13,340 -- 5,790 61,838 31,800
Percentage of Total Leased Sq. Ft.............. -- 11.8% -- 5.1% 54.6% 28.1%
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ 224,544 $ 0 $ 105,912 $1,061,064 $ 466,200
Percentage of Total Annual Escalated Rent(1)... -- 1.6% -- 0.9% 7.6% 3.4%
Number of Leases Expiring...................... -- 2 0 3 3 2
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 16.83 $ 18.29 $ 17.16 $ 14.66
Company Quoted Rental Rate Per Sq. Ft.......... $ 17.75
2800 NORTH CENTRAL(4)
Square Footage of Expiring Leases.............. 9,850 26,267 72,105 0 65,034 62,366
Percentage of Total Leased Sq. Ft.............. 3.0% 8.1% 22.2% -- 20.1% 19.2%
Annual Escalated Rent of Expiring Leases(1).... $ 139,980 $ 382,740 $1,185,624 $ 0 $ 963,108 $ 1,074,264
Percentage of Total Annual Escalated........... 0.5% 1.4% 4.3% 0 3.5% 3.9%
Number of Leases Expiring...................... 5 9 6 0 4 8
Escalated Rent Per Sq. Ft.(1).................. $ 14.21 $ 14.57 $ 16.44 -- $ 14.81 $ 17.23
Company Quoted Rental Rate Per Sq. Ft.......... $ 17.50
CENTURY PLAZA
Square Footage of Expiring Leases.............. 1,300 18,063 122,673 12,096 3,227 26,647
Percentage of Total Leased Sq. Ft.............. 0.7% 9.7% 65.6% 6.5% 1.7% 14.3%
Annual Escalated Rent of Expiring Leases....... $ 14,892 $ 242,148 $1,553,532 $ 149,400 $ 42,360 $ 378,240
Percentage of Total Annual Escalated Rent...... 0.2% 2.8% 18.1% 1.7% 0.5% 4.4%
Number of Leases Expiring...................... 1 7 11 7 2 2
Escalated Rent Per Sq. Ft. of Expiring
Leases........................................ $ 11.46 $ 13.41 $ 12.66 $ 12.35 $ 13.13 $ 14.19
Company Quoted Rental Rate Per Sq. Ft.......... $ 16.50
<CAPTION>
CORPORATE CENTER BUILDING 10220
Square Footage of Expiring Leases.............. 0 0 0 0 0 24,128
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ 0 $ 0 $ 0 $ 0 --
Percentage of Total Annual Escalated Rent(1)... -- -- -- -- -- --
Number of Leases Expiring...................... 0 0 0 0 0 1
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft..........
CORPORATE CENTER BUILDING 9630(4)
Square Footage of Expiring Leases.............. -- 396 -- 8,000 9,000 130,164
Percentage of Total Leased Sq. Ft.............. -- 0.3% -- 6.1% 6.9% 100%
Annual Escalated Rent of Expiring Leases(1).... $ 0 $ 5,928 $ 0 $ 264,372 $ 202,368 --
Percentage of Total Annual Escalated Rent(1)... -- 0.1% -- 1.9% 1.5% --
Number of Leases Expiring...................... -- 1 -- 1 1 13
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 14.97 -- $ 33.05 22.49 --
Company Quoted Rental Rate Per Sq. Ft..........
2800 NORTH CENTRAL(4)
Square Footage of Expiring Leases.............. 17,829 69,440 0 0 0 322,891
Percentage of Total Leased Sq. Ft.............. 5.5% 21.4% -- -- -- 99.6%
Annual Escalated Rent of Expiring Leases(1).... $ 250,452 $1,248,756 $ 0 $ 0 $ 0 --
Percentage of Total Annual Escalated........... 0.9% 4.5% -- -- -- --
Number of Leases Expiring...................... 1 3 0 0 0 36
Escalated Rent Per Sq. Ft.(1).................. $ 14.05 $ 17.98 $ -- $ -- -- --
Company Quoted Rental Rate Per Sq. Ft..........
CENTURY PLAZA
Square Footage of Expiring Leases.............. -- 2,979 -- -- -- 186,985
Percentage of Total Leased Sq. Ft.............. -- 1.6% -- -- -- 100%
Annual Escalated Rent of Expiring Leases....... -- $ 41,892 -- -- -- $ --
Percentage of Total Annual Escalated Rent...... -- 0.5% -- -- -- --
Number of Leases Expiring...................... -- 1 -- -- -- 31
Escalated Rent Per Sq. Ft. of Expiring
Leases........................................ -- $ 14.06 -- -- -- --
Company Quoted Rental Rate Per Sq. Ft..........
</TABLE>
83
<PAGE> 89
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1997 1998 1999 2000 2001 2002
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 BEYOND TOTAL
- ----------------------------------------------- ---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
5151 E. BROADWAY
Square Footage of Expiring Leases.............. 52,857 17,443 11,689 25,524 33,162 53,017
Percentage of Total Leased Sq. Ft.............. 21.4% 7.1% 4.7% 10.3% 13.4% 21.5%
Annual Escalated Rent of Expiring Leases(1).... $ 706,164 $ 288,732 $ 197,028 $ 440,712 $ 559,308 $ 865,128
Percentage of Total Annual Escalated Rent(1)... 3.9% 1.6% 1.1% 2.4% 3.1% 4.8%
Number of Leases Expiring...................... 5 5 6 9 10 7
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 13.36 $ 16.55 $ 16.86 $ 17.27 $ 16.87 $ 16.32
Company Quoted Rental Rate Per Sq. Ft.......... $ 16.50
ONE ORLANDO CENTER
Square Footage of Expiring Leases.............. 26,319 378 23,818 38,399 26,718 164,267
Percentage of Total Leased Sq. Ft. ............ 7.4% 0.1% 6.7% 10.8% 7.5% 46.3%
Annual Escalated Rent of Expiring Leases(1).... $ 504,924 $ 4,452 $ 443,784 $ 729,312 $ 534,108 $ 4,219,236
Percentage of Total Annual Escalated Rent(1)... 1.0% 0.0% 0.9% 1.5% 1.1% 8.8%
Number of Leases Expiring...................... 2 2 4 9 4 7
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 19.18 $ 11.78 $ 18.63 $ 18.99 $ 19.99 $ 25.69
Company Quoted Rental Rate Per Sq. Ft.......... $ 21.00
5750 MAJOR BOULEVARD
Square Footage of Expiring Leases.............. 21,376 2,495 3,709 -- -- --
Percentage of Total Leased Sq. Ft. ............ 77.5% 9.0% 13.4% -- -- --
Annual Escalated Rent of Expiring Leases(1).... $ 291,204 $ 32,436 $ 53,856 -- -- --
Percentage of Total Annual Escalated Rent(1)... 56.3% 6.3% 10.4% -- -- --
Number of Leases Expiring...................... 26 2 1 -- -- --
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 13.62 $ 13.00 $ 14.52 -- -- --
Company Quoted Rental Rate Per Sq. Ft.......... $ 18.75
MAITLAND FORUM
Square Footage of Expiring Leases.............. 23,492 11,216 1,532 2,022 70,031 11,676
Percentage of Total Leased Sq. Ft. ............ 8.9% 4.3% 0.6% 0.8% 26.6% 4.4%
Annual Escalated Rent of Expiring Leases(1).... $ 313,044 $ 185,760 $ 19,920 $ 33,432 $1,094,364 $ 166,296
Percentage of Total Annual Escalated Rent(1)... 1.3% 0.8% 0.1% 0.1% 4.5% 0.7%
Number of Leases Expiring...................... 2 4 1 2 2 1
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 13.33 $ 16.56 $ 13.00 $ 16.53 $ 15.63 $ 14.24
Company Quoted Rental Rate Per Sq. Ft.......... $ 17.00
2601 MAITLAND CENTER PARKWAY
Square Footage of Expiring Leases.............. -- 10,342 -- -- -- --
Percentage of Total Leased Sq. Ft. ............ -- 100.0% -- -- -- --
Annual Escalated Rent of Expiring Leases(1).... $ -- $ 157,548 $ -- $ -- $ -- $ --
Percentage of Total Annual Escalated Rent(1)... -- 50% -- -- -- --
Number of Leases Expiring...................... -- 1 -- -- -- --
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 15.23 -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.......... $ 15.50
<CAPTION>
5151 E. BROADWAY
Square Footage of Expiring Leases.............. 30,118 0 0 18,577 3,504 245,891
Percentage of Total Leased Sq. Ft.............. 12.2% -- -- 7.5% 1.4% 99.6%
Annual Escalated Rent of Expiring Leases(1).... $ 431,880 $ 0 $ 0 $ 329,232 $ 18,216 --
Percentage of Total Annual Escalated Rent(1)... 2.4% -- -- 1.8% 0.1% --
Number of Leases Expiring...................... 2 0 0 2 1 47
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 14.34 -- -- $ 17.72 $ 5.20 --
Company Quoted Rental Rate Per Sq. Ft..........
ONE ORLANDO CENTER
Square Footage of Expiring Leases.............. 1,842 31,708 400 25,541 13,678 353,069
Percentage of Total Leased Sq. Ft. ............ 0.5% 8.9% 0.1% 7.2% 3.9% 99.5%
Annual Escalated Rent of Expiring Leases(1).... $ 35,412 $ 752,616 $ 3,300 $ 519,096 $ 351,588 --
Percentage of Total Annual Escalated Rent(1)... 0.1% 1.6% 0.0% 1.1% 0.7% --
Number of Leases Expiring...................... 1 2 1 1 2 35
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 19.22 $ 23.74 $ 8.25 $ 20.32 $ 25.70 --
Company Quoted Rental Rate Per Sq. Ft..........
5750 MAJOR BOULEVARD
Square Footage of Expiring Leases.............. -- -- -- -- -- 27,580
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100.0%
Annual Escalated Rent of Expiring Leases(1).... -- -- -- -- -- --
Percentage of Total Annual Escalated Rent(1)... -- -- -- -- -- --
Number of Leases Expiring...................... -- -- -- -- -- 29
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft..........
MAITLAND FORUM
Square Footage of Expiring Leases.............. 124,425 -- 150 19,088 -- 263,632
Percentage of Total Leased Sq. Ft. ............ 47.2% -- 0.1% 7.2% -- 100%
Annual Escalated Rent of Expiring Leases(1).... $2,015,268 $ -- $ 1,608 $ 299,880 $ -- --
Percentage of Total Annual Escalated Rent(1)... 8.2% -- 0.0% 1.2% -- --
Number of Leases Expiring...................... 4 -- 1 1 -- 18
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 16.20 -- $ 10.72 $ 15.71 -- --
Company Quoted Rental Rate Per Sq. Ft..........
2601 MAITLAND CENTER PARKWAY
Square Footage of Expiring Leases.............. -- -- -- -- -- 10,342
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annual Escalated Rent of Expiring Leases(1).... $ -- $ -- $ -- $ -- $ -- --
Percentage of Total Annual Escalated Rent(1)... -- -- -- -- -- --
Number of Leases Expiring...................... -- -- -- -- -- 1
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft..........
</TABLE>
84
<PAGE> 90
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1997 1998 1999 2000 2001 2002
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 BEYOND TOTAL
- ----------------------------------------------- ---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
2603 MAITLAND PARKWAY
Square Footage of Expiring Leases.............. -- -- 8,743 -- -- --
Percentage of Total Leased Sq. Ft. ............ -- -- 100% -- -- --
Annual Escalated Rent of Expiring Leases(1).... $ -- $ -- $ 113,976 $ -- $ -- $ --
Percentage of Total Annual Escalated Rent(1)... -- -- 33.3% -- -- --
Number of Leases Expiring...................... -- -- 2 -- -- --
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 13.04 -- -- --
Company Quoted Rental Rate Per Sq. Ft. ........ $ 15.50
2605 MAITLAND PARKWAY
Square Footage of Expiring Leases.............. -- 2,185 5,827 15,184 -- 15,368
Percentage of Total Leased Sq. Ft. ............ -- 5.7% 15.1% 39.4% -- 39.9%
Annual Escalated Rent of Expiring Leases(1).... $ -- $ 30,636 $ 71,952 $ 222,288 $ -- $ 211,308
Percentage of Total Annual Escalated Rent(1)... -- 1.3% 3.0% 9.1% -- 8.7%
Number of Leases Expiring...................... -- 1 1 2 -- 1
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 14.02 $ 12.35 $ 14.64 -- $ 13.75
Company Quoted Rental Rate Per Sq. Ft. ........ $ 15.50
PORTFOLIO TOTALS/WEIGHTED AVG.
Square Footage of Expiring Leases.............. 172,218 150,011 367,762 169,620 425,677 637,182
Percentage of Total Leased Sq. Ft. ............ 6.2% 5.4% 13.2% 6.1% 15.3% 22.9%
Annual Escalated Rent of Expiring Leases(1).... $2,921,844 $2,663,760 $7,417,536 $3,787,884 $8,972,268 $13,033,956
Percentage of Total Annual Escalated Rent(1)... 0.74% 0.68% 1.89% 0.96% 2.29% 3.32%
Number of Leases Expiring...................... 50 46 54 43 48 50
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 16.97 $ 17.76 $ 20.17 $ 22.33 $ 21.08 $ 20.46
Weighted Average Company Quoted Rental Rate Per
Sq. Ft. ...................................... $ 21.93
<CAPTION>
2603 MAITLAND PARKWAY
Square Footage of Expiring Leases.............. -- -- -- -- -- 8,743
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annual Escalated Rent of Expiring Leases(1).... $ -- $ -- $ -- $ -- $ -- --
Percentage of Total Annual Escalated Rent(1)... -- -- -- -- -- --
Number of Leases Expiring...................... -- -- -- -- -- 2
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft. ........
2605 MAITLAND PARKWAY
Square Footage of Expiring Leases.............. -- -- -- -- -- 38,564
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annual Escalated Rent of Expiring Leases(1).... $ -- $ -- $ -- $ -- $ -- --
Percentage of Total Annual Escalated Rent(1)... -- -- -- -- -- --
Number of Leases Expiring...................... -- -- -- -- -- 5
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft. ........
PORTFOLIO TOTALS/WEIGHTED AVG.
Square Footage of Expiring Leases.............. 225,354 227,282 201,451 71,206 127,436 2,775,199
Percentage of Total Leased Sq. Ft. ............ 8.1% 8.2% 7.2% 2.6% 4.6% 99.8%(6)
Annual Escalated Rent of Expiring Leases(1).... $4,194,120 $7,423,032 $8,306,568 $ 1,412,580 $4,017,768 --
Percentage of Total Annual Escalated Rent(1)... 1.07% 1.89% 2.12% 0.36% 1.0% --
Number of Leases Expiring...................... 15 19 16 5 12 358
Escalated Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 18.61 $ 32.66 $ 41.23 $ 19.84 31.53 --
Weighted Average Company Quoted Rental Rate Per
Sq. Ft. ......................................
</TABLE>
- ---------------
(1) Represents Escalated Rent as of June 30, 1997.
(2) Represents the weighted average of high rise space, mid-rise space and low
rise space present in the Property.
(3) Data presented without proration on account of the Company's partial
ownership interest.
(4) Includes data with respect to two free-standing restaurants adjacent to this
Property, which account for, in the aggregate, annual escalated rent of
$466,000 pursuant to two leases which expire in 2006 ($264,000) and 2007
($202,000).
(5) Excludes an aggregate of 5,704 square feet (or .21% of total leased square
feet) with respect to four management offices occupied by the Company.
85
<PAGE> 91
TENANT RETENTION AND EXPANSION
The Company believes that its relationship with tenants contributed in
large part to its success in attracting, expanding and retaining a high quality
and diverse tenant base. The Company strives to develop and maintain good
relationships with tenants through its active management style, its onsite and
regional professional leasing and management staff and its responsiveness to
individual tenants' needs.
Management believes that tenant satisfaction fosters long-term tenant
relationships and creates renewal and expansion opportunities which, in turn,
enhance the Company's ability to maintain and increase occupancy rates. The
Company's success in this area is demonstrated in part by the number of existing
tenants who have leased additional space to support their expansion needs within
the Company's portfolio. Examples include D.E. Shaw which expanded its space in
Tower 45 from 15,882 square feet to 63,871 square feet; Honor Technology's
expansion in Maitland Forum from 17,950 square feet to 59,609 square feet; and
United Healthcare's expansion in One Orlando from 29,809 square feet to 39,280
square feet; and American Express has expanded in 10050 Corporate Center, 9630
Corporate Center and 10020 Corporate Center by 11,147 square feet, 7,832 square
feet, and 19,718 square feet, respectively, for a total expansion in Corporate
Center of 38,697 square feet since the Company's acquisition of the Property.
During 1995 and 1996, the Company expanded leased space for 20 tenants by a
total of over 200,000 square feet. In 1997 alone, five tenants expanded their
leased space by approximately 37,000 square feet. The development of strong
national tenant relationships has also led to tenant expansions in other Company
buildings. The Apollo Group has recently leased 18,944 square feet at the 5750
Major Boulevard Property, in addition to its original lease position at Maitland
Forum. Similarly, Equitable Life (who currently occupies 44,081 square feet in
Tower 45 and 6,004 square feet in 2800 North Central Avenue) expanded to 5151
East Broadway, renting 6,730 square feet.
As part of its initial repositioning of a Property after an acquisition,
the Company frequently pursues a policy of replacing some existing tenants with
more creditworthy tenants with a higher probability of expansion and renewal.
While this may adversely affect tenant reduction rates in the early years of
Property ownership, management believes it is beneficial to the Company in the
long run. The Company's retention rate at its Properties typically continues to
increase as each Property is repositioned and stabilized. The Company's
experience is that the net present value of renewed leases substantially exceeds
the net present value of leases with new tenants. The Company expects this
difference to continue as demand outpaces supply.
HISTORICAL LEASE RENEWALS
The following table sets forth certain historical information regarding
tenants at the Properties(1):
<TABLE>
<CAPTION>
TOTAL/
JANUARY 1, WEIGHTED
1997 AVERAGE
TO JUNE 30, 1994 TO JUNE
1994 1995 1996 1997 30, 1997
------ ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Number of leases expired during calendar
year......................................... 4 18 34 12 19
Number of lease renewals....................... 1 14 28 3 13
Percentage of leases renewed................... 25.00% 77.78% 82.35% 25.00% 67.65%
Aggregate rentable square footage of expiring
leases....................................... 11,199 129,750 287,306 42,973 137,494
Aggregate rentable square footage of lease
renewals..................................... 1,313 78,567 189,463 2,742 77,739
Percentage of expiring rentable square footage
renewed...................................... 11.72% 60.55% 63.73% 6.38% 56.54%(2)
</TABLE>
- ---------------
(1) Does not include (i) 2800 North Central Boulevard because the Company only
owns a 10% interest in this Property; (ii) Century Plaza because this
Property will be acquired simultaneously with the Closing; and (iii) 5750
Major Boulevard which is a redevelopment property.
(2) The results include two extraordinary events which occurred in 1995 and 1996
at Maitland Forum. During 1995 and 1996, Metropolitan Life Insurance Company
vacated 54,870 rentable square feet due to a corporate merger and
consolidation of its health care unit, and Cincinnati Bell vacated 62,648
rentable square feet of leased area due to relocation of space into a
facility built to suit their regional requirements. The Company believes
these events to be extraordinary and not indicative of normal operating
results. If these extraordinary events are excluded, the weighted average
retention ratio would be 74.81%. Accordingly, the Company believes a 70%
retention ratio is more representative of future results.
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<PAGE> 92
HISTORICAL TENANT IMPROVEMENTS AND LEASING COMMISSIONS
The following table sets forth certain historical information regarding
tenant improvement ("TI") and leasing commission ("LC") costs for tenants at the
Properties (other than the Century Plaza Property which is being acquired from
an unaffiliated third party concurrently with the consummation of the Offering
and the 2800 North Central Property because the Company only holds a 10%
interest in the Property) since the date of the Company's acquisition thereof.
<TABLE>
<CAPTION>
SIX MONTHS TOTAL/
ENDED WEIGHTED
1994 1995 1996 JUNE 30, 1997 AVERAGE
---------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
RECURRING:
RENEWALS
Number of Leases....................... 1 14 28 3 46
Square Feet of Renewals................ 1,313 78,567 189,463 2,742 77,739
TI per square foot..................... $ 0 $ 5.31 $ 7.23 $ 0 $ 6.57
LC per square foot..................... 0 3.48 3.66 0.15 3.56
-------- ---------- ---------- ---------- ----------
Total TI and LC per square
foot.......................... $ 0 $ 8.79 $ 10.89 $ 0.15 $ 10.13
-------- ---------- ---------- ---------- ----------
Total TI and LC................. $ 0 $ 690,604 $2,063.252 $ 411 $ 787,496
======== ========== ========== ========== ==========
RE-TENANTED SPACE
Number of Leases....................... 8 9 15 18 50
Square Feet of Re-tenanted Space....... 51,354 55,691 173,742 102,401 109,482
TI per square foot..................... $ 15.38 $ 16.41 $ 10.10 $ 8.55 $ 11.31
LC per square foot..................... 1.45 3.06 2.30 3.91 2.73
-------- ---------- ---------- ---------- ----------
Total TI and LC per square
foot.......................... $ 16.83 $ 19.47 $ 12.40 $ 12.46 $ 14.04
-------- ---------- ---------- ---------- ----------
Total TI and LC................. $ 864,288 $1,084,304 $2,154,401 $ 1,275,916 $1,537,127
======== ========== ========== ========== ==========
NON-RECURRING(1):
NEW TENANTS
Number of Leases....................... 5 17 11 8 41
Square Feet of New Tenants............. 20,985 104,998 24,179 70,742 73,635
TI per square foot..................... $ 13.01 $ 17.54 $ 20.27 $ 21.28 $ 18.61
LC per square foot..................... 3.72 5.45 4.18 5.76 5.24
-------- ---------- ---------- ---------- ----------
Total TI and LC per square
foot.......................... $ 16.73 $ 22.99 $ 24.45 $ 27.04 $ 23.85
-------- ---------- ---------- ---------- ----------
Total TI and LC................. $ 351,079 $2,413,904 $ 591,177 1,912,864 $1,756,195
======== ========== ========== ========== ==========
SHELL SPACE NUMBER OF LEASES............. 0 2 4 0 6
Square Feet of Shell Space............. 0 12,859 24,077 0 12,312
TI per square foot..................... $ 0 $ 30.29 $ 33.55 $ 0 $ 32.41
LC per square foot..................... 0 7.30 6.23 0 6.60
-------- ---------- ---------- ---------- ----------
Total TI and LC per square
foot.......................... $ 0 $ 37.59 $ 39.78 $ 0 $ 39.01
-------- ---------- ---------- ---------- ----------
Total TI and LC................. $ 0 $ 483,370 $ 957,783 $ 0 $ 480,291
======== ========== ========== ========== ==========
TOTAL
Number of Leases....................... 14 42 58 29 143
Square Feet............................ 73,652 252,115 411,461 175,885 273,168
TI per square foot..................... $ 14.43 $ 14.13 $ 10.75 $ 13.54 $ 12.88
LC per square foot..................... 2.07 4.40 3.27 4.59 3.82
-------- ---------- ---------- ---------- ----------
Total TI and LC per square
foot.......................... $ 16.50 $ 18.53 $ 14.02 $ 18.13 $ 16.70
-------- ---------- ---------- ---------- ----------
Total TI and LC................. $1,215,258 $4,671,691 $5,768,683 $ 3,188,795 $4,561,906
======== ========== ========== ========== ==========
</TABLE>
- ---------------
(1) Represents specific non-recurring leasing costs, including tenant
improvements and leasing commissions associated with the following recently
acquired properties, which costs were incurred in connection with the
repositioning of those Properties: 286 Madison Avenue, 292 Madison Avenue,
One Orlando Center, and 5151 East Broadway. These non-recurring leasing
costs were identified and budgeted at the time of the acquisition of such
Properties by the Company.
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<PAGE> 93
HISTORICAL CAPITAL EXPENDITURES
Recurring(1). The following table sets forth information relating to the
historical, recurring capital expenditures at the Properties (other than the
Century Plaza which is being acquired from an unaffiliated third party
concurrently with the consummation of the Offering):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
1994(1) 1995(1) 1996(1) JUNE 30, 1997
------- --------- --------- -------------
<S> <C> <C> <C> <C>
Number of Properties(2)........................ 1 4 16 2
Number of Square Feet.......................... 266,060 1,015,481 2,226,301 298,878
Recurring Capital Expenditures Incurred........ $2,937 $63,488 $286,318 $19,359
Weighted Average Recurring Capital Expenditures
per square foot(3)........................... $0.01 $0.06 $0.13 $0.07
Three-Year Weighted Average per square foot.... -- -- $0.10 --
</TABLE>
- ---------------
(1) Excludes data with respect to 2800 North Central because the Company only
holds a 10% interest in this Property.
(2) Represents the actual number of Properties for which capital expenditures
were incurred during the year.
(3) For those Properties owned less than a full year, computes the per square
foot amount by annualizing the capital expenditures amount to a pro forma
full year cost.
Non-recurring(1). The following table sets forth information relating to
the non-recurring capital costs associated with recently acquired redevelopment
Properties, which primarily relate to major capital improvements such as lobby
and elevator renovations, and mechanical equipment improvements (e.g., new
elevators, new chillers, etc.):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
1994(1) 1995(1) 1996(1) JUNE 30, 1997
------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Number of Properties(2)................... 2 5 16 6
Number of Square Feet..................... 325,670 849,883 2,081,457 1,612,243
Non-recurring Capital Expenditures
Incurred................................ $60,632 $1,899,145 $2,181,161 $235,460
Weighted Average Nonrecurring Capital
Expenditures per square foot(3)......... $.19 $2.23 $1.05 $.15
Three-Year Weighted Average per
square foot............................. -- -- $1.09 --
</TABLE>
- ---------------
(1) Excludes data with respect to 2800 North Central because the Company only
holds a 10% interest in this Property.
(2) Represents the actual number of Properties for which such non-recurring
tenant-related capital costs were incurred during the year.
(3) For those Properties owned less than a full year, computes the per square
foot amount by annualizing the capital expenditures amount to a pro forma
full year cost.
88
<PAGE> 94
SUBMARKET AND PROPERTY INFORMATION
The Properties are located in a number of office market sectors and
submarkets as outlined in the table below:
PROPERTY SUBMARKETS
PROPERTY STATISTICS
AT JUNE 30, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
TOTAL OF
PORTFOLIO PORTFOLIO
NUMBER OF RENTABLE RENTABLE ESCALATED ESCALATED
PROPERTIES SQUARE FEET SQUARE FEET RENT RENT
---------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Midtown Manhattan Market
Grand Central North Submarket...... 3 337,390 11.49% $ 8,940,684 13.94%
Times Square Submarket............. 1 443,114 15.10 20,447,208 31.87
Long Island Market
Central Nassau County Submarket.... 1 100,810 3.43 2,704,356 4.22
Metropolitan Orlando, Florida Market
Maitland Center Submarket.......... 4 325,670 11.10 4,937,280 7.70
Southwest Orlando Submarket........ 1 92,828 3.16 377,496 0.59
Downtown Orlando Submarket......... 1 357,378 12.18 8,097,828 12.62
Metropolitan Phoenix, Arizona Market
Northwest Phoenix Submarket........ 6 453,559 15.45 7,142,676 11.13
Uptown Phoenix Submarket........... 2 577,692 19.68 7,667,388 11.95
Metropolitan Tucson, Arizona Market
Tucson East Submarket.............. 1 246,813 8.41 3,836,400 5.98
--
--------- ----- ----------- -----
Total...................... 20 2,935,254 100.00% $64,151,316 100.00%
== ========= ===== =========== =====
</TABLE>
Times Square Submarket
The Times Square submarket contains approximately 21 million square feet of
office space and accounts for approximately 11.3% of the midtown Manhattan
office market's inventory. Approximately 60% of the office space in the Times
Square submarket consists of Class A office space (approximately 12.6 million
square feet). According to Landauer, the current direct vacancy rate for Class A
office space in this submarket decreased from 19.3% in 1992 to 3.8% in 1996. The
availability rate for all classes of space in the Times Square submarket
declined from 16.6% in 1992 to 7.0% in 1996, with 3.7 million square feet
absorbed while there were almost no additions to the inventory supply. Further
highlighting Times Square's resurgence, a 1.5 million square foot office
building is under construction and is already substantially preleased to two
tenants. The positive impact of supply reductions on rent levels lagged behind
absorption but is now becoming evident; in 1992 average asking rents for Class A
space in this submarket were $38.76 before falling during the recession in the
early 1990s to $24.38 per square foot in 1994. Since 1994 the average asking
rental rate for Class A space in this submarket has steadily risen to $30.06 per
square foot as of June 30, 1997. During the first six months of 1997, the Class
A direct vacancy rate in the Times Square submarket increased slightly from 3.8%
to 4.1% and, there was negative net absorption of approximately 463,000 square
feet.
Description of Times Square Submarket Property
Tower 45 (New York, New York). Tower 45 is a 40-story Class A office tower
located in midtown Manhattan. The building was completed in 1989 and contains
4,383 square feet of retail space along 45th Street between Sixth and Seventh
Avenues (as well as 100 square feet of retail space within the lobby), 438,631
square feet of office space (not including 2,000 square feet of storage space)
on floors two through 40 and an on-site 47-space parking garage consisting of
9,730 square feet. The exterior is composed of ironspot brick. The building's
entrance includes an open air atrium 175 feet high. As of June 30, 1997, this
Property
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<PAGE> 95
was 100% leased and the annualized Escalated Rent was $46.14 per leased square
foot as compared to an average market rental rate, for such period, of $38.00
per leased square foot. Major tenants include D.E. Shaw & Co., L.P. (63,871
rentable square feet), Equitable Life Assurance Society of the United States
(44,081 rentable square feet), NEC Business Communications Systems (East), Inc.
(15,200 rentable square feet), U.S. Government, General Services Agency (11,386
rentable square feet), King & Spalding (35,574 rentable square feet) and Shell
Mining Company (11,858 rentable square feet).
Grand Central North Submarket
The Grand Central North submarket is one of the largest submarkets in the
Manhattan office market, containing approximately 60.8 million square feet of
office space and accounting for approximately 32.8% of the midtown Manhattan
office market's inventory. According to Landauer, absorption in the Grand
Central North submarket from 1992 through 1996 was approximately 2.9 million
square feet.
Occupancy of Class B space increased 11.2% during this same 1992 through
1996 period, including 4.3% from 1995 to 1996 alone. The direct vacancy rate in
the submarket declined from 13.1% in 1992 to 12.0% in 1996; the Class B direct
vacancy rate declined from 13.1% in 1992 to 10.3% in 1996. Until recently, rent
increases have lagged behind the positive impact of supply reductions but are
now becoming evident; in 1992 the average asking rents in the submarket were
$32.65 per square foot before falling to $31.71 per square foot during the
recession in 1992 and then moderately increasing to $36.19 per square foot in
1996; Class B average asking rents were $29.37 per square foot in 1991, $27.04
per square foot in 1993 and $28.33 per square foot in 1996. During the first six
months of 1997, the overall direct vacancy rate in Grand Central North submarket
decreased from 12.0% to 10.1%, asking rents decreased from $36.19 per square
foot to $34.51 per square foot and there was net absorption of approximately 1.4
million square feet. There was no new construction in this submarket during the
first six months of 1997.
Description of Grand Central North Submarket Properties
286 Madison Avenue (New York, New York). 286 Madison Avenue is a 23-story
Class B high-rise office building located on the southwest corner of Madison
Avenue and 40th Street in midtown Manhattan. The building was built in 1918 and
contains 111,977 rentable square feet. The building is located within walking
distance from Grand Central Station and the Port Authority Terminal and offers
tenants the ability to establish a full floor presence due to the small floor
plates. The building was most recently renovated in 1996 to upgrade certain
mechanical and operating systems at a total cost of approximately $650,000. In
addition, the building is currently undergoing additional renovations to certain
other of its mechanical and operating systems which are expected to cost
approximately $400,000. As of June 30, 1997, this Property was 96.4% leased and
the annualized Escalated Rent was $24.33 per leased square foot as compared to a
market rental rate, for such period, of $23.00 per leased square foot.
290 Madison Avenue (New York, New York). 290 Madison Avenue is a six-story
Class B office building located on Madison Avenue between 40th and 41st Streets
in midtown Manhattan. The building was built in 1950 and contains 38,512
rentable square feet. Similar to 286 Madison Avenue described above, the
building is located within walking distance from Grand Central Station and the
Port Authority Terminal, offering tenants easy access to commuting facilities.
The building was most recently renovated to upgrade certain of its mechanical
and operating systems at a total cost of approximately $93,000. As of June 30,
1997
the building was 100% leased and the annualized Escalated Rent was $28.89 per
leased square foot as compared to a market rental rate, for such period, of
$23.00 per leased square foot.
292 Madison Avenue (New York, New York). 292 Madison Avenue is a 25-story
Class B office building located on the northwest corner of Madison Avenue and
41st Street in midtown Manhattan. The building was built in 1920 and contains
186,901 rentable square feet. The Property is conveniently located to centers of
mass transit which offers tenants a desirable location. It also holds benefits
for prospective and existing tenants to establish full floor identity. The
building is currently undergoing a renovation to upgrade certain of its
mechanical and operating systems which is expected to cost approximately
$275,000. As of June 30, 1997, this Property was 98.9% leased and the annualized
Escalated Rent was $28.14 per leased square foot as compared
90
<PAGE> 96
to a market rental rate, for such period, of $25.00 per leased square foot. The
major tenant is TBWA Advertising, Inc. ("TBWA") under a lease which expires on
December 31, 2005 and which is guaranteed by Ketchum Communications, Inc. (an
affiliate of Omnicom, Inc.). TBWA occupies 70,791 rentable square feet and
recently invested nearly approximately $4.0 million in tenant improvements in
the building.
Madison Avenue Property Redevelopment Strategy. The Company has adopted a
redevelopment strategy in midtown Manhattan, which is designed to reposition
these three older Properties with a view toward realizing increases in rental
rates. In July 1995, the Company acquired the three Madison Avenue Properties
for an aggregate purchase price of $30 million, or approximately $90 per square
foot. The Company believes this purchase price represented an approximately 75%
discount to replacement cost. These three Properties have the advantage of
occupying an entire blockfront in a prime midtown Manhattan location which
provides existing tenants with a presence near all the amenities offered by
midtown Manhattan at a competitive Escalated Rent of $26.99 per square foot as
of June 30, 1997, as compared to a midtown Manhattan average market rental rate
of $34.73 per square foot. The Company believes that the current high occupancy
rate at these Properties (98.2% as of June 30, 1997) reflects the attractiveness
of the affordability of this office space. While other potential purchasers of
these Properties may have viewed the age and relatively low market rental rates
of the Properties as negatives, as a result of its turnaround philosophy, the
Company viewed these Properties as excellent candidates to implement its
property repositioning strategy.
The Company's Madison Avenue redevelopment strategy is spearheaded by an
approximately $5.2 million comprehensive capital improvement program, which
includes (i) a physical combination of the three Properties into one address by
creating a common, upgraded lobby, refacing the Properties' exteriors with a
common granite facade and installing new storefronts and awnings to first floor
frontage; (ii) modernization of the Properties' elevators; (iii) replacement of
certain windows with vinyl clad thermal pane, awning type windows; and (iv)
improvements to common corridors and restrooms. The Company believes that this
redevelopment strategy will significantly enhance the Properties' image and
permit it to exploit their prime location and prestigious Madison Avenue address
to close the gap between existing rental rates at the Properties and current
Class A market rental rates. The Company expects to implement its Madison Avenue
redevelopment strategy in 1999 in anticipation of future lease rollovers that
will allow the Company to capture rental growth resulting from the repositioning
of the Properties. There can be no assurance that this redevelopment program
will be implemented.
Central Nassau County Submarket
The Central Nassau County Submarket contains approximately 8.1 million
square feet of space and accounts for 36.5% of the Long Island office market's
inventory. According to Landauer, the direct vacancy rate in the Central Nassau
County submarket decreased from 17.0% in 1992 to 10.9% in 1996, including a
significant 3.5% decrease from 1995 to 1996 alone. The availability rate in the
submarket declined from 17.0% in 1992 to 10.9% in 1996, with 200,000 square feet
absorbed while no square feet were added to the supply. In 1992 weighted average
asking rents in the submarket were $24.45 per square foot and in 1996 they were
$24.19. During the first quarter of 1997, the vacancy rate in this submarket
decreased to 9.8%, there was net absorption of 20,000 square feet and average
asking rental rates increased to $24.58. There was no new construction in this
submarket during the first quarter of 1997.
Description of Central Nassau County Submarket Property
120 Mineola Boulevard (Mineola, New York). 120 Mineola Boulevard is
comprised of both a six-story Class A office building with an accompanying
on-site enclosed, multi-level parking facility which accommodates approximately
415 vehicles. The building contains 100,810 rentable square feet and was
completed in 1982. The Property's location affords tenants and visitors easy
access to and from Manhattan and other parts of Long Island, via the Long Island
Railroad. Also, the Nassau County Government Seat is located just two blocks
from the building. The building's lobby was renovated in 1995 at a cost of
approximately $80,000. As of June 30, 1997, the building was 91% leased and the
annualized Escalated Rent was $29.43 per leased square foot as compared to a
market rental rate, for such period, of $23.00 per leased square foot. The major
tenants
91
<PAGE> 97
are Kraft Foods, Inc. (15,943 rentable square feet), U.S. Government, General
Services Agency (6,786 rentable square feet), and Winthrop University Hospital
(22,281 rentable square feet).
Northwest Phoenix Submarket
Metropolitan Phoenix Northwest Office submarket contains approximately 4.2
million square feet of space and accounts for approximately 9.4% of office
market inventory. According to Landauer, the vacancy rate in the Northwest
submarket decreased from 19.4% in 1992 to 13.8% in 1996. This decrease in
available space was due to an absorption of approximately 250,000 square feet
with no new space added to the supply. However, approximately 108,000 square
feet of pre-leased inventory was added to this submarket in 1997. The positive
impact of supply reductions has resulted in an increase in asking rents from
$12.00 per square foot in 1992 to $13.50 per square foot in 1996. During the
first quarter of 1997, the vacancy rate in this submarket decreased to 13.1%,
there was net absorption of 233,571 square feet and asking rents increased to
$13.95 per square foot. There are 108,000 square feet under construction in this
submarket during the first quarter of 1997.
Description of Northwest Phoenix Submarket Properties
Corporate Center Properties (Phoenix, Arizona). The Corporate Center
Properties include six multi-story Class A office buildings containing an
aggregate of 453,559 square feet, including two freestanding restaurants
(individually, each building contains the following amounts of square footage:
(i) Building 10010-30: 186,614 rentable square feet; (ii) Building 10040: 23,155
square feet; (iii) Building 10050: 42,398 square feet; (iv) Building 10210:
45,100 square feet; (v) Building 10220: 24,128 square feet; (vi) Building 9630:
113,164 square feet; and (vii) two restaurants: 17,000 square feet). The
Corporate Center is located in close proximity to five major hotels, over 40
restaurants, five financial institutions, Arizona State University West campus
and Metrocenter, one of the largest regional shopping malls in the southwest.
There is also a 63-acre city park with a variety of recreational facilities
located directly east of Corporate Center and adjacent to the Property is a
major conference center containing a state of the art video conferencing center,
meeting rooms, and auditoriums. Most buildings feature upgraded finishes such as
rosewood solid core entry doors, marble flooring in the lobby's wood paneled
elevators, marbled drinking fountains, plush carpeting and glass lobby
entrances. In addition, all buildings share 1,971 parking spaces. As of June 30,
1997, the Corporate Center Properties were leased in the following percentages:
(i) Building 10010-30: 100% leased; (ii) Building 10040: 96.3% leased; (iii)
Building 10050: 100% leased; (iv) Building 10210: 100% leased; (v) Building
10220: 100% leased; and (vi) Building 9630: 100% leased, and the annualized
Escalated Rent and the market rental rate for such period were as follows: (i)
Building 10010-30: $13.99 per leased square foot as compared to a market rental
rate, for such period, of $17.75 per leased square foot; (ii) Building 10040:
$15.39 per leased square foot as compared to a market rental rate, for such
period, of $17.75 per leased square foot; (iii) Building 10050: $16.62 per
leased square foot as compared to a market rental rate, for such period, of
$17.75 per leased square foot; (iv) Building 10210: $15.62 per leased square
foot as compared to a market rental rate, for such period, of $17.75 per leased
square foot; (v) Building 10220: $17.47 per leased square foot as compared to a
market rental rate, for such period, of $17.75 per leased square foot; and (vi)
Building 9630: $17.91 per leased square foot as compared to a market rental
rate, for such period, of $17.75 per leased square foot. The major tenants at
the Corporate Center Properties are as follows: (i) Building 10010-30: American
Express Travel Related Services Company which occupies an aggregate of 183,965
square feet; (ii) Building 10040: Toyota Motor Credit Corporation, which
occupies an aggregate of 10,384 square feet; (iii) Building 10050: American
Express Travel Related Services Company, Insurers Administrative Corporation and
Amica Mutual Insurance Company, which occupy an aggregate of 11,147, 8,796 and
5,663 square feet, respectively; (iv) Building 10210: Insurers Administrative
Corporation, Principal Mutual Life Insurance Company and Gary A. Blake dba
Farmers Sales, which occupy an aggregate of 21,454, 14,603 and 6,820 square
feet, respectively; (v) Building 10220: U.S. West Communications, Inc., which
occupies an aggregate of 24,128 square feet; and (vi) Building 9630: American
Express Travel Related Services Company, Hartford Fire Insurance Company,
General Motors Acceptance Corporation dba GMAC, Employers Mutual Casualty
Company, St. Paul Fire & Marine Insurance Company and Crawford & Company, which
occupy an aggregate of 37,717, 22,015, 23,625, 10,281, 7,271 and 6,068,
respectively. American Express Travel Related Services
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<PAGE> 98
Company occupies an aggregate of 232,829 square feet in Corporate Center and has
recently expanded its rentable square footage on three separate occasions. The
majority of the space leased by American Express is leased through 2002.
Uptown Phoenix Submarket
The Uptown submarket contains approximately 10.2 million square feet of
office space and accounts for approximately 26.9% of the Phoenix metropolitan
area office market's inventory. According to Landauer, the vacancy rate in the
Uptown submarket declined from 26.8% in 1992 to 13.0% in 1996, with
approximately 1.3 million square feet absorbed while no new space was added to
the supply. The positive impact of supply reductions has resulted in an increase
in asking rents from $14.20 per square foot in 1992 to $15.00 per square foot in
1996. During the first quarter of 1997, the vacancy rate in this submarket
decreased to 12.6%, there was net absorption of 75,960 square feet and asking
rents increased to $15.50 per square foot. There was no new construction in this
submarket during the first quarter of 1997.
Description of Uptown Phoenix Submarket Property
2800 North Central (Phoenix, Arizona). 2800 North Central is a 20-story
Class A office tower located in midtown Phoenix, which the Company, in a joint
venture with an affiliate of Carlyle Group, acquired in May 1996. The building
also features an ancillary two-story 7,000 square foot pavilion offering retail
space which is adjacent to a six-level parking garage which includes 1,083
parking spaces. The building was completed in December, 1987, and contains
357,923 rentable square feet. The Property interior consists of multi-tenant
office space finished to the tenant's specifications. The major tenants are AT&T
Communications, Inc. (22,459 rentable square feet), U.S. West Communications,
Inc. (37,486 rentable square feet), Bryan Cave, McPheeters & McRoberts (31,954
square feet), and Southwest Catholic Health Network, Inc. (35,648 rentable
square feet). The multi-story lobby is finished with imported marble and granite
on the walls and floors with extensive copper accent treatments. As of June 30,
1997, this property was 90.6% leased and the annualized Escalated Rent was
$16.17 per leased square foot as compared to a market rental rate, for such
period, of $17.50 per leased square foot.
The 2800 North Central Property is owned in a joint venture with an
affiliate of the Carlyle Group ("Carlyle") in which the Company owns a 1.01%
general partner interest and a 8.99% limited partner interest, as well as
certain promote interests that permit the Company's interest to increase to up
to an aggregate 10.3%, 11.5%, and 27.5% interest, respectively, in the event the
partners therein realize a rate of return in any given year in excess of 12% but
less than 15%, in excess of 15% but less than 20%, and in excess of 20%,
respectively.
Under the partnership agreement (the "2800 Partnership Agreement") of the
partnership that owns the 2800 North Central Property, certain significant
partnership actions require the approval of Carlyle, including (i) the sale or
other disposition of the Property, (ii) the financing or refinancing of the
Property, (iii) the undertaking of any redevelopment or improvements to the
Property, (iv) the approval of any operating or capital budget, or business
plan, and (v) determining the amount and timing of distributable funds to
partners. See "Risk Factors -- Risks Involved in Property Ownership through
Partnerships and Joint Ventures." In addition, under the 2800 Partnership
Agreement, each of the Company and Carlyle have the certain "buy/sell" rights to
provide the other with a notice setting forth the terms, based upon an all cash
sale, which the proposing partner would accept in connection with the sale of
the Property by the partnership. Upon receiving any such notice, the other
partner has 60 days to either: (a) authorize the proposing partner to attempt to
sell the Property on substantially the same terms as set forth in the proposing
partner's notice or (b) purchase the proposing partner's interest in the
partnership at the proposing partner's stated price. The failure of any
purchasing partner to make the down payment required under the partnership
agreement within 60 days of receiving the proposing partner's notice is deemed
an authorization to the proposing partner to attempt to sell the Property as
described above.
Century Plaza Property (Phoenix, Arizona). The Century Plaza Property is
10-story Class B office building located two and one-half miles west of downtown
Phoenix along the Central Avenue corridor. The
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building was built in 1974 and contains 219,769 rentable square feet with
parking for 600 vehicles. As of June 30, 1997, this property was 85.1% leased
and the average 1997 annual escalated rental rate was $12.96 per leased square
foot as compared to a market rental rate for such period of $16.50 per leased
square foot. The major tenants are Veterans Administration -- GSA (90,873 square
feet) and Arizona Department of Economic Security (58,240 square feet).
Tucson East Central Submarket
The Tucson East Central submarket contains approximately 2.5 million square
feet of office space and accounts for approximately 37% of the Metropolitan
Tucson office market's inventory. The direct vacancy rate in the Tucson East
Central submarket decreased from 20.8% in 1992 to only 10.2% in 1996. This
vacancy rate has further declined to 6.6% at the end of the first quarter of
1997. During this 1992-1996 period, no new speculative space was added to the
submarket's inventory. Largely as a result of the limited amount of space,
average asking rents in the Tucson East Central submarket have increased from
$13.50 in 1992 to $17.00 as of March 31, 1997. According to Landauer, there is a
low supply of Class A space in the Tucson East Central submarket which is
expected to remain among the most competitive submarkets in the Tucson office
market.
Description of Tucson Eastside Submarket Property
5151 East Broadway (Tucson, Arizona). 5151 East Broadway is the tallest
office building in Tucson, Arizona and is located in the heart of Tucson's
business and financial corridor. 5151 East Broadway is a 17-story Class A
high-rise office building which contains 246,813 rentable square feet and
includes 1,283 parking spaces. In 1995 and 1996, the building underwent an
extensive capital improvement program which included plaza and common area
upgrades and extensive improvements to the interior mechanical systems, at a
cost of approximately $2.75 million. The Company considers the building to be
one of the most desirable office projects in the Tucson market. As of June 30,
1997, this property was 100% leased and the annualized Escalated Rent was $15.54
per leased square foot as compared to a market rental rate for such period of
$16.50 per leased square foot. The major tenants are The Winters Company (25,800
rentable square feet), U.S. Home Corporation (15,350 rentable square feet), Dean
Witter Reynolds, Inc. (12,900 square feet), Allstate Insurance Company (12,524
square feet), Tucson Realty & Trust Company (7,801 rentable square feet), and
Equitable Life (6,730 rentable square feet).
Downtown Orlando Submarket
The Downtown Orlando submarket of the Orlando office market contains 5.3
million square feet of space and accounts for approximately 25% of the Orlando
office market's inventory. The Downtown Orlando submarket has absorbed over
675,000 square feet of office space since 1992, including approximately 335,000
square feet in 1996 (representing approximately 31% of the overall absorption
that occurred in the Orlando office market during that year). During this same
1992-1996 period, only 80,000 square feet were added to the supply. As a result,
the vacancy rate in this submarket for the year ended December 31, 1996 was
7.8%. Landauer reports that the strength of this submarket is partly explained
by the increasing attractiveness of downtown Orlando and the critical mass of
office space now located in this submarket. Average rental rates have steadily
risen to $16.75 per square foot in 1996 from $14.45 per square foot in 1992.
During the first quarter of 1997, the vacancy rate in this submarket decreased
to 7.5%, net absorption was approximately 77,000 square feet and asking rents
have increased to $19.68 per square foot. There was no new construction in this
submarket during the first quarter of 1997.
Description of Downtown Orlando Submarket Property
One Orlando Center (Orlando, Florida). One Orlando Center is a modern
19-story Class A granite and glass office tower that is easily visible on the
Orlando skyline with its unique neon lighting. The building is located four
blocks north of the Orlando central business district and is two blocks from the
new downtown courthouse complex. One Orlando Center was built in 1989 and
contains 357,378 rentable square feet with parking for 1,386 vehicles. The
vacant parcel adjacent to the current parking structure was upgraded in 1996 by
relandscaping the entire area into a park-like setting at a cost of
approximately $125,000. As of June 30,
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1997, this property was 99.3% leased and the annualized Escalated Rent was
$20.94 per leased square foot as compared to a market rental rate, for such
period, of $21.00 per leased square foot. The major tenants are First Union Bank
(69,364 square feet), American Express (13,387 square feet), United Healthcare
Services, Inc. (39,240 square feet)and Hanson, Lind & Meyer (30,000 square
feet).
Southwest Orlando Submarket
The Southwest Orlando submarket contains approximately 1.2 million square
feet of office space and accounts for approximately 5% of the Orlando office
market's inventory. According to Landauer, the availability rate in the
Southwest Orlando submarket increased from 17.2% in 1992 to 22.4% in 1996, with
the new supply of space in the submarket remaining relatively constant during
such period. As a result, the vacancy rate in this submarket for the year ended
December 31, 1996 was 22.4%, 14.1% above the average for the entire Orlando
office market, as compared to a vacancy rate of 17.2% in 1992. During the first
quarter of 1997, the vacancy rate in this submarket decreased considerably to
12.7%, while net absorption totaled approximately 41,500 square feet. Asking
rental rates in the submarket increased from $13.03 per square foot in 1992 to
$14.75 per square foot at March 31, 1997.
Description of Southwest Orlando Submarket Property
5750 Major Boulevard (Orlando, Florida). 5750 Major Boulevard is a
five-story Class B office building which is located directly across from
Universal Studios in Orlando, Florida. 5750 Major Boulevard was built in 1973
and contains 92,828 rentable square feet and 340 parking spaces. The Property is
currently undergoing an approximately $1.8 million capital improvement program,
which is expected to be completed in January 1998 that the Company believes will
reposition this Property into a Class A property, attracting higher quality
tenants and corresponding market rental rates.. As of June 30, 1997, this
property was 29.7% leased and the annualized Escalated Rent was $13.69 per
leased square foot as compared to a market rental rate, for such period, of
$18.75 per leased square foot. The Property would be 74.5% leased if all space
that was leased as of July 31, 1997, but was not yet occupied, had been included
in the percentage leased. Concurrent with the capital improvement program, a
focused and aggressive leasing program has been implemented to attract
creditworthy tenants, and to restructure and consolidate existing leases at
market rents. The Company has recently signed leases with Sverdrup Facilities,
Inc. for 37,888 net rentable square feet, Apollo Group Inc. for 18,944 net
rentable square feet, and Thruput Systems, Inc. for 7,314 net rentable square
feet; and expects such tenants to occupy its leased space during the third
quarter of 1997. The Company expects to complete its renovation and leasing
programs by January 1998.
Maitland Center Submarket
The Maitland Center submarket contains approximately 3.5 million square
feet of office space and accounts for approximately 16% of the Orlando office
market's inventory. According to Landauer, the availability rate in the Maitland
Center submarket declined from 16.0% in 1992 to 3.7% in 1996, with 429,800
square feet absorbed while no additional space was added to the supply. As a
result, the vacancy rate in this submarket for the year ended December 31, 1996
was 3.7%, 4.6% below the average for the entire Orlando office market. The
positive impact of supply reductions on rent levels lagged behind absorption but
is now becoming evident; during 1992 asking rents were approximately $15.50 per
square foot before decreasing to approximately $14.99 per square foot in 1993
and remaining stagnant at that level through 1995 and then moderately increasing
and reaching $15.51 per square foot at the end of 1996. During the first quarter
of 1997, the vacancy rate in this submarket increased to 12.6%, approximately
208,000 square feet were under construction, and there was negative net
absorption of 22,962 square feet. In addition, asking rents increased from
$15.51 at year-end 1996 to $16.08 at the end of the first quarter of 1997. The
Company believes the second quarter of 1997 has shown a return to tight market
conditions after absorption of new space and re-leasing of existing office
space.
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Description of Maitland Center Submarket Properties
Maitland Forum (Maitland, Florida). Maitland Forum is a four-story Class A
office building located within Maitland Center, which is Central Florida's
largest office complex, off Interstate Four, and is in close proximity to
downtown Orlando. The Maitland Forum was built in 1985 and contains 266,060
rentable square feet and includes 944 parking spaces. As of June 30, 1997 this
Property was 99.1% leased and the annualized Escalated Rent was $15.66 per
leased square foot as compared to a market rental rate, for such period, of
$17.00 per leased square foot. The major tenants at this property are Honor
Technologies, Inc. (59,609 square feet), Florida Power Corporation (the utility
company) (52,622 rentable square feet), ITT Educational Services, Inc. (34,422
rentable square feet), and Reliance Insurance Company (19,674 rentable square
feet).
Maitland West Properties (Maitland, Florida). Maitland West is comprised
of three Class B office buildings; one three-story office building which
contains 38,564 square feet and two free standing grade-level buildings
containing 21,046 square feet. All three properties share 249 parking spaces.
Maitland West I is also located within Maitland Center, Central Florida's
largest office complex, off Interstate Four, and is in close proximity to
downtown Orlando. As of June 30, 1997, the Maitland West Properties were leased
in the following percentages: (i) 2601 Maitland Center Parkway: 100% leased;
(ii) 2603 Maitland Center Parkway: 81.7% leased; and (iii) 2605 Maitland Center
Parkway: 100% leased, and the annualized Escalated Rent and the market rate for
such period were as follows: (i) 2601 Maitland Center Parkway: $15.23 per leased
square foot as compared to a market rental rate, for such period, of $15.50 per
leased square foot; (ii) 2603 Maitland Center Parkway: $13.04 per leased square
foot as compared to a market rental rate, for such period, of $15.50 per leased
square foot; and (iii) 2605 Maitland Center Parkway: $13.90 per leased square
foot as compared to a market rental rate, for such period, of $15.50 per leased
square foot. The major tenants at the Maitland West Properties are as follows:
(i) 2601 Maitland Center Parkway: P. Allen & Associates, which occupies an
aggregate of 10,342 square feet; (ii) 2603 Maitland Center Parkway: CCL
Consultants, Inc. and Blazer Financial Services, Inc., which occupy an aggregate
of 5,693 and 3,050 square feet, respectively; and (iii) 2605 Maitland Center
Parkway: Health Plans of America, Inc., Community Care Network, Inc., FJW
Enterprises Inc., Systems One Services, Inc. and G.E. Capital Corporation, which
occupy an aggregate of 15,368, 12,568, 5,827, 2,616 and 2,185 square feet,
respectively.
DEVELOPMENT PARCELS
5151 East Broadway. Upon consummation of the Offering, the Company will
hold additional development rights to develop 220,000 square feet which is
currently on the Tucson city counsel's agenda for planning and zoning approval.
Pursuant to the Company's preliminary development plan, the 220,000 square feet
will consist of a 150,000 square feet mid-rise office building and a 70,000
square foot expansion of the single-story portion of the site. The Company
estimates that the cost to complete such development will be approximately $30
million. There can be no assurance that such development will take place.
Corporate Center. Upon consummation of the Offering, the Company will hold
additional development rights to develop approximately 150,000 square feet on an
existing parking lot. In addition, the Company intends to expand its parking
facilities by adding a one level parking structure. The Company estimates that
the cost to complete such development will be approximately $15 million. There
can be no assurance that such development will take place.
LAND PARCEL OPTIONS
Phoenix Land Parcel. The Company acquired an option at the Primary
Contributors cost (approximately $250,000 as of July 30, 1997) to acquire their
contractual right to purchase and subject to certain conditions, 43.2 acres of
undeveloped land from an unaffiliated third party in the Northwest quadrangle
formed at the intersection of I-17, the Black Canyon Freeway and the new 101
Loop Freeway, in Phoenix, Arizona. The agreement provides for an aggregate
purchase price of approximately $10.35 million which, at the Company's option,
approximately $5.9 million of which is payable in cash at the closing, with the
remainder to be evidenced by a 120-day secured promissory note bearing interest
at 8% per annum or the entire purchase price may be evidenced by such a note. No
assurance can be given that the conditions to
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closing under the agreement (including due diligence and site plan approvals)
will be obtained or that the Company will exercise its option and acquire the
land. The Black Canyon is the only interstate freeway providing north access out
of Phoenix. The 101 Loop Freeway has been completed, going eastward, to the
Black Canyon, and from the southeast, north and west, reaches to Thomas and Pima
Roads. When fully completed, it will form a complete loop around Phoenix. Site
plans call for up to 1,000,000 square feet of office space development. Within a
30-minute drive from the site is the Dear Valley Airport (private planes) and
the Sky Harbor International Airport. As of July 31, 1997, the Company had
advanced approximately $250,000 for preliminary development work relating to
this land. The right to acquire the land expires on September 30, 1997, subject
to two one-month extensions that each require the payment of a $100,000
extension fee. Pursuant to the Company's by-laws, the Company is authorized to
exercise this option only if the independent directors unanimously approve the
exercise of such option.
One Orlando Center Land Parcel. The Company holds a seven-year option from
certain Primary Contributors to acquire additional development rights relating
to an approved master plan filed with the City of Orlando for the further
development of One Orlando Center. These development rights include
approximately 800,000 square feet of space including a second 405,000 square
foot office tower, a 300-room hotel, 60 residential units, and 100,000 square
feet of retail space. The Company estimates the cost to complete such
development to be approximately $150 million. The exercise price of the option
is $3.8 million (75% of the appraisal value of land as of May 9, 1997), which
equates to approximately $4.75 per buildable square foot. See "The
Properties -- Development Parcels" for certain conditions regarding the exercise
of this option.
AIR RIGHTS AND GROUND LEASE AGREEMENTS
Tower 45. The Company is the tenant under a lease providing it with air
rights for 124,000 square feet of development at a theater adjacent to the Tower
45 Property. The lease expires in November 2236 and currently provides for
annual lease payments of approximately $575,000 per year. As of July 31, 1997,
the Company has the right to acquire the site for approximately $11 million.
This price increases through the expiration of the option on October 31, 2001,
at a rate of 50% of the percentage increase in the consumer price index as
defined in the lease (approximately $13 million as of July 31, 1997).
120 Mineola Boulevard. The Company is the tenant under a lease for a
parking garage. The lease expires in May 2012, subject to the Company's right to
extend the term pursuant to two 30-year renewal options. The lease provides for
a current annual lease payment of $33,000, increasing to $46,500 in 2001.
DEPRECIATION OF SIGNIFICANT PROPERTIES
For federal income tax purposes, the basis, net of accumulated
depreciation, in the Tower 45 and One Orlando Center Properties (together, the
"Significant Properties") aggregated approximately $133.0 million at June 30,
1997. The real property associated with those Properties (other than land)
generally will be depreciated for federal income tax purposes over 40 years
using the straight line method. For financial reporting purposes, the
Significant Properties are recorded at their historical cost and are depreciated
using the straight line method over their estimated useful lives, typically 40
years. The federal tax basis on the Tower 45 Property equals approximately $18
million for the land and approximately $55.5 million for the building. The
federal tax basis on the One Orlando Center Property equals approximately $6.1
million for the land and approximately $53.4 million for the building.
Depreciation on these Properties is computed on the straight line method at a
rate of 2.5% and the life claimed with respect to the buildings is 40 years.
REAL ESTATE TAXES ON SIGNIFICANT PROPERTIES
The 1996 annual real estate taxes paid on the Tower 45 Property were
approximately $3.7 million. The New York City real estate tax rate is $10.402
per each $100 of assessed value. The 1996 annual real estate taxes paid on the
One Orlando Center Property were $758,000. The Orlando real estate tax rate is
$22.4557 per each $1,000 of assessed value.
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OCCUPANCY AND EFFECTIVE RENT AT SIGNIFICANT PROPERTIES
The following table sets forth year-end occupancy of and Net Effective Rent
at the Significant Properties for 1992 through 1996.
<TABLE>
<CAPTION>
OCCUPANCY AT DECEMBER 31, ANNUAL EFFECTIVE RENT
-------------------------------------- ------------------------------------------------
SIGNIFICANT PROPERTIES 1992 1993 1994 1995 1996 1992 1993 1994 1995 1996
- --------------------------- ---- ---- ---- ---- ---- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tower 45................... 94.8% 96.0% 99.8% 99.1% 99.3% $36.11 $34.74 $33.20 $26.38 $32.53
One Orlando Center......... (1) (1) (1) 99.1% 99.3% (1) (1) (1) $20.02 $19.95
</TABLE>
- ---------------
(1) Data not available because the Company did not own the Property during the
applicable period.
EXCLUDED PROPERTIES
Tower Equities will retain certain assets and liabilities which will not be
transferred to the Company in the Formation Transactions. These assets, the
Excluded Properties, consisting entirely of interests in seven retail shopping
center properties containing an aggregate of 800,000 rentable square feet. The
Excluded Properties were excluded from the Company because they were
inconsistent with the Company's investment objectives. The executive officers of
the Company will each devote substantially all their business time to the
day-to-day operations of the Company. Such officers are not expected to devote
any significant part of their business time to Tower Equities' continued
operations relating to the Excluded Properties. In addition, the members of
Tower Equities that hold interests in the Excluded Properties will enter into
management agreements with the Management Company with respect to operation of
such properties that will provide for the payment of a market rate property
management fee, as well as applicable leasing commissions.
MORTGAGE INDEBTEDNESS REMAINING FOLLOWING THE OFFERING
Upon the closing of the Offering, the Company will have total consolidated
mortgage indebtedness ("Mortgage Debt") of approximately $109 million,
representing approximately 23.8% of the Company's Total Market Capitalization
(excluding its pro rata share of Joint Venture Debt). Approximately $52.0
million of the Mortgage Debt consists of the Term Loan. The proceeds of the
initial borrowing under the Term Loan will be used to fund a portion of the
Company's acquisition of interests in the Properties. The remainder of the
Mortgage debt consists of prior indebtedness of the Tower Predecessor including
$35.0 million relating to the Tower 45 Property. The Company has the right to
prepay, prior to maturity, the $35.0 million of mortgage indebtedness that will
be secured by the Tower 45 Property following the consummation of the Offering.
If the Board of Directors determines that it is in the best interests of the
Company to cause the Company to prepay the loan prior to maturity, the Company
is positioned to finance such prepayment by drawing upon the Company's $35.0
million available under the Term Loan. The following table sets forth certain
information regarding the remaining mortgage indebtedness immediately after the
closing of the Offering.
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MORTGAGE INDEBTEDNESS REMAINING FOLLOWING THE OFFERING
<TABLE>
<CAPTION>
ANNUAL
INTEREST MATURITY --------------
PROPERTY(IES) RATE AMORTIZATION DATE
- ----------------------------- PRINCIPAL ------- ------------ ---------------------- (IN THOUSANDS)
AMOUNT
--------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Corporate Center
Properties................. $ 21,000 7.55% None (1) January 1, 2006 $ 1,586
Corporate Center
Properties................. 1,000 8.37% 25 years January 1, 2006 96
One Orlando Center, Maitland
Forum, 120 Mineola
Boulevard and 292 Madison
Avenue Properties.......... 52,000 (2) None (3) (4) 3,630
Tower 45..................... 35,000 LIBOR + None December 31, 1998 2,443
1.75%(5)
2800 North Central(6)........ 2,548 9.41% None May 31, 1999(7) $ 240
----------- ---- ----------
Total/Weighted
Average........... $111,548 7.16% October 1, 2003(8) $ 7,995
=========== ==== ==========
</TABLE>
- ---------------
(1) Commencing in February 1998, monthly payments will include principal based
on a 25-year amortization schedule until the maturity date.
(2) The Term Loan will bear interest at a fixed rate equal to .9% in excess of
seven-year United States Treasury Notes at the closing of the Offering. The
seven-year Treasury note rate of 6.08% as of July 31, 1997 was used for the
calculation of the weighted average rate in the table above. The Company's
borrowing capacity under the Term Loan will be approximately $87 million.
(3) After the first two years that this loan is outstanding, monthly payments
will include principal based on a 28-year amortization schedule until the
maturity date.
(4) This loan will mature seven years after the consummation of the Offering.
(5) This loan is prepayable prior to maturity without premium or penalty. The
Company expects to have borrowing capacity under the Term Loan in an amount
that would be sufficient to prepay the Tower 45 loan prior to maturity. The
interest rate on the Term Loan was used for the calculation of the weighted
average rate in the table above.
(6) Represents the Company's share of Joint Venture Debt relating to this
property, in which the Company holds a 10% unconsolidated equity interest.
The lender holds a right to certain participation payments upon the
occurrence of certain events, including certain sales, maturity,
refinancing, or other disposition of the underlying property.
(7) Subject to certain conditions, the borrower under this loan may extend the
maturity date to May 31, 2000.
(8) The Company's remaining mortgage debt will have a weighted average maturity
of six years. For this calculation it is assumed that the $52.0 million
debt matures in October 2004.
ASSUMED DEFERRED TAX LIABILITY
In connection with the Formation Transactions, the Company will assume
approximately $13 million of deferred taxes relating to the Tower 45 Property
which have accrued since 1988 under New York City's Industrial Commercial
Incentive Program (the "ICIP"). Under the ICIP, which was established to provide
incentives to developers and redevelopers of property in New York City, the
Company will be obligated to pay deferred taxes aggregating approximately $13
million in equal installments over a 10-year period, commencing in July 1998.
Interest does not accrue on the deferred taxes. The Company believes that, based
on current tenant contractual recoveries in respect of the ICIP deferred tax
liability, over the 10-year payment period it will be able to recover
approximately $2.5 million (or 19.2%) of the Company's total liability in
respect thereof.
LINE OF CREDIT
The Company is currently negotiating the Line of Credit that it intends to
close on or shortly after the closing of the Offering, but there can be no
assurances that the Company will obtain the Line of Credit. The
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Line of Credit may be used, among other things, to finance the acquisition or
development of additional properties and the redevelopment of properties owned
by the Company. The Line of Credit will bear interest at a variable rate and
will carry minimum debt service coverage, fixed charge, debt-to-value ratios and
other covenants and tests.
INSURANCE
The Operating Partnership will carry comprehensive liability, fire,
extended coverage and rental loss insurance covering all of the Properties, with
policy specifications and insured limits which the Company believes are adequate
and appropriate under the circumstances. There are, however, certain types of
losses that are not generally insured because they are either uninsurable or not
economically feasible to insure. Should an uninsured loss or a loss in excess of
insured limits occur, the Company could lose its capital invested in the
Property, as well as the anticipated future revenues from the Property and, in
the case of debt which is with recourse to the Company, would remain obligated
for any mortgage debt or other financial obligations related to the Property.
Any such loss would adversely affect the Company. Moreover, the Company will
generally be liable for any unsatisfied obligations other than non-recourse
obligations. Company management believes that the Properties are adequately
insured. No assurance can be given that material losses in excess of insurance
proceeds will not occur in the future. See "Risk Factors -- Real Estate
Investment Risks."
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, the presence of hazardous or toxic
substances, or the failure to remediate such property properly, may adversely
affect the owner's ability to borrow using such real property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of
hazardous substances at the disposal or treatment facility, whether or not such
facility is or ever was owned or operated by such person. In connection with the
ownership (direct or indirect), operation, management and development of real
properties, the Company may be considered an owner or operator of such
properties or as having arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, potentially liable for removal or remediation
costs, as well as certain other related costs, including governmental fines and
injuries to persons and property. Certain environmental laws and common law
principles could be used to impose liability for release of and exposure to
hazardous substances, including ACMs into the air, and third parties may seek
recovery from owners or operators of real properties for personal injury or
property damage associated with exposure to released hazardous substances,
including ACMs. As the owner of the Properties, the Company may be potentially
liable for any such costs.
The Company engaged an independent consulting firm to perform Phase I ESAs,
or updates on ESAs performed within the last 12 months, on all of the
Properties. The purpose of Phase I ESAs is to identify potential sources of
contamination for which the Company may be responsible and to assess the status
of environmental regulatory compliance. For a number of the Properties, the
Phase I ESAs referenced prior Phase II ESAs obtained on such Properties. Phase
II ESAs generally involve more invasive procedures than Phase I ESAs, such as
soil sampling and testing or the installation and monitoring of groundwater
wells. The ESAs have not revealed any environmental condition, liability or
compliance concern that the Company believes would have a material adverse
affect on the Company's business, assets or results of operations, nor is the
Company aware of any such condition, liability or concern. See "Risk
Factors -- Real Estate Investment Risks -- Possible Environmental Liabilities."
COMPETITION
The Company may be competing with other owners and developers that have
greater resources and more experience than the Company. Additionally, the number
of competitive properties in any particular market in which the Company's
Properties are located could have a material adverse effect on both the
Company's ability to lease space at the Properties or any newly acquired
property and on the rents charged at the Properties. The Company believes that
the Offering, the Line of Credit and its access as a public company to
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the capital markets to raise funds during periods when conventional sources of
financing may be unavailable or prohibitively expensive will provide the Company
with substantial competitive advantages. Further, the Company believes that the
number of real estate developers has decreased as a result of the recessionary
market conditions and tight credit markets during the early 1990s as well as the
reluctance on the part of more conventional financing sources to fund
development and acquisition projects.
EMPLOYEES
Upon consummation of the Offering and the Formation Transactions, the
Company will employ approximately 65 persons including five executive officers.
LEGAL PROCEEDINGS
As a result of its acquisition of the Properties, the Company will become a
successor party-in-interest to certain legal proceedings arising in the ordinary
course of business of Tower Equities. The Company does not expect that these
proceedings, in the aggregate, will have a material adverse effect on the
Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company will be expanded immediately
following the consummation of the Offering to include the director nominees
named below, each of whom has been nominated for election and consented to
serve. Upon election of the director nominees, there will be a majority of
directors who are Independent Directors. Pursuant to the Charter, the Board of
Directors is divided into three classes of directors. The initial terms of the
first, second and third classes will expire in 1998, 1999 and 2000,
respectively. Beginning in 1998, directors of each class will be chosen for
three-year terms upon the expiration of their current terms and each year one
class of directors will be elected by the stockholders. The Company believes
that classification of the Board of Directors will help to assure the continuity
and stability of the Company's business strategies and policies as determined by
the Board of Directors. Holders of shares of Common Stock will have no right to
cumulative voting in the election of directors. Consequently, at each annual
meeting of stockholders, the holders of a majority of the shares of Common Stock
will be able to elect all of the successors of the class of directors whose
terms expire at that meeting.
The following table sets forth certain information with respect to the
directors, director nominees and executive officers of the Company immediately
following the consummation of the Offering.
<TABLE>
<CAPTION>
TERM
NAME AGE POSITION EXPIRATION
- ------------------------------------ --- ------------------------------------ ----------
<S> <C> <C> <C>
Lawrence H. Feldman................. 43 Chairman of the Board, Chief 2000
Executive Officer and President
Robert L. Cox....................... 36 Executive Vice President and Chief 1999
Operating Officer and Director
Nominee
Joseph D. Kasman.................... 39 Senior Vice President and Chief
Financial Officer
Eric S. Reimer...................... 38 Vice President -- Leasing
Reuben Friedberg.................... 70 Vice President -- Finance
Lester S. Garfinkel................. 43 Director 1999
Robert M. Adams..................... 56 Director Nominee 1998
Stephen B. Siegel................... 52 Director Nominee 2000
........... Director Nominee 1998
........... Director Nominee 1998
</TABLE>
The following is a biographical summary of each of the directors, director
nominees and executive officers of the Company:
Directors and Executive Officers
LAWRENCE H. FELDMAN. Mr. Feldman serves as Chairman of the Board, Chief
Executive Officer and President of the Company. From March 1990 to March 1997,
he served as President and Chief Executive Officer of Tower Equities and prior
thereto was employed by Tower Equities for approximately 17 years. Mr. Feldman
is the Chairman emeritus and founder of the Midtown West Association, an
association of owners, merchants and tenants in the West 44th to 45th Street
area which has combined with the city to improve security and the physical
condition of the area. He is also a member of Associated Builders & Owners of
Greater New York and a member of the Real Estate Board of New York. Mr. Feldman
graduated from Windham College in 1976 with a business degree.
ROBERT L. COX. Mr. Cox serves as Executive Vice President Chief Operating
Officer and Director Nominee of the Company. From December 1995 to March 1997,
he served as Senior Vice President -- Construction of Tower Equities, and prior
to that, he served as Vice President -- Construction of Tower Equities from 1989
to November 1995 and his main responsibilities included supervising all of Tower
Equities's construction projects. Before joining Tower Equities, Mr. Cox was
Chairman of Cox Building Concepts, a national construction management company
specializing in the construction of high-rise office
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buildings. He is currently a member of Building Owners and Management
Association and the National Contractor's Register. Mr. Cox graduated from
Florida State University in 1983 with a Bachelor of Arts in Architecture.
JOSEPH D. KASMAN. Mr. Kasman serves as Senior Vice President and Chief
Financial Officer of the Company. From February 1996 to March 1997, he was
employed by Tower Equities where he administered real estate related
acquisitions. Prior to that, he was a Vice President of Acquisitions for Quantum
Realty Fund (an entity affiliated with George Soros) from September 1993 to
January 1996, where he was responsible for real estate transactions including
acquisitions, joint ventures and securitizations. Before his employment at
Quantum, Mr. Kasman was a Vice President of Finance with Olympia & York. Mr.
Kasman graduated from State University of New York at Buffalo in 1979 with a
Bachelor of Science degree in Civil Engineering and City University of New York
in 1983 with a Masters in Business Administration degree.
ERIC S. REIMER. Mr. Reimer serves as Vice President -- Leasing of the
Company. From 1987 to March 1997, he was employed at Tower Equities where his
responsibilities included overseeing all leasing activity in the Tower Equities'
portfolio throughout the United States. Prior to joining Tower Equities, he was
the Vice President of Leasing for Rostenberg-Doern in New York's Westchester
County and Connecticut's Fairfield County where he specialized in tenant
representation. He is a member of Building Owners and Management Association and
Industrial Office Real Estate Brokers Association. Mr. Reimer graduated from the
University of Vermont in 1981 with a Bachelor of Arts degree.
REUBEN FRIEDBERG. Mr. Friedberg serves as Vice President -- Finance of the
Company. From 1992 to 1997, he served as Vice President -- Finance of Tower
Equities. Prior to joining Tower Equities, Mr. Friedberg was the controller of
other firms in the real estate and construction industry. Mr. Friedberg
graduated from Baruch College in 1948 with a Bachelor of Business Administration
degree and has been a Certified Public Accountant in the State of New York since
1957.
LESTER S. GARFINKEL. Mr. Garfinkel has been a partner in the public
accounting firm of Reminick, Aarons & Company, LLP since October 1996, where he
is in charge of the firm's quality control and professional standards. Prior to
joining the firm, he managed his family's investment portfolio from March 1996
to September 1996. Prior to that, Mr. Garfinkel was a principal at Feldman Radin
& Company (no affiliation with Tower Equities or Lawrence H. Feldman
personally), a public accounting firm, from April 1995 to March 1996. Prior to
joining Feldman Radin & Company, he was a partner at Weber, Lipshie & Co., an
international public accounting firm, from January 1980 to June 1994, where his
clients, among others, were residential, commercial and shopping center
developers and owner operators. In addition, he is an active investor managing a
large portfolio of family bonds and equities. He has been a Certified Public
Accountant in the State of New York since 1979, and he is a member of the
American Institute of Certified Public Accountants and the New York State
Society of Certified Public Accountants where he has served on technical and
public relations committees.
ROBERT M. ADAMS. Mr. Adams currently serves as Director, New Business
Development at Keefe, Bruyette & Woods, Inc., an investment banking firm ("Keefe
Bruyette") and served as President of Adams Financial Services, Inc. from June
1995 to April 1996. Prior to that, Mr. Adams was a co-founder and Managing
Director of Adams Cohen & Associates, Inc. and Adams Cohen Securities Inc. from
1984 to May 1995. Prior to that, he was a Senior Vice President of E.F. Hutton &
Co. in the Corporate Finance Department, was a General Partner of Loeb Rhoades &
Co. and was a Second Vice President at Chase Manhattan Bank, N.A. Mr. Adams
graduated from Brown University in 1963 with a Bachelor of Arts in Economics
degree and the Wharton School of Finance and Commerce, University of
Pennsylvania in 1967 with a Masters in Business Administration degree with a
concentration in Finance.
STEPHEN B. SIEGEL. Mr. Siegel serves as President and Chief Executive
Officer of Insignia Commercial Group, Inc. He was named to this position
following the acquisition of Edward S. Gordon Company by Insignia Financial
Group in 1996. Mr. Siegel continues as President of Insignia/Edward S. Gordon
Co., a post he has held since 1992. From 1988 to 1992, Mr. Siegel was President
of Chubb Realty, a real estate development subsidiary of The Chubb Corporation.
Prior to that, he was employed by Cushman & Wakefield, Inc. for 27 years, rising
to the position of Chief Executive Officer. Mr. Siegel serves on the advisory
board of
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Wharton Business School's Real Estate Center and New York University's Real
Estate Council, and is a director of Liberty Property Trust.
Managing Directors and Other Key Employees
The following is a biographical summary of each of the managing directors
of Tower Equities' primary markets and other key employees:
SCOTT JENSEN. Mr. Jensen serves as the Managing Director -- Southwest
Region of the Company. From December 1995 to March 1997, he served as Regional
Vice President of Leasing at Tower Equities. Prior to that, Mr. Jensen was an
office leasing/sales specialist at Grubb & Ellis from 1983 to November 1995,
where he received several productivity-based awards. Mr. Jensen graduated from
the University of Arizona in 1980 with a Bachelor of Science degree in finance
and real estate.
CLIFFORD L. STEIN. Mr. Stein serves as Managing Director -- Southeast
Region of the Company. Prior to joining the Company, he founded and was a
principal of Properties Atlantic from 1987 to July 1997. Properties Atlantic is
a tenant representation firm which has developed a client list which includes
many "Fortune 500" companies and is currently one of the largest brokerage firms
in Orlando. Mr. Stein is a former Commissioner of the Community Redevelopment
Agency of Altamonte Springs and is a member of the Florida Chamber of Commerce
and the Economic Development Commission of Mid-Florida. Mr. Stein graduated from
the University of Central Florida in 1981 with a Bachelor of Arts degree.
JAMES A. COWAN. Mr. Cowan serves as Vice President-Acquisitions of the
Company. Prior to joining the Company, he served as an Associate of Victor
Capital Group, L.P. from March 1995 to April 1997 where he specialized in the
acquisition and restructuring of sub-performing mortgage debt. Prior to that,
Mr. Cowan was an Associate of Quantum Realty Fund (and entity affiliated with
George Soros) (from March 1994 to February 1995) and a consultant of the Realty
Consulting Group of Deloitte & Touche LLP (from March 1993 to February 1994).
Mr. Cowan graduated from Villanova University in 1989 with a Bachelor of Science
degree in Business Administration and New York University in 1996 with a Masters
of Science degree in Real Estate.
THOMAS WOODWARD. Mr. Woodward serves as Controller of the Company. He also
served as Controller of Tower Equities from October 1995 to February 1997. Prior
to joining Tower Equities, he served as the Controller of Century 21 from
January 1992 to September 1995. Prior to that, Mr. Woodward was the Controller
for Newmark & Co., Coldwell Banker, and Sutton & Edwards and he has over 23
years of accounting and financial reporting experience in the real estate
industry. Mr. Woodward graduated from Brooklyn College in 1973 with a Bachelor
of Science degree in Accounting and Economics.
JAMES BOURG. Mr. Bourg serves as the Vice President of Development and
Acquisitions-Southwest Region of the Company. Prior to joining the Company, he
served as the Vice President of Development & Acquisitions-Southwest Region of
Tower Equities. Prior to that, Mr. Bourg was a Real Estate Investment Sales
Specialist at Grubb & Ellis with emphasis on financial and real estate
evaluation for institutional sellers and he has over 16 years of real estate
experience. Mr. Bourg graduated from California State Polytechnic University in
1978 with a Bachelor of Science degree in accounting. Mr. Bourg has been a
Certified Public Accountant in the State of Arizona since 1980.
KLAUS P. HILGERS. Mr. Hilgers serves as Vice President-Corporate
Development of the Company. He is responsible for the systems, controls,
standard operating procedures, discipline, automation and training of staff in
order to better manage the Company's growth with maximum efficiency. Prior to
joining Tower Equities, from 1978 to April 1997 he was President of Epoch
Consultant's Inc., a management consulting firm specializing in organizational
development and training for such companies as Anadigics Inc., Weyerhaeuser,
Honeywell, RCA & AT&T. Mr. Hilgers graduated from Rider College in 1969 with a
Bachelor of Arts degree in Political Science and from Montclair State University
in 1974 with a Masters degree in Sociology.
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COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. Promptly following the completion of the Offering, the
Board of Directors will establish an Audit Committee. The Audit Committee will
consist of two or more Independent Directors. The Audit Committee will make
recommendations concerning the engagement of independent public accountants,
review with the independent public accountants the scope and results of the
audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public
accountants, consider the range of audit and non-audit fees, and review the
adequacy of the Company's internal accounting controls.
Compensation Committee. Promptly following the completion of the Offering,
the Board of Directors will establish a Compensation Committee. The Compensation
Committee will determine and establish compensation levels for the Company's
executive officers and administer the Company's 1997 Stock Incentive Plan (the
"1997 Plan") and the Company's Directors' Plan (the "Directors' Plan"). The
Compensation Committee will consist of two or more Independent Directors.
The Company may from time to time form other committees as circumstances
warrant. Such committees will have authority and responsibility as delegated by
the Board of Directors.
COMPENSATION OF DIRECTORS
In connection with the Offering, each Independent Director will be granted
nonqualified options to purchase 20,000 shares of Common Stock at the initial
public offering price per share that vest in five annual installments commencing
on the first anniversary of the date of grant. Any Independent Director who
ceases to be a director will forfeit the right to receive any options not
previously vested. See "-- Stock Option and Restricted Stock Plans -- Directors'
Plan." Independent Directors of the Company will not otherwise receive any fees
for their service on the Board of Directors or a committee thereof. Directors
who are employees of the Company will not receive any additional compensation
for their service on the Board of Directors or a committee thereof.
BOARD OBSERVATION RIGHTS
In connection with the Formation Transactions and the Concurrent Private
Placement, the Company has granted to each of MSAM and DRA Realty Advisors
("DRA") the right to have a representative observe the meetings of the Board of
Directors and its committees. These Board observation rights terminate at any
time such party holds less than 60% of the Common Stock acquired by them in such
transactions.
EXECUTIVE COMPENSATION
Prior to the Offering, the Company did not pay any compensation to its
officers. The following table sets forth the annual base salary rates and other
compensation expected to be paid during the Company's fiscal year ending
December 31, 1997, to the Company's Chief Executive Officer, and President and
the four other most highly compensated executive officers of the Company.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM
COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION SALARY(1) AWARDS AND OPTIONS(2)
- ------------------------------------------------------------ ------------ ---------------------
<S> <C> <C>
Lawrence H. Feldman
Chief Executive Officer and President..................... $175,000 175,000
Robert L. Cox
Executive Vice President, Chief Operating Officer......... $150,000 175,000
Joseph D. Kasman
Senior Vice President, Chief Financial Officer............ $150,000 95,000
Eric S. Reimer
Vice President -- Leasing................................. $125,000 60,000
Reuben Friedberg
Vice President -- Finance................................. $107,000 27,000
</TABLE>
- ---------------
(1) Amounts given are annualized projections for fiscal year 1997 which ends
December 31, 1997. Does not include bonuses that may be paid to the above
individuals. See "-- Incentive Compensation."
(2) Upon the effective date of the Offering, options to purchase a total of
838,000 shares of Common Stock will be granted to executive officers and
employees of the Company under the 1997 Plan at an exercise price equal to
the Offering Price. All options vest over three years (i.e., one-third of
each executive's options will vest and be exercisable on the first, second
and third anniversaries, respectively, of the consummation of the Offering).
See "-- Stock Option and Restricted Stock Plans -- 1997 Plan."
The executive officers, including Mr. Feldman, receive health insurance
benefits which do not exceed 10% of their respective salaries. These benefits
are also provided to all other employees of the Company.
EMPLOYMENT AGREEMENTS
The Company will enter into an employment agreement with Mr. Lawrence H.
Feldman pursuant to which Mr. Feldman will serve as Chairman of the Board, Chief
Executive Officer and President of the Company for a term of three years,
subject, in certain circumstances, to an automatic one year extension, at an
initial annual base compensation of $175,000 (subject to any increases in base
compensation approved by the Compensation Committee). In addition, the Company
will enter into employment agreements with Messrs. Cox and Kasman, pursuant to
which Mr. Cox will serve as Executive Vice President and Chief Operating
Officer, and Mr. Kasman will serve as Senior Vice President and Chief Financial
Officer, each for a term of three years, subject, in certain circumstances, to
an automatic one year extension, at an annual base compensation of $150,000
(subject to any increases in base compensation approved by the Compensation
Committee). In addition to base salary, each such executive officer will be
entitled under his employment agreement to receive annual performance-based
compensation as determined by the Compensation Committee. Upon termination of an
officer's employment agreement other than for cause, by such officer for "good
reason" (as such term is defined in each officer's employment agreement) or by
such officer's death or permanent disability, each of such officers will be
entitled to receive severance benefits in an amount equal to the greater of (i)
the aggregate of all compensation due such officer during the balance of the
term of the employment agreement or (ii) 2.99 times (or, after the second
anniversary of the date of the agreement, 1.99 times) the "base amount" as
determined in the Code, in each case, payable within 30 days of each such
officer's termination. In addition, such employment agreements will provide for
the grant of the options and the stock awards described under "-- Stock Option
and Restricted Stock Plans -- 1997 Plan" below.
As part of their employment agreements, each of Messrs. Feldman, Cox, and
Kasman will be bound by a noncompetition covenant with the Company which will
prohibit them from engaging in (i) the acquisition, management or leasing of any
office properties in the New York, Orlando, and Phoenix/Tucson metropolitan
areas, and (ii) any active or passive investment in or reasonably relating to
the acquisition, renovation, management or leasing of office properties in the
New York, Orlando, and Phoenix/Tucson metropolitan areas for a period of one
year following the date of such executive's termination (the "Noncompetition
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Period"), unless such termination was without cause. In the event of the
termination without cause of Messrs. Feldman, Cox, or Kasman's employment, these
agreements will not prohibit the related officer from engaging in competitive
activities, but, during the Noncompetition Period, will prohibit the related
officer from (a) soliciting any employee of the Company to leave his or her job
and (b) soliciting any client or identified potential client of the Company
during the Noncompetition Period.
INCENTIVE COMPENSATION
The Company may award incentive compensation to employees of the Company
and its subsidiaries, including incentive awards under the 1997 Plan that may be
earned on the attainment of performance objectives stated with respect to
criteria described above or other performance-related criteria. The Compensation
Committee may, in its discretion, approve bonuses to executive officers and
certain other officers and key employees if the Company achieves Company-wide,
regional and/or business unit performance objectives determined by it each year.
STOCK OPTION AND RESTRICTED STOCK PLANS
Prior to the Offering, the Board of Directors will adopt, and the sole
stockholder of the Company will approve, the 1997 Plan and the Directors' Plan
for the purposes of (i) attracting and retaining employees, directors, and other
service providers with ability and initiative; (ii) providing incentives to
those deemed important to the success of the Company and related entities; and
(iii) aligning the interests of these individuals with the interests of the
Company and its stockholders through opportunities for increased stock
ownership.
1997 Plan
The 1997 Plan will be administered by the Compensation Committee and
provide for the granting of stock options, restricted stock and performance
shares and incentive awards from time to time with respect to up to a number of
shares of Common Stock equal to 9.5% of the total number of issued and
outstanding shares of Common Stock (on a fully diluted basis assuming the
exchange of all OP Units for shares of Common Stock) to executive or other key
employees of the Company. Stock options may be granted in the form of "incentive
stock options" as defined in Section 422 of the Code, or non-statutory stock
options, and are exercisable for up to 10 years following the date of the grant.
The exercise price of each option will be set by the Compensation Committee;
provided, however, that the price per share must be equal to or greater than the
fair market value of the Common Stock on the grant date. Under the 1997 Plan,
participants may be permitted to transfer non-qualified stock options to certain
family members or trusts for the benefit of family members, provided the
participant does not receive any consideration for the transfer.
Awards granted to officers under the 1997 Plan will be qualified under Rule
16b-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
The 1997 Plan also permits the Company to issue incentive awards,
performance shares or shares of restricted stock to participants upon such terms
and conditions as shall be determined by the Compensation Committee in its sole
discretion.
Directors' Plan
A maximum of 200,000 shares of Common Stock will be issuable under the
Directors' Plan. The Directors' Plan will provide for the grant of options to
purchase Common Stock. No director who is an employee of the Company is eligible
to participate in the Directors' Plan.
The Directors' Plan will provide that each eligible director who is a
member of the Board of Directors as of the date that the registration statement
relating to the Offering is declared effective by the Securities and Exchange
Commission (the "Commission") will be awarded nonqualified options to purchase
20,000 shares of Common Stock on that date (each such director, a "Founding
Director"). Each eligible director who is not a Founding Director (a
"Non-Founding Director") will receive nonqualified options to purchase 20,000
shares
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of Common Stock on the date of the meeting of the Company's stockholders at
which the Non-Founding Director is first elected to the Board of Directors. The
options granted to Founding Directors upon effectiveness of the registration
statement relating to the Offering will have an exercise price equal to the
initial public offering price and will vest in five annual installments
beginning on the first anniversary of the date of grant, subject to the
Director's continuous service through such vesting date. The exercise price of
options under future grants will be 100% of the fair market value of the Common
Stock on the date of grant and will vest in the same manner. Options granted
under the Directors' Plan will be exercisable for ten years from the date of
grant. Upon termination of service as a director, options which have not vested
will be forfeited and vested options may be exercised until they expire.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provision which eliminates such liability to the maximum
extent permitted by Maryland law.
The Charter 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 (a) any present or
former director or officer or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise from and against any
claim or liability to which such person may become subject or which such person
may incur by reason of his or her status as a present or former director or
office of the Company. The Bylaws of the Company obligate it, 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 (a) any
present or former director or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The Charter and Bylaws also permit the Company to indemnify and advance expenses
to any person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a Maryland 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 Maryland corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, 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 in any proceeding in which the director was
adjudged to be liable 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 requires the Company, as a condition to
advancing expenses, to obtain (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 Company as
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authorized by the Bylaws and (b) a written statement by or on his behalf to
repay the amount paid or reimbursed by the Company if it shall ultimately be
determined that the standard of conduct was not met. Indemnification under the
provisions of the MGCL is not deemed exclusive of any other rights, by
indemnification or otherwise, to which an officer or director may be entitled
under the Company's Charter or Bylaws, resolutions of stockholders or directors,
contract or otherwise. However, it is the position of the Commission that
indemnification of directors and officers for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), is against public
policy and is unenforceable pursuant to Section 14 of the Securities Act.
The Company also has purchased and maintains insurance on behalf of all of
its directors and executive officers against liability asserted against or
incurred by them in their official capacities with the Company, whether or not
the Company is required or has the power to indemnify them against the same
liability.
INDEMNIFICATION AGREEMENTS
The Company has entered into indemnification agreements with each of its
executive officers and directors. The indemnification agreements require, among
other matters, that the Company indemnify its executive officers and directors
to the fullest extent permitted by law and advance to the executive officers and
directors all related expenses, subject to reimbursement if it is subsequently
determined that indemnification is not permitted. Under the agreements, the
Company must also indemnify and advance all expenses incurred by executive
officers and directors seeking to enforce their rights under the indemnification
agreements and may cover executive officers and directors under the Company's
directors' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by law, it provides greater assurance to directors and executive
officers that indemnification will be available, because, as a contract, it
cannot be modified unilaterally in the future by the Board of Directors or the
stockholders to eliminate the rights it provides.
FORMATION AND STRUCTURE OF THE COMPANY
The Company was formed to continue and expand the commercial real estate
business of Tower Equities and to acquire the interests in the 20 Properties.
Prior to or simultaneously with the closing of the Offering, the Company will
engage in the Formation Transactions described below which are designed to
consolidate the ownership of the Properties, Tower Equities' property management
and leasing business, and Properties Atlantic's tenant/landlord representation
business (which, prior to the Offering, was controlled and operated by Clifford
L. Stein, Managing Director-Southeast Region, of the Company) in the Company, to
facilitate the Offering and the Concurrent Private Placement, and to enable the
Company to qualify as a REIT commencing with the taxable year ending December
31, 1997. The Formation Transactions are as follows:
- The Company will sell 10,100,000 shares of Common Stock in the Offering
and 800,000 shares of Common Stock in the Concurrent Private Placement to
the Morgan Stanley Investors. All the net proceeds to the Company from
the Offering and the Concurrent Private Placement will be contributed to
the Operating Partnership. Following such contributions and the other
contributions set forth below, the Company's interest in the Operating
Partnership will increase to approximately 89.9%. The Company is the sole
general partner of the Operating Partnership and will own a 1% general
partner interest in the Operating Partnership and an approximate 88.9%
limited partnership interest in the Operating Partnership.
- The Company has acquired or will acquire, directly or indirectly, a 100%
interest in each of the Properties (other than the 2800 North Central
Property) and the ground lease encumbering the Maitland Forum Property
for an aggregate of shares of restricted Common Stock,
OP Units, approximately $57.2 million in cash, and the assumption of
approximately $239.5 million in
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mortgage indebtedness and approximately $13 million of
non-interest-bearing deferred tax liabilities payable over 10 years, as
follows:
- The Operating Partnership has acquired or will acquire directly or
indirectly from the Primary Contributors (as defined below under
"-- Benefits to Related Parties") interests in each of the Properties
(including an interest in the Maitland Forum ground lease), two
parcels of land adjacent to two of the Properties which can support
370,000 square feet of development, and substantially all the assets
of the assets of Tower Equities and Properties Atlantic management
companies in exchange for OP Units (valued at approximately
$ million based on the Offering Price); and
- The Company will acquire from persons other than the Primary
Contributors debt and equity interests in the Properties (including an
interest in the Maitland Forum ground lease) in exchange for
shares of restricted Common Stock (valued at approximately
$ based on the Offering Price), OP Units (valued at
approximately $ based on the Offering Price) and $57.2
million in cash to third parties.
- The Operating Partnership is expected to enter into the $87 million
seven-year Term Loan and will borrow approximately $52 million under such
facility at the closing of the Offering.
- The Operating Partnership will utilize $241.3 million of the net proceeds
of Term Loan, the Offering, and the Concurrent Private Placement to repay
mortgage indebtedness (including $1.9 million of prepayment penalties)
encumbering the Properties and the Property Partnerships concurrent with
the closing of the Offering. See "The Properties -- Mortgage Indebtedness
Remaining Outstanding Following the Offering."
- The Tower Equities and Properties Atlantic management and leasing
companies (that are owned entirely by the Primary Contributors) have
contributed or will contribute substantially all of the assets of such
companies to the Operating Partnership and the Operating Partnership
will, in turn, recontribute such assets to the Management Company in
exchange for 100% of the non-voting stock and 5% of the voting stock in
the Management Company (which collectively is entitled to receive
approximately 95% of the dividends). This structure is designed to assist
the Company in maintaining its status as a REIT.
- The Company will issue approximately $ million in shares of restricted
Common Stock in exchange for the cancellation of indebtedness outstanding
under the MSAM Notes.
- The Management Company and certain Primary Contributors that hold
interests in the Excluded Properties will enter into management
agreements with respect to each of the Excluded Properties. Four out of
seven of the Excluded Properties are controlled by certain Primary
Contributors and have non-cancellable management contracts. The remaining
three properties are under management contracts which may be terminated
upon payment of two years of management fees or upon a sale of such
property. In consideration for the services to be provided under the
management agreements, the Management Company will receive market rate
property and construction management fees, as well as applicable leasing
commissions.
- The Operating Partnership will have the right to acquire an option held
by certain Primary Contributors at their cost ($250,000 at July 31, 1997)
that will provide the Operations Partnership with the right to (i)
acquire from an unaffiliated third party for approximately 10.4 million
the Phoenix Land Parcel which contains approximately 43 acres of
undeveloped land in Phoenix that can support 1.0 million square feet of
office development. No additional consideration will be paid to the
Primary Contributors in exchange for the receipt of this option and (ii)
acquire from certain Primary Contributors for approximately $3.8 million
(75% of the appraised value of the land as of May 9, 1997) the One
Orlando Center Land Parcel. See "The Properties -- Land Parcel Options."
- The Operating Partnership expects to enter into the proposed $200 million
Line of Credit at or shortly after the consummation of the Formation
Transactions.
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- As part of the Formation Transactions, the Company acquired certain
interests in the Property Partnerships from the Primary Contributors and
certain third parties. Certain of the interests in three of the Property
Partnerships were acquired from Edward Feldman pursuant to a bankruptcy
proceeding under Chapter 7 of United States Bankruptcy Code. In
conjunction with the transfer of those interests to the Company, the
Company entered into a court-approved settlement agreement whereby the
Company has obtained a release of all potential claims of the bankruptcy
trustee and any creditor of the bankruptcy estate relating directly or
indirectly to the Company in exchange for a cash payment of $2.0 million.
Accordingly, the Company believes that this bankruptcy proceeding will
have no impact on Company operations. Edward Feldman, the father of
Lawrence H. Feldman, served as President of Tower Equities until December
1990, at which time he retired at age 70. Edward Feldman served as a
consultant to Tower Equities from the date of his retirement until March
1997.
EFFECTS OF THE FORMATION TRANSACTIONS
As a result of the Formation Transactions, including the Offering, (i) the
Operating Partnership will directly or indirectly own all of the Properties and
the two development parcels by virtue of the Operating Partnership's acquisition
of substantially all of the assets of Tower Equities, the Property interests and
other assets contributed by the Primary Contributors and the Continuing
Investors, (ii) the Company will be the sole General Partner of the Operating
Partnership and will hold directly or indirectly approximately 89.9% of the OP
Units and the remaining OP Units will be held by the Primary Contributors and
the Continuing Investors, (iii) immediately following the completion of the
Offering and the Concurrent Private Placement, purchasers of Common Stock in the
Offering will hold approximately % of the equity of the Company, the
purchasers of Common Stock in the Concurrent Private Placement (the Morgan
Stanley Investors) will hold approximately % of the equity of the Company,
the Primary Contributors will directly or indirectly hold approximately %
of the consolidated equity of the Company, and the Continuing Investors will
directly or indirectly hold approximately % of the equity of the Company,
and (iv) the Company, through the Operating Partnership, will own 100% of the
non-voting common stock of the Management Company and 5% of the common stock
(entitling it to receive approximately 95% of the dividends paid by the
Management Company on its capital stock) and Lawrence H. Feldman will own the
remaining 95% of the common stock of the Management Company (entitling him to
receive approximately 5% of the dividends paid by the Management Company on its
capital stock). See "Risk Factors -- Conflicts of Interest in the Formation
Transactions and the Business of the Company, "-- Benefits to the Related
Parties," "Principal Stockholders," and "Partnership Agreement -- Exchange
Rights."
DETERMINATION AND VALUATION OF OWNERSHIP INTERESTS
The Company's percentage interest in the Operating Partnership was
determined based upon the percentage of estimated Cash Available for
Distribution required to pay estimated cash distributions resulting in an annual
distribution rate equal to 7.0% of the Offering Price. The ownership interest in
the Operating Partnership allocated to the Company is equal to this percentage
of estimated Cash Available for Distribution and the remaining interest in the
Operating Partnership will be allocated to the Primary Contributors receiving OP
Units in the Formation Transactions. The parameters and assumptions used in
deriving the estimated Cash Available for Distribution are described under
"Distributions."
The Company did not obtain an opinion as to the fairness of the allocation
of shares to the purchasers in the Offering. In addition, other than as
described below, there was no independent valuation of the management and
leasing business or of the services, goodwill and other intangibles contributed
to the Company. The initial public offering price will be determined based upon
the estimated Cash Available for Distribution and the factors discussed under
"Underwriting," rather than a property-by-property valuation based on historical
cost or current market value. This methodology has been used because management
believes it is appropriate to value the Company as an ongoing business rather
than with a view to values that could be obtained from a liquidation of the
Company or of individual properties owned by the Company.
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<PAGE> 117
CERTAIN ESTIMATE OF VALUE
An appraisal of the fair market value of the Maitland Forum Property (the
"Appraised Property") dated May 9, 1997 was prepared by Robert A. Stanger & Co.,
Inc. ("Stanger"). Stanger was selected by the Company based on the Company's
knowledge of Stanger and its expertise in real property valuations. The
appraisal was delivered for the limited purpose of valuing the ground lease
relating to the Maitland Forum Property in connection with the acquisition of an
interest in such ground lease.
In preparing the appraisal, Stanger performed a site inspection, reviewed
local real estate market conditions, reviewed the current rent roll for the
Property, and conducted local market inquiries.
Stanger valued the Maitland Forum Property using the sales comparison, and
income capitalization approaches. Stanger placed principal reliance on the
income capitalization approach. In applying this approach, Stanger projected the
10-year discounted cash flow of the Maitland Forum Property. Stanger gave
secondary consideration to the sales comparison approach (analysis of transfers
of comparable properties) in support of its final conclusions.
Based on information contained in the appraisal, Stanger provided to the
Company an estimate of the value of the Property. In preparing its estimate,
which was based upon business, economic, real estate market and other
conditions, Stanger concluded that the value of the Property as estimated using
a 10-year discounted cash flow analysis ranged from $24.0 million to
approximately $26.7 million.
The Stanger estimate of the value of the Maitland Forum Property was not
intended to and did not value the Company or the Company's interest in the
Property and the Company cautions prospective investors against attaching undue
significance to these estimates. In addition, the estimate does not reflect the
effect of the reduction of debt on the Property and the reduction of the
interest rate on certain remaining debt, nor does it reflect any benefits to the
Company of owning a portfolio of properties and an ongoing business rather than
a single property owned by a single purpose partnership.
BENEFITS TO RELATED PARTIES
Certain affiliates of the Company, including the Primary Contributors, will
realize certain material benefits as a result of the Offering and the Formation
Transactions.
- The Primary Contributors will receive a total of OP Units
(including their pro rata share of the OP Units that will be issued to
certain Property Partnerships) in consideration for their interests in
the Properties, certain development parcels, and the Tower Equities and
Properties Atlantic management and leasing businesses, in connection with
the Formation Transactions. These OP Units (representing approximately
% of the equity interests in the Company on a consolidated basis)
will have a total value of approximately $ million based on the
Offering Price, compared to a net tangible book value of the assets
contributed to the Operating Partnership by the Primary Contributors of
approximately $ million) and will be exchangeable, commencing one
year following completion of the Offering, for cash or, at the Company's
option, shares of Common Stock on a one-for-one basis. These OP Units
will subject to certain limited exceptions, be subject to certain
restrictions on transfer for a two year period following the consummation
of the Offering without the consent of the Representatives. See
"Underwriting." The Company believes that the net tangible book value of
the individual assets contributed to the Operating Partnership by the
Primary Contributors (which reflects the historical cost of such assets
less accumulated depreciation) is less than the aggregate current market
value of such assets. In addition, the Primary Contributors will be
reimbursed their costs associated with the Phoenix Land Parcel Option
($250,000 at July 31, 1997).
- Messrs. Feldman and Cox will each serve as a director and officer of the
Company, Mr. Adams will serve as a director of the Company, and Messrs.
Feldman, Cox, and Kasman will enter into employment agreements with the
Company. See "Management -- Employment Agreements."
- The Company will grant to Messrs. Feldman, Cox, Kasman, Reimer,
Friedberg, and the five members of the Board of Directors of the Company
who are not employees or affiliates of the Company,
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including Mr. Adams options to purchase an aggregate of 632,000 shares of
Common Stock under the Company's 1997 Incentive Plan and 1997 Directors
Plans at the Offering Price, subject to certain vesting requirements. See
"Management -- Stock Option and Restricted Stock Plans -- 1997 Plan."
- The Formation Transactions may provide the Primary Contributors with
increased liquidity and, until the disposition of certain assets
contributed to the Company, with continued deferral of the taxable gain
associated with those assets.
Additional information concerning benefits to executive officers, directors
and significant stockholders of the Company is set forth under "Certain
Relationships and Transactions."
TRANSFER OF PROPERTIES
The Company's interest in the Properties will be acquired pursuant to
various agreements, the forms of which will be filed as exhibits to the
Registration Statement, of which this Prospectus forms a part. These
acquisitions are subject to all of the terms and conditions of such agreements.
The Company will assume all obligations relating to the Properties that may
arise after the transfer.
The agreements effecting the transfer of the assets or direct or indirect
interest of the partners and other holders of equity in the entities selling the
Properties will contain representations and warranties from each such person
concerning title to the interests being transferred and the absence of liens or
other encumbrances thereon. The Primary Contributors have agreed to make
additional representations with respect to the Company and the Properties
concerning the operation of such Properties, environmental matters and other
representations and warranties customarily found in similar documents and also
have agreed to indemnify the Company against breaches of such representations
and warranties. These representations and warranties will survive the closing of
the Offering for a period of one year.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
FORMATION TRANSACTIONS
The terms of the acquisition of interests in the Properties and in Tower
Equities by the Company and the Operating Partnership are described under
"Formation and Structure of the Company -- Effects of the Formation Transactions
and Benefits to Related Parties."
In connection with the Formation Transactions, the Operating Partnership
previously has acquired directly or indirectly from the bankruptcy estate of
Edward Feldman, the father of Lawrence H. Feldman, the Chairman, Chief Executive
Officer, and President of the Company, pursuant to his bankruptcy proceeding
interests in the partnerships that own, directly or indirectly, the Tower 45 and
120 Mineola Boulevard Properties, as well as his interests in the Maitland Forum
ground lease, in exchange for $1.7 million in cash. Edward Feldman has received
from the Company consulting fees of approximately $131,670 for the year ended
December 31, 1996 and is expected to receive fees of approximately $65,652 for
the year ending December 31, 1997.
EXCHANGE RIGHTS
The Company will enter into the Partnership Agreement and the Exchange
Agreement (as defined and described under "Partnership Agreement -- Exchange
Rights") with the Limited Partners, including the Primary Contributors,
receiving OP Units. Among other things, the Exchange Agreement provides such
holders of OP Units the right to cause the Operating Partnership to exchange OP
Units for cash or, at the election of the Company, exchange such OP Units for
shares of Common Stock of the Company (on a one-for-one basis). See "Risk
Factors -- Conflicts of Interest in the Formation Transactions and the Business
of the Company," "Formation and Structure of the Company -- Benefits to Related
Parties" and "Partnership Agreement -- Exchange Rights."
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REGISTRATION RIGHTS
For a description of certain registration rights held by the Primary
Contributors and the Morgan Stanley Investors, see "Partnership
Agreement -- Registration Rights" and "Shares Available for Future Sale --
Registration Rights."
EMPLOYMENT AGREEMENTS; AWARD OF OPTIONS
In connection with the formation of the Company, each of Messrs. Feldman,
Cox, and Kasman entered into three-year employment agreements with the Company.
See "Management -- Employment Agreements." In order to induce each such
executive to enter into such employment agreements, Messrs. Feldman, Cox, and
Kasman were granted options to purchase 175,000, 175,000 and 95,000 shares of
Common Stock, respectively, at the Offering Price. See "Management -- Executive
Compensation" and "-- 1997 Plan."
EXCLUDED PROPERTY MANAGEMENT AGREEMENTS
In connection with the Formation Transactions, certain Primary Contributors
that hold interests in the Excluded Properties will enter into management
agreements with the Management Company with respect to operation of such
properties. Four out of seven of the Excluded Properties are controlled by
certain Primary Contributors and have non-cancellable management contracts. The
remaining three properties are under management contracts which may be
terminated upon payment of two years of management fees or upon a sale of such
property. In consideration for the services to be provided under the management
agreements, the Management Company will receive market rate property and
construction management fees, as well as applicable leasing commissions. See
"The Properties -- Excluded Properties."
EXECUTIVE OFFICER AND DIRECTOR DISTRIBUTIONS AND FEES
The executive officers and directors have received distributions and
management fees from all of the Properties of approximately $3,724,300 for the
year ended December 31, 1996 and are expected to receive distributions and
management fees of approximately $3,071,000 for the year ending December 31,
1997.
MISCELLANEOUS
The Company acquired its interest in One Orlando Center, the Corporate
Center Properties and the Madison Avenue Properties from certain affiliates of
DRA Advisors, Inc. for $23,819,000 of restricted Common Stock and $23,819,000 in
cash. See "Principal Stockholders."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock (including Common Stock for which OP Units
are exchangeable) by (i) each director (and director nominee) of the Company,
(ii) each executive officer of the Company, (iii) all directors (and director
nominees) and executive officers of the Company as a group and (iv) each person
or entity which is expected to be the beneficial owner of 5% or more of the
outstanding shares of Common Stock immediately following the Offering. Except as
otherwise described below, all shares are owned directly and the indicated
person has sole voting and investment power. The extent to which the persons or
entities will hold OP Units, as opposed to shares of Common Stock, is set forth
in the footnotes below.
<TABLE>
<CAPTION>
NUMBER OF SHARES
AND OP UNITS PERCENT PERCENT OF
BENEFICIALLY OF ALL ALL SHARES AND
NAME OF BENEFICIAL OWNER(1) OWNED SHARES(2) OP UNITS(3)
- --------------------------------------------------- ------------------ ---------- --------------
<S> <C> <C> <C>
Lawrence H. Feldman................................
Robert L. Cox......................................
Joseph D. Kasman...................................
Eric S. Reimer.....................................
Reuben Friedberg...................................
Lester S. Garfinkel(4).............................
Robert M. Adams(5).................................
Stephen B. Siegel(6)...............................
DRA Opportunity Fund(7)............................
Office Invest Sub LLC(8)...........................
Morgan Stanley Asset Management Inc.(9)............
All executive officers, directors and director
nominees as a group (8 persons).................. % %
------------------
</TABLE>
- ---------------
* Represents less than 1.0% of the class.
(1) Unless otherwise indicated, the business address of each person listed is
c/o Tower Realty Trust, Inc., 120 West 45th Street, New York, New York
10036.
(2) Assumes 12,552,800 shares of Common Stock outstanding immediately following
the Offering and the Concurrent Private Placement. Assumes that all OP Units
held by the person are exchanged for shares of Common Stock. The total
number of shares of Common Stock outstanding used in calculating this
percentage assumes that none of the OP Units held by other persons are
exchanged for shares of Common Stock.
(3) Assumes a total of 13,961,743 shares of Common Stock and OP Units
outstanding immediately following the Offering (12,552,800 shares of Common
Stock and OP Units, which may be exchanged for cash or shares of
Common Stock under certain circumstances). Assumes that all OP Units held by
the person are exchanged for shares of Common Stock. The total number of
shares of Common Stock outstanding used in calculating this percentage
assumes that all of the OP Units held by other persons are exchanged for
shares of Common Stock.
(4) The business address for Mr. Garfinkel is Reminick, Aarons & Company LLP,
685 Third Avenue, New York, New York 10017-4037.
(5) The business address of Mr. Adams is Adams Financial Services, Inc., 13
South Bayless Avenue, Port Washington, New York 11050.
(6) The business address of Mr. Siegel is Edward S. Gordon, 200 Park Avenue,
19th Floor, New York, New York 10166.
(7) The business address of DRA Opportunity Fund is 1180 Avenue of the Americas,
New York, New York 10036.
(8) The business address of Office Invest Sub LLC is c/o DRA Advisors, Inc.,
1180 Avenue of the Americas, New York, New York 10036.
(9) MSAM, as investment adviser to the Morgan Stanley Investors, and Morgan
Stanley, Dean Witter, Discover & Co., as the owner of all the common stock
of MSAM, are deemed to beneficially own the shares of Common Stock
beneficially owned by such investors. MSAM maintains its principal office at
1221 Avenue of the Americas, New York, New York 10020 and Morgan Stanley,
Dean Witter, Discover & Co. maintains its principal office at 1585 Broadway,
New York, New York 10036.
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DESCRIPTION OF CAPITAL STOCK
The following summary description of (i) the capital stock of the Company
and (ii) certain provisions of Maryland law and of the Charter and Bylaws of the
Company does not purport to be complete and is subject to and qualified in its
entirety by reference to Maryland law, and to the Charter and Bylaws of the
Company, copies of which are exhibits to the Registration Statement of which
this Prospectus is a part.
GENERAL
Under its Charter, the Company has the authority to issue 250,000,000
shares of Common Stock, par value $0.01 per share, and 100,000,000 shares of
preferred stock, $.01 par value per share (the "Preferred Stock"). Upon
completion of the Offering, 12,552,800 shares of Common Stock and no shares of
Preferred Stock will be 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 nonassessable. 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 stock if, as and when authorized and declared by the Board of
Directors of the Company out of assets legally available therefor and to share
ratably in the assets of the Company legally available for distribution to its
stockholders in the event of its liquidation, dissolution or winding up after
payment of or adequate provision for all known debts and liabilities of the
Company.
Subject to the provisions of the Charter regarding the restrictions on
transfer of stock, each outstanding share of Common Stock entitles the holder to
one vote on all matters submitted to a vote of stockholders, including the
election of directors and, except as provided with respect to any other class or
series of stock, the holders of such shares will possess exclusive voting power.
There is no cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of Common Stock can elect all of
the directors then standing for election and the holders of the remaining shares
will not be able to elect any directors.
Holders of shares of Common Stock have no preference, conversion, exchange,
sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any securities of the Company. Subject to the provisions of the
Charter regarding the restrictions on transfer of stock, shares of Common Stock
will have equal dividend, liquidation and other rights.
Under the 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 Charter does not
provide for a lesser percentage in such situations except that the provisions of
the Charter relating to authorized shares of stock and the classification and
reclassification of shares of Common Stock and Preferred Stock may be amended by
the affirmative vote of the holders of not less than a majority of the votes
entitled to be cast on the matter.
PREFERRED STOCK
The Charter authorizes the Board of Directors to classify any unissued
shares of Preferred Stock and to reclassify any previously classified but
unissued shares of any series, as authorized by the Board of Directors. Prior to
issuance of shares of each series, the Board is required by the MGCL and the
Charter of the Company to set, subject to the provisions of the Charter
regarding the restrictions on transfer of stock, the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions qualifications and terms or conditions of
redemption for each such series. Thus, the Board could
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<PAGE> 122
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. As of the date
hereof, no shares of Preferred Stock are outstanding and the Company has no
present plans to issue any Preferred Stock.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock and
to classify or reclassify unissued shares of Common Stock and Preferred Stock
and thereafter to cause the Company to issue such classified or reclassified
shares of stock will provide the Company with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
needs which might arise. The additional classes or series, as well as the Common
Stock, will be available for issuance without further action by the Company's
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which the Company's
securities may be listed or traded. Although the Board of Directors has no
intention at the present time of doing so, it could authorize the Company to
issue a class or series that could, depending upon the terms of such class or
series, delay, defer or prevent a transaction or a change in control of the
Company that might involve a premium price for holders of Common Stock or
otherwise be in their best interest.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of stock.
Specifically, not more than 50.0% in value of the Company's outstanding shares
of stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year, and the shares of stock of the Company must be beneficially owned
by 100 or more persons during at least 335 days of a taxable year of twelve
months or a proportionate part of a shorter taxable year. These two requirements
do not apply until after the first taxable year for which the Company makes an
election to be taxed as a REIT. See "Federal Income Tax
Considerations -- Requirements for Qualification as a REIT."
Because the Board of Directors believes it is essential for the Company to
continue to qualify as a REIT, the Charter, subject to certain exceptions
described below, provides that no holder may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than (9.8% of the number or
value of the outstanding shares of any class of capital stock of the Company
("Ownership Limitation").
Any transfer of capital stock of the Company that would (i) result in any
person owning, directly or indirectly, capital stock of the Company in excess of
the Ownership Limitation, (ii) result in Common Stock being owned by fewer than
100 persons (determined without reference to any rules or attribution), (iii)
result in the Company being "closely held" within the meaning of section 856(h)
of the Code, or (iv) cause the Company to own, actually or constructively, 9.9%
or more of the ownership interests in a tenant of the Company's, the Operating
Partnership's or a Subsidiary Partnership's real property, within the meaning of
section 856(d)(2)(B) of the Code, will be void ab initio, and the intended
transferee will acquire no rights in such shares of capital stock.
The ownership attribution rules under the Code are complex and may cause
shares owned actually or constructively by a group of related individuals and/or
entities to be owned constructively by one individual or entity. As a result,
the acquisition of less than 9.8% of the shares of Common Stock or any class or
series of Preferred Stock (or the acquisition of an interest in an entity that
owns, actually or constructively, shares of capital stock) by an individual or
entity, could nevertheless cause that individual or entity, or another
individual or entity, to own constructively in excess of 9.8% of the outstanding
shares of Common Stock or any class or series of Preferred Stock and thus
subject such shares to the Ownership Limit. The Board of Directors may grant an
exemption from the Ownership Limit with respect to one or more persons who would
not be treated as "individuals" for purposes of the Code if it is satisfied,
based upon the advice of counsel or a ruling from the IRS or such other evidence
satisfactory to the Board, that such ownership will not cause any person
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<PAGE> 123
who is an individual to be treated as owning shares of capital stock in excess
of the Ownership Limit, applying the applicable constructive ownership rules,
and will not otherwise jeopardize the Company's status as a REIT. As a condition
of such waiver, the Board of Directors may require such undertakings or
representations from the applicant with respect to preserving the REIT status of
the Company. Under certain circumstances, the Board of Directors may, in its
sole and absolute discretion, grant an exemption for individuals to acquire
shares of Preferred Stock in excess of the Ownership Limit, provided that
certain conditions are met and any representations and undertaking that may be
required by the Board of Directors are made.
Subject to certain exceptions described below, with respect to any
purported transfer that violates the above limitations, that number of shares in
violation of such limitations will be designated as "Shares-in-Trust" and will
be transferred automatically to a trust (a "Trust"), effective on the day before
the purported transfer of such shares of Capital Stock. The record holder of the
shares of capital stock that are designated as Shares-in-Trust (the "Prohibited
Owner") will be required to submit such number of shares of capital stock to the
Company for registration in the name of the trustee of the Trust (the
"Trustee"). The Trustee will be designated by the Company but will not be
affiliated with the Company. The beneficiary of the Trust (the "Beneficiary")
will be one or more charitable organizations named by the Company.
Shares-in-Trust will remain issued and outstanding shares of capital stock
and will be entitled to the same rights and privileges as all other shares of
the same class or series. The Trustee will receive all dividends and
distributions on the Shares-in-Trust and will hold such dividends or
distributions in trust for the benefit of the Beneficiary. The Trustee will vote
all Shares-in-Trust. The Trustee will designate a permitted transferee of the
Shares-in-Trust, provided that the permitted transferee (i) purchases such
Shares-in-Trust for valuable consideration and (ii) acquires such
Shares-in-Trust without such acquisition resulting in another transfer to
another Trust.
The Prohibited Owner with respect to Shares-in-Trust will be required to
repay to the Trustee the amount of any dividends or distributions received by
the Prohibited Owner (i) that are attributable to any Shares-in-Trust and (ii)
the record date of which was on or after the date that such shares become
Shares-in-Trust. Any vote taken by a Prohibited Owner prior to the Company's
discovery that the Shares-in-Trust were held in trust will be rescinded as void
ab initio and recast by the Trustee, in its sole and absolute discretion;
provided, however, that if the Company has already taken corporate action based
on such vote, then the Trustee shall not have the authority to rescind and
recast such vote. The Prohibited Owner generally will receive from the Trustee
the lesser of (i) the price per share such Prohibited Owner paid for the shares
of capital stock that were designated as Shares-in-Trust (or, in the case of a
gift or devise, the Market Price (as defined below) per share on the date of
such transfer) or (ii) the price per share received by the Trustee from the sale
of such Shares-in-Trust. Any amounts received by the Trustee in excess of the
amounts to be paid to the Prohibited Owner will be distributed to the
Beneficiary.
The Shares-in-Trust will be deemed to have been offered for sale to the
Company, or its designee, at a price per share equal to the lesser of (i) the
price per share in the transaction that created such Shares-in-Trust (or, in the
case of a gift or devise, the Market Price per share on the date of such
transfer) or (ii) the Market Price per share on the date that the Company, or
its designee, accepts such offer. Subject to the Trustee's ability to designate
a permitted transferee, the Company will have the right to accept such offer for
a period of 90 days after the later of (i) the date of the purported transfer
which resulted in the creation of such Shares-in-Trust or (ii) the date the
Company determines in good faith that a transfer resulting in such
Shares-in-Trust occurred.
"Market Price" on any date shall mean the average of the Closing Price for
the five consecutive Trading Days (as defined below) ending on such date. The
"Closing Price" on any date shall mean the last sale price, regular way, or, in
case no such sale takes place on such day, the average of the closing bid and
asked prices, regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed or
admitted to trading on the NYSE or, if the shares of Common Stock are not listed
or admitted to trading on the NYSE, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which the shares of Common Stock are listed or
admitted to trading or, if the shares of Common Stock are not listed or admitted
to trading on any
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national securities exchange, the last quoted price, or if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by the National Association of Securities Dealers, Inc. Automated
Quotation System or, if such system is no longer in use, the principal other
automated quotations system that may then be in use or, if the shares of Common
Stock are not quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a market in
the shares of Common Stock selected by the Board of Directors. "Trading Day"
shall mean a day on which the principal national securities exchange on which
the shares of Common Stock are listed or admitted to trading is open for the
transaction of business or, if the shares of Common Stock are not listed or
admitted to trading on any national securities exchange, shall mean any day
other than a Saturday, a Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law or executive order to
close.
Any person who acquires or attempts to acquire capital stock in violation
of the foregoing restrictions, or any person who owned shares of Capital Stock
that were transferred to a Trust, will be required (i) to give immediately
written notice to the Company of such event and (ii) to provide to the Company
such other information as the Company may request in order to determine the
effect, if any, of such transfer on the Company's status as a REIT.
All persons who own, directly or indirectly, more than 5.0% (or such lower
percentages as required pursuant to regulations under the Code) of the
outstanding shares of capital stock of the Company must, within 30 days after
January 1 of each year, provide to the Company a written statement or affidavit
stating (i) the name and address of such direct or indirect owner; (ii) the
number of shares of capital stock owned directly or indirectly; and (iii) a
description of how such shares are held. In addition, each direct or indirect
stockholder shall provide to the Company such additional information as the
Company may request in order to determine the effect, if any, of such ownership
the Company's status as a REIT and to ensure compliance with the Ownership
Limitation.
The Ownership Limitation generally will not apply to the acquisition of
shares of capital stock by an underwriter that participates in a public offering
of such shares. In addition, the Board of Directors, upon such conditions as the
Board of Directors may direct, may exempt a person from the Ownership Limitation
under certain circumstances.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above.
The Ownership Limitation could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority of, shares of Common Stock might receive a premium from their shares of
Common Stock over the then prevailing market price or which such holders might
believe to be otherwise in their best interest.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
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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 the
Company's Charter and Bylaws does not purport to be complete and is subject to
and qualified in its entirety by reference to Maryland law and to the Company's
Charter and Bylaws, copies of which are exhibits to the Registration Statement
of which this Prospectus is a part.
The Charter and the Bylaws of the Company contain certain provisions that
could make more difficult the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise. These provisions are expected to discourage
certain types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of the Company to negotiate first
with the Board of Directors. The Company believes that the benefits of these
provisions outweigh the potential disadvantages of discouraging such takeover
proposals because, among other things, negotiation of such takeover proposals
might result in an improvement of their terms.
NUMBER OF DIRECTORS; CLASSIFICATION OF THE BOARD OF DIRECTORS
The Charter and Bylaws provide that the number of directors will consist of
not less than three nor more than fifteen persons, as determined by the
affirmative vote of a majority of the members of the entire Board of Directors.
The Charter requires that at all times a majority of the directors shall be
Independent Directors, except that upon the death, removal, incapacity or
resignation of an Independent Director, such requirement shall not be applicable
for 60 days. Following the Offering, there will be seven directors, five of whom
will be Independent Directors. The holders of shares of Common Stock are
entitled to vote on the election or removal of directors, with each share
entitled to one vote. 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.
Pursuant to the Charter, the Board of Directors is divided into three
classes of directors. The initial terms of the first, second and third classes
will expire in 1998, 1999, and 2000, respectively. As the term of each class
expires, directors in that class will be elected by the stockholders of the
Company for a term of three years and until their successors are duly elected
and qualify. Classification of the Board of Directors is intended to assure the
continuity and stability of the Company's business strategies and policies as
determined by the Board of Directors. Because holders of shares of Common Stock
will have no right to cumulative voting in the election of directors, at each
annual meeting of stockholders, the holders of a majority of the shares of
Common Stock will be able to elect all of the successors of the class of
directors whose terms expire at that meeting.
The classified board provision could have the effect of making the
replacement of incumbent directors more time consuming and difficult, which
could delay, defer or prevent an attempt by a third party to obtain control of
the Company or other transaction, even though such an attempt or other
transaction might be beneficial to the Company and its stockholders. At least
two annual meetings of stockholders, instead of one, will generally be required
to effect a change in a majority of the Board of Directors. Thus, the classified
board provision could increase the likelihood that incumbent directors will
retain their positions.
REMOVAL; FILLING VACANCIES
The Bylaws provide that any vacancies on the Board of Directors for any
cause other than an increase in the number of directors will be filled by the
affirmative vote of a majority of the remaining directors, even if such majority
is not sufficient to constitute a quorum. Any vacancy in the number of directors
created by an increase in the number of directors will be filled by the
affirmative vote of a majority of the entire Board of Directors. Any director so
elected shall hold office until the next annual meeting of stockholders and
until his successor is elected and qualifies. The Charter provides that
directors may be removed, with cause, only by the affirmative vote of the
holders of shares of at least a majority of the votes entitled to be cast in the
election of directors. This provision, when coupled with the provision of the
Bylaws authorizing the Board of Directors to
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fill vacant directorships, precludes stockholders from removing incumbent
directors except for cause and filling the vacancies created by such removal
with their own nominees.
See "Management -- Limitation of Liability and Indemnification" for a
description of the limitations on liability of directors and officers of the
Company and the provisions for indemnification of directors and executive
officers provided for under applicable Maryland Law and the Charter.
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 10.0% or more of the voting
power of such corporation's shares or an affiliate of such corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10.0% or more of the voting power of the then-outstanding
voting stock of such corporation (an "Interested Stockholder") or an affiliate
thereof are prohibited for five years after the most recent date on which the
Interested Stockholder becomes an Interested Stockholder. Thereafter, any such
business combination must be recommended by the board of directors of such
corporation and approved by the affirmative vote of at least (a) 80.0% of the
votes entitled to be cast by holders of outstanding shares of voting stock of
such corporation and (b) two-thirds of the votes entitled to be cast by holders
of shares of such 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 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. The Company's Board of Directors
has resolved to opt out of the business combination provisions of the MGCL. See
"-- Control Share Acquisition Statute" below. There can be no assurance that the
Board of Directors will not opt into such provisions at any time in the future.
CONTROL SHARE ACQUISITION STATUTE
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 owned by the acquiror, by officers or by directors who are
employees of the corporation. "Control Shares" are voting shares which, if
aggregated with all other such shares previously acquired by the acquiror or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (i) one-fifth or more but less than one-third;
(ii) one-third or more but less than a majority; or (iii) a majority or more of
all voting power. Control Shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of control shares,
subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of directors of the corporation to call a special meeting
of stockholders to be held within 50 days of demand to consider the voting
rights of the shares. If no request for a meeting is made, the corporation may
itself present the question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at
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a stockholders meeting and the acquiror becomes entitled to vote a majority of
the shares entitled to vote, all other stockholders may exercise appraisal
rights. The fair value of the shares as determined for purposes of such
appraisal rights may not be less than the highest price per share paid by the
acquiror in the control share acquisition, and certain limitations and
restrictions otherwise applicable to the exercise of dissenters' rights do not
apply in the context of a control share acquisition.
The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The Bylaws of the Company contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's shares of Common Stock. There can be no assurance that such provision
will not be amended or eliminated at any time in the future.
AMENDMENT TO THE CHARTER
The Charter of the Company may be amended by the affirmative vote of the
holders of shares entitled to cast a majority of all votes entitled to be cast
on such an amendment; provided, however, (i) no term or provision of the Charter
may be added, amended or repealed in any respect that would, in the
determination of the Board of Directors, cause the Company not to qualify as a
REIT under the Code; (ii) certain provisions of the Charter, including
provisions relating to the classification of directors, the removal of
directors, Independent Directors, preemptive rights of holders of stock and the
indemnification and limitation of liability of officers and directors, may not
be amended or repealed; and (iii) provisions imposing cumulative voting in the
election of directors may not be added to the Charter, unless, in each such
case, such action is approved by the affirmative vote of the holders of shares
of not less than two-thirds of all the votes entitled to be cast on the matter.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be approved by the affirmative vote of
the holders of shares entitled to cast not less than a majority of all of the
votes entitled to be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual
meeting of stockholders, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by stockholders may be
made only (i) pursuant to the Company's notice of the meeting; (ii) by the Board
of Directors; or (iii) by a stockholder who is entitled to vote at the meeting
and has complied with the advance notice procedures set forth in the Bylaws and
(b) with respect to special meetings of stockholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of stockholders and nominations of persons for election to the Board of
Directors may be made only (i) pursuant to the Company's notice of the meeting;
(ii) by the Board of Directors; or (iii) provided that the Board of Directors
has determined that directors shall be elected at such meeting, by a stockholder
who is entitled to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.
MEETINGS OF STOCKHOLDERS
The Company's Bylaws provide that annual meetings of stockholders shall be
held on a date and at the time set by the Board of Directors during the month of
May each year (commencing in May 1998). Special meetings of the stockholders may
be called by (i) the President of the Company, (ii) the Chief Executive Officer
or (iii) the Board of Directors. As permitted by the MGCL, the Bylaws of the
Company provide that special meetings must be called by the Secretary of the
Company upon the written request of the holders of shares entitled to cast not
less than a majority of all votes entitled to be cast at the meeting.
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OPERATIONS
The Company is generally prohibited by the Charter from holding any assets
or engaging in any activity that would cause the Company to fail to qualify as a
REIT.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER
AND BYLAWS
The business combination provisions, if the Board of Directors determines
to opt in to such provisions, and, if the applicable provision in the Bylaws is
rescinded, the control share acquisition provisions of the MGCL, the provisions
of the Charter on classification of the Board of Directors and removal of
directors and the advance notice provisions of the Bylaws could delay, defer or
prevent a transaction or a change in control of the Company that might involve a
premium price for holders of shares of Common Stock or otherwise be in their
best interest.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect to
investment, disposition, financing, conflicts of interest and certain other
activities. These policies have been determined by the Board of Directors of the
Company and may be amended or revised from time to time at the discretion of the
Board of Directors without a vote of the stockholders of the Company, except
that (i) the Company cannot change its policy of holding its assets and
conducting its business only through the Operating Partnership and its
affiliates without the consent of the holders of OP Units as provided in the
Partnership Agreement; (ii) changes in certain policies with respect to
conflicts of interest must be consistent with legal requirements; and (iii) the
Company cannot take any action intended to terminate its qualification as a REIT
without the approval of the holders of shares of Common Stock representing
two-thirds of all the votes entitled to be cast on the matter at a regular or
special meeting of stockholders.
INVESTMENT POLICIES
Investments in Real Estate or Interests in Real Estate. The Company will
conduct all of its investment activities through the Operating Partnership and
its affiliates. The Company's investment objectives are to provide quarterly
cash distributions and achieve long-term capital appreciation through increases
in the value of the Company. For a discussion of the Properties and the
Company's acquisition and other strategic objectives, see "The Properties" and
"Operating and Growth Strategies."
The Company expects to pursue its investment objectives primarily through
the direct ownership by the Operating Partnership of the Properties and other
acquired office properties. The Company currently intends to invest primarily in
existing improved properties but may, if market conditions warrant, invest in
additional development projects as well. Future investment or development
activities will not be limited to any geographic area or product type or to a
specified percentage of the Company's assets. While the Company intends to
diversify in terms of property locations, size and market, the Company does not
have any limit on the amount or percentage of its assets that may be invested in
any one property or any one geographic area. The Company intends to engage in
such future investment or development activities in a manner which is consistent
with the maintenance of its status as a REIT for federal income tax purposes. In
addition, the Company may purchase or lease income-producing commercial and
other types of properties for long-term investment, expand and improve the real
estate presently owned or other properties purchased, or sell such real estate
properties, in whole or in part, when circumstances warrant.
The Company may also participate with third parties in property ownership,
through joint ventures or other types of co-ownership. Such investments may
permit the Company to own interests in larger assets without unduly restricting
diversification and, therefore, add flexibility in structuring its portfolio.
The Company will not, however, enter into a joint venture or partnership to make
an investment that would not otherwise meet its investment policies.
Equity investments may be subject to existing mortgage financing and other
indebtedness or such financing or indebtedness as may be incurred in connection
with acquiring or refinancing these investments.
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Debt service on such financing or indebtedness will have a priority over any
distributions with respect to the Common Stock. Investments are also subject to
the Company's policy not to be treated as an investment company under the
Investment Company Act of 1940, as amended (the "1940 Act").
Investments in Real Estate Mortgages. While the Company's current
portfolio consists of, and the Company's business objectives emphasize, equity
investments in commercial real estate, the Company may, in the discretion of the
Board of Directors, invest in mortgages and other types of equity real estate
interests consistent with the Company's qualification as a REIT. The Company
does not presently intend to invest in mortgages or deeds of trust, but may
invest in participating or convertible mortgages if the Company concludes that
it may benefit from the cash flow or any appreciation in value of the property.
Investments in real estate mortgages run the risk that one or more borrowers may
default under such mortgages and that the collateral securing such mortgages may
not be sufficient to enable the Company to recoup its full investment.
Securities or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the percentage of ownership
limitations and gross income tests necessary for REIT qualification, the Company
also may invest in securities of other REITs, other entities engaged in real
estate activities or securities of other issuers, including for the purpose of
exercising control over such entities.
DISPOSITION POLICIES
The Company does not currently intend to dispose of any of the Properties,
although it reserves the right to do so if, based upon management's periodic
review of the Company's portfolio, the Board of Directors determines that such
action would be in the best interests of the Company. The tax consequences of
the disposition of the Properties may, however, influence the decision of
certain directors and executive officers of the Company who hold OP Units as to
the desirability of a proposed disposition. See "Risk Factors -- Conflicts of
Interests in the Formation Transactions and the Business of the Company." Any
decision to dispose of a Property will be made by the Company and approved by a
majority of the Board of Directors.
FINANCING POLICIES
As a general policy, the Company intends to maintain a Debt Policy limiting
the Company's total consolidated indebtedness plus its pro rata share of Joint
Venture Debt to 50% of the Company's Total Market Capitalization. Upon
completion of the Offering and the Formation Transactions, the debt to Total
Market Capitalization ratio of the Company will be approximately 23.8% (22.0% if
the Underwriters' overallotment option is exercised in full). The Charter and
Bylaws do not, however, limit the amount or percentage of indebtedness that the
Company may incur. In addition, the Company may from time to time modify its
Debt Policy in light of current economic conditions, relative costs of debt and
equity capital, market values of its Properties, general conditions in the
market for debt and equity securities, fluctuations in the market price of its
Common Stock, growth and acquisition opportunities and other factors.
Accordingly, the Company may increase or decrease its debt to Total Market
Capitalization ratio beyond the limits described above. If these policies were
changed, the Company could become more highly leveraged, resulting in an
increased risk of default on its obligations and a related increase in debt
service requirements that could adversely affect the financial condition and
results of operations of the Company and the Company's ability to make
distributions to stockholders.
The Company has established its Debt Policy relative to the Total Market
Capitalization of the Company computed at the time the debt is incurred, rather
than relative to the book value of such assets, a ratio that is frequently
employed, because it believes that the book value of its assets (which to a
large extent is the depreciated value of real property, the Company's primary
tangible asset) does not accurately reflect its ability to borrow and to meet
debt service requirements. Total Market Capitalization, however, is subject to
greater fluctuation than book value, and does not necessarily reflect the fair
market value of the underlying assets of the Company at all times. Moreover, due
to fluctuations in the value of the Company's portfolio of Properties over time,
and since any measurement of the Company's total consolidated indebtedness to
Total Market Capitalization is made only at the time debt is incurred, the debt
to Total Market Capitalization ratio could exceed the 50% level.
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The Company has not established any limit on the number or amount of
mortgages that may be placed on any single property or on its portfolio as a
whole.
Although the Company will consider factors other than Total Market
Capitalization in making decisions regarding the incurrence of debt (such as the
purchase price of properties to be acquired with debt financing, the estimated
market value of properties upon refinancing, and the ability of particular
properties and the Company as a whole to generate sufficient cash flow to cover
expected debt service), there can be no assurance that the debt to Total Market
Capitalization ratio, or any other measure of asset value, at the time the debt
is incurred or at any other time will be consistent with any particular level of
distributions to stockholders. See "Risk Factors -- Changes in Policies without
Stockholder Approval; No Limitations on Debt" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies and entered into certain
agreements with Messrs. Feldman, Cox, and Kasman designed to minimize potential
conflicts of interest. The Company's Board of Directors is subject to certain
provisions of Maryland law, which are designed to eliminate or minimize certain
potential conflicts of interest. However, there can be no assurance that these
policies will always be successful in eliminating the influence of such
conflicts, and if they are not successful, decisions could be made that might
fail to reflect fully the interests of all stockholders.
Charter and Bylaw Provisions. The Company's Charter, with limited
exceptions, requires that a majority of the Company's Board of Directors be
comprised of Independent Directors (defined as persons who are not officers or
employees of the Company, affiliates of officers or employees of the Company or
affiliates of any advisor to the Company under an advisory agreement). The
Charter provides that such provisions relating to Independent Directors may not
be amended, altered, changed or repealed without the affirmative vote of all of
the Independent Directors and the affirmative vote of the holders of shares
entitled to cast not less than two-thirds of the votes entitled to be cast on
such a matter. In addition, the Company's Bylaws provide that any action
pertaining to any transaction in which the Company is purchasing, selling,
leasing or mortgaging any real estate asset, making a joint venture investment
or engaging in any other transaction in which an advisor, director or officer of
the Company, or affiliated contract manager of any property of the Company or
any affiliate of the foregoing, has any direct or indirect interest other than
as a result of such person's status as a director, officer or stockholder of the
Company, must be approved by the affirmative vote of a majority of the
Independent Directors even if the Independent Directors constitute less than a
quorum.
The Operating Partnership. A conflict of interest may arise between the
Company, as a general and limited partner of the Operating Partnership, and the
other Limited Partners of the Operating Partnership, which may include
affiliates of the Primary Contributors, due to the differing potential tax
liability to the Company and the other Limited Partners from the subsequent sale
of certain Properties by the Operating Partnership resulting from the differing
tax bases of the Company and such affiliates in such Properties. In an effort to
address this and other potential conflicts of interest, the Company's Bylaws
provide that the Company's decision with respect to the subsequent sale of a
Property purchased from Tower Equities must be made by the Independent
Directors. The Partnership Agreement of the Operating Partnership gives the
Company, as general partner of the Operating Partnership, full, complete and
exclusive discretion in managing and controlling the business of the Operating
Partnership and in making all decisions affecting the business and assets of the
Operating Partnership.
Provisions of the MGCL. Pursuant to the MGCL, each director of the Company
is required to discharge his duties in good faith, in a manner he reasonably
believes to be in the best interest of the Company and with the care that an
ordinarily prudent person in a like position would exercise under similar
circumstances. In addition, under the MGCL, a contract or other transaction
between the Company and a director or between the Company and any other
corporation or other entity in which a director of the Company is a director or
has a material financial interest is not void or voidable solely on the grounds
of such interest, the presence of the director at the meeting at which the
contract or transaction is approved or the
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director's vote in favor thereof if (a) the fact of the common directorship or
interest is disclosed or known to (i) the board of directors or committee, and
the board or committee authorizes, approves or ratifies the contract or
transaction by the affirmative vote of a majority of disinterested directors,
even if the disinterested directors constitute less than a quorum, or (ii) the
stockholders entitled to vote, and the transaction or contract is authorized,
approved or ratified by a majority of the votes cast by the stockholders
entitled to vote other than the votes of shares owned of record or beneficially
by the interested director or corporation, firm or other entity, or (b) the
transaction or contract is fair and reasonable to the Company.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer Common Stock, Preferred Stock or options
to purchase stock in exchange for property and to repurchase or otherwise
acquire its Common Stock or other securities in the open market or otherwise and
may engage in such activities in the future. As described under "The Partnership
Agreement -- Exchange Rights," the Company expects (but is not obligated) to
issue Common Stock to holders of OP Units in the Operating Partnership upon
exercise of their exchange rights. Except in connection with the Formation
Transactions and the Concurrent Private Placement, the Company has not issued
Common Stock, OP Units or any other securities in exchange for property or any
other purpose, and the Board of Directors has no present intention of causing
the Company to repurchase any Common Stock. The Company may issue Preferred
Stock from time to time, in one or more series, as authorized by the Board of
Directors without the need for stockholder approval. See "Description of Capital
Stock -- Preferred Stock." The Company has not engaged in trading, underwriting
or agency distribution or sale of securities of other issuers other than the
Operating Partnership, nor has the Company invested in the securities of other
issuers other than the Operating Partnership for the purposes of exercising
control, and does not intend to do so. At all times, the Company intends to make
investments in such a manner as to qualify as a REIT, unless because of
circumstances or changes in the Code (or the Treasury Regulations), the Board of
Directors determines that it is no longer in the best interest of the Company to
qualify as a REIT and such determination is approved by the affirmative vote of
the holders of shares representing not less than two-thirds of all the votes
entitled to be cast on the matter as required by the Charter. The Company has
not made any loans to third parties, although it may in the future make loans to
third parties, including, without limitation, to joint ventures in which it
participates. The Company intends to make investments in such a way that it will
not be treated as an investment company under the 1940 Act. The Company's
policies with respect to such activities may be reviewed and modified or amended
from time to time by the Company's Board of Directors without a vote of the
stockholders.
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves in amounts that the
Board of Directors determines to be adequate to meet normal contingencies in
connection with the operation of the Company's business and investments.
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SHARES AVAILABLE FOR FUTURE SALE
GENERAL
Upon the completion of the Offering and the Formation Transactions, the
Company will have 12,552,800 shares of Common Stock issued and outstanding
(14,067,800 shares if the Underwriters' overallotment option is exercised in
full). In addition, (i) 1,408,943 shares of Common Stock are reserved for
issuance upon exchange of OP Units, (ii) 9.5% of the total number of issued and
outstanding shares of Common Stock (on a fully diluted basis assuming the
exchange of all OP Units for shares of Common Stock) are reserved for grants of
options and other awards to officers and employees of the Company pursuant to
the 1997 Plan and (iii) 200,000 shares of Common Stock are reserved for grants
of options under the Directors' Plan (the "Company Options"). All of the Common
Stock issued in the Offering will be freely tradeable by persons, other than
affiliates of the Company, without restriction under the Securities Act, subject
to certain limitations on ownership set forth in the Charter. See "Description
of Capital Stock -- Restrictions on Transfer" and "Risk Factors -- Possible
Adverse Effect on Common Stock Price of Shares Available for Future Sale." The
1,652,800 shares of Common Stock issued in the Formation Transactions, the
800,000 shares of Common Stock issued in the Concurrent Private Placement and
the 1,408,943 shares of Common Stock available for issuance upon exchange of OP
Units issued in connection with the Formation Transactions, and the Company
Options (collectively, "Restricted Shares") are "restricted" securities under
the meaning of Rule 144 under the Securities Act and may be sold only pursuant
to an effective registration statement under the Securities Act or an applicable
exemption, including an exemption under Rule 144 under the Securities Act. As
described below under "-- Registration Rights," the Company has granted certain
holders registration rights with respect to their shares of Common Stock.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of Restricted Shares from the Company
or any "affiliate" of the Company, as that term is defined under the Securities
Act, the acquiror or subsequent holder is entitled to sell within any
three-month period a number of shares of Common Stock that does not exceed the
greater of 1.0% of the then outstanding Common Stock or the average weekly
trading volume of Common Stock on all exchanges and reported through the
automated quotation system of a registered securities association during the
four calendar weeks preceding the date on which notice of the sale is filed with
the Commission. Sales under Rule 144 are also subject to certain restrictions on
the manner of sales, notice requirements, and the availability of current public
information about the Company. If two years have elapsed since the date of
acquisition of Restricted Shares from the Company or from an "affiliate" of the
Company, and the acquiror or subsequent holder thereof is deemed not to have
been an affiliate of the Company at any time during the 90 days preceding a
sale, such person would be entitled to sell such Common Stock in the public
market under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements, or notice requirements.
In connection with the Offering, the officers and directors of the Company
have agreed, subject to certain limited exceptions, not to sell, offer or
contract to sell, grant any option for the sale of, or otherwise dispose of any
shares of Common Stock or OP Units or any securities convertible into or
exchangeable for Common Stock or OP Units for a period of two years from the
date of the Prospectus, without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated. In addition, the other recipients of shares
of Common Stock and OP Units in connection with the Formation Transactions,
including the Morgan Stanley Investors, have agreed, subject to certain limited
exceptions, not to sell, offer, or contract to sell, grant any option for the
sale of, or otherwise, dispose of any shares of Common Stock or OP Units or any
securities convertible into or exchangeable for shares of Common Stock or OP
Units for a period of one year from the date of the Prospectus, without the
prior written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated. See
"Underwriting."
The Company has established various stock option plans for the purpose of
attracting and retaining highly qualified directors, executive officers and
other key employees. See "Management -- Stock Option Plan and Restricted Stock
Plans and -- Compensation of Directors." The Company intends to issue options to
purchase approximately 937,000 shares of Common Stock to directors, executive
officers and certain key employees prior to the completion of the Offering and
has reserved additional shares of future issuance under these plans.
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Prior to the expiration of the initial 12-month period following consummation of
the Offering, the Company expects to file a registration statement on Form S-8
with the Commission with respect to the shares of Common stock issuable under
these plans, which shares may be resold without restriction, unless held by
affiliates.
Prior to the Offering, there has been no public market for the Common
Stock. Trading of the Common Stock on the New York Stock Exchange is expected to
commence immediately following the completion of the Offering. No prediction can
be made as to the effect, if any, that future sales of shares, or the
availability of shares for future sale, will have on the market price prevailing
from time to time. Sales of substantial amounts of Common Stock (including
shares issued upon the exercise of options), or the perception that such sales
could occur, could adversely affect prevailing market prices of the Common
Stock. See "Partnership Agreement -- Transferability of Interests."
REGISTRATION RIGHTS
The Company has agreed to file a registration statement with the Commission
with respect to sales of Common Stock received upon exchange of OP Units and
shares of Common Stock issued in connection with the Concurrent Private
Placement and the Formation Transactions within 15 days after the expiration of
the one year period following completion of this Offering. The Company will be
obligated to maintain the effectiveness of such registration statement until a
date to be agreed upon or until such time as all of the shares registered
pursuant to such registration statement (i) have been disposed of pursuant to
such registration statement; (ii) have been otherwise distributed pursuant to
Rule 144; or (iii) have been otherwise transferred in a transaction resulting in
the transferee receiving Common Stock no longer deemed to be "restricted
securities." See "Partnership Agreement -- Registration Rights." In addition,
the Company has granted to the Morgan Stanley Investors certain demand and
"piggyback" registration rights. Pursuant to the Company's registration rights
agreement with the Morgan Stanley Investors, the Morgan Stanley Investors have
the right, subject to certain exceptions, (i) on any date within 90 days before
the end of the applicable lock-up period (which, subject to certain exceptions,
expires one year following the consummation of the Offering), to cause the
Company to effect the registration of all or part of the Common Stock held by
the Morgan Stanley Investors; (ii) to cause the Company to effect a shelf
registration of the Common Stock held by Morgan Stanley Investors at any time
following the Offering; and (iii) in the event the Company proposes to effect
the registration of shares of Common Stock for its own account or for the
account of any other holder of Common Stock, to have the Common Stock held by
the Morgan Stanley Investors included in the registration statement related
thereto. The existence of such agreements by the Company may adversely affect
the terms upon which the Company can obtain additional equity financing in the
future.
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PARTNERSHIP AGREEMENT
The following summary of the Partnership Agreement, and the descriptions of
certain provisions thereof set forth elsewhere in this Prospectus, is qualified
in its entirety by reference to the Partnership Agreement, which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
MANAGEMENT
The Operating Partnership has been organized as a Delaware limited
partnership pursuant to the terms of the Agreement of Limited Partnership of the
Operating Partnership, dated March 24, 1997 (as amended, the "Partnership
Agreement"), with the Company, as general partner and a limited partner, and
certain of the Primary Contributors, as additional limited partners (together
with the Company, as a limited partner, the "Limited Partners"). Pursuant to the
Partnership Agreement, the Company, as the sole general partner of the Operating
Partnership (the "General Partner"), has full, complete and exclusive
responsibility and discretion in the management and control of the business and
affairs of the Operating Partnership, and the Limited Partners in their capacity
as such have no authority to transact business for, participate in or exercise
control or management power over the business and affairs of the Operating
Partnership. However, any amendment to the Partnership Agreement, other than
amendments that (i) add to the obligations of the General Partner or surrender
any right or power granted to the General Partner or any Affiliate of the
General Partner for the benefit of the Limited Partners, (ii) reflect the
admission, substitution, termination or withdrawal of partners in accordance
with the Partnership Agreement, (iii) set forth the designation rights, powers,
duties and preferences of the holders of additional partnership interests issued
by the Operating Partnership pursuant to Section 4.3 of the Partnership
Agreement, (iv) reflect a change that does not adversely affect the Limited
Partners in any material respect, or to cure any ambiguity, correct or
supplement any provision in this Agreement not inconsistent with law or with
other provisions, or make other changes with respect to matters arising under
this Partnership Agreement that will not be inconsistent with law or with the
provisions of the Partnership Agreement and (v) satisfy any requirements,
conditions, or guidelines contained in any order, directive, opinion, ruling or
regulation of a federal or state agency or contained in federal or state law,
requires the consent of Limited Partners holding more than 50.0% of the OP Units
held by such Limited Partners (including OP Units held by the Company). The
consent of each adversely affected partner is required for any amendment with
respect to any Partner that would (i) convert a Limited Partner's interest in
the Operating Partnership into a general partner interest; (ii) modify the
limited liability of a Limited Partner in a manner adverse to such Limited
Partner; or (iii) amend Section 14.1(c) of the Partnership Agreement.
The Limited Partners of the Operating Partnership have agreed that in the
event of any conflict in the fiduciary duties owed by the Company to its
stockholders and by the Company, as General Partner of the Operating
Partnership, to such Limited Partners, the Company may act in the best interests
of the Company's stockholders without violating its fiduciary duties to such
Limited Partners or being liable for any resulting breach of its duties to the
Limited Partners.
The Operating Partnership Agreement provides that, subject to limited
exceptions, all business activities of the Company, including all activities
pertaining to the acquisition and operation of properties, must be conducted
through the Operating Partnership, and that the Operating Partnership must be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT unless the General Partner ceases to qualify as a
REIT for any reason not related to the business conducted by the Operating
Partnership.
TRANSFERABILITY OF INTERESTS
Subject to limited exceptions, the General Partner may not voluntarily
withdraw from the Operating Partnership or transfer or assign its interests in
the Operating Partnership unless: (i) Limited Partners holding more than 50.0%
of the OP Units held by the Limited Partners (other than OP Units held by the
Company or any affiliate of the Company as a Limited Partner) consent to such
transfer; (ii) such transfer is to an entity which is wholly owned by the
General Partner and is a "Qualified REIT Subsidiary" as defined in Section
856(i) of the Code; or (iii) the transfer occurs in connection with a
transaction which includes a merger,
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consolidation or other combination of the Operating Partnership or sale of
substantially all of the assets of the Operating Partnership as a result of
which all Limited Partners will receive an amount of cash, securities or other
property for their OP Units. With certain exceptions, the Limited Partners may
transfer their interests in the Operating Partnership, in whole or in part,
without the written consent of the General Partner.
The General Partner may not engage in any transaction resulting in a change
of control of the Operating Partnership (a "Transaction") unless in connection
with the Transaction the Limited Partners receive or have the right to receive
cash, securities, or other property equal to the product of the number of shares
of Common Stock into which each OP Unit is then exchangeable and the greatest
amount of cash, securities or other property paid in the Transaction to the
holder of one share of Common Stock in consideration of one share of Common
Stock. If, in connection with the Transaction, a purchase, tender or exchange
offer shall have been made to and accepted by the holders of more than fifty
(50%) of the outstanding shares of Common Stock, each holder of OP Units will
receive, or will have the right to elect to receive, the greatest amount of
cash, securities, or other property which such holder would have received had it
exercised its exchange rights to receive shares of Common Stock in exchange for
its OP Units immediately prior to the expiration of such purchase, tender or
exchange offer and had thereupon accepted such purchase, tender or exchange
offer.
Notwithstanding the foregoing paragraph, the Company may merge, or
otherwise combine its assets, with another entity if, immediately after such
merger or other combination, substantially all of the assets of the surviving
entity, other than OP Units held by the Company, are contributed to the
Operating Partnership as a capital contribution in exchange for OP Units with a
fair market value, as reasonably determined by the Company, equal to the agreed
value of the assets so contributed and the surviving general partner expressly
agrees to assume all obligations of the General Partner.
CAPITAL CONTRIBUTION
The Company intends to contribute to the Operating Partnership all of the
net proceeds of the Offering and the Concurrent Private Placement, in partial
consideration of which it will receive an approximate 1.0% general partner
interest and an approximate 88.9% limited partnership interest in the Operating
Partnership. The Partnership Agreement provides that if the Operating
Partnership requires additional funds at any time or from time to time in excess
of funds available to the Operating Partnership from borrowing or capital
contributions, the Company may borrow such funds from a financial institution or
other lender and lend such funds to the Operating Partnership on the same terms
and conditions as are applicable to the Company's borrowing of such funds. Under
the Partnership Agreement, the Company generally is obligated to contribute the
proceeds of any stock offering as additional capital to the Operating
Partnership. Moreover, the Company is authorized to cause the Operating
Partnership to issue partnership interests (in the form of OP Units) on such
terms and conditions (as determined by the General Partner in its sole
discretion). If the Company so contributes additional capital to the Operating
Partnership, the Company will receive additional OP Units, and its percentage
interest in the Operating Partnership will be increased on a proportionate basis
based upon the amount of such additional capital contributions and the value of
the Operating Partnership at the time of such contributions. Conversely, the
percentage interests of the Limited Partners, other than the Company will be
decreased on a proportionate basis in the event of additional capital
contributions by the Company. However, no additional partnership interests may
be issued to the General Partner unless either (a) such interests are issued in
connection with the grant, award or issuance of equity interests in the General
Partner or (b) such interests are issued to all partners holding partnership
interests in the same class in proportion to their respective percentage
interests in such class.
EXCHANGE RIGHTS
Pursuant to the Exchange Rights Agreement among the Company, the Operating
Partnership and the Limited Partners other than the Company (the "Exchange
Agreement"), such Limited Partners received rights (the "Exchange Rights") that
enable them to cause the Operating Partnership to exchange each OP Unit for cash
equal to the value of a share of Common Stock (or, at the Company's election,
the Company may purchase each OP Unit offered for exchange for one share of
Common Stock). The Operating Partnership may not satisfy a Limited Partner's
Exchange Right if and to the extent that the delivery of
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Common Stock upon exercise of such rights would (i) be prohibited under the
Charter, (ii) otherwise jeopardize the REIT status of the Company or (iii) cause
the acquisition of shares of Common Stock by such exchanging Limited Partner to
be "integrated" with any other distribution of shares of Common Stock for
purposes of complying with the Securities Act. The Exchange Rights may be
exercised at any time after one year following the closing of the Offering,
provided that a Limited Partner may not exercise the Exchange Rights for less
than 1,000 OP Units or, if such Limited Partner holds less than 1,000 OP Units,
for all of the OP Units held by such Limited Partner. The aggregate number of
shares of Common Stock currently issuable upon exercise of the Exchange Rights
is 1,408,943. The number of shares of Common Stock issuable upon exercise of the
Exchange Rights will be adjusted upon the occurrence of share splits, mergers,
consolidations or similar pro rata share transactions, which otherwise would
have the effect of diluting the ownership interests of the Limited Partners or
the stockholders of the Company. See "Shares Available for Future Sale."
REGISTRATION RIGHTS
The Company has entered into a registration rights agreement (the
"Registration Rights Agreement") with the Operating Partnership and each holder
of OP Units pursuant to which the Company has agreed to file a registration
statement with the Commission with respect to sales of Common Stock received
upon exchange of OP Units and shares of Common Stock issued in connection with
the Concurrent Private Placement and the Formation Transactions within 15 days
after the expiration of the one year period following the Offering. The Company
will be obligated to maintain the effectiveness of such registration statement
until a date to be agreed upon or until such time as all of the shares
registered pursuant to such registration statement (i) have been disposed of
pursuant to such registration statement, (ii) have been otherwise distributed
pursuant to Rule 144, or (iii) have been otherwise transferred in a transaction
resulting in the transferee receiving Common Stock no longer deemed to be
"restricted securities." The Company is required to bear the costs of such
registration statements exclusive of underwriting discounts, commissions, and
certain other costs attributable to, and to be borne by, the selling
stockholders. In connection with such registrations, the Company and the selling
stockholders will mutually indemnify each other against certain liabilities,
including liabilities under the federal securities laws.
OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT, to avoid any federal income or excise tax
liability imposed under the Code and to ensure that the Operating Partnership
will not be classified as a "publicly traded partnership" for purposes of
section 7704 of the Code.
In addition to the administrative and operating costs and expenses incurred
by the Operating Partnership, the Operating Partnership pays all administrative
costs and expenses of the Company (the "Company Expenses"), and the Company
Expenses are treated as expenses of the Operating Partnership. The Company
Expenses generally include (i) all expenses relating to the formation of the
Company and the Operating Partnership, (ii) all expenses relating to the public
offering and registration of securities by the Company, (iii) all expenses
associated with the preparation and filing of any periodic reports by the
Company under federal, state or local laws or regulations, (iv) all expenses
associated with compliance by the Company with laws, rules and regulations
promulgated by any regulatory body and (v) all other operating or administrative
costs of the Company incurred in the ordinary course of its business on behalf
of the Operating Partnership.
DISTRIBUTIONS AND ALLOCATIONS
The Partnership Agreement provides that the Operating Partnership will
distribute cash from operations (including net sale or refinancing proceeds, but
excluding net proceeds from the sale of the Operating Partnership's property in
connection with the liquidation of the Operating Partnership) on a quarterly
(or, at the election of the General Partner, more frequently) basis, in amounts
determined by the General Partner in its sole discretion, to the partners in
accordance with their respective percentage interests in the Operating
Partnership. Upon liquidation of the Operating Partnership, after payment of, or
adequate provision for, debts and obligations of the Operating Partnership,
including any partner loans, any remaining assets of the
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Operating Partnership will be distributed to all partners with positive capital
accounts in accordance with their respective positive capital account balances.
Profit and loss of the Operating Partnership for each fiscal year of the
Operating Partnership generally will be allocated among the partners in
accordance with their respective interests in the Operating Partnership. Taxable
income and loss will be allocated in the same manner, subject to compliance with
the provisions of Code sections 704(b) and 704(c) and the Treasury Regulations
promulgated thereunder.
TERM
The Operating Partnership will continue until December 31, 2047, or until
sooner dissolved upon (i) the withdrawal of the General Partner (unless a
majority of remaining partners elect to continue the business of the Operating
Partnership), (ii) the election by the General Partner to dissolve the Operating
Partnership (which election, prior to December 31, 2047, requires the consent of
a majority of the Limited Partners), (iii) the entry of a decree of judicial
dissolution of the Operating Partnership, (iv) the sale of all or substantially
all of the assets and properties of the Operating Partnership or (v) the
bankruptcy or insolvency of the Company, unless all of the remaining partners
elect to continue the business of the Operating Partnership.
TAX MATTERS
Pursuant to the Partnership Agreement, the General Partner will be the tax
matters partner of the Operating Partnership and, as such, will have authority
to handle tax audits and to make tax elections under the Code on behalf of the
Operating Partnership.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary includes a discussion of the material federal income
tax considerations associated with an investment in the Common Stock being sold
in the Offering. The summary should not be construed as tax advice. The
provisions governing treatment as a REIT are highly technical and complex, and
this summary is qualified in its entirety by the applicable Code provisions, the
rules and regulations promulgated thereunder and administrative and judicial
interpretations thereof. Moreover, this summary does not deal with all tax
aspects that might be relevant to a particular prospective stockholder in light
of his personal circumstances, and it does not deal with particular types of
stockholders that are subject to special treatment under the Code, such as
tax-exempt organizations, insurance companies, financial institutions or
broker-dealers, and (with the exception of the general discussion below) foreign
corporations and persons who are not citizens or residents of the United States.
The information in this section is based on the Code, current, temporary and
proposed Treasury Regulations thereunder, the legislative history of the Code,
current administrative interpretations and practices of the IRS (including its
practices and policies as endorsed in private letter rulings, which are not
binding on the IRS except with respect to a taxpayer that receives such a
ruling), and court decisions, all as of the date hereof. No assurance can be
given that future legislation, Treasury Regulations, administrative
interpretations and court decisions will not significantly change the current
law or adversely affect existing interpretations of current law. Any such change
could apply retroactively to transactions preceding the date of the change.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES
TO HIM OF THE PURCHASE, OWNERSHIP AND SALE OF COMMON STOCK, OF THE COMPANY'S
ELECTION TO BE TAXED AS A REIT AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
The Company will elect to be taxed as a REIT, commencing with its taxable
year ending December 31, 1997. The Company believes that, commencing with its
taxable year ending December 31, 1997, it will be organized and will operate in
such manner as to qualify for taxation as a REIT under the Code, and the Company
intends to operate in such a manner so as to meet the Code requirements for
qualification as a REIT
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for federal income tax purposes. However, no assurance can be given that such
requirements will be met or that the Company will be so qualified at any time.
Based on representations made by the Company and the Operating Partnership as to
certain factual matters, including matters related to the organization and
operation of the Company, the Operating Partnership and the Subsidiary
Partnerships, in the opinion of Counsel, Battle Fowler LLP, the Company will
qualify to be taxed as a REIT under the Code commencing with its taxable year
ending December 31, 1997 and the Operating Partnership and the Subsidiary
Partnerships will be treated as partnerships for federal income tax purposes.
Qualification and taxation as a REIT depends upon the Company's ability to meet
(through actual annual operating results, distribution levels and diversity of
stock ownership) the various qualification tests imposed under the Code. Counsel
will not review the Company's actual operating results, and no assurance can be
given that such results will meet the REIT requirements on a continuing basis.
Further, the anticipated income tax treatment described in this Prospectus may
be changed, perhaps retroactively, by legislative, administrative or judicial
action at any time.
The opinions described herein represent Counsel's best legal judgment as to
the most likely outcome of an issue if the matter were litigated. Opinions of
Counsel have no binding effect or official status of any kind, and in the
absence of a ruling from the IRS, there can be no assurance that the IRS will
not challenge the conclusion or propriety of any of Counsel's opinions. The
Company does not intend to apply for a ruling from the IRS that it qualifies as
a REIT.
REQUIREMENTS FOR QUALIFICATION AS A REIT
In General. Under the Code, a trust, corporation or unincorporated
association meeting certain requirements (see "-- Structural and Organizational
Requirements") may elect to be treated as a REIT for purposes of federal income
taxation. If a valid election is made, then, subject to certain conditions, the
Company's income that is distributed to its stockholders generally will be taxed
to such stockholders without being subject to tax at the Company level. This
substantially eliminates the "double taxation" (taxation at both the corporate
and stockholder levels) that typically results from the use of corporate
investment vehicles. However, the Company will be taxed at regular corporate
rates on any of its income that is not distributed to the stockholders. (See
"-- Taxation of the Company.") Once made, the election to be taxed as a REIT
continues in effect until voluntarily revoked or automatically terminated by the
Company's failure to qualify as a REIT for a taxable year. If the Company's
election to be treated as a REIT is terminated automatically or is voluntarily
revoked, the Company will not be eligible to re-elect REIT status until the
fifth taxable year after the first taxable year for which the Company's election
was terminated. However, in the event such election is terminated automatically,
the four-year prohibition on a subsequent election to be taxed as a REIT is not
applicable if (i) the Company did not willfully fail to file a timely return
with respect to the termination taxable year; (ii) the inclusion of any
incorrect information in such return was not due to fraud with intent to evade
tax; and (iii) the Company establishes that its failure to meet the requirements
was due to reasonable cause and not to willful neglect.
Structural and Organizational Requirements. To be eligible to be taxed as
a REIT, the Company must satisfy certain structural and organizational
requirements. Among the requirements are the following: (i) the shares of Common
Stock must be transferable; (ii) the shares of Common Stock must be held by 100
or more persons during at least 335 days of a taxable year of twelve months (or
during a proportionate part of a taxable year of less than twelve months) (the
"100-person requirement"); and (iii) no more than 50% of the value of the
outstanding shares of Common Stock may be owned, directly or indirectly, by five
or fewer individuals at any time during the last half of each taxable year (the
"five or fewer" requirement). The requirements of (ii) and (iii) are not
applicable to the first taxable year for which the Company makes an election to
be treated as a REIT. However, the Company believes that it will issue a
sufficient amount of Common Stock with sufficient diversity of ownership to
satisfy requirements (ii) and (iii). The Company expects, and will take all
necessary measures within its control to ensure, that the beneficial ownership
of the Company will at all times be held by 100 or more persons and that the
Company will at all times satisfy the "five or fewer" requirement. In this
regard, the Company's Charter contains certain restrictions on the ownership and
transfer of the Company's stock which are designed to assist the Company to
satisfy the "five or fewer" requirement. These restrictions, however, may not
ensure that the Company will, in all cases, be able to satisfy the "five or
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fewer" requirement. If the Company were to fail to satisfy the 100 person or the
"five or fewer" requirement, the Company's status as a REIT would terminate, and
the Company would not be able to prevent such termination. See "-- Failure to
Qualify as a REIT" and "Description of Capital Stock -- Restrictions on
Transfer."
If a REIT owns a corporate subsidiary that is a "qualified REIT
subsidiary," that subsidiary is disregarded for federal income tax purposes, and
all assets, liabilities and items of income, deduction and credit of the
subsidiary are treated as assets, liabilities and such items of the REIT itself.
A "qualified REIT subsidiary" is a corporation all of the stock of which has
been owned by the REIT from the commencement of such corporation's existence.
Except for its interest in the Management Company, the Company currently does
not have any corporate subsidiaries, but it may have corporate subsidiaries in
the future. In such event, such corporations would generally be organized so as
to constitute "qualified REIT subsidiaries."
A REIT that is a partner in a partnership is deemed to own its
proportionate share of the assets of the partnership and is deemed to be
entitled to the income of the partnership attributable to such share. In
addition, the character of the assets and gross income of the partnership
retains the same character in the hands of the REIT for purposes of satisfying
the gross income and asset tests, as described below. Thus the Company's
proportionate share of the assets and items of income of the Operating
Partnership (including the Operating Partnership's share of such items of the
Subsidiary Partnerships) will be treated as assets and items of income of the
Company for purposes of applying the requirements described herein. A summary of
the rules governing the federal income taxation of partnerships and their
partners is provided below in "-- Tax Aspects of the Operating Partnership."
Income Tests. In order to qualify and to continue to qualify as a REIT,
the Company must satisfy three income tests for each taxable year. First, at
least 75% of the Company's annual gross income (excluding annual gross income
from certain sales of property held primarily for sale to customers in the
ordinary course of business) must be derived directly or indirectly from
investments relating to real property or mortgages on real property or certain
temporary investments. Second, at least 95% of the Company's annual gross income
(excluding gross income from certain sales of property held primarily for sale
in the ordinary course of business) must be derived directly or indirectly from
any of the sources qualifying for the 75% test and from dividends, interest and
gain from the sale or disposition of stock or securities. Third, subject to
certain exceptions in the year in which the Company is liquidated, (i)
short-term gains from sales of stock or securities, (ii) gains from sales of
property (other than foreclosure property) held primarily for sale to customers
in the ordinary course of business and (iii) gains from the sale or other
taxable disposition of real property (including interests in real property and
mortgages on real property) held for less than four years (other than from
involuntary conversions and foreclosure property) must represent in the
aggregate less than 30% of the Company's annual gross income. In applying these
tests, because the Company is a partner in the Operating Partnership, which is
in turn a partner, either directly or indirectly, in the Subsidiary
Partnerships, the Company will be treated as realizing its proportionate share
of the income and loss of these respective partnerships, as well as the
character of such income or loss, and other partnership items, as if the Company
owned directly its proportionate share of the assets owned by these
partnerships.
Substantially all of the income received by the Company is expected to be
rental income. In order for such income to qualify as "rents from real property"
for purposes of satisfying the 75% and 95% gross income tests, several
conditions must be satisfied. First, the amount of rent must not be based in
whole or in part on the income or profits of any person, although rents
generally will qualify as rents from real property if they are based on a fixed
percentage of receipts or sales. Second, rents received from a tenant will not
qualify as "rents from real property" if the Company or an owner of 10% or more
of the Company, directly or constructively, owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property leased
in connection with a lease of real property is greater than 15% of the total
rent received under the lease, the portion of rent attributable to such personal
property will not qualify as "rents from real property." Finally, the Company
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 whom the Company derives no income. However, the "independent contractor"
requirement does not apply to the extent the services rendered by the Company
are customarily furnished or rendered in connection with the rental of the real
property in the
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geographic area in which the property is located (i.e., services which are not
considered rendered to the occupant of the property). Based on the experience of
the Company and its officers and employees in the office rental markets in which
the Company's Properties are located, the Company believes that all services
provided to tenants by the Company will be considered "usually or customarily
rendered" in connection with the rental of office space for occupancy, although
there can be no assurance that the IRS will not contend otherwise.
The Company believes that its real estate investments, which include its
allocable share of income from the Operating Partnership, will give rise to
income, substantially all of which will qualify as "rents from real property"
for purposes of the 75% and 95% gross income tests. The Company has represented
that it will not (i) charge rent for any property that is based in whole or in
part on the income or profits of any person (other than being based on a
percentage of receipts of sales); (ii) receive rents in excess of a de minimis
amount from Related Party Tenants; (iii) derive rents attributable to personal
property which constitute greater than 15% of the total rents received under the
lease; or (iv) perform services considered to be rendered to the occupant of
property, other than through an independent contractor from whom the Company
derives no income.
The Operating Partnership will own 5% of the voting common stock, and all
of the non-voting stock of the Management Company, a corporation that is taxable
as a regular corporation. The Management Company will perform management,
development and leasing services for the Operating Partnership and other real
properties owned in whole or in part by third parties. The income earned by and
taxed to the Management Company would be nonqualifying income if earned directly
by the Company; as a result of the ownership structure described above, the
income will be earned by and taxed to the Management Company. Dividends paid by
the Management Company to the Company on its stock are qualifying income for
purposes of the 95% gross income test.
The Company expects to receive fees in exchange for the performance of
certain management activities for third parties with respect to properties in
which the Company does not own an interest. Such fees will result in
nonqualifying income to the Company under the 95% and 75% gross income tests. If
the sum of the income realized by the Company (whether directly or through its
interest in the Operating Partnership or the Subsidiary Partnerships) which does
not satisfy the requirements of the 95% gross income test (collectively,
"Non-Qualifying Income") exceeds 5% of the Company's gross income for any
taxable year, the Company's status as a REIT would be jeopardized. The Company
has represented that the amount of its Non-Qualifying Income in any taxable
year, including such fees, will not exceed 5% of the Company's annual gross
income for any taxable year.
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales. Furthermore, interest from a loan that is based on the residual cash
proceeds from sale of the property securing the loan will be treated as gain
from the sale of the secured property.
It is possible that, from time to time, the Company, the Operating
Partnership or a Subsidiary Partnership will enter into hedging transactions
with respect to one or more of its assets or liabilities. Any such hedging
transactions could take a variety of forms. If the Company, the Operating
Partnership or a Subsidiary Partnership enters into an interest rate swap or cap
contract to hedge any variable rate indebtedness incurred to acquire or carry
real estate assets, any periodic income or gain from the disposition of such
contract should be qualifying income for purposes of the 95% gross income test
but not for the 75% gross income test. Furthermore, any such contract would be
considered a "security" for purposes of applying the 30% gross income test. To
the extent that the Company, the Operating Partnership or a Subsidiary
Partnership hedges with other types of financial instruments or in other
situations, it may not be entirely clear how the income from those transactions
will be treated for purposes of the various income tests that apply to REITs
under the Code. The Company intends to structure any hedging transactions in a
manner that does not jeopardize its status as a REIT.
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If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may still qualify as a REIT for such year if the
Company's failure to meet such tests was due to reasonable cause and not 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 supplied
fraudulently with the intent to evade tax. It is not possible to state whether
in all circumstances the Company would be entitled to the benefit of these
relief provisions. Even if these relief provisions apply, a 100% tax is imposed
on the net income attributable to the greater of the amount by which the Company
failed the 75% test or the 95% test. Failure to comply with the 30% gross income
test is not excusable; therefore, if the Company fails to meet the requirements
of the 30% gross income test, its status as a REIT automatically terminates
regardless of the reason for such failure.
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the ordinary
course of business (including the Company's share of any such gain realized by
the Operating Partnership or a Subsidiary Partnership) will be treated as income
from a prohibited transaction that is subject to a 100% penalty tax. Such
prohibited transaction income may also have an adverse effect upon the Company's
ability to satisfy the income tests for qualification as a REIT. Under existing
law, whether property is held as inventory or primarily for sale to customers in
the ordinary course of a trade or business is a question of fact that depends on
all the facts and circumstances with respect to the particular transaction. The
Operating Partnership and the Subsidiary Partnerships have represented that they
intend to hold the Properties for investment with a view to long-term
appreciation, to engage in the business of acquiring, developing, owning and
operating the Properties (and other properties) and to make such occasional
sales of the Properties as are consistent with the investment objectives of the
Operating Partnership and Subsidiary Partnerships, as the case may be. There can
be no assurance, however, that the IRS might not contend that one or more of
such sales is subject to the 100% penalty tax.
Asset Tests. At the close of each quarter of its taxable year, the Company
also must satisfy two tests relating to the nature and diversification of its
assets. First, at least 75% of the value of the Company's total assets must be
represented by real estate assets (including its allocable share of real estate
assets held by the Operating Partnership and the Subsidiary Partnerships, stock
or debt instruments held for not more than one year purchased with the proceeds
of an issuance of stock or long-term (at least five years) debt of the Company),
cash, cash items and government securities. Second, no more than 25% of the
Company's total assets may be represented by securities other than those that
can satisfy the 75% asset test described in the preceding sentence. Of the
investments included in the 25% asset class, the value of any one issuer's
securities (excluding shares in qualified REIT subsidiaries and/or another REIT
and excluding partnership interests such as those in the Operating Partnership
and in any Subsidiary Partnerships) 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 (excluding securities of a
qualified REIT subsidiary or another REIT and excluding partnership interests).
The Company has represented that, as of the date of the Offering, (i) at least
75% of the value of its total assets will be represented by real estate assets,
cash and cash items (including receivables) and government securities and (ii)
it will not own any securities that do not satisfy the 25% asset requirement. In
addition, the Company has represented that it will not acquire or dispose, or
cause the Operating Partnership or a Subsidiary Partnership to acquire or
dispose, of assets in the future in a way that would cause it to violate either
asset requirement.
The Operating Partnership owns 5% of the voting stock and 100% of the
non-voting stock of the Management Company. The Company believes that the
Company's pro rata share of the value of the securities of the Management
Company do not exceed 5% of the total value of the Company's assets. There can
be no assurance, however, that the IRS will not contend either that the value of
the securities of the Management Company held by the Company (through the
Operating Partnership) exceeds the 5% value limitation or that nonvoting stock
of the Management Company should be considered "voting stock" for this purpose.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset values.
If the failure to satisfy the asset tests results from an acquisition of
securities or other property during a quarter (including as a result of the
Company increasing its interest in the Operating Partnership), the failure
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can be cured by disposition of sufficient nonqualifying assets within 30 days
after the close of that quarter. The Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset tests and
to take such other actions within 30 days after the close of any quarter as may
be required to cure any noncompliance. If the Company fails to cure
noncompliance with the asset tests within such time period, the Company will
cease to qualify as a REIT.
Annual Distribution Requirements. In order to qualify as a REIT, the
Company must distribute to the holders of shares of Common Stock an amount at
least equal to (A) the sum of 95% of (i) the Company's "real estate investment
trust taxable income" (computed without regard to the deduction for dividends
paid and excluding any net capital gain) plus (ii) the excess of the net income,
if any, from foreclosure property over the tax on such income, minus (B) the
excess of the sum of certain items of non-cash income (income attributable to
leveled stepped rents, original issue discount on purchase money debt, or a
like-kind exchange that is later determined to be taxable over 5% of the amount
determined under clause (i) above). Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before the Company timely files its tax return for such year and if paid on or
before the first regular distribution date after such declaration. The amount
distributed must not be preferential -- i.e., each holder of shares of Common
Stock must receive the same distribution per share. A REIT may have more than
one class of stock, as long as distributions within each class are pro rata and
non-preferential. Such distributions are taxable to holders of Common Stock
(other than tax-exempt entities or nontaxable persons, as discussed below) in
the year in which paid, even though such distributions reduce the Company's
taxable income for the year in which declared. To the extent that the Company
does not distribute all of its net capital gain or distributes at least 95%, but
less than 100%, of its "real estate investment trust taxable income," it will be
subject to tax thereon at regular corporate tax rates. Finally, as discussed
below, the Company may be subject to an excise tax if it fails to meet certain
other distribution requirements.
The Company intends to make quarterly distributions to the holders of
shares of Common Stock in an amount sufficient to satisfy the requirements of
the annual distribution test. In this regard, the Partnership Agreement
authorizes the Company, as general partner, to take such steps as are necessary
to distribute to the partners of the Operating Partnership an amount sufficient
to permit the Company to meet the annual distribution requirements. However, 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, or to distribute
such greater amount as may be necessary to avoid income and excise taxation, due
to timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in arriving at taxable income of the Company, or if
the amount of nondeductible expenses, such as principal amortization or capital
expenditures, exceeds the amount of noncash deductions, such as depreciation. In
the event that such timing differences occur, the Company may find it necessary
to cause the Operating Partnership to arrange for borrowings or liquidate some
of its investments in order to meet the annual distribution requirement, or
attempt to declare a consent dividend, which is a hypothetical distribution to
holders of shares of Common Stock out of the earnings and profits of the
Company. The effect of such a consent dividend (which, in conjunction with
dividends actually paid, must not be preferential to those holders who agree to
such treatment) would be that such holders would be treated for federal income
tax purposes as if they had received such amount in cash and they then had
immediately contributed such amount back to the Company as additional paid-in
capital. This would result in taxable income to those holders without the
receipt of any actual cash distribution but would also increase their tax basis
in their shares of Common Stock by the amount of the taxable income recognized.
A portion of the cash to be used by the Company to fund distributions is
expected to come from the Management Company through payments of dividends on
the stock of the Management Company held by the Operating Partnership. The
Management Company pays federal and state income tax at the full applicable
corporate rates. To the extent that the Management Company is required to pay
federal, state or local taxes, the cash available for distribution by the
Company to the Stockholders will be reduced accordingly.
If the Company fails to meet the 95% distribution test due to an adjustment
to the Company's income by reason of a judicial decision or by agreement with
the IRS, the Company may pay a "deficiency dividend" to holders of shares of
Common Stock in the taxable year of the adjustment, which dividend would relate
back to
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the year being adjusted. In such case, the Company also would be required to pay
interest plus a penalty to the IRS. However, a deficiency dividend cannot be
used to meet the 95% distribution test if the failure to meet such test was due
to the Company's failure to distribute sufficient amounts to the holders of
shares of Common Stock.
In addition, if the IRS successfully challenged the Company's deduction of
all or a portion of the salary and bonus it pays to officers who are also
holders of shares of Common Stock, such payments could be recharacterized as
dividend distributions to such employees in their capacity as stockholders. If
such distributions were viewed as preferential distributions, they would not
count toward the 95% distribution test.
FAILURE TO QUALIFY AS A REIT
The Company's treatment as a REIT for federal income tax purposes will be
terminated automatically if the Company fails to meet the requirements described
above and any available relief provisions do not apply. In such event, the
Company will be subject to tax (including any applicable alternative minimum
tax) on its taxable income at regular corporate rates, and distributions to
holders of shares of Common Stock will not be deductible by the Company. All
distributions to holders of shares of Common Stock will be taxable as ordinary
income to the extent of current and accumulated earnings and profits of the
Company and distributions in excess thereof will be treated first as a tax-free
return of capital (to the extent of a holder's tax basis in his shares of Common
Stock) and then as gain realized from the sale of shares of Common Stock.
Corporate stockholders will be eligible for the dividends received deduction to
the extent that distributions are made out of earnings and profits. As noted
above, the Company will not be eligible to elect REIT status again until the
beginning of the fifth taxable year after the year during which the Company's
qualification was terminated, unless the Company meets certain relief
requirements. Failure to qualify for even one year could result in the Company
incurring substantial indebtedness (to the extent borrowings are feasible) or
liquidating substantial investments in order to pay the resulting corporate
income taxes.
TAXATION OF THE COMPANY
In General. For any taxable year in which the Company qualifies as a REIT,
it generally will not be subject to federal income tax on that portion of its
REIT taxable income which is distributed to stockholders (except income or gain
with respect to foreclosure property, which will be taxed at the highest
corporate rate -- currently 35%). If the Company were to fail to qualify as a
REIT, it would be taxed at rates applicable to corporations on all its income,
whether or not distributed to holders of shares of Common Stock. Even if it
qualifies as a REIT, the Company will be taxed on the portion of its REIT
taxable income which it does not distribute to the holders of shares of Common
Stock, such as taxable income retained as reserves.
100 Percent Tax. The Company will be subject to a 100% tax on (i) the
greater of the net income attributable to the amount by which it fails the 75%
income test or the 95% income test; and (ii) any net income derived from a
"prohibited transaction" (i.e., the sale of "dealer" property by the Company).
The imposition of any such tax on the Company would reduce the amount of cash
available for distribution to holders of shares of Common Stock.
A "dealer" is one who holds property primarily for sale to customers in the
ordinary course of its trade or business. The Company believes no asset owned by
the Company, the Operating Partnership or a Subsidiary Partnership is held for
sale to customers and that a sale of any such asset will not occur in the
ordinary course of business of the Company, the Operating Partnership or a
Subsidiary Partnership. Whether property is held "primarily for sale to
customers in the ordinary course of a trade or business" depends, however, on
the facts and circumstances in effect from time to time, including those related
to a particular property. Nevertheless, the Company will attempt to comply with
the terms of safe harbor provisions in the Code prescribing when asset sales
will not be characterized as prohibited transactions. Complete assurance cannot
be given, however, that the Company can comply with the safe harbor provisions
of the Code or avoid owning property that may be characterized as property held
primarily for sale to customers in the ordinary course of a trade or business.
Tax on Net Income from Foreclosure Property. The Company will be subject
to a tax at the highest rate applicable to corporations (currently 35%) on any
"net income from foreclosure property." "Foreclosure
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property" is property acquired by the Company as a result of a foreclosure
proceeding or by otherwise reducing such property to ownership by agreement or
process of law. "Net income from foreclosure property" is the gross income
derived during the taxable year from foreclosure property, less applicable
deductions, but only to the extent such income does not qualify under the 75%
income test and 95% income test.
Alternative Minimum Tax. The Company will be subject to the alternative
minimum tax on undistributed items of tax preference allocable to it. Code
Section 59(d) authorizes the Treasury to issue regulations allocating items of
tax preference between a REIT and its stockholders. Such regulations have not
yet been issued; however, the Company does not anticipate any significant items
of tax preference.
Excise Tax. In addition to the tax on any undistributed income, the
Company would also be subject to a 4% excise tax on the amount, if any, by which
(i) the sum of (A) 85% of its REIT taxable income for a calendar year, (B) 95%
of any net capital gain for such year and (C) any undistributed amounts (for
purpose of avoiding this excise tax) from prior years, exceeds (ii) the amount
actually distributed by the Company to holders of shares of Common Stock during
the calendar year (or declared as a dividend during the calendar year, if
distributed during the following January) as ordinary income dividends. The
imposition of any excise tax on the Company would reduce the amount of cash
available for distribution to holders of shares of Common Stock. The Company
intends to take all measures within its control to avoid imposition of the
excise tax.
Tax on Built-In Gain of Certain Assets. If a C corporation elects to be
taxed as a REIT, or if assets of a C corporation are transferred to a REIT in a
transaction in which the REIT has a carryover basis in the assets acquired, such
C corporation generally will be treated as if it sold all of its assets to such
REIT at their respective fair market values and liquidated immediately
thereafter, recognizing and paying tax on all gain. However, under such
circumstances under present law, the REIT is permitted to make an election under
which the C corporation will not recognize gain and instead the REIT will be
required to recognize gain and pay any tax thereon only if it disposes of such
assets during the subsequent 10-year period (the "10-Year Rule"). The Company
intends to make the appropriate election to obtain the above-described tax
consequences. Thus, if the Company acquires any asset from a C corporation as a
result of a merger or other nontaxable exchange, and the Company recognizes gain
on the disposition of such asset during the 10-year period following acquisition
of the asset, then such gain will be subject to tax at the highest regular
corporate rate to the extent the Built-In Gain (the excess of (a) the fair
market value of such asset as of the date of acquisition over (b) the Company's
adjusted basis in such asset as of such date) on the sale of such asset exceeds
any Built-In Loss arising from the disposition during the same taxable year of
any other assets acquired in the same transaction, where Built-In Loss equals
the excess of (x) the Company's adjusted basis in such other assets as of the
date of acquisition over (y) the fair market value of such other assets as of
such date.
TAXATION OF STOCKHOLDERS
Taxable U.S. Stockholders
This Section describes tax consequences to a holder of Common Stock that
(for United States federal income tax purposes) (i) is a citizen or resident of
the United States; (ii) is a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof; or (iii) is an estate or trust the income of which is
subject to United States federal income taxation regardless of its source.
Dividend Income. Distributions from the Company (other than distributions
designated as capital gains dividends) will be taxable to holders of shares of
Common Stock which are not tax-exempt entities as ordinary income to the extent
of the current or accumulated earnings and profits of the Company. Distributions
from the Company which are designated (by notice to stockholders within 30 days
after the close of the Company's tax year or with its annual report) as capital
gains dividends by the Company will be taxed as long-term capital gains to
taxable holders of shares of Common Stock to the extent that they do not exceed
the Company's actual net capital gain for the taxable year. Holders of shares of
Common Stock that are corporations may be required to treat up to 20% of any
such capital gains dividends as ordinary income. Such distributions, whether
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characterized as ordinary income or as capital gain, are not eligible for the
70% dividends received deduction for corporations.
Distributions from the Company to holders which are not designated as
capital gains dividends and which are in excess of the Company's current and
accumulated earnings and profits are treated as a return of capital to such
holders and reduce the tax basis of a holder's shares of Common Stock (but not
below zero). Any such distribution in excess of the tax basis is taxable to any
such holder that is not a tax-exempt entity as gain realized from the sale of
the shares of Common Stock, taxable as described below.
The declaration by the Company of a consent dividend would result in
taxable income to consenting holders of shares of Common Stock (other than
tax-exempt entities) without any corresponding cash distributions. See
" -- Requirements for Qualification as a REIT -- Annual Distribution
Requirements."
Portfolio Income. Dividends paid to holders of shares of Common Stock will
be treated as portfolio income. Such income therefore will not be subject to
reduction by losses from passive activities (i.e., any interest in a rental
activity or in a trade or business in which the holder does not materially
participate, such as certain interests held as a limited partner) of any holder
who is subject to the passive activity loss rules. Such distributions will,
however, be considered investment income which may be offset by certain
investment expense deductions.
No Flow-through of Losses. Holders of shares of Common Stock will not be
permitted to deduct any net operating losses or capital losses of the Company.
Sale of Shares. A holder of shares of Common Stock who sells shares will
recognize taxable gain or loss equal to the difference between (i) the amount of
cash and the fair market value of any property received on such sale or other
disposition and (ii) the holder's adjusted basis in such shares. Gain or loss
recognized by a holder of shares of Common Stock who is not a dealer in
securities and whose shares have been held for more than one year will generally
be taxable as long-term capital gain or loss.
Back-up Withholding. Distributions from the Company will ordinarily not be
subject to withholding of federal income taxes, except as discussed under
"Foreign Stockholders." Withholding of income tax at a rate of 31% may be
required, however, by reason of a failure of a holder of shares of Common Stock
to supply the Company or its agent with the holder's taxpayer identification
number. Such "backup" withholding also may apply to a holder of shares of Common
Stock who is otherwise exempt from backup withholding (including a nonresident
alien of the United States and, generally, a foreign entity) if such holder
fails to properly document his status as an exempt recipient of distributions.
Each holder will therefore be asked to provide and certify his correct taxpayer
identification number or to certify that he is an exempt recipient. A
stockholder that does not provide the Company with its correct taxpayer
identification number may be subject to penalties imposed by the IRS.
TAX-EXEMPT STOCKHOLDERS
In general, a holder of shares of Common Stock which is a tax-exempt entity
will not be subject to tax on distributions from the Company. The IRS has ruled
that amounts distributed as dividends by a REIT do not constitute unrelated
business taxable income ("UBTI") when received by certain tax-exempt entities.
Thus, distributions paid to a holder of shares of Common Stock which is a
tax-exempt entity and gain on the sale of shares of Common Stock by a tax-exempt
entity (other than those tax-exempt entities described below) will not be
treated as UBTI, even if the Company incurs indebtedness in connection with the
acquisition of real property (through its percentage ownership of the Operating
Partnership and the Subsidiary Partnerships) provided that the tax-exempt entity
has not financed the acquisition of its shares of Common Stock of the Company.
For tax-exempt entities which are social clubs, voluntary employee
beneficiary associations, supplemental unemployment benefit trusts and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the UBTI generated by its investment in the Company.
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Such prospective investors should consult their own tax advisors concerning
these "set aside" and reserve requirements.
In the case of a "qualified trust" (generally, a pension or profit-sharing
trust) holding shares in a REIT, the beneficiaries of such a trust are treated
as holding shares in the REIT in proportion to their actuarial interests in the
qualified trust, instead of treating the qualified trust as a single individual
(the "look through exception"). A qualified trust that holds more than 10% of
the shares of a REIT is required to treat a percentage of REIT dividends as UBTI
if the REIT incurs debt to acquire or improve real property. This rule applies,
however, only if (i) the qualification of the REIT depends upon the application
of the "look through" exception (described above) to the restriction on REIT
shareholdings by five or fewer individuals, including qualified trusts (see
"Description of Capital Stock -- Restrictions on Transfer"), and (ii) the REIT
is "predominantly held" by qualified trusts, i.e., if either (x) a single
qualified trust held more than 25% by value of the interests in the REIT or (y)
one or more qualified trusts, each owning more than 10% by value, held in the
aggregate more than 50% of the interests in the REIT. The percentage of any
dividend paid (or treated as paid) to such a qualified trust that is treated as
UBTI is equal to the amount of modified gross income (gross income less directly
connected expenses) from the unrelated trade or business of the REIT (treating
the REIT as if it were a qualified trust), divided by the total modified gross
income of the REIT. A de minimis exception applies where the percentage is less
than 5%. Because the Company expects the shares of Common Stock to be widely
held, this provision should not result in UBTI to any tax-exempt entity.
FOREIGN STOCKHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships, foreign estates
and foreign trusts (collectively, "Foreign Investors") are complex, and no
attempt will be made herein to provide more than a summary of such rules.
Prospective Foreign Investors should consult their own tax advisors to determine
the impact of federal, state and local income tax laws on an investment in the
shares of Common Stock, including any reporting requirements, as well as the tax
treatment of such an investment under their home country laws.
Distributions by the Company. Foreign Investors that are not engaged in
the conduct of a business in the United States and that purchase shares of
Common Stock generally will not be considered as engaged in the conduct of a
trade or business in the United States by reason of ownership of such shares.
The taxation of distributions by the Company to Foreign Investors will depend
upon whether such distributions are attributable to operating income or are
attributable to sales or exchanges by the Company of its United States Real
Property Interests ("USRPIs"). USRPIs are generally direct interests in real
property located in the United States and interests in domestic corporations in
which the fair market value of its USRPIs exceeds a certain percentage.
The Company anticipates that a substantial portion of the distributions to
holders of shares of Common Stock will be attributable to the receipt of rent by
the Company. To the extent that such distributions do not exceed the current or
accumulated earnings and profits of the Company, they will be treated as
dividends and will be subject to a withholding tax equal to 30% of the gross
amount of the dividend, which tax will be withheld and remitted to the IRS by
the Company. Such 30% rate may be reduced by United States income tax treaties
in effect with the country of residence of the Foreign Investor. Dividends that
are effectively connected with a U.S. trade or business will be subject to tax
on a net basis (that is, after an allowance for deductions) at graduated rates,
in the same manner as domestic holders are taxed with respect to such dividends,
and are generally not subject to withholding. Any such dividends received by a
Foreign Investor that is a corporation may also be subject to an additional
branch profits tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
Applicable Treasury Regulations provide that dividends paid to an address
in a country outside the Untied States generally are presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations, however, a Foreign Investor that wishes to claim
the benefit of an applicable treaty rate would be required to satisfy certain
certification and other requirements. Under certain treaties, lower withholding
rates
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generally applicable to dividends do not apply to dividends from a REIT, such as
the Company. Certain certification and disclosure requirements must be satisfied
to be exempt from withholding under the effectively connected income exemption
discussed above. Distributions in excess of the Company's earnings and profits
will be treated as a nontaxable return of capital to a Foreign Investor to the
extent of the basis of its shares of Common Stock, and any excess amount will be
treated as an amount received in exchange for the sale of its shares of Common
Stock and treated under the rules described below for the sale of Common Stock.
As a result of a legislative change made by the Small Business Job Protection
Act of 1996, it appears that the Company will be required to withhold 10% of any
distribution in excess of the Company's current and accumulated earnings and
profits. Consequently, although the Company intends to withhold at a rate of 30%
(or lower applicable treaty rate), to the extent that the Company does not do
so, any portion of a distribution not subject to withholding at a rate of 30%
(or lower applicable treaty rate) will be subject to a withholding rate of 10%.
However, the Foreign Investor may seek a refund of such amounts from the IRS if
it subsequently determines that such distribution was, if fact, in excess of the
current or accumulated earnings and profits of the Company, and the amount
withheld exceeded the Foreign Investor's United States tax liability, if any,
with respect to the distribution.
Distributions which are attributable to net capital gains realized from the
disposition of USRPIs (i.e., the Properties) by the Company will be taxed as
though the Foreign Investors were engaged in a trade or business in the United
States and the distributions were gains effectively connected with such trade or
business. Thus, a Foreign Investor would be entitled to offset its gross income
by allowable deductions and would pay tax on the resulting taxable income at the
graduated rates applicable to United States citizens or residents. In addition,
such gain may be subject to a 3% branch profits tax in the hands of a foreign
investor that is a corporation. For both individuals and corporations, the
Company must withhold a tax equal to 35% of all dividends that could be
designated by the Company as capital gains dividends. To the extent that such
withholding exceeds the actual tax owed by the Foreign Investor, a Foreign
Investor may claim a refund from the IRS.
Sale of Common Stock. Gain recognized by a Foreign Investor upon the sale
or exchange of Common Stock generally will not be subject to United States
taxation unless such shares constitute a USRPI. Shares of Common Stock will not
constitute a USRPI so long as the Company is a "domestically controlled REIT."
It is anticipated that the shares owned directly or indirectly by Foreign
Investors will be less than 50% in value of the shares of Common Stock and
therefore the Company will be a "domestically controlled REIT." Accordingly,
shares of Common Stock held by Foreign Investors in the United States will not
be considered USRPIs and gains on sales of such shares will not be taxed to such
Foreign Investors as long as the seller is not otherwise considered to be
engaged in a trade or business in the United States. (The same rule applies to
gains attributable to distributions in excess of the Foreign Investor's cost for
its shares, discussed above.) Similarly, a foreign corporation not otherwise
subject to United States tax which distributes shares of Common Stock to its
stockholders will not be taxed under this rule. However, because the shares of
Common Stock are expected to be publicly traded, no assurance can be given that
the Company will continue to be a "domestically controlled REIT."
Notwithstanding the foregoing, gain from the sale or exchange of shares of
Common Stock not considered a USRPI will be taxable to a Foreign Investor if the
Foreign Investor is a nonresident alien individual who is present in the United
States for 183 days or more during the taxable year and has a "tax home" in the
United States. In such case, the nonresident alien individual will be subject to
a 30% Untied States withholding tax on the amount of such individual's gain.
If the Company does not qualify as or ceases to be a
"domestically-controlled REIT," whether gain arising from the sale or exchange
by a Foreign Investor would be subject to United States taxation as a USRPI will
depend on whether the Common Stock is "regularly traded" (as defined by
applicable Treasury Regulations) on an established securities market (e.g., the
New York Stock Exchange) and on the size of the selling Foreign Investor's
interest in the Company. If gain on the sale or exchange of Common Stock were
subject to taxation as USRPI, the Foreign Investor would be subject to regular
United States income tax with respect to such gain in the same manner as a
United States holder (subject to any applicable alternative minimum tax, a
special alternative minimum tax in the case of nonresident alien individuals and
the possible application of the 30% branch profits tax in the case of foreign
corporations), and 10% of the purchase price would be required to be withheld
and remitted to the IRS.
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Back-up Withholding and Information Reporting. The IRS is authorized to
impose annual reporting requirements on certain United States and foreign
persons directly holding USRPIs. The required reports are in addition to any
necessary income tax returns, and do not displace existing reporting
requirements imposed on Foreign Investors by the Agricultural Foreign Investment
Disclosure Act of 1978 and the International Investment Survey Act of 1976. As
of the date of this Prospectus, the IRS has not exercised its authority to
impose reporting under this provision. Furthermore, because shares in a
domestically controlled REIT do not constitute a USRPI, such reporting
requirements are not expected to apply to a Foreign Investor in the Company.
However, the Company is required to file an information return with the IRS
setting forth the name, address and taxpayer identification number of the payee
of distributions from the Company (whether the payee is a nominee or is the
actual beneficial owner).
Back-up withholding tax (which generally is a withholding tax imposed at a
rate of 31% on certain payments to persons that fail to furnish certain
information under the United States information reporting requirements) and
information reporting generally will not apply to distributions paid to Foreign
Investors outside the United States that are treated as (i) dividends subject to
the 30% (or lower treaty rate) withholding tax discussed above, (ii) capital
gains dividends or (iii) distributions attributable to gain from the sale or
exchange by the Company of USRPIs. As a general matter, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
shares of Common Stock by or through a foreign office of a Foreign broker.
Information reporting (but not backup withholding) will apply, however, to a
payment of the proceeds of a sale of Common Stock by a foreign office of a
broker that (i) is a United States person, (ii) derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the United
States or (iii) is a "controlled foreign corporation" (generally, a foreign
corporation controlled by United States stockholders) for United States tax
purposes, unless the broker has documentary evidence in its record that the
holder is a Foreign Investor and certain other conditions are met, or the holder
otherwise establishes an exemption. A Foreign Investor may obtain a refund of
any amounts withheld under the backup withholding rules by filing the
appropriate claim for refund with the IRS.
The United States Treasury has recently issued proposed regulations
regarding the withholding and information reporting rules discussed above. In
general, the proposed regulations do not alter the substantive reporting
requirements but unify current certification procedures and forms and clarify
and modify reliance standards. If finalized in their current form, the proposed
regulations generally would be effective for payment made after December 31,
1997, subject to certain transition rules.
STATEMENT OF STOCK OWNERSHIP
The Company is required to demand annual written statements from the record
holders of designated percentages of its shares of Common Stock disclosing the
actual owners of the shares of Common Stock. The Company must also maintain,
within the Internal Revenue District in which it is required to file its federal
income tax return, permanent records showing the information it has received as
to the actual ownership of such shares of Common Stock and a list of those
persons failing or refusing to comply with such demand.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
The following discussion summarizes certain federal income tax
considerations applicable solely to the Company's investment in the Operating
Partnership and the Subsidiary Partnerships. The discussion does not cover state
or local tax laws or any federal tax laws other than income tax laws.
Classification as a Partnership. The Company will hold substantially all
of its real estate investments through the Operating Partnership which will hold
interests in the Subsidiary Partnerships. In general, partnerships are
"pass-through" entities which are not subject to federal income tax. Instead,
partners are allocated their proportionate shares of the items of income, gain,
loss, deduction and credit of a partnership, and are subject to tax thereon,
without regard to whether the partners receive cash distributions from the
partnership. The Company will be entitled to include in its REIT taxable income
its distributive share of the income of any partnership (including the Operating
Partnership) in which it has an interest and to deduct its distributive share of
the losses of any partnership (including the Operating Partnership) in which it
has an
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interest only if each such partnership is classified for federal income tax
purposes as a partnership rather than as an association taxable as a
corporation.
Under recently issued regulations ("check the box regulations"), an
organization with two or more members will be classified as a partnership on or
after January 1, 1997 unless it elects to be treated as an association (and
therefore taxable as a corporation) or falls within one of several specific
provisions which define a corporation. For entities which were in existence
prior to January 1, 1997 (such as the Subsidiary Partnerships), the claimed
classification by the entity will be respected for all periods prior to January
1, 1997 if (i) the entity had a reasonable basis for its claimed classification
under the law prior to January 1, 1997; (ii) the entity and all members thereof
recognized the federal tax consequence of any change in the entity's
classification within the sixty (60) months prior to January 1, 1997; and (iii)
neither the entity nor any member was notified in writing on or before May 8,
1996 that the classification of the entity was under examination (in which case
the entity's classification would be determined in the examination). An
exception to partnership classification under the "check the box regulations"
exists for a "publicly traded partnership" (i.e., a partnership in which
interests are traded on an established securities market or are readily tradable
on a secondary market or the substantial equivalent thereof). A publicly traded
partnership is treated as a corporation unless at least 90% of the gross income
of such partnership, for each taxable year the partnership is a publicly traded
partnership, consists of "qualifying income." "Qualifying income" includes
income from real property rents, gain from the sale or other disposition of real
property, interest and dividends.
The IRS has issued final regulations providing limited safe harbors from
the definition of a publicly traded partnership. Pursuant to one of those safe
harbors (the "Private Placement Exclusion"), interests in a partnership will not
be treated as readily tradable on a secondary market or the substantial
equivalent thereof if (i) all of the partnership interests are issued in a
transaction that is not required to be registered under the Securities Act and
(ii) the partnership does not have more than 100 partners at any time during the
taxable year (taking into account as a partner each person who indirectly owns
an interest in the partnership through a partnership, grantor trust, or S
corporation (a "flow-through entity"), but only if (a) substantially all the
value of the beneficial owner's interest in the flow-through entity is
attributable to the flow-through entity's interest (direct or indirect) in the
partnership, and (b) a principal purpose of the use of the tiered arrangement is
to permit the partnership to satisfy the 100-partner limitation).
All of the partnership interests in the Operating Partnership and the
Subsidiary Partnerships will be issued in transactions that are not required to
be registered under the Securities Act. In addition, upon the closing of the
Offering, in the aggregate, the Operating Partnership and the Subsidiary
Partnerships will not have more than 100 partners (even taking into account
indirect ownership of such partnerships through partnerships, grantor trusts and
S corporations). Thus, the Operating Partnership and each Subsidiary Partnership
should satisfy the Private Placement Exclusion.
None of the Operating Partnership and the Subsidiary Partnerships has
requested, and none intends to request, a ruling from the IRS that it will be
classified as a partnership for federal income tax purposes. Instead, at the
closing of the Offering, Battle Fowler LLP will deliver its opinion that, based
on the provisions of the partnership agreement of the Operating Partnership and
each Subsidiary Partnership, and certain representations described in the
opinion, the Operating Partnership and each Subsidiary Partnership pursuant to
the provisions of the "check the box regulations" as well as the law prior to
January 1, 1997 will be treated for federal income tax purposes as partnerships
and not as associations taxable as corporations or as publicly traded
partnerships. Unlike a tax ruling, an opinion of counsel is not binding upon the
IRS, and no assurance can be given that the IRS will not challenge the status of
the Operating Partnership and each Subsidiary Partnership as a partnership for
federal income tax purposes. If such challenge were sustained by a court, the
Operating Partnership and each Subsidiary Partnership would be treated as a
corporation for federal income tax purposes, as described below. In addition,
the opinion of Battle Fowler LLP is based on existing law, including
administrative and judicial interpretation thereof. No assurance can be given
that administrative or judicial changes would not modify the conclusions
expressed in the opinion.
If for any reason any partnership in which the Company has an interest was
taxable as a corporation rather than as a partnership for federal income tax
purposes, the Company likely would not be able to satisfy
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the asset requirements for REIT status. See "-- Requirements for Qualification
as a REIT -- Asset Tests." In addition, any change in the partnership status of
such entities for tax purposes might be treated as a taxable event in which case
the Company might incur a tax liability without any related cash distribution.
See "-- Income Taxation of the Operating Partnership and Its Partners -- Basis
in Operating Partnership Interest." Further, items of income and deduction of
such partnerships would not pass through to its partners (including the
Company), and such partners would be treated as stockholders for tax purposes.
The partnerships in which the Company has an interest would be required to pay
income tax at corporate tax rates on their net income, and distributions to
their partners would constitute dividends that would not be deductible in
computing the relevant entities' taxable income.
Under a regulatory "anti-abuse" rule (the "Anti-Abuse Rule"), the IRS may
(i) recast a transaction involving the use of a partnership to reflect the
underlying economic arrangement under the partnership provisions of the Code
(the "Partnership Provisions"), or (ii) prevent the use of a partnership to
circumvent the intended purpose of a Code provision. The Anti-Abuse Rule
contains an example in which a corporation that elects to be treated as a REIT
contributes substantially all of the proceeds from a public offering to a
partnership in exchange for a general partnership interest. The example
concludes that the use of the partnership is not inconsistent with the intent of
the Partnership Provisions and, thus, cannot be recast by the IRS. However, the
Exchange Rights do not conform in all respects to the redemption rights
contained in the foregoing example. Moreover, the Anti-Abuse Rule is
extraordinarily broad in scope and is applied based on an analysis of all of the
facts and circumstances. As a result, there can be no assurance that the IRS
will not attempt to apply the Anti-Abuse Rule to the Company. If the conditions
of the Anti-Abuse Rule are met, the IRS is authorized to take appropriate
enforcement action, including disregarding the Operating Partnership for federal
income tax purposes or treating one or more of the partners as nonpartners. Any
such action potentially could jeopardize the Company's status as a REIT.
INCOME TAXATION OF THE OPERATING PARTNERSHIP AND ITS PARTNERS
Operating Partnership Allocations. As noted above, the Company must
include in its REIT taxable income its distributive share of the income and
losses of any partnership in which it has an interest. Although the provisions
of a partnership agreement generally will determine the allocation of income and
losses among partners, such allocations will be disregarded for tax purposes
under Section 704(b) of the Code if they do not have "substantial economic
effect" or otherwise do not comply with the provisions of Section 704(b) of the
Code and Treasury Regulations.
If an allocation is not recognized for federal income tax purposes, the
item subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking into
account all of the facts and circumstances relating to the economic arrangement
of the partners in respect of such item. The allocations of taxable income and
loss of partnerships in which the Company has an interest are intended to comply
with the requirements of Section 704(b) of the Code and Treasury Regulations.
Tax Allocations in Respect of Contributed Properties. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
or depreciated property that is contributed to a partnership in exchange for an
interest in the partnership must be allocated for federal income tax purposes in
a manner such that the contributing partner benefits from, or is charged with,
the unrealized gain or unrealized loss associated with the property at the time
of the contribution. The amount of such unrealized gain or unrealized loss
generally is equal to the difference between the fair market value of the
contributed property and the adjusted tax basis of such property at the time of
contribution (the "Book-Tax Difference").
The Treasury Department has issued final and temporary regulations under
Section 704(c) of the Code (the "Regulations") which give partnerships great
flexibility in ensuring that a partner contributing property to a partnership
receives the tax burdens and benefits of any precontribution gain or loss
attributable to the contributed property. The Regulations permit partnerships to
use any "reasonable method" of accounting for Book-Tax Differences. The
Regulations specifically describe three reasonable methods, including (i) the
"traditional method" under current law, (ii) the traditional method with the use
of "curative allocations" which would permit distortions caused by a Book-Tax
Difference to be rectified on an annual basis and
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(iii) the "remedial allocation method" which is similar to the traditional
method with "curative allocations." The Partnership Agreement permits the
Company, as general partner, to select one of these methods to account for
Book-Tax Differences in connection with the contribution of the Properties and
the limited partnership interests in the Subsidiary Partnerships to the
Operating Partnership in exchange for the OP Units.
Basis in Operating Partnership Interest. The Company's adjusted tax basis
in each of the partnerships in which it has an interest generally (i) will be
equal to the amount of cash and the basis of any other property contributed to
such partnership by the Company, (ii) will be increased by (a) its allocable
share of such partnership's income and (b) its allocable share of any
indebtedness of such partnership and (iii) will be reduced, but not below zero,
by the Company's allocable share of (a) such partnership's loss and (b) the
amount of cash and the fair market value of any property distributed to the
Company, and by constructive distributions resulting from a reduction in the
Company's share of indebtedness of such partnership.
If the Company's allocable share of the loss (or portion thereof) of any
partnership in which it has an interest would reduce the adjusted tax basis of
the Company's partnership interest in such partnership below zero, the
recognition of such loss will be deferred until such time as the recognition of
such loss (or portion thereof) would not reduce the Company's adjusted tax basis
below zero. To the extent that distributions from a partnership to the Company,
or any decrease in the Company's share of the nonrecourse indebtedness of a
partnership (each such decrease being considered a constructive cash
distribution to the partners), would reduce the Company's adjusted tax basis
below zero, such distributions (including such constructive distributions) would
constitute taxable income to the Company. Such distributions and constructive
distributions normally would be characterized as long-term capital gain if the
Company's interest in such partnership has been held for longer than the
long-term capital gain holding period (currently one year).
Depreciation Deductions Available to the Operating Partnership. Certain
assets owned by the Operating Partnership consist of property contributed to it
by its partners. In general, when property is contributed in a tax-free
transaction under Section 721 of the Code, the transferee-partnership is treated
in the same manner as the contributing partner for purposes of computing
depreciation. The effect of this rule is to continue the historic basis, placed
in service dates and depreciation methods with respect to property contributed
to a partnership. This general rule would apply for any properties the Operating
Partnership acquires by reason of the deemed termination for tax purposes of any
of the Subsidiary Partnerships or to the extent that the Operating Partnership
receives an adjustment under Section 743(b) of the Code by reason of the
acquisition of any interests in a Subsidiary Partnership that did not terminate
for tax purposes.
As described above (see " -- Income Taxation of the Operating Partnership
and Its Partners -- Tax Allocations in Respect of Contributed Properties"), the
Treasury Department has recently issued Regulations which give partnerships
flexibility in ensuring that a partner contributing property to a partnership
receives the tax benefits and burdens of any precontribution gain or loss
attributable to the contributed property.
As described previously, the Company as a general partner may select any
permissible method to account for Book-Tax Differences in connection with the
contribution of the Properties and the limited partnership interests in the
Subsidiary Partnerships to the Operating Partnership in exchange for OP Units.
The use of certain of these methods may result in the Company being allocated
lower depreciation deductions than if a different method were used. The
resulting higher taxable income and earnings and profits of the Company, as
determined for federal income tax purposes, should decrease the portion of
distributions by the Company which may be treated as a return of capital. See
" -- Requirements for Qualification as a REIT -- Annual Distribution
Requirements." The Company may adopt a different method to account for Book-Tax
Differences for property contributed to the Operating Partnership or a
Subsidiary Partnership after the Formation Transactions.
OTHER TAX CONSIDERATIONS
State and Local Taxes. The tax treatment of the Company and holders of
shares of Common Stock in states having taxing jurisdiction over them may differ
from the federal income tax treatment. Accordingly, only a very limited
discussion of state taxation of the Company, the shares of Common Stock or their
holders
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of shares of Common Stock is provided herein, and no representation is made as
to the tax status of the Company, the shares of Common Stock or their holders of
shares of Common Stock in such states. However, holders of shares of Common
Stock should note that certain states impose a withholding obligation on
partnerships carrying on a trade or business in a state having partners who are
not resident in such state. The Partnership Agreement contains a provision which
permits the Operating Partnership to withhold a portion of a non-resident
partner's distribution (e.g., a distribution to the Company) and to pay such
withheld amount to the taxing state as agent for the non-resident partner. Most
(but not all) states follow the Code in their taxation of REITs. In such states,
the Company should generally not be liable for tax and should be able to file a
claim for refund and obtain any withheld amount from the taxing state. However,
due to the time value of money, the requirement of the Operating Partnership to
withhold on distributions to the Company will reduce the yield on an investment
in shares of Common Stock. Each holder of shares of Common Stock should consult
his own tax advisor as to the status of the shares of Common Stock under the
respective state tax laws applicable to him.
Possible Legislative or Other Actions Affecting Tax Consequences; Possible
Adverse Tax Legislation. Prospective stockholders 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 legislative and
administrative review, resulting in revisions of regulations and revised
interpretations of established concepts as well as statutory changes. Revisions
in federal tax laws and interpretations thereof could adversely affect the tax
consequences of an investment in the Company.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and the
prohibited transaction provisions of section 4975 of the Code that may be
relevant to a prospective purchaser (including, with respect to the discussion
contained in "Status of the Company and the Operating Partnership (and the
Subsidiary Partnerships) under ERISA," a prospective purchaser that is an
employee benefit plan, or another tax-qualified retirement plan, or an
individual retirement account ("IRA")). The discussion does not purport to deal
with all aspects of ERISA or section 4975 of the Code that may be relevant to
particular stockholders (including employee benefit plans subject to Title I of
ERISA, other retirement plans and IRAs subject to the prohibited transaction
provisions of section 4975 of the Code, or governmental plans or church plans
that are exempt from ERISA and section 4975 of the Code but may nonetheless be
subject to similar state law requirement) in light of their particular
circumstances.
The discussion is based on current provisions of ERISA and the Code,
existing and currently proposed regulations under ERISA and the Code, the
legislative history of ERISA and the Code, existing administrative rulings of
the Department of Labor ("DOL") and reported judicial decisions. No assurance
can be given that legislative, judicial or administrative changes will not
affect the accuracy of any statements herein with respect to transactions
entered into or contemplated prior to the effective date of such changes.
A FIDUCIARY MAKING THE DECISION TO INVEST IN THE COMMON SHARES ON BEHALF OF
A PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING
THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE CODE, AND
STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, OR SALE OF THE COMMON SHARES
BY SUCH PLAN OR IRA.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS, AND IRAS
Each fiduciary of a pension, profit-sharing or other employee benefit plan
subject to Title I of ERISA ("ERISA Plan") should consider carefully whether an
investment in the Common Stock is consistent with its fiduciary responsibilities
under ERISA. In particular, the fiduciary requirements of Part 4 of Title I of
ERISA require an ERISA Plan's investments to be (i) prudent and in the best
interests of the ERISA Plan, its participants, and its beneficiaries; (ii)
diversified in order to minimize the risk of large losses, unless it is clearly
prudent not to do so; and (iii) authorized under the terms of the ERISA Plan's
governing documents (provided the documents are consistent with ERISA). In
determining whether an investment in the Common Shares is prudent for purposes
of ERISA, the appropriate fiduciary of a ERISA Plan should consider all of the
facts and circumstances, including whether the investment is reasonably
designed, as a part of the ERISA Plan's portfolio for which the fiduciary has
investment responsibility, to meet the objectives of the ERISA Plan, taking into
consideration the risk of loss and opportunity for gain (or other return) from
the investment, the diversification, cash flow and funding requirements of the
ERISA Plan and its portfolio. A fiduciary also should take into account the
nature of the Company's business, the management of the Company, the length of
the Company's operating history, the fact that certain investment properties may
not have been identified yet and the possibility of the recognition of UBTI.
The fiduciary of an IRA or of a qualified retirement plan not subject to
Title I of ERISA because it is a governmental or church plan or of a benefits
arrangement that is a medical savings account or is not subject to ERISA because
it does not cover common law employees ( a "Non-ERISA Plan") should consider
that such an IRA or Non-ERISA Plan may only make investments that are authorized
by the appropriate governing documents and/or under applicable state law.
Fiduciaries of ERISA Plans and persons making the investment decision for
an IRA or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Code in making their investment
decision. A "party in interest" or "disqualified person" with respect to an
ERISA Plan or with respect to a Non-ERISA Plan or IRA subject to Code section
4975 is subject to (i) an initial 10% excise tax on the amount involved in any
prohibited transaction involving the assets of the plan or IRA
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and (ii) an excise tax equal to 100% of the amount involved if any prohibited
transaction is not corrected. If the disqualified person who engages in the
transaction is the individual on behalf of whom an IRA or medical savings
account is maintained (or his beneficiary), the IRA or medical savings account
will lose its tax-exempt status and its assets will be deemed to have been
distributed to such individual in a taxable distribution (and no excise tax will
be imposed) on account of the prohibited transaction. In addition, a fiduciary
who permits an ERISA Plan to engage in a transaction that the fiduciary knows or
should know is a prohibited transaction may be liable to the ERISA Plan for any
loss the ERISA Plan incurs as a result of the transaction or for any profits
earned by the fiduciary in the transaction.
STATUS OF THE COMPANY AND THE OPERATING PARTNERSHIP (AND THE SUBSIDIARY
PARTNERSHIPS) UNDER ERISA
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Code apply to an entity because one or
more investors in the equity interest in the entity is an ERISA Plan or is a
plan subject to Section 4975 of the Code or is an "employee benefit plan" as
defined in Section 3(3) of ERISA. An ERISA Plan fiduciary also should consider
the relevance of those principles to ERISA's prohibition on improper delegation
of control over or responsibility for "plan assets" and ERISA's imposition of
co-fiduciary liability on a fiduciary who participates in, permits (by action or
inaction) the occurrence of or fails to remedy a known breach by another
fiduciary.
If the underlying assets of the Company are deemed to be "plan assets"
under ERISA, (i) the prudence standards and other provisions of Part 4 of Title
I of ERISA would be applicable to any transactions involving the Company's
assets; (ii) persons who exercise any authority or control over the Company's
assets, or who provide investment advice to the Company, with regards to company
assets for a fee or other compensation would (for purposes of the fiduciary
responsibility provisions of ERISA) be fiduciaries of each ERISA Plan that
acquires Common Stock, and transactions involving the Company's assets
undertaken at their direction or pursuant to their advice might violate their
fiduciary responsibilities under ERISA, especially with regard to conflicts of
interest; (iii) a fiduciary exercising his investment discretion over the assets
of an ERISA Plan to cause it to acquire or hold the Common Shares could be
liable under Part 4 of Title I of ERISA for transactions entered into by the
Company that do not conform to ERISA standards of prudence and fiduciary
responsibility; and (iv) certain transactions that the Company might enter into
in the ordinary course of its business and operations might constitute
"prohibited transactions" under ERISA and Section 4975 of the Code.
The Plan Asset Regulations generally provide that when an ERISA Plan or
Non-ERISA Plan or IRA each subject to Section 4975 of the Code, acquires a
security that is an equity interest in an entity and the security is neither a
"publicly-offered security" nor a security issued by an investment company
registered under the Investment Company Act of 1940, the ERISA or Non-ERISA
Plan's or IRA's assets include both the equity interest and an undivided
interest in each of the underlying assets of the issuer of such equity interest,
unless one or more exceptions specified in the Plan Asset Regulations are
satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "freely transferable" and is part of a class of securities that is
"widely-held" and is either registered under Section 12(b) or 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or sold
pursuant to an effective registration statement under the Securities Act
(provided the securities are registered under the Exchange Act within 120 days
(or such later date as may be allowed by the SEC) after the end of the fiscal
year of the issuer during which the offering occurred). The Common Stock are
being sold in an offering registered under the Securities Act and will be
registered under the Exchange Act. The Plan Asset Regulations provide that a
security is "widely held" only if it is part of a class of securities that is
owned by 100 or more investors independent of the issuer and of one another. A
security will not fail to be widely held because the number of independent
investors falls below 100 subsequent to the initial public offering as a result
of events beyond the issuer's control. The Company anticipates that upon
completion of the Offering, the Common Stock will be "widely held."
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The Plan Asset Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The Plan Asset Regulations further provide
that where a security is part of an offering in which the minimum investment is
$10,000 or less (as is the case with this Offering), certain restrictions
ordinarily will not, alone or in combination, affect a finding that such
securities are freely transferable. The restrictions on transfer enumerated in
the Plan Asset Regulations as not affecting that finding include: (i) any
restriction on or prohibition against any transfer or assignment that would
result in the termination or reclassification of an entity for federal or state
tax purposes, or that otherwise would violate any federal or state statute,
court order, or rule of law (ii) any requirement that advance notice of a
transfer or assignment be given to the issuer, (iii) any administrative
procedure that establishes an effective date, or an event (such as completion of
an offering), prior to which a transfer or assignment will not be effective, and
(iv) any limitation or restriction on transfer or assignment that is not imposed
by the issuer or a person acting on behalf of the issuer. The Company believes
that the restrictions imposed under the Declaration of Trust on the transfer of
the Company's shares of beneficial interest will not result in the failure of
the Common Shares to be "freely transferable." The Company also is not aware of
any other facts or circumstances limiting the transferability of the Common
Stock that are not enumerated in the Plan Asset Regulations as those not
affecting free transferability, and the Company does not intend to impose in the
future (or to permit any person to impose on its behalf) any limitations or
restrictions on transfer that would not be among the enumerated permissible
limitations or restrictions. The Plan Asset Regulations only establish a
presumption in favor of a finding of free transferability, and no assurance can
be given that the DOL or the Treasury Department will not reach a contrary
conclusion.
Assuming that the Common Stock will be "widely held" and that no other
facts and circumstances other than those referred to in the preceding paragraph
exist that restrict transferability of the Common Shares, the Common Stock
should be publicly offered securities and the assets of the Company should not
be deemed to be "plan assets" of any ERISA Plan, IRA, or Non-ERISA Plan subject
to Code Section 4975 that invests in the Common Stock.
The Plan Asset Regulations also will apply in determining whether the
assets of the Operating Partnership (and the Subsidiary Partnerships) will be
deemed to be "plan assets." The partnership interests in the Operating
Partnership and the Subsidiary Partnerships will not be publicly-offered
securities. Nevertheless, if the Common Stock constitute publicly-offered
securities, the indirect investment in the Partnership and the Subsidiary
Partnerships by ERISA Plans, IRAs, or Non-ERISA Plans subject to section 4975 of
the Code through their ownership of Common Stock will not cause the assets of
the Operating Partnership or the Subsidiary Partnerships to be treated as "plan
assets" of such stockholders.
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<PAGE> 156
UNDERWRITING
The Underwriters named below, acting through their representatives, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Legg Mason Wood Walker Incorporated,
Prudential Securities Incorporated and Smith Barney Inc. (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Purchase Agreement with the Company and the Operating Partnership, to
purchase from the Company the number of shares of Common Stock set forth below
opposite their respective names. The Underwriters are committed to purchase all
of such shares if any are purchased. Under certain circumstances, the
commitments of non-defaulting Underwriters may be increased as set forth in the
Purchase Agreement.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------
---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.........................................
Legg Mason Wood Walker, Incorporated..............................
Prudential Securities Incorporated................................
Smith Barney Inc. ................................................
---------
Total................................................
=========
</TABLE>
The Representatives have advised the Company that they propose initially to
offer the shares to the public at the public offering price per share set forth
on the cover page of this Prospectus, and to certain dealers at such price less
a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a discount not in excess of $ per share
on sales to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The Company has granted the Underwriters an option exercisable for 30 days
after the date hereof to purchase up to 1,515,000 additional shares of Common
Stock to cover over-allotments, if any, at the initial public offering price,
less the underwriting discount set forth on the cover page of this Prospectus.
If the Underwriters exercise this option, each of the Underwriters will have a
firm commitment, subject to certain conditions, to purchase approximately the
same percentage thereof which the number of shares of Common Stock to be
purchased by it shown in the foregoing table is of the 10,100,000 shares of
Common Stock initially offered hereby.
At the request of the Company, the Underwriters have reserved up to 100,000
shares of Common Stock for sale at the public offering price to certain
employees of the Company, their business affiliates and related parties who have
expressed an interest in purchasing shares. The number of shares available to
the general public will be reduced to the extent these persons purchase the
reserved shares. Any reserved shares that are not so purchased by such persons
at the closing of the Offering will be offered by the Underwriters to the
general public on the same terms as the other shares offered by this Prospectus.
In the Purchase Agreement, the Company has agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments the Underwriters may be required to
make in respect thereof. Insofar as indemnification of the Underwriters for
liabilities arising under the Securities Act may be permitted pursuant to the
foregoing provisions, the Company has been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Company and the Operating Partnership have agreed, subject to certain
exceptions, not to sell, offer or contract to sell, grant any option for the
sale of, or otherwise dispose of any shares of Common Stock or OP Units or any
securities convertible into or exchangeable for Common Stock or OP Units for a
period of one year from the date of the Prospectus, without the prior written
consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated.
In connection with the Offering, the Continuing Investors, the Primary
Contributors and the Morgan Stanley Investors have agreed, subject to certain
exceptions, not to sell, offer or contract to sell, grant any option for the
sale of, or otherwise dispose of any shares of Common Stock or OP Units or any
securities
151
<PAGE> 157
convertible into or exchangeable for Common Stock or OP Units for a period of
two years for the Primary Contributors and one year for the other Continuing
Investors and the Morgan Stanley Investors from the date of this Prospectus,
without the prior written consent of Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
The Underwriters do not intend to confirm sales of any account over which
they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price will be determined through
negotiations between the Company and the Representatives. Among the factors to
be considered in such negotiations, in addition to prevailing market conditions,
will be dividend yields and financial characteristics of publicly traded REITs
that the Company and the Representatives believes to be comparable to the
Company, the expected results of operations of the Company (which will be based
on the results of operations of the Properties and the management and leasing
businesses in recent periods), estimates of the future business potential and
earnings prospects of the Company as a whole and the current state of the real
estate market in the Company's primary markets and the economy as a whole.
Until the distribution of the Common Shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase the Common Shares. As an
exception to these rules, the Representatives are permitted to engage in certain
transactions that stabilize the price of the Common Shares. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Shares.
If the Underwriters create a short position in the Common Shares in
connection with the Offering, i.e., if they sell more Common Shares than are set
forth on the cover page of this Prospectus, the Representatives may reduce that
short position by purchasing Common Shares in the open market. The
Representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
Common Shares in the open market to reduce the Underwriters' short position or
to stabilize the price of the Common Shares, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discounted without notice.
The Company has agreed to pay to Merrill Lynch an advisory fee equal to
1.90% of the gross proceeds of the Offering (excluding any exercise of the
Underwriters' over-allotment option) for advisory services rendered in
connection with the evaluation, analysis and structuring of the Offering.
A portion of the net proceeds from the Offering will be used by the Company
to repay in full a mortgage loan made to the Company prior to the Offering by an
affiliate of Merrill Lynch. In connection with such mortgage loan, (i) an
affiliate of Merrill Lynch made an $11.3 million secured loan to the Property
Partnership that owns the 120 Mineola Boulevard Property and (ii) the lender
received an origination fee of 1.00% of the original loan amount, and
reimbursement for its out-of-pocket expenses, including reasonable fees and
expenses of counsel, incurred in connection therewith.
The Company will apply for listing of the Common Stock on the NYSE under
the symbol "TOW."
152
<PAGE> 158
EXPERTS
The consolidated balance sheet of the Company as of March 31, 1997, the
combined balance sheets of the Tower Predecessor as of December 31, 1996 and
1995, and the related combined statements of operations, owners' deficit and
cash flows for each of the three years in the period ended December 31, 1996 and
the financial statement schedule and the combined statements of revenues and
certain operating expenses of DRA Joint Ventures for each of the two years in
the period ended December 31, 1996 and the period from November 21, 1994 through
December 31, 1994, included in this Prospectus, have been included herein in
reliance on the reports of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The Landauer Market Studies were prepared for the Company by Landauer,
which is a real estate service firm with significant experience and expertise
relating to the midtown Manhattan, Orlando, Phoenix, and Tucson office markets
and the various submarkets therein. The statistical and other information from
the Landauer Market Studies appearing in this Prospectus has been included
herein in reliance on Landauer Associate's expertise as real estate services
firm, with respect to the Manhattan, Phoenix, Tucson, and Orlando office
markets. The Landauer Market Studies are filed as an exhibit to the registration
statement of which this Prospectus forms a part.
LEGAL MATTERS
Certain legal matters including the validity of the shares of Common Stock
offered hereby will be passed upon for the Company by Battle Fowler LLP. In
addition, the description of federal income tax consequences contained in the
section of the Prospectus entitled "Federal Income Tax Considerations" is based
on the opinion of Battle Fowler LLP. Certain legal matters will be passed upon
for the Underwriters by Hogan & Hartson L.L.P. Battle Fowler LLP will rely on
Ballard Spahr Andrews & Ingersoll as to certain matters of Maryland law.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 (of which this Prospectus is a part) under the Securities Act with respect
to the securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of which
have been omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference and the exhibits and schedules hereto. For further information
regarding the Company and the shares of Common Stock offered hereby, reference
is hereby made to the Registration Statement and such exhibits and schedules.
The Registration Statement and the exhibits and schedules forming a part
thereof filed by the Company with the Commission can be inspected and copies
obtained from the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such materials can be obtained by mail from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a
site on the World Wide Web, the address of which is http://www.sec.gov, that
contains reports, proxy and information statements and other information
regarding issuers, such as the Company, that file electronically with the
Commission.
The Company intends to furnish its stockholders with annual reports
containing audited combined financial statements and a report thereon by
independent certified public accountants.
153
<PAGE> 159
GLOSSARY
Unless the context otherwise requires, the following capitalized terms have
the meanings set forth below for the purposes of this Prospectus.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1997 Plan" means the Tower Realty Trust, Inc. 1997 Stock Incentive Plan.
"ACMs" means asbestos-containing materials.
"Acquisition Cost" means, as of the date of acquisition of a Property, the
aggregate acquisition cost of a Property, including the applicable purchase
price amount and closing costs, and anticipated tenant improvements, leasing
commissions and capital expenditures.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"Adjusted Acquisition Yield" means the Annualized Net Operating Income at
Acquisition of a Property divided by the Acquisition Cost of the Property.
"Adjusted Investment Yield" means the Annualized Net Operating Income at
March 31, 1997 of a Property divided by the Investment Cost.
"Anti-Abuse Rule" means the regulations issued by the United States
Treasury Department under the Partnership Provisions that would authorize the
IRS, in certain "abusive" transactions involving partnerships, to disregard the
form of a transaction and recast it for federal tax purposes as it deems
appropriate.
"Annualized Net Operating Income at Acquisition" means the rental income
from the Property for the first full month of ownership by the Company
multiplied by 12, and less property operating expenses for such Property for the
first full calendar quarter of ownership by the Company multiplied by four.
"Annualized Net Operating Income at March 31, 1997" means the net
operating income of the Property for the quarter ended March 31, 1997 multiplied
by four.
"Base Rent" means the fixed base rental amount paid by a tenant under the
terms of the related lease agreement, which amount generally does not include
payments on account of real estate taxes, operating expense escalations and
utility charges.
"Beneficiary" means one or more charitable organizations named by the
Company as beneficiary to the Trust.
"Board of Directors" means the Board of Directors of the Company.
"Bylaws" means the Bylaws of the Company.
"Cash Available for Distribution" means Funds From Operations adjusted for
certain non-cash items, less reserves for capital expenditures.
"Charter" means the charter of the Company filed for record with the State
Department of Assessments and Taxation of Maryland, as may be amended from time
to time.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the shares of Common Stock, par value $0.01 per
share, of the Company.
"Company" means Tower Realty Trust, Inc., a Maryland corporation, together
with its subsidiaries.
"Company Expenses" means all administrative costs and expenses of the
Company.
"Company Options" means the stock options granted to officers, directors
and employees of the Company pursuant to the 1997 Plan and the Directors' Plan.
154
<PAGE> 160
"Concurrent Private Placement" means the private placement by the Company
of $20 million of Common Stock to the Morgan Stanley Investors at a price per
share equal to the Offering Price to be consummated concurrent with the
Offering.
"Continuing Investors" means certain third parties that own interests in
the Properties and who will own OP Units and/or shares of Common Stock upon
completion of the Offering.
"Control Shares" means voting Shares which, if aggregated with all other
such shares previously acquired by the acquiror, or in the respect of which the
acquiror is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquiror to exercise
voting power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third; (ii) one-third or more but
less than a majority; or (iii) a majority or more of all voting power.
"Counsel" means Battle Fowler LLP.
"CPI" means the United States Consumer Price Index.
"Debt Policy" means the Company's policy of limiting its total
consolidated indebtedness plus its pro rata share of indebtedness of
unconsolidated investments plus its pro rata share of Joint Venture Debt to 50%
of the Company's Total Market Capitalization.
"direct vacancy" means office space for which a landlord is not collecting
rent under a prime lease in an office building of 20,000 square feet or more and
does not include office space available for sublease.
"Directors' Plan" means the Tower Realty Trust, Inc. Non-Employee
Directors' Incentive Plan.
"DOL" means the United States Department of Labor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means a pension, profit-sharing or other employee benefit
plan subject to Title I of ERISA.
"ESAs" means phase I environmental site assessments.
"Escalated Rent" means the base rental income represented by applicable
leases, plus tenant payments on account of real estate tax and operating expense
escalations.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agreement" means that Exchange Rights Agreement among the
Company, the Operating Partnership and the Limited Partners, other than the
Company.
"Exchange Rights" means, pursuant to the Partnership Agreement, the rights
of the Limited Partners to cause the Operating Partnership to exchange each Unit
in exchange for cash or, at the Company's election, one share of Common Stock.
"Excluded Properties" means the properties that will continue to be owned
by Tower Equities after the Formation Transactions.
"Foreign Investors" means nonresident alien individuals, foreign
corporations, foreign partnerships and foreign trusts and estates.
"Formation Transactions" means the principal transactions in connection
with the formation of the Company and the acquisition of the Properties.
"Founding Director" means each Independent Director eligible to receive
options under the Directors' Plan who is a member of the Board of Directors as
of the date that the registration statement is declared effective by the
Commission.
"Funds From Operations" means income (loss) before minority interest
(computed in accordance with generally accepted accounting principles),
excluding gains (losses) from debt restructuring and sales of
155
<PAGE> 161
property, plus real estate related depreciation and amortization (excluding
amortization of financing costs), and after adjustments for unconsolidated
partnerships and joint ventures.
"GAAP" means generally accepted accounting principles.
"General Partner" means the sole general partner of the Operating
Partnership.
"Independent Director" means a director of the Company who is not an
officer or employee of the Company, any affiliate of an officer or employee or
any affiliate of any advisor to the Company under an advisory agreement, any
subsidiary of the Company or any partnership which is an affiliate of, the
Company.
"Interested Stockholder" means a stockholder holding 10% or more of the
voting securities in a Maryland corporation, such as the Company.
"Investment Cost" means as of March 31, 1997 the aggregate investment cost
of a Property, including the applicable purchase price amount, closing costs,
tenant improvements, leasing commissions and capital expenditures less any
applicable depreciation and amortization of tenant improvements, leasing
commissions and capital expenditures.
"IRA" means individual retirement account.
"IRS" means the U.S. Internal Revenue Service.
"ISOs" means incentive stock options.
"Joint Venture Debt" means indebtedness of unconsolidated investments.
"Landauer" means Landauer Associates, Inc.
"Landauer Market Studies" means the report prepared for the Company by
Landauer relating to the midtown Manhattan, Orlando, Phoenix and Tucson office
markets and the various submarkets therein.
"leased" means all space for which leases have been executed and the lease
term has commenced.
"Limited Partners" means the limited partners of the Operating
Partnership.
"Line of Credit" means the Company's proposed $200 million line of credit.
"Lock-up Period" means the one- or two-year period (as applicable)
commencing from the date of this Prospectus.
"Management Company" means Tower Equities Management, Inc., a Delaware
corporation.
"Merrill Lynch" means Merrill Lynch & Co.
"Metropolitan New York City" means New York, Bronx, Kings, Putnam, Queens,
Richmond, Rockland, Nassau, Suffolk and Westchester Counties, as designated by
Landauer in its market study cited herein.
"Metropolitan Orlando" means Lake, Orange, Osceola and Seminole Counties
in Florida, as designated by Landauer in its market study cited herein.
"Metropolitan Phoenix" means Maricopa and Pinal Counties in Arizona, as
designated by Landauer in its market study cited herein.
"Metropolitan Tucson" means Pima County, Arizona, as designated by
Landauer in its market study cited herein.
"MGCL" means the Maryland General Corporation Law, as may be amended from
time to time.
"Morgan Stanley Investors" means certain private investment funds and
separate accounts advised by MSAM that have agreed to purchase Common Shares in
the Concurrent Private Placement.
"MSAM" means Morgan Stanley Asset Management Inc.
156
<PAGE> 162
"MSAM Notes" means the convertible notes of the Company held by the Morgan
Stanley Investors in the aggregate principal amount of approximately $
million for the purpose of funding certain pre-Offering transaction expenses and
the acquisition of certain interests of third parties of certain properties.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"Non-ERISA Plan" means a qualified retirement plan not subject to Title I
because it is a governmental or church plan or because it does not cover common
law employees.
"Non-Founding Director" is every director of the Company who is not a
Founding Director.
"Non-Qualifying Income" means income realized by the Company which does
not satisfy the requirements of the 95% gross income test.
"NYSE" means the New York Stock Exchange, Inc.
"occupied" means all space which is leased and for which the lease term
has commenced.
"Offering" means the offering of Common Stock which is the subject of the
Prospectus.
"Offering Price" means the public offering price of the Common Stock of
$25.00 per share.
"Operating Partnership" means Tower Equities Operating Partnership, L.P.,
a limited partnership organized under the laws of Delaware. Unless the context
requires otherwise, Operating Partnership includes any subsidiaries of the
Operating Partnership.
"OP Units" means units of limited partnership interest in the Operating
Partnership.
"Ownership Limitation" means the ownership of more than 9.8% of the number
or value of any class of the Company's outstanding stock by any person.
"Participants" means individuals who will participate in the 1997 plan.
"Partnership Agreement" means the agreement of limited partnership of the
Operating Partnership. "Partnership Provisions" means the partnership provisions
of the Code.
"Phoenix Land Parcel" means the 43.2 acres of undeveloped land in Phoenix
that the Company holds an option to purchase.
"Plan Asset Regulations" mean the Department of Labor regulations which
define "plan assets."
"Preferred Stock" means the shares of preferred stock, par value $.01 per
share, of the Company.
"Primary Contributors" means Lawrence H. Feldman (Chairman, Chief
Executive Officer and President of the Company), Robert L. Cox (Executive Vice
President and Chief Operating Officer of the Company), Joseph D. Kasman (Senior
Vice President and Chief Financial Officer of the Company), Clifford L. Stein
(Managing Director of the Company's Southeast Region), Robert M. Adams (a
nominee for director of the Company), Richard Wisely (a significant investor in
certain Tower Equities entities), Eric S. Reimer (Vice President -- Leasing of
the Company), Reuben Friedberg (Vice President -- Finance of the Company), and
Reid Berman (a significant investor in Properties Atlantic and a regional
director of leasing for the Company), and their respective controlled
affiliates, provided, however, that "Primary Contributors" excludes certain
persons affiliated or associated with Tower Equities or the Primary Contributors
because they were not eligible to receive OP Units for their interests in
Properties under applicable securities laws.
"Property Partnerships" means the partnerships that currently own the
Properties.
"Registration Rights Agreement" means the Registration Rights Agreement
among the Company, the Operating Partnership and the Limited Partners other than
the Company.
"REIT" means real estate investment trust as defined in Section 856 of the
Code.
157
<PAGE> 163
"Related Party Tenant" under the Code means a tenant of the Company's real
property in which the Company or an owner of 10.0% or more of the Company,
directly or constructively owns 10.0% or more of the ownership interests.
"Representatives" means Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Legg Mason Wood Walker, Prudential Securities Incorporated and
Smith Barney Inc.
"Restricted Shares" means the 1,652,800 shares of Common Stock received by
the Primary Contributors and Continuing Investors in the Formation Transactions,
the 800,000 shares of Common Stock issued in the Concurrent Private Placement
and the 1,408,943 shares of Common Stock available for issuance upon exchange of
OP Units issued in connection with the Formation Transactions, and the Company
Options.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares-in-Trust" means shares of Common or Preferred Stock that are
transferred automatically to the Trust.
"Stanger" means Robert A. Stanger & Co., Inc.
"Subsidiary Partnerships" means one or more subsidiary partnerships, joint
ventures, general partnerships and limited liability companies through which the
Operating Partnership owns certain of the Properties.
"Term Loan" means the $87 million loan facility that the Company is
negotiating and expects to enter into concurrent with the consummation of the
Offering.
"Total Market Capitalization" means the Company's total equity market
capitalization plus its consolidated indebtedness and pro rata share of
indebtedness of unconsolidated investments.
"Tower" means Tower Equities & Realty Corp., a Delaware corporation.
"Tower Equities" includes Tower Equities & Realty Corp., a Delaware
corporation ("Tower"), the companies and partnerships affiliated with Tower and
the predecessor entities and affiliates of Tower.
"Tower 45 Loan" means the mortgage indebtedness secured by the Tower 45
Property.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"UBTI" means unrelated business taxable income.
"Underwriters" means the underwriters named in the Prospectus relating to
the Offering.
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<PAGE> 164
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Tower Realty Trust, Inc...............................................................
Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1997 (unaudited)..... F-2
Pro Forma Condensed Consolidated Statement of Operations for the three months ended
March 31, 1997 (unaudited)....................................................... F-3
Pro Forma Condensed Consolidated Statement of Operations for the year ended December
31, 1996 (unaudited)............................................................. F-4
Notes to the Pro Forma Condensed Consolidated Financial Information................. F-5
Report of Independent Accountants................................................... F-16
Consolidated Balance Sheet as of March 31, 1997..................................... F-17
Notes to Consolidated Balance Sheet................................................. F-18
Tower Predecessor
Report of Independent Accountants................................................... F-22
Combined Balance Sheets as of December 31, 1996 and 1995 and (unaudited) as of March
31, 1997......................................................................... F-23
Combined Statements of Operations for each of the three years in the period ended
December 31, 1996 and (unaudited) for the three months ended March 31, 1997 and
1996............................................................................. F-24
Combined Statements of Owners' Deficit for each of the three years in the period
ended December 31, 1996 and (unaudited) for the three months ended March 31,
1997............................................................................. F-25
Combined Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 and (unaudited) for the three months ended March 31, 1997 and
1996............................................................................. F-26
Notes to Combined Financial Statements.............................................. F-27
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 1996...... F-37
DRA Joint Ventures
Report of Independent Accountants................................................... F-39
Combined Statements of Revenues and Certain Operating Expenses for each of the two
years in the period ended December 31, 1996 and the period from November 21, 1994
through December 31, 1994 and (unaudited) for the three months ended March 31,
1997 and 1996.................................................................... F-40
Notes to Combined Statements of Revenues and Certain Operating Expenses............. F-41
</TABLE>
F-1
<PAGE> 165
TOWER REALTY TRUST, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
The following unaudited pro forma condensed consolidated balance sheet is
presented as if (i) the transfer of the Properties, certain development land and
other assets of Tower Equities to be contributed to the Company and (ii) the
consummation of the Offering, the Concurrent Private Placement, the MSAM Notes
and Term Loan and the application of the net proceeds therefrom had occurred on
March 31, 1997. This pro forma condensed consolidated balance sheet should be
read in conjunction with the historical combined financial statements listed on
the index on page F-1. In management's opinion, all adjustments necessary to
reflect the effects of the above transactions have been made.
The following pro forma condensed consolidated balance sheet is not
necessarily indicative of what the actual financial position would have been
assuming the above transactions had been consummated at March 31, 1997, nor does
it purport to represent the future financial position of the Company.
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------------------
THE OFFERING
AND CONCURRENT
THE ACQUISITION PRIVATE OTHER
COMPANY PREDECESSOR PROPERTIES PLACEMENT ADJUSTMENTS
HISTORICAL HISTORICAL (A) (B) (C) PRO FORMA
---------- ----------- ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Real estate, net................... $ 128,352 $ 260,008 $388,360
Deferred charges, net.............. $1,583 12,225 $ (3,498)(1) 10,310
Receivables, net................... 4,103 (1,603)(6) 2,500
Unbilled rent receivable........... 15,089 (15,089)(2)
Escrowed funds..................... 527 (527)(6)
Cash and cash equivalents.......... 2,092 4,843 (335,090) $244,240 88,031(4)(5)(6) 4,116
Investments in joint ventures...... 5,013 909 (5,013)(3) 909
Prepaid expenses and other
assets........................... 3,940 3,000 (3,940)(6) 3,000
---------- ----------- ----------- -------------- ----------- ---------
Total assets............... $3,675 $ 174,092 $ (71,173) $244,240 $ 58,361 $409,195
======== ========= ========= ============ ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Debt on real estate................ $4,000 $ 200,097 $ (146,622) $ 51,525(5) $109,000
Accounts payable and other
liabilities...................... 26,886 (13,935)(6) 12,951
Amounts due to (from) affiliates... (326) 9,054 (8,728)(6)
---------- ----------- ----------- ----------- ---------
Total liabilities.......... 3,674 236,037 (146,622) 28,862 121,951
---------- ----------- ----------- ----------- ---------
Minority interest in Operating
Partnership...................... 11,117 17,895(7) 29,012
----------- ----------- ---------
Shareholders' equity:
Preferred shares, 100,000,000
shares authorized, none issued
and outstanding................
Common shares, $.01 par value,
250,000,000 shares authorized;
1,000 shares issued and
outstanding (historical) and
12,552,800 shares issued and
outstanding (pro forma)........ 1 11 $ 110 4(4) 126
Additional paid-in capital....... 26,457 244,130 (12,481)(4)(8) 258,106
Owners' equity (deficit)......... (61,945) 37,864 24,081(1)(5)(6)(8)
---------- ----------- ----------- -------------- ----------- ---------
Total shareholders' equity
(deficit)................ 1 (61,945) 64,332 244,240 11,604 258,232
---------- ----------- ----------- -------------- ----------- ---------
Total liabilities and
shareholders' equity
(deficit)................ $3,675 $ 174,092 $ (71,173) $244,240 $ 58,361 $409,195
======== ========= ========= ============ ========== ========
</TABLE>
The accompanying notes are an integral part of this pro forma condensed
consolidated balance sheet.
F-2
<PAGE> 166
TOWER REALTY TRUST, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following unaudited pro forma condensed consolidated statements of
operations are presented as if (i) the transfer of the Properties, certain
development land and other assets of Tower Equities to be contributed to the
Company and (ii) the completion of the Offering, the Concurrent Private
Placement, the MSAM Notes and Term Loan and the application of the net proceeds
therefrom had occurred on January 1, 1996. These pro forma condensed
consolidated statements of operations should be read in conjunction with the
historical combined financial statements listed on the index on page F-1. In
management's opinion, all adjustments necessary to reflect the effects of the
above transactions have been made.
The following pro forma condensed consolidated statements of operations are
not necessarily indicative of what the actual results of operations of the
Company would have been assuming the above transactions had been consummated as
of January 1, 1996, nor does it purport to represent the results of operations
for future periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
PRO FORMA ADJUSTMENTS
-------------------------
ACQUISITION OTHER
PREDECESSOR PROPERTIES ADJUSTMENTS
HISTORICAL (A) (B) PRO FORMA
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income................................... $ 6,945 $ 7,353 $ 797 $ 15,095
Management fees................................. 257 (257)
Construction, leasing, and other fees........... 498 181 (476) 203
------- ------ ------- ----------
Total revenues.......................... 7,700 7,534 64 15,298
------- ------ ------- ----------
Expenses:
Property operating and maintenance.............. 1,350 1,842 3,192
Real estate taxes............................... 1,196 918 (25) 2,089
General office and administration............... 1,095 429 (666) 858
Interest expense................................ 3,485 (1,528) 1,957
Depreciation and amortization................... 1,698 1,337 3,035
Ground rent and air rights expense.............. 150 150
------- ------ ------- ----------
Total expenses.......................... 8,974 3,189 (882) 11,281
Equity in income (loss) of joint ventures....... 34 (25) 9
------- ------ ------- ----------
Income (loss) before minority interest............ (1,240) 4,345 921 4,026
Minority interest in Operating Partnership........ 407 407
------- ------ ------- ----------
Net income (loss)................................. $(1,240) $ 4,345 $ 514 $ 3,619
======= ====== ======= ==========
Net income per share.............................. $ 0.29
==========
Weighted average number of common shares
outstanding..................................... 12,553
==========
</TABLE>
The accompanying notes are an integral part of this pro forma condensed
consolidated statements of operations.
F-3
<PAGE> 167
TOWER REALTY TRUST, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------------------------------------
PRO FORMA ADJUSTMENTS
------------------------------------------
PROPERTY
ACQUIRED PRIOR
TO THE
FORMATION ACQUISITION OTHER
PREDECESSOR TRANSACTIONS PROPERTIES ADJUSTMENTS
HISTORICAL (A) (B) (C) PRO FORMA
----------- -------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income........................ $26,138 $462 $31,414 $ 3,189 $ 61,203
Management fees...................... 1,261 (1,261)
Construction, leasing, and other
fees.............................. 1,335 2 1,413 (2,008) 742
------- ---- ------- ------- ----------
Total revenues............... 28,734 464 32,827 (80) 61,945
------- ---- ------- ------- ----------
Expenses:
Property operating and maintenance... 5,134 193 8,788 14,115
Real estate taxes.................... 4,569 79 3,747 (100) 8,295
General office and administration.... 3,994 47 1,448 (2,130) 3,359
Interest expense..................... 15,511 (7,676) 7,835
Depreciation and amortization........ 6,853 5,436 12,289
Ground rent and air rights expense... 599 599
------- ---- ------- ------- ----------
Total expenses............... 36,660 319 13,983 (4,470) 46,492
Equity in income (loss) of joint
ventures.......................... 461 (147) 314
------- ---- ------- ------- ----------
Income (loss) before minority
interest............................. (7,465) 145 18,844 4,243 15,767
Minority interest in Operating
Partnership.......................... 1,592 1,592
------- ---- ------- ------- ----------
Net income (loss)...................... $(7,465) $145 $18,844 $ 2,651 $ 14,175
======= ==== ======= ======= ==========
Net income per share................... $ 1.13
==========
Weighted average number of common
shares outstanding................... 12,553
==========
</TABLE>
The accompanying notes are an integral part of this pro forma condensed
consolidated statements of operations.
F-4
<PAGE> 168
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. PRO FORMA ADJUSTMENTS TO THE CONSOLIDATED BALANCE SHEET -- MARCH 31, 1997
A. ACQUISITION PROPERTIES
Concurrent with the Offering and related Formation Transactions, the
Company will enter into the following transactions:
- Acquisition of partnership interests in the entities comprising the Tower
Predecessor. The acquisitions of all partnership interests in the Tower
Predecessor, excluding Lawrence Feldman's interest, for approximately
$193.5 million in cash (including repayment of indebtedness), 70,340 OP
Units (approximate value of $1.8 million based on a value of $25.00 per
OP Unit) and 106,000 shares of restricted Common Stock (approximate value
of $2.6 million based on a value of $25 per common share) are accounted
for utilizing the purchase method of accounting. The acquisition of
Lawrence Feldman's interest in the Tower Predecessor is accounted for at
historical cost.
- Acquisition of partnership interests in the 2800 North Central Avenue
Property. The acquisitions of certain partnership interests in the 2800
North Central Avenue Property, excluding Lawrence Feldman's interest, for
36,360 OP Units (approximate value of $0.9 million based on a value of
$25.00 per OP Unit) is accounted for utilizing the purchase method of
accounting. The acquisition of Larry Feldman's interest in the 2800 North
Central Property is accounted for at historical cost. In total, the pro
forma consolidated balance sheet includes an approximate 10% ownership in
2800 North Central Avenue Property.
- Acquisition of partnership interests in the entities comprising the DRA
Joint Ventures. The acquisitions of all partnership interests in the DRA
Joint Ventures, excluding Lawrence H. Feldman's interest, for
approximately $23.8 million in cash plus assumption of and repayment of
indebtedness aggregating approximately $127.9 million, 217,960 OP Units
(approximate value of $5.4 million based on a value of $25.00 per OP
Unit) and 952,760 shares of restricted Common Stock (approximate value
$23.8 million based on a value of $25.00 per common share) are accounted
for utilizing the purchase method of accounting. The acquisition of
Lawrence Feldman's interest in the DRA Joint Ventures is accounted for at
historical cost.
- Acquisition of Century Plaza. The acquisition of Century Plaza from an
unrelated third party for approximately $11.9 million in cash is
accounted for utilizing the purchase method of accounting.
- Acquisition of Properties Atlantic. The acquisition of Properties
Atlantic for 120,000 OP Units (approximate value of $3.0 million based on
a value of $25.00 per OP Unit) is accounted for utilizing the purchase
method of accounting.
F-5
<PAGE> 169
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The pro forma adjustments to reflect the acquisitions of Tower Predecessor
(including the acquisition of an approximate 10% ownership in 2800 North Central
Property), DRA Joint Ventures, Century Plaza and Properties Atlantic are as
follows:
<TABLE>
<CAPTION>
DRA
TOWER JOINT CENTURY PROPERTIES
PREDECESSOR VENTURES PLAZA ATLANTIC TOTAL
----------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Real estate.................... $ 67,188 $ 180,950 $ 11,870 $ 260,008
Cash and cash equivalents...... (193,539) (129,681) (11,870) (335,090)
Investment in joint ventures... 909 909
Prepaid expenses and other
assets....................... $3,000 3,000
--------- --------- -------- ------ ---------
$ (125,442) $ 51,269 $ $3,000 $ (71,173)
========= ========= ======== ====== =========
Debt........................... $ (168,622)(a) $ 22,000 (146,622)
Minority interest in Operating
Partnership.................. 2,667 5,450 $3,000 11,117
Common shares.................. 1 10 11
Additional paid in capital..... 2,648 23,809 26,457
Owners' equity................. 37,864 37,864
--------- --------- -------- ------ ---------
$ (125,442) $ 51,269 $ $3,000 $ (71,173)
========= ========= ======== ====== =========
</TABLE>
- ---------------
(a) Historical debt on real estate for Tower Predecessor at March 31, 1997 is
$200.1 million. The debt on real estate has been reduced by $31.5 million to
reflect anticipated reduction from debt restructurings. (See pro forma
adjustment C5).
The other historical assets and liabilities of Tower Predecessor, DRA Joint
Ventures, Century Plaza and Properties Atlantic will not be acquired or assumed
in the acquisitions, except for a deferred real estate tax liability of
approximately $13.0 million and the related receivable for a portion of this
liability which is expected to be recovered from tenants. This deferred real
estate liability represents a portion of real estate taxes accrued on Tower 45
from 1988 through 1995 which is payable to the taxing authority commencing on
July 1, 1998 in payments of $1.3 million per year.
B. THE OFFERING AND CONCURRENT PRIVATE PLACEMENT
Reflects the initial capitalization of the Company and the issuance of
10,900,000 common shares in connection with the Offering and Concurrent Private
Placement at an assumed initial public offering price of $25.00 per share. The
estimated costs of the Offering include $16.2 million of underwriters' discount
and $12.1 million of other offering costs, which have been reflected as a
reduction to additional paid-in capital (there is no underwriter's discount for
the common shares sold in the Concurrent Private Placement). The resulting net
proceeds of the Offering total approximately $244.2 million.
C. OTHER ADJUSTMENTS
The following pro forma adjustments represent other aspects of the Offering
and related Formation Transactions.
(1) Represents the write-off to shareholders' equity of historical
Tower Predecessor's previously capitalized deferred financing costs on
mortgage loans and organizational costs to be written off concurrent with
the Offering and the Company's deferred formation costs paid through March
31, 1997
F-6
<PAGE> 170
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
which are netted against proceeds in connection with the Offering. Also
includes the capitalization of a $653 deferred financing fee to be incurred
on the Term Loan:
<TABLE>
<S> <C>
Deferred financing costs........................................... $(1,468)
Organizational costs............................................... (1,100)
Deferred formation costs........................................... (1,583)
Financing fees on Term Loan........................................ 653
-------
Deferred financing costs, net............................ $(3,498)
=======
</TABLE>
(2) Represents the elimination of unbilled rental revenue of the Tower
Predecessor due to the assumed acquisition of the properties on March 31,
1997.
(3) Represents the elimination of the investment in DRA Joint Ventures
from the Tower Predecessor historical balance sheet. The pro forma
adjustments reflecting the acquisition of the DRA Joint Ventures
effectively records 100% of the DRA Joint Ventures.
(4) Represents the conversion of certain debt held by certain
investment funds advised by MSAM (the "MSAM Notes") assumed to be incurred
of $ million to shares of restricted Common Stock and the
redemption of 1,000 shares from the initial incorporation of the Company.
The pro forma adjustment is to increase cash since the proceeds from the
MSAM Notes will be received subsequent to March 31, 1997.
(5) Represents the new borrowings under the Term Loan of $87.0 million
offset by debt forgiveness of $31.5 million and the $4.0 million of MSAM
Notes borrowed by March 31, 1997 converted to shares of restricted Common
Stock.
Pro forma debt outstanding at March 31, 1997 is as follows:
<TABLE>
<S> <C>
Corporate Center.................................................. $22,000
Term Loan......................................................... 87,000
---------
$109,000
=========
</TABLE>
At the time of the Offering, it has been assumed for pro forma
purposes, that a portion of the debt encumbering Tower 45 will remain
outstanding, and will be repaid with proceeds from the Term Loan. The above
Term Loan amount of $87.0 million reflects the repayment of this Tower 45
debt.
(6) Represents elimination of other assets and liabilities of the
Tower Predecessor, except for accounts receivable of $2.5 million and a
deferred real estate tax liability of approximately $13.0 million, which
will not be acquired or assumed in the transaction. This deferred real
estate liability represents a portion of real estate taxes accrued on Tower
45 from 1988 through 1995 which is payable to the taxing authority
commencing on July 1, 1998 in payments of $1.3 million per year.
(7) Represents the equity attributable to OP Units owned. The Company
is the sole general partner of the Operating Partnership and will own
approximately 89.9% of the Operating Partnership. Total OP Units
outstanding will be 1,408,943 which will represent an approximate 10.1%
minority interest in the Operating Partnership. The minority interest is
reported as the equity of the Operating Partnership multiplied by the
minority interest ownership percentage in the Operating Partnership.
(8) Reclassifies remaining historical Tower Predecessor owners' equity
to additional paid in capital.
F-7
<PAGE> 171
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. PRO FORMA ADJUSTMENTS TO THE STATEMENT OF OPERATIONS -- MARCH 31, 1997
A. ACQUISITION PROPERTIES
The statement of operations information for the three months ended March
31, 1997 reflects the historical operations of the DRA Joint Ventures, Century
Plaza and Properties Atlantic as follows:
<TABLE>
<CAPTION>
DRA JOINT CENTURY PROPERTIES
VENTURES PLAZA ATLANTIC TOTAL
--------- ------- ---------- ------
<S> <C> <C> <C> <C>
Rental income............................... $ 7,151 $ 202 $7,353
Other income................................ 41 $140 181
------ ---- ---- ------
Total revenues.................... 7,192 202 140 7,534
------ ---- ---- ------
Property operating and maintenance.......... 1,777 65 1,842
Real estate taxes........................... 893 25 918
Other expenses.............................. 378 21 30 429
------ ---- ---- ------
Total expenses.................... 3,048 111 30 3,189
------ ---- ---- ------
Revenues in excess of certain operating
expenses.................................. $ 4,144 $ 91 $110 $4,345
====== ==== ==== ======
</TABLE>
F-8
<PAGE> 172
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
B. OTHER ADJUSTMENTS
PRO FORMA ADJUSTMENT SUMMARY
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
EQUITY IN
CONSTRUCTION, REAL GENERAL OFFICE DEPRECIATION INCOME (LOSS)
PRO FORMA RENTAL MANAGEMENT LEASING AND ESTATE AND INTEREST AND OF JOINT
ADJUSTMENT INCOME FEES OTHER FEES TAXES ADMINISTRATION EXPENSE AMORTIZATION VENTURES
- ---------- ------ ----------- -------------- ------ -------------- -------- ------------ -------------
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C>
2B(1) Straight line rental
income.............. $797
2B(2) Equity investment in
Management
Company............. $ (91) $ (225) $ (280) $ 22
2B(3) Elimination of
property management
and other fees...... (166) (251) (177)
2B(4) Real estate taxes... $(25)
2B(5) General office and
administration...... (209)
2B(6) Mortgage interest... $ (1,379)
2B(7) Amortization of
deferred financing
costs............... (149)
2B(8) Depreciation
expense............. $1,337
2B(9) Consolidation of DRA
Joint Ventures...... (34)
2B(10) Equity investment in
2800 North Central
Avenue Property..... (13)
2B(11) Record minority
interest in
Operating
Partnership.........
---- ----- ----- ----- ------- ------ ---- ----
Total............... $797 $(257) $ (476) $(25) $ (666) $ (1,528) $1,337 $ (25)
==== ===== ===== ===== ======= ====== ==== ====
<CAPTION>
MINORITY
INTEREST IN
PRO FORMA OPERATING
ADJUSTMENT PARTNERSHIP
- ---------- -----------
<C> <C>
2B(1)
2B(2)
2B(3)
2B(4)
2B(5)
2B(6)
2B(7)
2B(8)
2B(9)
2B(10)
2B(11)
$ 407
----
$ 407
====
</TABLE>
(1) Reflects an adjustment to increase the properties' rental revenue for
straight-line rent based on the acquisition date of the properties of January 1,
1996.
F-9
<PAGE> 173
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(2) Reflects the elimination of revenues and certain expenses of the Tower
Predecessor management companies in connection with the Excluded Properties and
third party management contracts to be assigned to the Management Company as
follows:
<TABLE>
<S> <C>
Management fees.............................................................. $ 91
Construction, leasing and other fees......................................... 225
General office and administrative............................................ (280)
-----
Net income of the Management Company............................... $ 36
=====
</TABLE>
Also reflects income taxes of 35% on the Management Company's income (65% x
$36 or $23) and the 95% economic interests in the Management Company recorded on
the equity method of accounting (95% of $23 or $22).
(3) Represents the elimination of management fees and construction, leasing
and other fees ($251) and general office and administrative expenses ($166)
related to the DRA Joint Ventures as a result of the Company's prospective
ownership and management of the properties. Also reflects the elimination of
property management fees for Century Plaza ($11).
(4) Reflects the reduction in real estate taxes related to the parcel of
land adjacent to One Orlando Center which will not be acquired in the Formation
Transactions (option parcel).
(5) Reflects a net decrease of $209 in general office and administrative
expense which is a result of eliminating certain nonoperating expenses (such as
separate partnership accounting fees and reductions in salaries of certain
officers) affected by the Formation Transactions partially offset by additional
costs of operating as a public company.
(6) Reflects the net decrease in interest expense as a result of the
repayment of a portion of the existing debt on real estate of Tower Predecessor
partially offset by the assumption of existing debt in connection with the
acquisition of Corporate Center, and borrowings under the Term Loan. The
following presents the debt to
F-10
<PAGE> 174
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
be outstanding subsequent to the Offering and related Formation Transactions and
the corresponding interest expense adjustment:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST
AMOUNT RATE INTEREST
--------- -------- --------
<S> <C> <C> <C>
Corporate Center..................................... $ 21,000 7.55% $ 396
Corporate Center..................................... 1,000 8.37% 20
Term Loan(a)......................................... 87,000 6.98% 1,518
-------- -------
Total...................................... $ 109,000
========
Pro forma annual interest expense.................... 1,934
Historical interest expense, excluding amortization
of deferred financing costs, in previous columns
(also see (7) below)............................... (3,313)
-------
Reduction to interest expense (also see (7)
below)................................... $ (1,379)
=======
</TABLE>
- ---------------
(a) At the time of the Offering, it has been assumed for pro forma purposes that
a portion of the debt encumbering Tower 45 will remain outstanding and then be
repaid with proceeds from the Term Loan. The above Term Loan amount of $87.0
million reflects the repayment of this Tower 45 debt. The interest rate is based
on the 7 year U.S. Treasury Note rate (6.08% at July 31, 1997) plus 90 basis
points.
(7) Reflects the net decrease in the amortization of deferred financing
fees ($149) as a result of a reduction of the amortization expense associated
with historical deferred financing costs to be written off concurrent with the
Offering ($172) partially offset by the amortization of the $653 deferred
financing fee associated with the Term Loan ($23) amortized over the seven year
term.
(8) Reflects the net increase in depreciation and amortization as a result
of the acquisition of Tower Predecessor, DRA Joint Ventures, Century Plaza and
Properties Atlantic and the related increase in the basis of the assets. The
following outlines the components of the net increase:
<TABLE>
<CAPTION>
PRO FORMA
PURCHASE PURCHASE THREE MONTHS
INCREASE INCREASE PRICE PRICE DEPRECIATION
IN REAL IN OTHER ASSIGNED ASSIGNED DEPRECIABLE AND
ESTATE ASSETS TO LAND TO BUILDING LIFE AMORTIZATION
-------- -------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tower Predecessor............ $ 67,188 $ 13,436 $ 53,752 40 years $ 336
DRA Joint Ventures........... 180,950 54,284 126,666 40 years 792
Century Plaza................ 11,870 2,374 9,496 40 years 59
Properties Atlantic.......... $3,000 5 years 150
-------- ------ ------- -------- ------
Net increase in depreciation
and amortization expense... $260,008 $3,000 $ 70,094 $ 189,914 $ 1,337
======== ====== ======= ======== ======
</TABLE>
(9) Represents the elimination of the equity in earnings from the
investment in the DRA Joint Ventures from Tower Predecessor historical statement
of operations ($34).
(10) Reflects the decrease of the equity in earnings from the investment in
the 2800 North Central Property to reflect the purchase of additional
partnership interests, 10% of net loss or ($13).
F-11
<PAGE> 175
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(11) Represents net income attributable to the minority interest of the
Operating Partnership. The Company is the sole general partner and will own
approximately 89.9% of the Operating Partnership.
3. PRO FORMA ADJUSTMENTS TO THE STATEMENT OF OPERATIONS -- DECEMBER 31, 1996
A. PROPERTY ACQUIRED PRIOR TO THE FORMATION TRANSACTIONS
The statement of operations for the year ended December 31, 1996
information reflects the historical operations of 5750 Major Boulevard which was
acquired on October 24, 1996 (prior to the Formation Transactions). Operations
for 5750 Major Boulevard are included in the Tower Predecessor's combined
financial statements for the period from date of acquisition to December 31,
1996. Operations for this property for the period from January 1, 1996 to the
date of acquisition are reflected in the following table:
<TABLE>
<CAPTION>
5750 MAJOR
BLVD
----------
<S> <C>
Rental income..................................................... $462
Other income...................................................... 2
Total revenues.......................................... 464
----
Property operating and maintenance................................ 193
Real estate taxes................................................. 79
Other expenses.................................................... 47
----
Total expenses.......................................... 319
----
Revenues in excess of certain operating expenses........ $145
====
</TABLE>
B. ACQUISITION PROPERTIES
The statement of operations information for the year ended December 31,
1996 reflects the historical operations of the DRA Joint Ventures, Century Plaza
and Properties Atlantic as follows:
<TABLE>
<CAPTION>
DRA JOINT CENTURY PROPERTIES
VENTURES PLAZA ATLANTIC TOTAL
--------- ------- ---------- -------
<S> <C> <C> <C> <C>
Rental income............................ $29,010 $ 2,404 $31,414
Other income............................. 288 194 $931 1,413
------- ------ ---- -------
Total revenues................. 29,298 2,598 931 32,827
------- ------ ---- -------
Property operating and maintenance....... 7,791 997 8,788
Real estate taxes........................ 3,533 214 3,747
Other expenses........................... 1,122 174 152 1,448
------- ------ ---- -------
Total expenses................. 12,446 1,385 152 13,983
------- ------ ---- -------
Revenues in excess of certain operating
expenses............................... $16,852 $ 1,213 $779 $18,844
======= ====== ==== =======
</TABLE>
F-12
<PAGE> 176
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
C. OTHER ADJUSTMENTS
PRO FORMA ADJUSTMENT SUMMARY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
CONSTRUCTION, GENERAL
PRO FORMA RENTAL MANAGEMENT LEASING AND REAL OFFICE AND INTEREST DEPRECIATION
ADJUSTMENT INCOME FEES OTHER FEES ESTATE TAXES ADMINISTRATION EXPENSE AND AMORTIZATION
- ---------- ------ ---------- ------------- ------------ -------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3C(1) Straight line
rental revenue.... $3,189
3C(2) Equity investment
in Management
Company........... $ (460) $(1,520) $ (1,452)
3C(3) Elimination of
property
management and
other fees........ (801) (488) (893)
3C(4) Reduction of real
estate taxes...... $ (100)
3C(5) General office and
administration.... 215
3C(6) Mortgage
interest.......... $(7,265)
3C(7) Amortization of
deferred financing
costs............. (411)
3C(8) Depreciation
expense........... $5,436
3C(9) Consolidation of
DRA Joint
Ventures..........
3C(10) Equity investment
in 2800 North
Central Avenue
Property..........
3C(11) Record minority
interest in
Operating
Partnership.......
------ ------- ------- ------- ------- ------ -----
Total.............. $3,189 $ (1,261) $(2,008) $ (100) $ (2,130) $(7,676) $5,436
====== ======= ======= ======= ======= ====== =====
<CAPTION>
EQUITY IN MINORITY
INCOME INTEREST IN
PRO FORMA OF JOINT OPERATING
ADJUSTMENT VENTURES PARTNERSHIP
- ---------- --------- ------------
<S> <C> <C>
3C(1)
3C(2)
$ 326
3C(3)
3C(4)
3C(5)
3C(6)
3C(7)
3C(8)
3C(9)
(461)
3C(10)
(12)
3C(11)
$1,592
---- ------
$(147) $1,592
==== ======
</TABLE>
(1) Reflects an adjustment to increase the properties' rental revenue for
straight-line rent based on the acquisition date of the properties of January 1,
1996.
(2) Reflects the elimination of revenues and certain expenses of the Tower
Predecessor management companies in connection with the Excluded Properties and
third party management contracts to be assigned to the Management Company as
follows:
<TABLE>
<S> <C>
Management fees.................................................... $ 460
Construction, leasing and other fees............................... 1,520
General office and administrative.................................. (1,452)
-------
Net income of the Management Company..................... $ 528
=======
</TABLE>
Also reflects income taxes of 35% on the Management Company's income (65% x
$528 or $343) and the 95% economic interests in the Management Company recorded
on the equity method of accounting (95% of $343 or $326).
F-13
<PAGE> 177
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) Represents the elimination of management fees and construction, leasing
and other fees ($1,289) and general office and administrative expenses ($801)
related to the DRA Joint Ventures as a result of the Company's prospective
ownership and management of the properties. Also reflects the elimination of
property management fees for Century Plaza and 5750 Major Boulevard ($92).
(4) Reflects the reduction in real estate taxes related to the parcel of
land adjacent to One Orlando Center which will not be acquired in the Formation
Transactions (option parcel).
(5) Reflects a net increase of $215 in general office and administrative
expense which is a result of the estimated additional costs of operating as a
public company partially offset by certain nonoperating expenses (such as
separate partnership accounting fees) that are no longer required.
(6) Reflects the net decrease in interest expense as a result of the
repayment of a portion of the existing debt on real estate of Tower Predecessor
partially offset by the assumption of existing debt in connection with the
acquisition of Corporate Center and borrowings under the Term Loan. The
following presents the debt to be outstanding subsequent to the Offering and
related Formation Transactions and the corresponding interest expense
adjustment:
<TABLE>
<CAPTION>
PRINCIPAL INTEREST
AMOUNT RATE INTEREST
--------- -------- --------
<S> <C> <C> <C>
Corporate Center............................ $ 21,000 7.55% $ 1,586
Corporate Center............................ 1,000 8.37% 84
Term Loan(a)................................ 87,000 6.98% 6,072
-------- --------
Total............................. $ 109,000
========
Pro forma annual interest expense........... 7,742
Historical interest expense, excluding
amortization of deferred financing costs,
in previous columns (also see (7)
below).................................... (15,007)
--------
Reduction to interest expense
(also see (7) below)............ $ (7,265)
========
</TABLE>
- ---------------
(a) At the time of the Offering, it has been assumed for pro forma purposes that
a portion of the debt encumbering Tower 45 will remain outstanding and then be
repaid with proceeds from the Term Loan. The above Term Loan amount of $87.0
million reflects the repayment of this Tower 45 debt. The interest rate is based
on the 7 year U.S. Treasury Note rate (6.08% at July 31, 1997) plus 90 basis
points.
(7) Reflects the net decrease in the amortization of deferred financing
fees ($411) as a result of reduction of the amortization expense associated with
historical deferred financing costs to be written off concurrent with the
Offering ($504) partially offset by the amortization of the $653 deferred
financing fee associated with the Term Loan ($93) amortized over the seven year
term.
F-14
<PAGE> 178
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(8) Reflects the net increase in depreciation and amortization as a result
of the acquisition of Tower Predecessor, DRA Joint Ventures, Century Plaza and
Properties Atlantic and the related increase in the basis of the assets. The
following outlines the components of the net increase:
<TABLE>
<CAPTION>
PRO FORMA
TWELVE
INCREASE PURCHASE PURCHASE MONTHS
INCREASE IN PRICE PRICE DEPRECIATION
IN REAL OTHER ASSIGNED ASSIGNED DEPRECIABLE AND
ESTATE ASSETS TO LAND TO BUILDING LIFE AMORTIZATION
-------- -------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Tower Predecessor.......... $ 67,188 $ 13,436 $ 53,752 40 years $1,345
DRA Joint Ventures......... 180,950 54,284 126,666 40 years 3,167
Century Plaza.............. 11,870 2,374 9,496 40 years 237
Properties Atlantic........ $3,000 5 years 600
Additional depreciation
expense for 5750 Major
Blvd due to acquisition
in 1996.................. 87
-------- ------ ------- -------- ------
Net increase in
depreciation and
amortization expense..... $260,008 $3,000 $ 70,094 $ 189,914 $5,436
======== ====== ======= ======== ======
</TABLE>
(9) Represents the elimination of the equity in earnings from the
investment in the DRA Joint Ventures from Tower Predecessor historical statement
of operations ($461).
(10) Reflects the decrease of the equity in earnings from the investment in
the 2800 North Central Property to reflect the purchase of additional
partnership interests, 10% of net loss or ($12).
(11) Represents net income attributable to the minority interest of the
Operating Partnership. The Company is the sole general partner and will own
approximately 89.9% of the Operating Partnership.
F-15
<PAGE> 179
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Tower Realty Trust, Inc.:
We have audited the accompanying consolidated balance sheet of the Tower
Realty Trust, Inc. as of March 31, 1997. The consolidated balance sheet is the
responsibility of the management of Tower Realty Trust, Inc. Our responsibility
is to express an opinion on the consolidated balance sheet based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of Tower Realty Trust,
Inc. as of March 31, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
April 21, 1997
F-16
<PAGE> 180
TOWER REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<S> <C>
Cash................................................................................ $2,092
Deferred charges.................................................................... 1,583
Due from affiliates................................................................. 1,000
-----
$4,675
=====
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt................................................................................ $4,000
Due to affiliates................................................................... 674
-----
4,674
Commitments and contingencies (Notes 4 and 5)
Shareholders' equity:
Preferred shares, 100,000,000 shares authorized, none issued and outstanding........
Common shares, $.01 par value, 250,000,000 shares authorized; 1,000 shares issued
and outstanding................................................................... 1
Additional paid-in capital..........................................................
-----
$4,675
=====
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-17
<PAGE> 181
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION:
Tower Realty Trust, Inc. (the "Company") was organized in the state of
Maryland on March 27, 1997. The Company intends to qualify as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended,
commencing with its taxable year ending December 31, 1997. Upon completion of
the planned initial public offering (the "Offering")(see Note 3), the Company
intends to acquire a sole 1% general partnership interest in Tower Realty
Operating Partnership, L.P. (the "Operating Partnership"), a Delaware limited
partnership, and an 88.9% limited partnership interest in the Operating
Partnership.
The Company has been formed to continue and expand the commercial real
estate business of Tower Equities & Real Estate Corp. and its affiliates
(collectively, "Tower Equities"), including developing, acquiring, owning,
renovating, managing, and leasing office properties in midtown Manhattan,
Phoenix, Tucson, and Orlando markets.
The Company has had no operations to date, however, on March 31, 1997
interests in certain partnerships, properties and limited liability companies
were contributed to the Operating Partnership in exchange for units of limited
partnership interest in the Operating Partnership ("OP Units"). Certain of these
interests will be owned by the Operating Partnership after consummation of the
Company's Offering. Simultaneously, the Company issued $4.0 million of notes to
certain investors advised by Morgan Stanley Asset Management, Inc. ("MSAM")
which are collateralized by the Properties. All interests contributed in the
previously described transactions were accounted for at historical cost.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH
Cash consists of funds held at a major financial institution which balance
at times exceeds insurable limits.
DUE FROM (TO) AFFILIATES
Due from (to) affiliates represents amounts paid in connection with the
Offering and formation transactions by or on behalf of affiliates. These amounts
are expected to be settled upon completion of the Offering.
USE OF ESTIMATES IN THE PREPARATION OF THE BALANCE SHEET
The preparation of the balance sheet in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates.
DEFERRED CHARGES
Deferred charges consists of expenses incurred in connection with the
Offering which will be charged to additional paid-in capital upon completion of
the Offering.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), No.
129 "Disclosure of Information About Capital Structure" ("SFAS 129"), No. 130
"Reporting Comprehensive Income" ("SFAS 130"), and No. 131
F-18
<PAGE> 182
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS
131"). All of these statements are effective for fiscal years beginning after
December 15, 1997.
SFAS 128 specifies the computation, representation and disclosure
requirements for earnings per share. SFAS 129 established standards for
disclosing information about an entity's capital structure such as information
about securities, liquidation preference of preferred stock and redeemable
stock. SFAS 130 specifies the presentation and disclosure requirement for
reporting comprehensive income which includes those items which have been
formerly reported as a component of shareholders' equity. SFAS 131 establishes
the disclosure requirements for reporting segment information.
Management believes that, when adopted, SFAS 128, 129, 130 and 131 will not
have a significant impact on the Company's financial statements.
3. THE OFFERING AND RELATED FORMATION TRANSACTIONS:
The Company is expected to file a registration statement on Form S-11 with
the Securities and Exchange Commission with respect to the Offering. In
addition, the Company intends to sell shares of Common stock in a concurrent
private placement (the "Concurrent Private Placement"). All the net proceeds to
the Company from the Offering and the Concurrent Private Placement will be
contributed either directly or indirectly to the Operating Partnership in
exchange for a 1% sole general partnership interest and an 88.9% limited
partnership interest in the Operating Partnership.
Upon consummation of the Offering and certain related transactions
(collectively, the "Formation Transactions"), the Operating Partnership will own
20 office properties (the "Properties"). The Company will also own or have an
option to acquire four parcels of land adjacent to four of the Properties (the
"Development Parcels"), which can support 2.2 million of rentable square feet of
development.
The Operating Partnership will borrow approximately $87.0 million from
Merrill Lynch Mortgage Capital, Inc. (the "Term Loan") pursuant to a seven year
term facility.
The Tower Equities management and leasing companies and Properties Atlantic
Inc. (which, prior to the Offering, was controlled and operated by Clifford
Stein, Managing Director, Southeast Region of the Company) will contribute an
undivided 95% interest in the assets of such companies to the Operating
Partnership in exchange for OP Units and the Operating Partnership will, in
turn, recontribute such assets to Tower Realty Management, Inc. (the "Management
Company") in exchange for 100% of the non-voting stock and 5% of the voting
stock in the Management Company (which collectively is entitled to receive 95%
of the dividends).
The Management Company and each of the members of Tower Equities that hold
interests in seven retail properties and that will continue to be owned by Tower
Equities after the consummation of the Formation Transactions (the "Excluded
Properties") will enter into management agreements with respect to each of the
Excluded Properties. In consideration for the services to be provided under the
management agreements, the Management Company will receive a property management
fee and applicable leasing commissions which will be determined by reference to
existing market rates for similar transactions.
LINE OF CREDIT
The Operating Partnership expects to enter into the proposed $200 million
Line of Credit at or shortly after the consummation of the Formation
Transactions. The Line of Credit may be used, among other things, to finance the
acquisition or development of additional properties and the redevelopment of
properties owned by the Company.
F-19
<PAGE> 183
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
4. STOCK INCENTIVE PLANS:
Prior to the Offering, the Board of Directors plans to adopt the 1997 Plan
and the Directors' Plan.
THE 1997 PLAN
The 1997 Plan will provide for the granting of stock options, restricted
stock and performance shares and incentive awards from time to time with respect
to a number of shares equal to 9.5% of the total number of issued and
outstanding shares of Common Stock (on a fully diluted basis assuming the
exchange of all OP Units for shares of Common Stock) to executives or other key
employees of the Company. Options granted under the 1997 Plan may be incentive
stock options ("ISO") or nonqualified stock options. An option entitles a
Participant to purchase shares of Common Stock from the Company at the option
price. The option price will be fixed by the Compensation Committee, however,
that the price per share must be equal to or greater than the fair market value
of the Common Stock on the grant date.
The 1997 Plan also permits the Company to issue incentive awards,
performance shares or shares of restricted stock to participants upon such terms
and conditions as shall be determined by the Compensation Committee in its sole
discretion.
THE DIRECTORS' PLAN
A maximum of 200,000 shares of Common Stock will be issuable under The
Directors' Plan. The Directors' Plan will provide that each eligible director
who is a member of the Board of Directors as of the date that the registration
statement relating to the Offering is declared effective by the Commission will
be awarded nonqualified options to purchase 20,000 shares of Common Stock on
that date (each such director, a "Founding Director"). Each eligible director
who is not a Founding Director (a "Non-Founding Director") will receive
nonqualified options to purchase 20,000 shares of Common Stock on the date of
the meeting of the Company's stockholders at which the Non-Founding Director is
first elected to the Board of Directors. The options granted to Founding
Directors upon effectiveness of the registration statement relating to the
Offering will have an exercise price equal to the initial public offering price
and will vest in five annual installments beginning on the first anniversary of
the date of grant, subject to the Director's continuous service through such
vesting date. The exercise price of options under future grants will be 100% of
the fair market value of the Common Stock on the date of grant and will vest in
the same manner. Options granted under the Directors' Plan will be exercisable
for ten years from the date of grant. Upon termination of service as a director,
options which have not vested will be forfeited and vested options may be
exercised until they expire.
The Directors' Plan will also provide for the annual award of shares of
Common Stock to each eligible director ("Director Stock Award").
5. COMMITMENTS:
EMPLOYMENT AGREEMENTS
The Company will enter into an employment agreement with Mr. Lawrence
Feldman pursuant to which Mr. Feldman will serve as Chairman of the Board, Chief
Executive Officer and President of the Company for a term of three years at an
initial annual base compensation of $175,000, subject to any increases in base
compensation approved by the Compensation Committee. In addition, the Company
will enter into employment agreements with Messrs. Cox, and Kasman, pursuant to
which Mr. Cox will serve as Executive Vice President and Chief Operating
Officer, and Mr. Kasman will serve as Senior Vice President and Chief Financial
Officer, each for a term of three years subject, in certain circumstances, to an
automatic one year extension, at an annual base compensation of $150,000
(subject to any increase in base compensation approved by the Compensation
Committee). In addition to base salary, each such executive officer will be
entitled under his employment agreement to receive annual performance-based
compensation as determined
F-20
<PAGE> 184
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED BALANCE SHEET -- (CONTINUED)
by the Compensation Committee. Upon termination of an officer's employment
agreement other than for cause, or by such officer for "good reason" (as such
term is defined in each officer's employment agreement), each of such officers
will be entitled to receive severance benefits in an amount equal to the greater
of (i) the aggregate of all compensation due such officer during the balance of
the term of the employment agreement or (ii) 2.99 times (or, after the second
anniversary of the date of the agreement, 1.99 times) the "base amount" as
determined in the Code. In addition, such employment agreements will provide for
the grant of the options and the stock awards previously described above.
AIR RIGHTS AND GROUND LEASES
On November 30, 1980 Tower Predecessor entered into an air rights lease
agreement with the Village of Mineola which expires in May 2012, subject to the
Company's right to extend the term pursuant to two 30-year renewal options. The
lease provides for a current annual lease payment of $33,000, increasing to
$46,500 in 2001.
On November 30, 1986, Tower Predecessor entered into an agreement to lease
for 250 years the air and corresponding development rights adjacent to one of
the properties. The Operating Partnership has an option that is exercisable from
November 1, 1996 through October 31, 2001 to acquire the lessor's site for a
price as of July 31, 1997, of $11 million. This price increases through the
expiration of the option on October 31, 2001, at a rate of 50% of the percentage
increase in the consumer price index as defined in the lease (approximately $13
million as of July 31, 1997).
The future minimum lease payments to be paid under these two agreements are
as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31: (IN THOUSANDS)
--------------------------------------------------------------- --------------
<S> <C>
1997........................................................ $ 597
1998........................................................ 597
1999........................................................ 597
2000........................................................ 598
2001........................................................ 606
Thereafter..................................................... 135,394
--------
$138,389
========
</TABLE>
LAND OPTIONS
The Operating Partnership holds an option to acquire contractual rights to
purchase undeveloped land in Phoenix, Arizona. The agreement provides for an
aggregate purchase price of approximately $10.35 million, approximately $5.9
million of which is payable in cash at the closing, with the remainder to be
evidenced by a 120-day collateralized promissory note bearing interest at 8% per
annum.
In addition, the Company holds an option to acquire additional development
rights relating to an approved master plan filed with the city of Orlando for
further development of One Orlando Center.
F-21
<PAGE> 185
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners and Owners of
Tower Predecessor
We have audited the accompanying combined balance sheets of Tower
Predecessor as of December 31, 1996 and 1995, and the related combined
statements of operations, owners' deficit, and cash flows for each of the three
years in the period ended December 31, 1996 and the financial statement schedule
included in the index on page F-1 of this Prospectus. These financial statements
and financial statement schedule are the responsibility of the management of
Tower Predecessor. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Tower
Predecessor as of December 31, 1996 and 1995, and the combined results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be set
forth therein.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
April 21, 1997
F-22
<PAGE> 186
TOWER PREDECESSOR
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
MARCH 31, 1997 -------- --------
--------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate............................................. $170,303 $169,619 $163,879
Less: accumulated depreciation........................ (41,951) (40,555) (35,741)
--------- --------- ---------
Real estate, net........................................ 128,352 129,064 128,138
Deferred charges, net................................... 12,225 11,636 12,543
Receivables, net of allowance for doubtful accounts of 4,103 2,776 3,121
approximately $2.5 million for all periods............
Unbilled rent receivable................................ 15,089 15,242 16,447
Escrowed funds.......................................... 527 413 297
Cash and cash equivalents............................... 4,843 4,985 5,208
Investments in joint ventures........................... 5,013 5,316 4,538
Prepaid expenses and other assets....................... 3,940 3,555 3,597
--------- --------- ---------
Total assets.................................. $174,092 $172,987 $173,889
========= ========= =========
LIABILITIES AND OWNERS' DEFICIT
Real estate debt........................................ $200,097 $202,892 $199,962
Deferred real estate taxes.............................. 12,951 12,951 12,951
Accounts payable and other liabilities.................. 13,935 12,867 11,600
Amounts due to affiliates............................... 9,054 6,147 6,464
--------- --------- ---------
Total liabilities............................. 236,037 234,857 230,977
Commitments and contingencies (Note 12)
Owners' deficit......................................... (61,945) (61,870) (57,088)
--------- --------- ---------
Total liabilities and owners' deficit......... $174,092 $172,987 $173,889
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-23
<PAGE> 187
TOWER PREDECESSOR
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
--------------------------- -------------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income...................... $ 6,945 $ 7,110 $26,138 $25,202 $25,994
Management fees.................... 257 369 1,261 961 82
Construction, leasing, and other 498 278 1,335 1,041 320
fees............................
------- ------- -------- -------- --------
Total revenues............. 7,700 7,757 28,734 27,204 26,396
------- ------- -------- -------- --------
Expenses:
Property operating and 1,350 1,251 5,134 4,992 5,014
maintenance.....................
Real estate taxes.................. 1,196 1,177 4,569 4,570 3,969
General office and 1,095 983 3,994 3,838 2,778
administration..................
Interest expense................... 3,485 3,883 15,511 15,150 12,751
Depreciation and amortization...... 1,698 1,690 6,853 6,897 7,415
Ground rent and air rights 150 150 599 599 599
expense.........................
------- ------- -------- -------- --------
Total expenses............. 8,974 9,134 36,660 36,046 32,526
------- ------- -------- -------- --------
Equity in income of joint ventures... 34 45 461 193 1
------- ------- -------- -------- --------
Net loss................... $(1,240) $(1,332) $(7,465) $(8,649) $(6,129)
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-24
<PAGE> 188
TOWER PREDECESSOR
COMBINED STATEMENTS OF OWNERS' DEFICIT
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Balance at January 1, 1994........................................................ $(47,469)
Net loss........................................................................ (6,129)
Contributions, net.............................................................. 2,429
-------
Balance at December 31, 1994...................................................... (51,169)
Net loss........................................................................ (8,649)
Contributions, net.............................................................. 2,730
-------
Balance at December 31, 1995...................................................... (57,088)
Net loss........................................................................ (7,465)
Contributions, net.............................................................. 2,683
-------
Balance at December 31, 1996...................................................... (61,870)
Net loss (unaudited)............................................................ (1,240)
Contributions, net (unaudited).................................................. 1,165
-------
Balance at March 31, 1997 (unaudited)............................................. $(61,945)
=======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-25
<PAGE> 189
TOWER PREDECESSOR
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net loss................................... $(1,240) $(1,332) $(7,465) $(8,649) $(6,129)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization........... 1,698 1,690 6,853 6,897 7,415
Amortization of deferred financing
costs................................. 172 126 504 575 574
Equity in income of joint ventures, net
of distributions...................... (461) (193) (34)
Gain on disposal of assets.............. (39) (30) (81)
Change in:
Deferred charges...................... (1,054) (804) (867) (373) 1,085
Receivables........................... (1,327) (645) 345 2,673 (2,471)
Unbilled rent receivable.............. 153 59 1,205 3,084 2,437
Escrowed funds........................ (114) (270) (116) 268 69
Prepaid expenses and other assets..... (386) 1,063 42 (616) (278)
Deferred real estate taxes............ 366 1,074
Accounts payable and other
liabilities........................ 1,068 869 1,267 90 (1,548)
Amounts due to affiliates............. 2,907 (219) (317) (2,330) 2,005
------- ------- ------- ------- -------
Net cash flow provided by operating
activities....................... 1,877 537 951 1,762 4,118
------- ------- ------- ------- -------
Cash flow from investing activities:
Improvements to real estate................ (693) (1,182) (2,659) (967) (1,602)
Acquisitions of real estate................ (3,850)
Distribution from (contribution to) joint
ventures................................ 304 13 (317) (2,503) (1,808)
Proceeds from disposal of assets........... 39 30 273
------- ------- ------- ------- -------
Net cash flow used in investing
activities....................... (389) (1,169) (6,787) (3,440) (3,137)
------- ------- ------- ------- -------
Cash flow from financing activities:
Partners' contributions, net............... 1,165 766 2,683 2,730 2,429
Proceeds from real estate debt............. 474 28 7,039 424 780
Repayment of real estate debt.............. (3,269) (1,049) (4,109) (2,916) (3,179)
------- ------- ------- ------- -------
Net cash flow (used in) provided by
financing activities............. (1,630) (255) 5,613 238 30
------- ------- ------- ------- -------
Net (decrease) increase in cash and cash
equivalents................................ (142) (887) (223) (1,440) 1,011
Cash and cash equivalents, beginning of
years...................................... 4,985 5,208 5,208 6,648 5,637
------- ------- ------- ------- -------
Cash and cash equivalents, end of years...... $ 4,843 $ 4,321 $ 4,985 $ 5,208 $ 6,648
======= ======= ======= ======= =======
Supplemental cash flow information:
Cash paid for interest..................... $ 3,385 $ 3,433 $15,007 $14,575 $12,177
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-26
<PAGE> 190
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying combined financial statements of the Tower Predecessor
have been presented on a combined historical cost basis because of common
ownership and management, and because the assets and liabilities are expected to
be the subject of a business combination with Tower Realty Trust, Inc. (the
"Company") and Tower Realty Operating Partnership, L.P. (the "Operating
Partnership"), both newly formed entities with no prior operations. Upon
completion of the Company's public offering, the Company will own a sole 1%
general partnership and a 88.9% limited partnership interest in the Operating
Partnership.
The following entities comprising Tower Predecessor are controlled and
managed by Tower Equities and Real Estate Corp. and its affiliates
(collectively, "Tower Equities") (which is controlled by Lawrence H. Feldman,
Chairman of the Board, Chief Executive Officer and President of the Company):
<TABLE>
<CAPTION>
LAWRENCE H.
FELDMAN'S
OWNERSHIP INTEREST LOCATION
-------------------- ------------------
<S> <C> <C>
Tower 45........................................ 6% New York City
120 Mineola Boulevard........................... 5% Long Island, NY
Maitland Forum.................................. 15% Maitland, FL
Maitland Center Parkway (3 properties).......... 90% Maitland, FL
5750 Major Boulevard (purchased in October
1996)......................................... 6% Orlando, FL
Management Companies............................ 90% New York City and
Maitland, FL
</TABLE>
Lawrence H. Feldman owns a majority general partnership interest in the
partnerships owning these properties. The accompanying combined financial
statements include 100% of the assets, liabilities and operations of these
properties.
Lawrence H. Feldman holds a non-controlling interest in the partnerships
that own the properties listed in the following table. Lawrence H. Feldman is a
general partner and an affiliate of DRA Advisors, Inc. ("DRA") is the managing
general partner in each partnership. The accompanying combined financial
statements include these investments in the DRA Joint Ventures using the equity
method of accounting (see Note 5). Upon consummation of the initial public
offering, the Company will purchase all of the partnership interests in the DRA
Joint Ventures.
<TABLE>
<CAPTION>
LAWRENCE H.
FELDMAN'S
OWNERSHIP INTEREST LOCATION
-------------------- -----------------
<S> <C> <C>
286 Madison Avenue......................................... 3% New York City
290 Madison Avenue......................................... 3% New York City
292 Madison Avenue......................................... 3% New York City
Corporate Center Building(6 properties).................... 20% Phoenix, AZ
5151 East Broadway......................................... 3% Tucson, Arizona
One Orlando Center......................................... 3% Orlando, Florida
</TABLE>
Lawrence H. Feldman also holds a 3.8% non-controlling interest in a
partnership controlling the 2800 North Central Property (which economic interest
could increase up to 27.5% if certain performance criteria are achieved). The
accompanying combined financial statements include this investment using the
equity method of accounting (see Note 5). The Company, upon consummation of the
initial public offering is expected to acquire this interest and the interests
of other Tower Equities employees (10% aggregate interest).
The Company is formed with the intent of qualifying as a Real Estate
Investment Trust ("REIT") under the Internal Revenue Code of 1986, as amended.
The Company expects to raise equity through an initial public offering (the
"Offering") and a concurrent private placement (the "Concurrent Private
Placement"). The proceeds from the Offering and the Concurrent Private Placement
are expected to be used to purchase a
F-27
<PAGE> 191
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1% sole general partnership interest and 88.1% limited partnership interest in
the Operating Partnership which will hold the operating assets and liabilities
of the Company.
All significant intercompany transactions have been eliminated in the
combined financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE
Real estate and leasehold improvements are stated at cost. In accordance
with Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,"
Tower Predecessor records impairment writedowns on long-lived assets, when
events and circumstances indicate that the assets might be impaired and the
estimated undiscounted cash flows to be generated by those assets are less than
the carrying amounts of those assets. No such impairment losses have been
recognized in these financial statements.
Depreciation on buildings and improvements is provided under the
straight-line method over an estimated useful life of thirty to forty years.
Depreciation on furniture and fixtures is provided under the straight-line
method over an estimated useful life of five to seven years.
When assets are sold or retired, their costs and related accumulated
depreciation are removed from the accounts with the resulting gains or losses
reflected in net income or loss. Expenditures for maintenance and repairs are
charged to operations as incurred.
DEFERRED CHARGES
Deferred financing costs are recorded at cost and are being amortized on
the straight-line method, which approximates the interest method over the life
of the related debt. Leasing commissions and leasehold improvements are deferred
and amortized over the lesser of the useful life or the terms of the related
leases. Other deferred charges are amortized over terms applicable to the
expenditure.
ESCROWED FUNDS
Escrowed funds are comprised of funds held for the payment of real estate
taxes and mortgage interest.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and investments with
maturities of three months or less when purchased. The majority of Tower
Predecessor's cash and cash equivalents are held at major financial institutions
which balances at times exceed insurable limits. For purposes of the statements
of cash flows, all transactions between Tower Predecessor and other affiliated
entities have been accounted for as settled in cash at the time the transaction
was recorded.
RECEIVABLES AND DEFERRED REAL ESTATE TAXES
Deferred real estate taxes represent a portion of real estate taxes accrued
from 1988 through 1995 for Tower 45 which are payable to the taxing authority
commencing on July 1, 1998 in payments of approximately $1.3 million per year. A
portion of these deferred real estate taxes are expected to be recovered from
tenants (approximately $2.5 million) and is recorded as a receivable in the
accompanying financial statements.
INCOME TAXES
Tower Predecessor is not a legal entity subject to Federal, State or local
income taxes. No provision for income taxes is necessary in the financial
statements of Tower Predecessor since Tower Predecessor's
F-28
<PAGE> 192
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
statements combine the operations and balances of partnerships which are not
subject to income tax. The tax effect of its activities accrues to the
individual partners of the respective entity.
REVENUE RECOGNITION
Tower Predecessor, as a lessor, has retained substantially all of the risks
and benefits of ownership of the rental properties and accounts for its leases
as operating leases. Space is leased to tenants under leases ranging from 3 to
10 years. Rental income is recognized over the terms of the leases as it is
earned. Unbilled rental revenue represents rental income earned on a
straight-line basis in excess of rent payments received pursuant to terms of the
individual lease agreements.
Management fee income from third parties and joint venture properties is
recognized as earned under the terms of the related agreements. Construction
fees are recognized ratably over each project's construction period and leasing
fees are generally recognized upon tenant occupancy of the leased premises
unless such fees are irrevocably due and payable upon lease execution, in which
case recognition occurs on the lease execution date.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates relate to the recoverability of
real estate, unbilled rent receivable and investment in joint ventures. Actual
results could differ from those estimates.
UNAUDITED INTERIM STATEMENTS
The combined financial statements as of March 31, 1997 and for the three
months ended March 31, 1997 and 1996 are unaudited. In the opinion of
management, all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of such combined financial statements have
been included. The results of operations for the three months ended March 31,
1997 are not necessarily indicative of Tower Predecessor's future results of
operations for the full year ending December 31, 1997.
3. REAL ESTATE
Real estate consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Land.............................................. $ 25,662 $ 25,662 $ 25,280
Buildings and improvements........................ 144,522 143,838 138,441
Furniture, fixtures and equipment................. 119 119 158
-------- -------- --------
Total................................... 170,303 169,619 163,879
Less: Accumulated depreciation.................... (41,951) (40,555) (35,741)
-------- -------- --------
$ 128,352 $129,064 $128,138
======== ======== ========
</TABLE>
Depreciation expense on real estate for the years ended December 31, 1996,
1995 and 1994 was approximately $5.6 million, $5.7 million and $6.2 million,
respectively, and for the three months ended March 31, 1997 and 1996 (unaudited)
was approximately $1.4 million for each period.
F-29
<PAGE> 193
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. DEFERRED CHARGES
Deferred charges consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------- --------------------
1997 1996 1995
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Deferred financing costs........................... $ 2,204 $ 1,049 $ 2,214
Deferred leasing costs............................. 17,036 17,018 16,500
Deferred brokerage commissions..................... 7,469 7,330 7,132
-------- -------- --------
26,709 25,397 25,846
Less: Accumulated amortization................ (14,484) (13,761) (13,303)
-------- -------- --------
$12,225 $ 11,636 $12,543
======== ======== ========
</TABLE>
During 1996, fully amortized deferred charges of approximately $2.5 million
were written off and removed from the deferred charges asset and accumulated
amortization accounts.
5. INVESTMENTS IN JOINT VENTURES
Tower Predecessor accounts for its investments in joint ventures using the
equity method of accounting and, therefore reports its share of income and
losses based on Lawrence H. Feldman's ownership interests in the respective
entities as described in Note 1.
Presented below is condensed combined financial information of the DRA
Joint Ventures:
DRA JOINT VENTURES
Combined Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------
1997 1996 1995
----------- -------- --------
<S> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Real estate, net of accumulated depreciation.............. $ 140,136 $140,759 $139,169
Other assets.............................................. 19,256 19,249 10,759
-------- -------- --------
Total assets.................................... $ 159,392 $160,008 $149,928
======== ======== ========
LIABILITIES AND OWNERS' EQUITY
Debt on real estate....................................... $ 127,861 $126,517 $119,288
Accounts payable and other liabilities.................... 3,685 3,956 5,428
-------- -------- --------
Total liabilities............................... 131,546 130,473 124,716
Owners' equity............................................ 27,846 29,535 25,212
-------- -------- --------
Total liabilities and owners' equity............ $ 159,392 $160,008 $149,928
======== ======== ========
</TABLE>
F-30
<PAGE> 194
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
DRA JOINT VENTURES
Combined Statements of Operations
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
--------------------------- ----------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- ----
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income......................... $ 7,151 $ 6,736 $29,010 $12,629 $207
Management fees and other............. 41 62 288 224
------ ------ ------- ------- ----
Total revenues................ 7,192 6,798 29,298 12,853 207
------ ------ ------- ------- ----
Expenses:
Property (including maintenance, real
estate taxes and management
fees).............................. 3,048 3,215 12,446 6,283 170
Interest expense...................... 2,824 2,392 10,176 3,814
Depreciation and amortization......... 1,130 943 4,118 1,684 31
------ ------ ------- ------- ----
Total expenses................ 7,002 6,550 26,740 11,781 201
------ ------ ------- ------- ----
Net income.................... $ 190 $ 248 $ 2,558 $ 1,072 $ 6
====== ====== ======= ======= ====
</TABLE>
F-31
<PAGE> 195
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Presented below is condensed financial information of the 2800 North
Central Property:
2800 NORTH CENTRAL PROPERTY
Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Real estate, net of accumulated depreciation........................ $30,755 $ 30,638
Other assets........................................................ 2,580 2,244
------- -------
Total assets.............................................. $33,335 $ 32,882
======= =======
LIABILITIES AND OWNERS' EQUITY
Debt on real estate................................................. $25,481 $ 25,021
Accounts payable and other liabilities.............................. 1,405 1,285
------- -------
Total liabilities......................................... 26,886 26,306
Owners' equity...................................................... 6,449 6,576
------- -------
Total liabilities and owners' equity...................... $33,335 $ 32,882
======= =======
</TABLE>
2800 NORTH CENTRAL PROPERTY
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
THREE- MONTHS MAY 1996
ENDED THROUGH
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Revenues:
Rental income.................................................... $1,374 $3,615
Management fees and other........................................ 10 48
------ ------
Total revenues........................................... 1,384 3,663
------ ------
Expenses:
Property (including maintenance, real estate taxes and
management fees).............................................. 635 1,687
Interest expense................................................. 626 1,581
Depreciation and amortization.................................... 250 519
------ ------
Total expenses........................................... 1,511 3,787
------ ------
Net loss................................................. $ (127) $ (124)
====== ======
</TABLE>
F-32
<PAGE> 196
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. REAL ESTATE DEBT
Real estate debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Tower 45.................................................. $ 145,550 $147,616 $151,109
120 Mineola Boulevard..................................... 18,892 18,892 18,892
Maitland Forum............................................ 29,882 29,409 27,013
Maitland Center Parkway (3 properties).................... 3,235 4,437 2,948
5750 Major Boulevard...................................... 2,538 2,538
-------- -------- --------
$ 200,097 $202,892 $199,962
======== ======== ========
</TABLE>
The interest rates on the mortgage loans referred to above (with the
exception of Tower 45) are calculated based on the GECC Commercial Paper Rate
(5.3% and 5.6% (unaudited) on December 31, 1996 and March 31, 1997,
respectively), plus 3.25 or 3.5%. These mortgages are collateralized by the
land, building and improvements, furniture and fixtures, machinery and equipment
and tenant leases and sub leases. The Tower 45 rate is based on the LIBOR rate
(5.6% and 5.8% (unaudited) on December 31, 1996 and March 31, 1997,
respectively), plus 2.5%. This loan is collateralized by the Company's rights in
a lease on the air and corresponding development rights adjacent to the property
(see Note 12).
Scheduled principal repayments of debt on real estate at December 31, 1996,
are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
----------------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
1997................................................................... $ 1,138
1998................................................................... 170,945
2001................................................................... 28,271
Thereafter............................................................. 2,538
--------
$202,892
========
</TABLE>
7. LEASING ACTIVITIES
The future minimum lease payments to be received by Tower Predecessor as of
December 31, 1996 under noncancelable operating leases, which expire on various
dates through 2007, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
--------------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
1997................................................................. $ 23,436
1998................................................................. 23,131
1999................................................................. 22,133
2000................................................................. 20,867
2001................................................................. 19,134
Thereafter........................................................... 51,299
--------
$160,000
========
</TABLE>
F-33
<PAGE> 197
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The geographic concentration of the future minimum lease payments to be
received are as follows:
<TABLE>
<CAPTION>
LOCATION AMOUNT
----------------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
New York, NY........................................................... $132,660
Orlando, Florida....................................................... 27,340
--------
$160,000
========
</TABLE>
Tower 45 comprises 64.6%, 65.1% and 71.7% of total revenues for the years
ended December 31, 1996, 1995 and 1994, respectively.
Tower Predecessor also occupies office space in certain properties it
manages. The costs of operating these property management offices are borne
entirely by the respective owners.
8. ACCOUNTS PAYABLE AND OTHER LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------
1997 1996 1995
----------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued interest............................................ $ 6,122 $ 6,022 $ 5,455
Accounts payable............................................ 3,953 3,336 4,161
Advance rent and deposits................................... 2,699 2,322 1,801
Deferred income............................................. 1,161 1,187 183
------- ------- -------
$13,935 $12,867 $11,600
======= ======= =======
</TABLE>
9. RELATED PARTY TRANSACTIONS
Under the terms of various management agreements, Tower Predecessor
receives cost reimbursements and property management, leasing and tenant service
fees from certain affiliates in which Tower Equities have ownership interests.
Cost reimbursements are comprised primarily of salary and employee benefit
recoveries and reimbursements of certain administrative costs. During the years
ended December 31, 1996 and 1995 fees and cost reimbursements derived from these
agreements totalled approximately $2.2 million and $3.5 million. For the three
months ended March 31, 1997 and 1996, fees and costs derived from these
agreements totalled $0.2 million (unaudited) and $0.5 million (unaudited),
respectively.
Amounts due to affiliates at December 31, 1996 and 1995, consisted
primarily of loans payable to affiliates of Tower Predecessor.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments," requires disclosure about the fair value of all
financial assets and liabilities for which it is practicable to estimate the
fair value. Cash equivalents, receivables, accounts payable and other
liabilities, except for deferred real estate taxes and the related receivable,
are carried at amounts that reasonably approximate their fair values. The fair
value of deferred real estate taxes is approximately $8.5 million based upon a
discount rate of 7.1%. The fair value of the related receivable, for which the
carrying amount is $2.5 million and is included in receivables, is approximately
$1.7 million based upon a discount rate of 7.1%. There is no quoted market value
available for any of Tower Predecessor's financial instruments. The real estate
debt of Tower Predecessor are at variable rates based upon LIBOR or the GECC
Commercial Paper Rate plus a fixed amount, as noted in Note 6, which approximate
current market rates. Management believes that
F-34
<PAGE> 198
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the carrying amount of Tower Predecessor's financial instruments at December 31,
1996 and 1995 are not significantly different than their fair value.
11. SAVINGS PLAN
Effective January 1, 1994, Tower Predecessor adopted a 401(k) Savings Plan
(the "Plan") for its employees. Under the Plan, as amended, employees, age 21
and older, are eligible to participate in the Plan immediately upon employment.
Base salary and wages are eligible for contribution to the Plan.
Participants may make salary deferral contributions from 1% to 15% per payroll
period.
The Plan provides that matching employer contributions are to be determined
at the discretion of Tower Predecessor. There were no discretionary matching
contributions for the years ended December 31, 1996, 1995 and 1994 and the three
months ended March 31, 1997.
Participants are immediately vested in their pre-tax contributions, and are
vested in Tower Predecessor's discretionary matching contributions after two
years of service.
12. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
Tower Predecessor is subject to various legal proceedings and claims that
arise in the ordinary course of business. These matters are generally covered by
insurance. Management believes that the final outcome of such matters will not
have a material adverse effect on the financial position, results of operations
or liquidity of Tower Predecessor.
AIR RIGHTS AND GROUND LEASES
On November 30, 1980 Tower Predecessor entered into an air rights lease
agreement with the Village of Mineola which expires in May 2012, subject to the
Company's right to extend the term pursuant to two 30-year renewal options. The
lease provides for a current annual lease payment of $33,000, increasing to
$46,500 in 2001.
On November 30, 1986, Tower Predecessor entered into an agreement to lease
for 250 years the air and corresponding development rights adjacent to one of
the properties. The Operating Partnership has an option that is exercisable from
November 1, 1996 through October 31, 2001 to acquire the lessor's site for a
price, as of July 31, 1997, of $11 million. This price increases through the
expiration of the option on October 31, 2001, at a rate of 50% of the percentage
increase in the consumer price index as defined in the lease (approximately $13
million as of July 31, 1997). Upon the Company's exercise of this option, its
obligation to pay rent under the air rights lease would automatically be
eliminated.
F-35
<PAGE> 199
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The future minimum lease payments to be paid under these two agreements are
as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
----------------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
1997................................................................... $ 597
1998................................................................... 597
1999................................................................... 597
2000................................................................... 598
2001................................................................... 606
Thereafter............................................................. 135,394
--------
$138,389
========
</TABLE>
F-36
<PAGE> 200
SCHEDULE III
TOWER PREDECESSOR
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS AMOUNT CARRIED
INITIAL COST COSTS AT CLOSE OF PERIOD
--------------------- CAPITALIZED --------------------------
BUILDING AND SUBSEQUENT TO LAND AND BUILDING AND
PROPERTY NAME(1) LOCATION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITIONS IMPROVEMENTS IMPROVEMENTS
- ------------------------------ ---------------- ------------ ------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maitland Center Parkway....... Maitland, FL $ 4,437 $ 218 $ 2,400 $ 556 $ 218 $ 2,956
120 Mineola Boulevard......... Long Island, NY 18,892 3,216 16,885 390 3,216 17,275
Maitland Forum................ Maitland, FL 29,409 3,817 10,415 7,862 3,817 18,277
Tower 45...................... New York, NY 147,616 18,029 71,886 30,095 18,029 101,981
5750 Major Boulevard.......... Orlando, FL 2,538 382 3,468 -- 382 3,468
------- ------- ------- ------- -------- --------
$202,892 $25,662 $105,054 $38,903 $ 25,662 $143,957
======= ======= ======= ======= ======== ========
<CAPTION>
ACCUMULATED DATE OF DATE DEPRECIABLE
PROPERTY NAME(1) TOTAL DEPRECIATION CONSTRUCTION ACQUIRED LIVES (YEARS)
- ------------------------------ -------- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Maitland Center Parkway....... $ 3,174 $ 355 -- 1992 (2)
120 Mineola Boulevard......... 20,491 4,701 -- 1988 (2)
Maitland Forum................ 22,094 7,666 1984 -- (2)
Tower 45...................... 120,010 27,814 1989 -- (2)
5750 Major Boulevard.......... 3,850 19 -- 1996 (2)
-------
$169,619 $ 40,555
=======
</TABLE>
- ---------------
Notes:
(1) Includes properties held by Tower Predecessor. For Maitland Center Parkway
(3 properties), information is unavailable on an individual property basis.
(2) Buildings and improvements depreciated over 35 years to 40 years.
F-37
<PAGE> 201
TOWER PREDECESSOR
REAL ESTATE AND ACCUMULATED DEPRECIATION
A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Real estate:
Balance at beginning of years...................... $163,879 $163,326 $163,189
Improvements..................................... 2,659 967 1,602
Acquisition of real estate....................... 3,850
Disposition of real estate....................... (769) (414) (1,465)
-------- -------- --------
Balance at end of years.................. $169,619 $163,879 $163,326
======== ======== ========
Accumulated depreciation:
Balance at beginning of years.................... $ 35,741 $ 30,422 $ 25,527
Depreciation expense............................. 5,583 5,733 6,168
Accumulated depreciation of real estate sold or
written off................................... (769) (414) (1,273)
-------- -------- --------
Balance at end of years.................. $ 40,555 $ 35,741 $ 30,422
======== ======== ========
</TABLE>
F-38
<PAGE> 202
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Tower Realty Trust, Inc.:
We have audited the accompanying combined statements of revenues and
certain operating expenses of DRA Joint Ventures for each of the two years in
the period ended December 31, 1996 and the period from November 21, 1994 through
December 31, 1994. These historical statements of revenues and certain operating
expenses are the responsibility of DRA Joint Ventures' management. Our
responsibility is to express an opinion on these statements of revenues and
certain operating expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the historical combined statements of
revenues and certain operating expenses are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the combined statements of revenues and certain operating
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the combined statement of revenues and certain operating
expenses. We believe that our audits provide a reasonable basis for our opinion.
The accompanying combined statements of revenues and certain operating
expenses were prepared for the purpose of complying with rules and regulations
of the Securities and Exchange Commission (for inclusion in the registration
statement on Form S-11 of Tower Realty Trust, Inc.) as described in Note 1, and
are not intended to be a complete presentation of the DRA Joint Ventures'
revenues and expenses.
In our opinion, the combined statements of revenues and certain operating
expenses referred to above presents fairly, in all material respects, the
combined revenues and certain operating expenses of the DRA Joint Ventures as
described in Note 1 for each of the two years in the period ended December 31,
1996 and the period from November 21, 1994 through December 31, 1994, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
April 21, 1997
F-39
<PAGE> 203
DRA JOINT VENTURES
COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS ENDED YEAR ENDED NOVEMBER 21,
MARCH 31, DECEMBER 31, 1994 THROUGH
--------------------------- ------------------- DECEMBER 31,
1997 1996 1996 1995 1994
----------- ----------- ------- ------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income................... $ 7,040 $ 6,512 $27,592 11,672 $193
Unbilled rental income.......... 111 224 1,418 957 14
Other income.................... 41 62 288 224
------ ------ ------- ------- ----
Total revenues.......... 7,192 6,798 29,298 12,853 207
------ ------ ------- ------- ----
Certain operating expenses:
Property operating and
maintenance.................. 1,777 1,807 7,791 3,664 90
Real estate taxes............... 893 943 3,533 1,544 38
General office and
administration............... 212 305 321 503 36
Management fees................. 166 160 801 572 6
------ ------ ------- ------- ----
Total certain operating
expenses.............. 3,048 3,215 12,446 6,283 170
------ ------ ------- ------- ----
Revenues in excess of
certain operating
expenses.............. $ 4,144 $ 3,583 $16,852 $ 6,570 $ 37
====== ====== ======= ======= ====
</TABLE>
The accompanying notes are an integral part of these combined
statements of revenues and certain operating expenses.
F-40
<PAGE> 204
DRA JOINT VENTURES
NOTES TO COMBINED STATEMENTS OF REVENUES AND
CERTAIN OPERATING EXPENSES
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
The accompanying combined statements of revenues and certain operating
expenses of the DRA Joint Ventures have been presented on a combined historical
cost basis because of common ownership and management, and because the assets
and liabilities are expected to be the subject of a business combination with
Tower Realty Trust, Inc. (the "Company") and Tower Realty Operating Partnership,
L.P. (the "Operating Partnership"), both newly formed entities with no prior
operations. The Company will own a sole 1% general partnership and a 88.9%
limited partnership interest in the Operating Partnership concurrent with the
Company's initial public offering.
The following entities, comprising the Tower Predecessor, are controlled
and managed by Tower Equities and Real Estate Corp. and its affiliates
(collectively, "Tower Equities") (which is controlled by Lawrence H. Feldman,
Chairman of the Board, Chief Executive Officer and President of the Company)
(these properties will also be contributed or acquired by the Operating
Partnership Concurrent with the Offering):
<TABLE>
<CAPTION>
LAWRENCE H.
FELDMAN'S
OWNERSHIP INTEREST LOCATION
------------------ ------------------
<S> <C> <C>
Tower 45.......................................... 6% New York City
120 Mineola Boulevard............................. 5% Long Island, NY
Maitland Forum.................................... 15% Maitland, FL
Maitland Center Parkway (3 properties):........... 90% Maitland, FL
5750 Major Boulevard (purchased in October
1996)........................................... 6% Orlando, FL
Management Companies.............................. 90% New York City and
Maitland, FL
</TABLE>
Mr. Lawrence H. Feldman is a general partner and an affiliate of DRA
Advisors, Inc. ("DRA") is the managing general partner in each partnership
listed in the following table. The accompanying combined statements of revenues
and certain operating expenses include 100% of the revenues and certain
operating expenses of these properties. Upon consummation of the Offering, the
Company will purchase all of the partnership interests in the DRA Joint
Ventures.
<TABLE>
<CAPTION>
LAWRENCE H.
FELDMAN'S
OWNERSHIP INTEREST LOCATION
------------------ ------------------
<S> <C> <C>
286 Madison Avenue................................ 3% New York City
290 Madison Avenue................................ 3% New York City
292 Madison Avenue................................ 3% New York City
Corporate Center Building (6 properties):......... 20% Phoenix, AZ
5151 East Broadway................................ 3% Tucson, AZ
One Orlando Center................................ 3% Orlando, FL
</TABLE>
The Company is formed with the intent of qualifying as a Real Estate
Investment Trust ("REIT") under the Internal Revenue code of 1986, as amended.
The Company expects to raise equity through an initial public offering (the
"Offering") and a concurrent private placement (the "Concurrent Private
Placement"). The proceeds from the Offering and the Concurrent Private Placement
will be used to purchase a 1% sole general partnership interest and 88.9%
limited partnership interest in the Operating Partnership which will hold the
operating assets and liabilities of the Company.
All significant intercompany transactions have been eliminated in the
combined financial statements.
The accompanying historical statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission and do
not reflect all operations of the properties for the periods
F-41
<PAGE> 205
DRA JOINT VENTURES
NOTES TO COMBINED STATEMENTS OF REVENUES AND
CERTAIN OPERATING EXPENSES -- (CONTINUED)
presented. The statements exclude certain expenses such as interest,
depreciation and amortization and other costs not directly related to the future
operations of the properties that may not be comparable to the expenses expected
to be incurred in the proposed future operations of the properties.
REVENUE RECOGNITION
The DRA Joint Ventures, as a lessor, has retained substantially all of the
risks and benefits of ownership of the rental properties and accounts for its
leases as operating leases. Space is leased to tenants under leases ranging from
3 to 12 years. Rental income is recognized over the terms of the leases as it is
earned. Unbilled rental revenue is recorded for rental income earned on a
straight-line basis in excess of rent payments received pursuant to terms of the
individual lease agreements.
FUTURE RENTAL REVENUE
The future minimum lease payments to be received by the DRA Joint Ventures
as of December 31, 1996 under noncancelable operating leases, which expire on
various dates through 2009, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
----------------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
1997................................................................. $ 24,457
1998................................................................. 24,279
1999................................................................. 23,085
2000................................................................. 21,618
2001................................................................. 15,097
Thereafter........................................................... 33,551
--------
$142,087
========
</TABLE>
The geographic concentration of the future minimum lease payments to be
received are as follows:
<TABLE>
<CAPTION>
LOCATION AMOUNT
----------------------------------------------------------------------- --------------
(IN THOUSANDS)
<S> <C>
New York, New York..................................................... $ 53,826
Phoenix and Tucson, Arizona............................................ 42,929
Orlando, Florida....................................................... 45,332
--------
$142,087
========
</TABLE>
For the year ended December 31, 1996, One Orlando Center and Corporate
Center Building comprised 29.7% and 27.1% of total revenues, respectively. For
the three months ended March 31, 1997, One Orlando Center and Corporate Center
comprise 30.3% and 26.4% of total revenues, respectively.
One major tenant represented 14% and 13% of the DRA Joint Ventures total
rental income for the year ended December 31, 1996 and the three months ended
March 31, 1997.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of combined statements of revenues and certain operating
expenses in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
revenues and certain operating expenses during the reporting period. The most
significant estimate relates to unbilled rental income. Actual results could
differ from those estimates.
F-42
<PAGE> 206
DRA JOINT VENTURES
NOTES TO COMBINED STATEMENTS OF REVENUES AND
CERTAIN OPERATING EXPENSES -- (CONTINUED)
UNAUDITED INTERIM STATEMENTS
The combined revenues in excess of certain operating expenses for the three
months ended March 31, 1997 and 1996 are unaudited. In the opinion of
management, all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of such combined statements have been
included. The revenues in excess of certain operating expenses for the three
months ended March 31, 1997 are not necessarily indicative of the DRA Joint
Ventures future operations for the full year ending December 31, 1997.
2. RELATED PARTY TRANSACTIONS
Under the terms of various management agreements, DRA Joint Ventures pay
cost reimbursements comprised primarily of salary and employee benefit expenses,
leasing commissions, construction management fees and property management fees
to certain affiliates in which Tower Equities has ownership interests. During
the years ended December 31, 1996 and 1995 fees paid under these agreements
totalled approximately $2.1 million and $2.5 million, respectively. During the
three months ended March 31, 1997 and 1996, fees paid under these agreements
totalled $0.5 million (unaudited).
3. LEGAL MATTERS
DRA Joint Ventures is subject to various legal proceedings and claims that
arise in the ordinary course of business. These matters are generally covered by
insurance. Management believes that the final outcome of such matters will not
have a material adverse effect on the financial position, results of operations
or liquidity of DRA Joint Ventures.
F-43
<PAGE> 207
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 21
The Company........................... 34
Operating and Growth Strategies....... 36
Use of Proceeds....................... 41
Distributions......................... 42
Capitalization........................ 46
Dilution.............................. 47
Selected Combined Financial and
Operating Data...................... 49
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 54
Property Office Markets and Market
Economies........................... 63
The Properties........................ 76
Management............................ 102
Formation and Structure of the
Company............................. 109
Certain Relationships and
Transactions........................ 113
Principal Stockholders................ 115
Description of Capital Stock.......... 116
Certain Provisions of Maryland Law and
of the Company's Charter and
Bylaws.............................. 120
Policies with Respect to Certain
Activities.......................... 123
Shares Available for Future Sale...... 127
Partnership Agreement................. 129
Federal Income Tax Considerations..... 132
ERISA Considerations.................. 148
Underwriting.......................... 151
Experts............................... 153
Legal Matters......................... 153
Additional Information................ 153
Glossary.............................. 154
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF THE DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
10,100,000 SHARES
TOWER REALTY
TRUST, INC.
COMMON STOCK
------------------
PROSPECTUS
------------------
MERRILL LYNCH & CO.
LEGG MASON WOOD WALKER
INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
, 1997
======================================================
<PAGE> 208
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than underwriting discounts and commissions) payable by the
Registrant in connection with the issuance and distribution of the shares of
Common Stock.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................ $87,993
NASD filing fee.................................................... 29,538
NYSE listing fee................................................... *
Advisory fee....................................................... *
Printing, engraving and mailing expenses........................... *
Accountant's fees and expenses..................................... *
Blue Sky fees and expenses......................................... *
Legal fees......................................................... *
Transfer agent's fees.............................................. *
Miscellaneous expenses............................................. *
--------
Total.................................................... $ *
========
Indemnification Insurance Costs (see Item 33)...................... $ *
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 32. SALES TO SPECIAL PARTIES.
See response to Item 32.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
As part of the Formation Transactions an aggregate of million OP Units
will be issued to the Primary Contributors in return for (i) the contribution of
certain interests in the Tower Predecessor Company and in certain of the
Properties and the Development Parcels to the Operating Partnership and (ii) the
contribution by the Primary Contributors of certain assets, including management
contracts relating to certain of the Properties, the Excluded Properties and
certain other Properties. The issuance of the OP Units will be effected in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act. The descriptions of the foregoing transactions in the Prospectus
under the heading "Formation and Structure of the Company" are incorporated
herein by reference.
Concurrent with the Offering, and subject to certain conditions, the
Company is directly placing with certain private investment funds advised by
Morgan Stanley Asset Management, Inc. $20 million of Common Stock at the price
per share sold in the Offering in reliance on an exemption from registration
under Section 4(2) of the Securities Act. In addition, concurrent with the
Offering, the Company will issue to the Morgan Stanley Investors approximately
shares of restricted Common Stock in exchange for the cancellation of
approximately $ million outstanding under the MSAM Notes. On March 31, 1997,
May 15, 1997, and July 31, 1997, the Company issued an aggregate of $7.7 million
of the MSAM Notes to the Morgan Stanley Investors upon an exemption from
registration under Section 4(2) of the Securities Act.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active
II-1
<PAGE> 209
and deliberate dishonesty established by a final judgment as being material to
the cause of action. The Charter of the Company contains such a provision which
eliminates such liability to the maximum extent permitted by Maryland law.
The Charter 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 (a) any present or
former director or officer or (b) any individual who, while a director of the
Company and at the request of the Company, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise from and against any
claim or liability to which such person may become subject or which such person
may incur by reason of his or her status as a present or former director or
office of the Company. The Bylaws of the Company obligate it, 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 (a) any
present or former director or officer who is made a party to the proceeding by
reason of his service in that capacity or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has served
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity.
The Charter and Bylaws also permit the Company to indemnify and advance expenses
to any person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor of
the Company.
The MGCL requires a Maryland 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 Maryland corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the result
of active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c) in
the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, 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 in any proceeding in which the director was
adjudged to be liable 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 requires the Company, as a condition to
advancing expenses, to obtain (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 Company as authorized by the Bylaws and (b)
a written statement by or on his behalf to repay the amount paid or reimbursed
by the Company if it shall ultimately be determined that the standard of conduct
was not met. Indemnification under the provisions of the MGCL is not deemed
exclusive of any other rights, by indemnification or otherwise, to which an
officer or director may be entitled under the Company's Charter or Bylaws,
resolutions of stockholders or directors, contract or otherwise. However, it is
the position of the Commission that indemnification of directors and officers
for liabilities arising under the Securities Act is against public policy and is
unenforceable pursuant to Section 14 of the Securities Act.
The Company also has purchased and maintains insurance on behalf of all of
its directors and executive officers against liability asserted against or
incurred by them in their official capacities with the Company, whether or not
the Company is required or has the power to indemnify them against the same
liability.
The Underwriting Agreement will contain certain provisions pursuant to
which certain officers, directors and controlling persons may be entitled to be
indemnified by the underwriters named therein.
II-2
<PAGE> 210
ITEM 35. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED.
None.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(1) Financial Statements are included in the Prospectus. See "Index to
Financial Statements" in the Prospectus on page F-1.
II-3
<PAGE> 211
(2) The following financial statement schedules of the registrant are filed
herewith:
III Real Estate and Accumulated Depreciation
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- ----------------------------------------------------------------------------------
<C> <S>
*1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation of the Company
*3.2 Form of Amended and Restated Articles of Incorporation
3.3 Bylaws of the Company
*4.1 Form of Common Stock Certificate for the Company
*5.1 Opinion of Battle Fowler LLP
*8.1 Opinion of Battle Fowler LLP, as to Tax Matters
10.1 Form of Amendment and Restatement of Agreement of Limited Partnership of Tower
Realty Operating Partnership, L.P., by and among Tower Realty Trust, Inc., as
general partner, Lawrence H. Feldman, as initial Limited Partner, and the Persons
set forth in Exhibit A thereto.
10.2 Form of Exchange Rights Agreement
10.3 Form of Registration Rights Agreement.
10.4 Form of Lock-up Agreement
*10.5 Form of Tower Realty Trust, Inc. 1997 Incentive Plan
*10.6 Form of Tower Realty Trust, Inc. Non-Employee Directors' Incentive Plan
*10.7 Form of Employment Agreement between the Company and Lawrence H. Feldman
*10.8 Form of Employment Agreement between the Company and Robert L. Cox
*10.9 Form of Employment Agreement between the Company and Joseph L. Kasman
*10.10 Form of Indemnification Agreement between the Company and its executive officers
and directors
*10.11 Purchase Agreement, dated March 31, 1997, by and among Tower Realty Trust, Inc.,
Tower Realty Operating Partnership, L.P., and the Investors signatory thereto.
*10.12 Assignment and Option Agreement, dated March 31, 1997, by and among Morgan Stanley
Asset Management, Inc., Madison 40/41 Management Corp., CXX Mineola Management
Corp. and Tower Equities of Arizona, LLC, and Lawrence H. Feldman.
*21.1 Subsidiaries of the Company
*23.1 Consent of Battle Fowler LLP (included in Exhibits 5.1 and 8.1 hereto)
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Landauer Associates, Inc.
24.1 Powers of Attorney (included on signature page hereto at II-6)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
99.1 Consent of Robert M. Adams to be named as a director nominee
99.2 Consent of Stephen B. Siegel to be named as a director nominee
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 37. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-4
<PAGE> 212
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 provisions referred to in Item 33 of this
Registration Statement, 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 as to
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.
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-5
<PAGE> 213
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 Form S-11 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on August 6, 1997.
TOWER REALTY TRUST, INC.
a Maryland corporation (Issuer)
By:
/s/ LAWRENCE H. FELDMAN
------------------------------------
Name: Lawrence H. Feldman
Title: Chairman, Chief Executive
Officer and President
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Lawrence H. Feldman and Joseph D. Kasman and each or either of them, as his true
and lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities (until revoked in writing), to sign any and all amendments (including
post-effective amendments) to this registration statement, any registration
statement filed pursuant to Rule 462(b), and to cause the same to be filed, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting to said attorneys-in-fact
and agents, and each of them or their substitutes or substitute, full power and
authority to do and perform each and every act and thing whatsoever requisite or
desirable to be done in and about the premises, as fully to all intents and
purposes as the undersigned might or could do in person, hereby ratifying and
confirming all acts and things that said attorneys-in-fact and agents, or either
of them, or their substitutes or substitute, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------------- ---------------
<C> <S> <C>
/s/ LAWRENCE H. FELDMAN Chairman, Chief Executive Officer August 6, 1997
- ------------------------------------------ and President (principal executive
Lawrence H. Feldman officer)
/s/ JOSEPH D. KASMAN Senior Vice President and Chief August 6, 1997
- ------------------------------------------ Financial Officer (principal
Joseph D. Kasman financial officer)
/s/ THOMAS WOODWARD Vice President of Accounting and August 6, 1997
- ------------------------------------------ Controller (principal accounting
Thomas Woodward officer)
/s/ LESTER S. GARFINKEL Director August 6, 1997
- ------------------------------------------
Lester S. Garfinkel
</TABLE>
II-6
<PAGE> 214
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NUMBERED PAGE
- ------- ---------------------------------------------------------------------- -------------
<S> <C> <C>
*1.1 Form of Underwriting Agreement
3.1 Articles of Incorporation of the Company
*3.2 Form of Amended and Restated Articles of Incorporation
3.3 Bylaws of the Company
*4.1 Form of Common Stock Certificate for the Company
*5.1 Opinion of Battle Fowler LLP
*8.1 Opinion of Battle Fowler LLP, as to Tax Matters
10.1 Form of Amendment and Restatement of Agreement of Limited Partnership
of Tower Realty Operating Partnership, L.P., by and among Tower Realty
Trust, Inc., as general partner, Lawrence H. Feldman, as initial
Limited Partner, and the Persons set forth in Exhibit A thereto.
10.2 Form of Exchange Rights Agreement
10.3 Form of Registration Rights Agreement.
10.4 Form of Lock-up Agreement
*10.5 Form of Tower Realty Trust, Inc. 1997 Incentive Plan
*10.6 Form of Tower Realty Trust, Inc. Non-Employee Directors' Incentive
Plan
*10.7 Form of Employment Agreement between the Company and Lawrence H.
Feldman
*10.8 Form of Employment Agreement between the Company and Robert L. Cox
*10.9 Form of Employment Agreement between the Company and Joseph L. Kasman
*10.10 Form of Indemnification Agreement between the Company and its
executive officers and directors
*10.11 Purchase Agreement, dated March 31, 1997, by and among Tower Realty
Trust, Inc., Tower Realty Operating Partnership, L.P., and the
Investors signatory thereto.
*10.12 Assignment and Option Agreement, dated March 31, 1997, by and among
Morgan Stanley Asset Management, Inc., Madison 40/41 Management Corp.,
CXX Mineola Management Corp. and Tower Equities of Arizona, LLC, and
Lawrence H. Feldman.
*21.1 Subsidiaries of the Company
*23.1 Consent of Battle Fowler LLP (included in Exhibits 5.1 and 8.1 hereto)
23.2 Consent of Coopers & Lybrand L.L.P.
23.3 Consent of Landauer Associates, Inc.
24.1 Powers of Attorney (included on signature page hereto at II-6)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
99.1 Consent of Robert M. Adams to be named as a director nominee
99.2 Consent of Stephen B. Siegel to be named as a director nominee
</TABLE>
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* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
TOWER REALTY TRUST, INC.
THIS IS TO CERTIFY THAT:
FIRST: The undersigned, Tracy A. Bacigalupo, whose address is c/o
Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street, Baltimore, Maryland
21202, being at least eighteen (18) years of age, does hereby form a corporation
under the general laws of the State of Maryland.
SECOND: The name of the corporation (which is hereinafter called the
"Corporation") is:
Tower Realty Trust, Inc.
THIRD: The Corporation is formed for the purpose of carrying on any
lawful business. Subject to, and not in limitation of the preceding sentence,
the Corporation intends to engage in business as a real estate investment trust
(a "REIT") qualifying as such under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended, or any successor statute (the "Code").
FOURTH: The address of the principal office of the Corporation in
this State is c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street,
Baltimore, Maryland 21202, Attention: Tracy A. Bacigalupo, Esq.
FIFTH: The name of the resident agent of the Corporation is Tracy A.
Bacigalupo, Esq. c/o Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street,
Baltimore, Maryland 21202. The resident agent is a citizen of and resides in the
State of Maryland.
SIXTH: The total number of shares of stock which the Corporation has
authority to issue is 1,000 shares, par value $.01 per share, all of one class.
SEVENTH: The Corporation shall have a Board of Directors consisting
of two directors unless the number is increased or decreased in accordance with
the Bylaws of the Corporation. At least one director of the Corporation shall be
independent, as such term is
<PAGE> 2
defined below. However, the number of directors shall never be less than the
minimum number required by the Maryland General Corporation Law. The initial
directors are:
Lawrence H. Feldman
[Independent Director]
A person qualifies as an "independent" director if such person (i) does not have
any direct or material indirect economic interest in the Corporation, any
affiliate of the Corporation or any person or entity with which the Corporation
has any material contractual relationship; and (ii) does not have any connection
to the Corporation or to any affiliate of the Corporation as an officer,
director, employee, promoter, underwriter, trustee or person performing similar
functions, and (iii) does not have any family relative that is a person covered
by (i) or (ii).
EIGHTH: (a) The Corporation reserves the right to make any amendment
of the charter, now or hereafter authorized by law, including any
amendment which alters the contract rights, as expressly set forth in the
charter, of any shares of outstanding stock.
(b) The Board of Directors of the Corporation may authorize
the issuance from time to time of shares of its stock of any class,
whether now or hereafter authorized, or securities convertible into shares
of its stock of any class, whether now or hereafter authorized, for such
consideration as the Board of Directors may deem advisable, subject to
such restrictions or limitations, if any, as may be set forth in the
Bylaws of the Corporation.
(c) The Board of Directors of the Corporation may, by articles
supplementary, classify or reclassify any unissued stock from time to time
by setting or changing the preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms
or conditions of redemption of the stock.
(d) It shall be the duty of the Board of Directors to use
commercially reasonable efforts to ensure that the Corporation satisfies
the requirements for qualification as a REIT under the Code, including,
but not limited to, the Ownership of its outstanding stock, the nature of
its assets, the sources of its income, and the amount and timing of its
distribution to the Corporation's stockholders.
NINTH: No holder of shares of stock of any class shall have any
preemptive right to subscribe to or purchase any additional shares of any class,
or any bonds or convertible securities of any nature; provided, however, that
the Board of Directors may, in authorizing the issuance of shares of stock of
any class, confer any preemptive right that the Board of Directors may deem
advisable in connection with such issuance.
<PAGE> 3
TENTH: To the maximum extent that Maryland law in effect from time
to time permits limitation of the liability of directors and officers, no
director or officer of the Corporation shall be liable to the Corporation or any
of its stockholders for money damages. Neither the amendment nor repeal of this
Article, nor the adoption or amendment of any other provision of the charter or
Bylaws inconsistent with this Article, shall apply to or affect in any respect
the applicability of the preceding sentence with respect to any act or failure
to act which occurred prior to such amendment, repeal or adoption.
ELEVENTH: The affirmative vote of the Corporation's independent
director will be required for the approval of any of the following actions by or
with respect to the Corporation or any corporation, limited liability company,
partnership or trust, the majority of the shares or other legal or beneficial
interests of which are held by the Corporation, of which the Corporation is a
managing member, general partner or trustee, or of which the Corporation has the
right to elect, designate or appoint a majority of the directors, managers or
trustees (each, a "Subsidiary"):
(a) filing or consenting to the filing of a bankruptcy petition;
(b) otherwise instituting or causing the Company or such Subsidiary
to acquiesce in the institution of an insolvency proceeding;
(c) dissolving, liquidating, consolidating, merging or selling all
or substantially all of its assets; or
(d) amending these Articles of Incorporation or the articles of
incorporation, limited liability company agreement, partnership agreement
or trust agreement of any Subsidiary.
The independent director will have a fiduciary duty to creditors and will be
required to consider the interests of creditors in connection with any decision
or action with respect to any of the foregoing actions.
IN WITNESS WHEREOF, I have signed these Articles of Incorporation
and acknowledge the same to be my act on this 21st of March, 1997.
/S/ TRACEY A. BACIGALUPO
______________________________
Tracey A. Bacigalupo
<PAGE> 1
EXHIBIT 3.3
TOWER REALTY TRUST, INC.
BYLAWS
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Corporation shall
be located at such place or places as the Board of Directors may designate. The
initial principal office of the Corporation shall be 125 West 45th Street, New
York, New York 10036.
Section 2. ADDITIONAL OFFICES. The Corporation may have additional offices
at such places as the Board of Directors may from time to time determine or the
business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE. All meetings of stockholders shall be held at the
principal office of the Corporation or at such other place within the United
States as shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the stockholders for the
election of directors and the transaction of any business within the powers of
the Corporation shall be held on a date and at the time set by the Board of
Directors during the month of May in each year.
Section 3. SPECIAL MEETINGS. The president, chief executive officer or
Board of Directors may call special meetings of the stockholders. Special
meetings of stockholders shall also be called by the secretary of the
Corporation upon the written request of the holders of shares entitled to cast
not less than a majority of all the votes entitled to be cast at such meeting.
Such request shall state the purpose of such meeting and the matters proposed to
be acted on at such meeting. The secretary shall inform such stockholders of the
reasonably estimated cost of preparing and mailing notice of the meeting and,
upon payment to the Corporation by such stockholders of such costs, the
secretary shall give notice to each stockholder entitled to notice of the
meeting.
Section 4. NOTICE. Not less than ten nor more than 90 days before each
meeting of stockholders, the secretary shall give to each stockholder entitled
to vote at such meeting
<PAGE> 2
and to each stockholder not entitled to vote who is entitled to notice of the
meeting written or printed notice stating the time and place of the meeting and,
in the case of a special meeting or as otherwise may be required by any statute,
the purpose for which the meeting is called, either by mail or by presenting it
to such stockholder personally or by leaving it at his residence or usual place
of business. If mailed, such notice shall be deemed to be given when deposited
in the United States mail addressed to the stockholder at his post office
address as it appears on the records of the Corporation, with postage thereon
prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Corporation may be
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except as otherwise set forth in Section 12(a) and
except for such business as is required by any statute to be stated in such
notice. No business shall be transacted at a special meeting of stockholders
except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of stockholders, the chairman of
the board, if there be one, shall conduct the meeting or, in the case of vacancy
in office or absence of the chairman of the board, one of the following officers
present shall conduct the meeting in the order stated: the vice chairman of the
board, if there be one, the president, the vice presidents in their order of
rank and seniority, or a chairman chosen by the stockholders entitled to cast a
majority of the votes which all stockholders present in person or by proxy are
entitled to cast, shall act as chairman, and the secretary, or, in his absence,
an assistant secretary, or in the absence of both the secretary and assistant
secretaries, a person appointed by the chairman shall act as secretary.
Section 7. QUORUM. At any meeting of stockholders, the presence in person
or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the charter of the
Corporation for the vote necessary for the adoption of any measure. If, however,
such quorum shall not be present at any meeting of the stockholders, the
stockholders entitled to vote at such meeting, present in person or by proxy,
shall have the power to adjourn the meeting from time to time to a date not more
than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.
Section 8. VOTING. A plurality of all the votes cast at a meeting of
stockholders duly called and at which a quorum is present shall be sufficient to
elect a director. Each share may be voted for as many individuals as there are
directors to be elected and for whose election the share is entitled to be
voted. A majority of the votes cast at a meeting of stockholders duly called and
at which a quorum is present shall be sufficient to approve any other matter
which may properly come before the meeting, unless more than a majority of the
votes cast is required by statute or by the charter of the Corporation. Unless
otherwise
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<PAGE> 3
provided in the charter, each outstanding share, regardless of class, shall be
entitled to one vote on each matter submitted to a vote at a meeting of
stockholders.
Section 9. PROXIES. A stockholder may vote the stock owned of record by
him, either in person or by proxy executed in writing by the stockholder or by
his duly authorized attorney in fact. Such proxy shall be filed with the
secretary of the Corporation before or at the time of the meeting. No proxy
shall be valid after eleven months from the date of its execution, unless
otherwise provided in the proxy.
Section 10. (a) VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the
Corporation registered in the name of a corporation, partnership, trust or other
entity, if entitled to be voted, may be voted by an office thereof, a general
partner or trustee thereof, as the case may be, or a proxy appointed by any of
the foregoing individuals, unless some other person who has been appointed to
vote such stock pursuant to a bylaw or a resolution of the governing body of
such corporation or other entity or agreement of the partners of a partnership
presents a certified copy of such bylaw, resolution or agreement, in which case
such person may vote such stock. Any director or other fiduciary may vote stock
registered in his name as such fiduciary, either in person or by proxy.
Shares of stock of the Corporation directly or indirectly owned by it
shall not be voted at any meeting and shall not be counted in determining the
total number of outstanding shares entitled to be voted at any given time,
unless they are held by it in a fiduciary capacity, in which case they may be
voted and shall be counted in determining the total number of outstanding shares
at any given time.
The Board of Directors may adopt by resolution a procedure by which a
stockholder may certify in writing to the Corporation that any shares of stock
registered in the name of the stockholder are held for the account of a
specified person other than the stockholder. The resolution shall set forth the
class of stockholders who may make the certification, the purpose for which the
certification may be made, the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books within which the certification must be received by
the Corporation; and any other provisions with respect to the procedure which
the Board of Directors considers necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the stockholder of record of
the specified stock in place of the stockholder who makes the certification.
(b) Exemption From Control Share Acquisition Statute. Notwithstanding any
other provision of the charter of the Corporation or these Bylaws, Title 3,
Subtitle 7 of the Corporations and Associations Article of the Annotated Code of
Maryland (or any successor statute) shall not apply to any acquisition by any
person of shares of stock of the Corporation. This section may be repealed, in
whole or in part, at any time, whether before or after an
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<PAGE> 4
acquisition of control shares and, upon such repeal, may, to the extent provided
by any successor bylaw, apply to any prior or subsequent control share
acquisition.
(c) Exemption From Business Combination Statute. Notwithstanding any other
provision of the charter of the Corporation or these Bylaws, Title 3, Subtitle 6
of the Corporations and Associations Article of the Annotated Code of Maryland
(or any successor statute) shall not apply to any acquisition by any person of
shares of stock of the Corporation. This section may be repealed, in whole or in
part, at any time, whether before or after an acquisition of control shares and,
upon such repeal, may, to the extent provided by any successor bylaw, apply to
any prior or subsequent control share acquisition.
Section 11. INSPECTORS. At any meeting of stockholders, the chairman of
the meeting may appoint one or more persons as inspectors for such meeting. Such
inspectors shall ascertain and report the number of shares represented at the
meeting based upon their determination of the validity and effect of proxies,
count all votes, report the results and perform such other acts as are proper to
conduct the election and voting with impartiality and fairness to all the
stockholders.
Each report of an inspector shall be in writing and signed by him or by a
majority of them if there is more than one inspector acting at such meeting. If
there is more than one inspector, the report of a majority shall be the report
of the inspectors. The report of the inspector or inspectors on the number of
shares represented at the meeting and the results of the voting shall be prima
facie evidence thereof.
Section 12. NOMINATIONS AND STOCKHOLDER BUSINESS
(a) Annual Meetings of Stockholders. (1) Nominations of persons for
election to the Board of Directors and the proposal of business to be considered
by the stockholders may be made at an annual meeting of stockholders (i)
pursuant to the Corporation's notice of meeting, (ii) by or at the direction of
the Board of Directors or (iii) by any stockholder of the Corporation who was a
stockholder of record both at the time of giving of notice provided for in this
Section 12(a) and at the time of the annual meeting of stockholders, who is
entitled to vote at the meeting and who complied with the notice procedures set
forth in this Section 12(a).
(2) For nominations or other business to be properly brought before
an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1)
of this Section 12, the stockholder must have given timely notice thereof in
writing to the secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to the secretary at the principal executive offices of
the Corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the
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<PAGE> 5
close of business on the later of the 60th day prior to such annual meeting or
the tenth day following the day on which public announcement of the date of such
meeting is first made. Such stockholder's notice shall set forth (i) as to each
person whom the stockholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (ii) as to any other business that the stockholder
proposes to bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and of the beneficial owner, if any, on whose behalf the proposal is
made; and (iii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination or proposal is made, (x) the name
and address of such stockholder, as they appear on the Corporation's books, and
of such beneficial owner and (y) the number of shares of each class of stock of
the Corporation which are owned beneficially and of record by such stockholder
and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this Section 12 to the contrary, in the event that the number of
directors to be elected to the Board of Directors is increased and there is no
public announcement naming all of the nominees for director or specifying the
size of the increased Board of Directors made by the Corporation at least 70
days prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section 12(a) shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the secretary at the principal executive
offices of the Corporation not later than the close of business on the tenth day
following the day on which such public announcement is first made by the
Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) provided that the Board of Directors has determined that
directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of record both at the time of giving of notice
provided for in this Section 12(b) and at the time of the special meeting, who
is entitled to vote at the meeting and who complied with the notice procedures
set forth in this Section 12(b). In the event the Corporation calls a special
meeting of stockholders for the purpose of electing one or more directors to the
Board of Directors, any such stockholder may nominate a person or persons (as
the case may be) for election to such position as specified in the Corporation's
notice of meeting, if the stockholder's notice containing the information
required by paragraph (a)(2) of this Section 12 shall be delivered to the
secretary at the principal executive offices of the Corporation not earlier than
the 90th day
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<PAGE> 6
prior to such special meeting and not later than the close of business on the
later of the 60th day prior to such special meeting or the tenth day following
the day on which public announcement is first made of the date of the special
meeting and of the nominees proposed by the Board of Directors to be elected at
such meeting.
(c) General. (1) Only such persons who are nominated in accordance with
the procedures set forth in this Section 12 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 12. The presiding officer of the meeting shall have
the power and duty to determine whether a nomination or any business proposed to
be brought before the meeting was made in accordance with the procedures set
forth in this Section 12 and, if any proposed nomination or business is not in
compliance with this Section 12, to declare that such defective nomination or
proposal be disregarded.
(2) For purposes of this Section 12, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed by
the Corporation with the Securities and Exchange Commission pursuant to Section
13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 12, a
stockholder shall also comply with all applicable requirements of state law and
of the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 12. Nothing in this Section 12 shall be deemed
to affect any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 13. VOTING BY BALLOT. Voting on any question or in any election
may be viva voce unless the presiding officer shall order or any stockholder
shall demand that voting be by ballot.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed under the direction of its Board of Directors.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular
meeting or at any special meeting called for that purpose, a majority of the
entire Board of Directors may establish, increase or decrease the number of
directors, provided that the number thereof shall never be less than the minimum
number required by the Maryland
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<PAGE> 7
General Corporation Law, nor more than 15, and further provided that the tenure
of office of a director shall not be affected by any decrease in the number of
directors.
Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of
Directors shall be held immediately after and at the same place as the annual
meeting of stockholders, no notice other than this Bylaw being necessary. The
Board of Directors may provide, by resolution, the time and place, either within
or without the State of Maryland, for the holding of regular meetings of the
Board of Directors without other notice than such resolution.
Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the chairman of the board, president or by
a majority of the directors then in office. The person or persons authorized to
call special meetings of the Board of Directors may fix any place, either within
or without the State of Maryland, as the place for holding any special meeting
of the Board of Directors called by them.
Section 5. NOTICE. Notice of any special meeting of the Board of Directors
shall be delivered personally or by telephone, facsimile transmission, United
States mail or courier to each director at his business or residence address.
Notice by personal delivery, by telephone or a facsimile transmission shall be
given at least two days prior to the meeting. Notice by mail shall be given at
least five days prior to the meeting and shall be deemed to be given when
deposited in the United States mail properly addressed, with postage thereon
prepaid. Telephone notice shall be deemed to be given when the director is
personally given such notice in a telephone call to which he is a party.
Facsimile transmission notice shall be deemed to be given upon completion of the
transmission of the message to the number given to the Corporation by the
director and receipt of a completed answer-back indicating receipt. Neither the
business to be transacted at, nor the purpose of, any annual, regular or special
meeting of the Board of Directors need be stated in the notice, unless
specifically required by statute or these Bylaws.
Section 6. QUORUM. A majority of the directors shall constitute a quorum
for transaction of business at any meeting of the Board of Directors, provided
that, if less than a majority of such directors are present at said meeting, a
majority of the directors present may adjourn the meeting from time to time
without further notice, and provided further that if, pursuant to the charter of
the Corporation or these Bylaws, the vote of a majority of a particular group of
directors is required for action, a quorum must also include a majority of such
group.
The directors present at a meeting which has been duly called and
convened may continue to transact business until adjournment, notwithstanding
the withdrawal of enough directors to leave less than a quorum.
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<PAGE> 8
Section 7. VOTING. The action of the majority of the directors present at
a meeting at which a quorum is present shall be the action of the Board of
Directors, unless the concurrence of a greater proportion is required for such
action by applicable statute.
Section 8. TELEPHONE MEETINGS. Directors may participate in a meeting by
means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.
Section 9. INFORMAL ACTION BY DIRECTORS. Any action required or permitted
to be taken at any meeting of the Board of Directors may be taken without a
meeting, if a consent in writing to such action is signed by each director and
such written consent is filed with the minutes of proceedings of the Board of
Directors.
Section 10. VACANCIES. If for any reason any or all the directors cease to
be directors, such event shall not terminate the Corporation or affect these
Bylaws or the powers of the remaining directors hereunder (even if fewer than
three directors remain). Any vacancy on the Board of Directors for any cause
other than an increase in the number of directors shall be filled by a majority
of the remaining directors, although such majority is less than a quorum. Any
vacancy in the number of directors created by an increase in the number of
directors may be filled by a majority vote of the entire Board of Directors. Any
individual so elected as director shall hold office until the next annual
meeting of stockholders and until his successor is elected and qualifies.
Section 11. COMPENSATION. Directors shall not receive any stated salary
for their services as directors but, by resolution of the Board of Directors,
may receive fixed sums per year and/or per meeting and/or per visit to real
property or other facilities owned or leased by the Corporation and for any
service or activity they performed or engaged in as directors. Directors may be
reimbursed for expenses of attendance, if any, at each annual, regular or
special meeting of the Board of Directors or of any committee thereof and for
their expenses, if any, in connection with each property visit and any other
service or activity they performed or engaged in as directors; but nothing
herein contained shall be construed to preclude any directors from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 12. LOSS OF DEPOSITS. No director shall be liable for any loss
which may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with whom moneys or stock have been
deposited.
Section 13. SURETY BONDS. Unless required by law, no director shall be
obligated to give any bond or surety or other security for the performance of
any of his duties.
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Section 14. RELIANCE. Each director, officer, employee and agent of the
Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.
Section 15. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
The directors shall have no responsibility to devote their full time to the
affairs of the Corporation. Any director or officer, employee or agent of the
Corporation, in his personal capacity or in a capacity as an affiliate,
employee, or agent of any other person, or otherwise, may have business
interests and engage in business activities similar to or in addition to or in
competition with those of or relating to the Corporation.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors may
appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee, a Nominating Committee and other committees, composed of
two or more directors, to serve at the pleasure of the Board of Directors. If
appointed, the members of the Audit Committee and Compensation Committee shall
at all times consist solely of Independent Directors (i.e., a director of the
Corporation who is not an officer or employee of the Corporation, any affiliate
of an officer or employee or any affiliate of any advisor to the Corporation
under an advisory agreement, any lessee of any property of the Corporation any
subsidiary of the Corporation or any partnership which is an affiliate of, the
Corporation).
Section 2. POWERS. The Board of Directors may delegate to committees
appointed under Section 1 of this Article any of the powers of the Board of
Directors, except as prohibited by law.
Section 3. MEETINGS. Notice of committee meetings shall be given in the
same manner as notice for special meetings of the Board of Directors. A majority
of the members of the committee shall constitute a quorum for the transaction of
business at any meeting of the committee. The act of a majority of the committee
members present at a meeting shall be the act of such committee. The Board of
Directors may designate a chairman of any committee, and such chairman or any
two members of any committee may fix the time and place of its meeting unless
the Board shall otherwise provide. In the absence of any member of any such
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committee, the members thereof present at any meeting, whether or not they
constitute a quorum, may appoint another director to act in the place of such
absent member. Each committee shall keep minutes of its proceedings.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or permitted
to be taken at any meeting of a committee of the Board of Directors may be taken
without a meeting, if a consent in writing to such action is signed by each
member of the committee and such written consent is filed with the minutes of
proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to designate alternate members to replace any
absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Corporation shall
include a chief executive officer, a president, a secretary and a treasurer and
may include a chairman of the board, a vice chairman of the board, one or more
vice presidents, a chief operating officer, a chief financial officer, one or
more assistant secretaries and one or more assistant treasurers. In addition,
the Board of Directors may from time to time appoint such other officers with
such powers and duties as they shall deem necessary or desirable. The officers
of the Corporation shall be elected annually by the Board of Directors at the
first meeting of the Board of Directors held after each annual meeting of
stockholders, except that the chief executive officer may appoint one or more
vice presidents, assistant secretaries and assistant treasurers. If the election
of officers shall not be held at such meeting, such election shall be held as
soon thereafter as may be convenient. Each officer shall hold office until his
successor is elected and qualifies or until his death, resignation or removal in
the manner hereinafter provided. Any two or more offices except president and
vice president may be held by the same person. In its discretion, the Board of
Directors may leave unfilled any office except that of president, treasurer and
secretary. Election of an officer or agent shall not of itself create contract
rights between the Corporation and such officer or agent.
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<PAGE> 11
Section 2. REMOVAL AND RESIGNATION. Any officer or agent of the
Corporation may be removed by the Board of Directors if in its judgment the best
interests of the Corporation would be served thereby, but such removal shall be
without prejudice to the contract rights, if any, of the person so removed. Any
officer of the Corporation may resign at any time by giving written notice of
his resignation to the Board of Directors, the chairman of the board, the
president or the secretary. Any resignation shall take effect at any time
subsequent to the time specified therein or, if the time when it shall become
effective is not specified therein, immediately upon its receipt. The acceptance
of a resignation shall not be necessary to make it effective unless otherwise
stated in the resignation. Such resignation shall be without prejudice to the
contract rights, if any, of the Corporation.
Section 3. VACANCIES. A vacancy in any office may be filled by the Board
of Directors for the balance of the term.
Section 4. CHIEF EXECUTIVE OFFICER. The Board of Directors may designate a
chief executive officer. In the absence of such designation, the chairman of the
board shall be the chief executive officer of the Corporation. The chief
executive officer shall have general responsibility for implementation of the
policies of the Corporation, as determined by the Board of Directors, and for
the management of the business and affairs of the Corporation.
Section 5. CHIEF OPERATING OFFICER. The Board of Directors may
designate a chief operating officer. The chief operating officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 6. CHIEF FINANCIAL OFFICER. The Board of Directors may
designate a chief financial officer. The chief financial officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 7. CHAIRMAN OF THE BOARD. The Board of Directors shall designate a
chairman of the board. The chairman of the board shall preside over the meetings
of the Board of Directors and of the stockholders at which he shall be present.
The chairman of the board shall perform such other duties as may be assigned to
him or them by the Board of Directors.
Section 8. PRESIDENT. The president or chief executive officer, as the
case may be, shall in general supervise and control all of the business and
affairs of the Corporation. In the absence of a designation of a chief operating
officer by the Board of Directors, the president shall be the chief operating
officer. He may execute any deed, mortgage, bond, contract or other instrument,
except in cases where the execution thereof shall be expressly delegated by the
Board of Directors or by these Bylaws to some other officer or agent of the
Corporation or shall be required by law to be otherwise executed; and in general
shall perform all duties incident to the office of president and such other
duties as may be prescribed by the Board of Directors from time to time.
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Section 9. VICE PRESIDENTS. In the absence of the president or in the
event of a vacancy in such office, the vice president (or in the event there be
more than one vice president, the vice presidents in the order designated at the
time of their election or, in the absence of any designation, then in the order
of their election) shall perform the duties of the president and when so acting
shall have all the powers of and be subject to all the restrictions upon the
president; and shall perform such other duties as from time to time may be
assigned to him by the president or by the Board of Directors. The Board of
Directors may designate one or more vice presidents as executive vice president
or as vice president for particular areas of responsibility.
Section 10. SECRETARY. The secretary shall (a) keep the minutes of the
proceedings of the stockholders, the Board of Directors and committees of the
Board of Directors in one or more books provided for that purpose; (b) see that
all notices are duly given in accordance with the provisions of these Bylaws or
as required by law; (c) be custodian of the corporate records and of the seal of
the Corporation; (d) keep a register of the post office address of each
stockholder which shall be furnished to the secretary by such stockholder; (e)
have general charge of the share transfer books of the Corporation; and (f) in
general perform such other duties as from time to time may be assigned to him by
the chief executive officer, the president or by the Board of Directors.
Section 11. TREASURER. The treasurer shall have the custody of the funds
and securities of the Corporation and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. In the absence of a designation of a chief financial officer by the
Board of Directors, the treasurer shall be the chief financial officer of the
Corporation.
The treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the president and Board of Directors, at the
regular meetings of the Board of Directors or whenever it may so require, an
account of all his transactions as treasurer and of the financial condition of
the Corporation.
If required by the Board of Directors, the treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, moneys and other property of whatever kind in his possession or under
his control belonging to the Corporation.
Section 12. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretaries and assistant treasurers, in general, shall perform such
duties as shall be
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assigned to them by the secretary or treasurer, respectively, or by the
president or the Board of Directors. The assistant treasurers shall, if required
by the Board of Directors, give bonds for the faithful performance of their
duties in such sums and with such surety or sureties as shall be satisfactory to
the Board of Directors.
Section 13. SALARIES. The salaries and other compensation of the officers
shall be fixed from time to time by the Board of Directors and no officer shall
be prevented from receiving such salary or other compensation by reason of the
fact that he is also a director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors may authorize any officer or
agent to enter into any contract or to execute and deliver any instrument in the
name of and on behalf of the Corporation and such authority may be general or
confined to specific instances. Any agreement, deed, mortgage, lease or other
document executed by one or more of the directors or by an authorized person
shall be valid and binding upon the Board of Directors and upon the Corporation
when authorized or ratified by action of the Board of Directors.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name of
the Corporation shall be signed by such officer or agent of the Corporation in
such manner as shall from time to time be determined by the Board of Directors.
Section 3. DEPOSITS. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board of Directors may
designate.
ARTICLE VII
STOCK
Section 1. CERTIFICATES. Each stockholder shall be entitled to a
certificate or certificates which shall represent and certify the number of
shares of each class of stock held by him in the Corporation. Each certificate
shall be signed by the chief executive officer, the president or a vice
president and countersigned by the secretary or an assistant secretary or the
treasurer or an assistant treasurer and may be sealed with the seal, if any, of
the Corporation. The signatures may be either manual or facsimile. Certificates
shall be consecutively numbered; and if the Corporation shall, from time to
time, issue several classes of stock, each class may have its own number series.
A certificate is valid and may be issued whether or not
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<PAGE> 14
an officer who signed it is still an officer when it is issued. Each certificate
representing shares which are restricted as to their transferability or voting
powers, which are preferred or limited as to their dividends or as to their
allocable portion of the assets upon liquidation or which are redeemable at the
option of the Corporation, shall have a statement of such restriction,
limitation, preference or redemption provision, or a summary thereof, plainly
stated on the certificate. If the Corporation has authority to issue stock of
more than one class, the certificate shall contain on the face or back a full
statement or summary of the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of redemption of each
class of stock and, if the Corporation is authorized to issue any preferred or
special class in series, the differences in the relative rights and preferences
between the shares of each series to the extent they have been set and the
authority of the Board of Directors to set the relative rights and preferences
of subsequent series. In lieu of such statement or summary, the certificate may
state that the Corporation will furnish a full statement of such information to
any stockholder upon request and without charge. If any class of stock is
restricted by the Corporation as to transferability, the certificate shall
contain a full statement of the restriction or state that the Corporation will
furnish information about the restrictions to the stockholder on request and
without charge.
Section 2. TRANSFERS. Upon surrender to the Corporation or the transfer
agent of the Corporation of a stock certificate duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, the
Corporation shall issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of
any share of stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share or
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
Notwithstanding the foregoing, transfers of shares of any class of
stock will be subject in all respects to the charter of the Corporation and all
of the terms and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the Board of
Directors may direct a new certificate to be issued in place of any certificate
previously issued by the Corporation alleged to have been lost, stolen or
destroyed upon the making of an affidavit of that fact by the person claiming
the certificate to be lost, stolen or destroyed. When authorizing the issuance
of a new certificate, an officer designated by the Board of Directors may, in
his discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or the owner's legal
representative to advertise the same in such manner as he shall require and/or
to give bond, with sufficient
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<PAGE> 15
surety, to the Corporation to indemnify it against any loss or claim which may
arise as a result of the issuance of a new certificate.
Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board
of Directors may set, in advance, a record date for the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders or
determining stockholders entitled to receive payment of any dividend or the
allotment of any other rights, or in order to make a determination of
stockholders for any other proper purpose. Such date, in any case, shall not be
prior to the close of business on the day the record date is fixed and shall be
not more than 90 days and, in the case of a meeting of stockholders, not less
than ten days, before the date on which the meeting or particular action
requiring such determination of stockholders of record is to be held or taken.
In lieu of fixing a record date, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period but not longer
than 20 days. If the stock transfer books are closed for the purpose of
determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least ten days before the date
of such meeting.
If no record date is fixed and the stock transfer books are not
closed for the determination of stockholders, (a) the record date for the
determination of stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day on which the notice of
meeting is mailed or the 30th day before the meeting, whichever is the closer
date to the meeting; and (b) the record date for the determination of
stockholders entitled to receive payment of a dividend or an allotment of any
other rights shall be the close of business on the day on which the resolution
of the directors, declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting
of stockholders has been made as provided in this section, such determination
shall apply to any adjournment thereof, except when (i) the determination has
been made through the closing of the transfer books and the stated period of
closing has expired or (ii) the meeting is adjourned to a date more than 120
days after the record date fixed for the original meeting, in either of which
case a new record date shall be determined as set forth herein.
Section 5. STOCK LEDGER. The Corporation shall maintain at its principal
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of
Directors may issue fractional stock or provide for the issuance of scrip, all
on such terms and under such conditions as they may determine. Notwithstanding
any other provision of the
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charter or these Bylaws, the Board of Directors may issue units consisting of
different securities of the Corporation. Any security issued in a unit shall
have the same characteristics as any identical securities issued by the
Corporation, except that the Board of Directors may provide that for a specified
period securities of the Corporation issued in such unit may be transferred on
the books of the Corporation only in such unit.
ARTICLE VIII
ACCOUNTING YEAR
The Board of Directors shall have the power, from time to time, to fix the
fiscal year of the Corporation by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon the stock
of the Corporation may be authorized and declared by the Board of Directors,
subject to the provisions of law and the charter of the Corporation. Dividends
and other distributions may be paid in cash, property or stock of the
Corporation, subject to the provisions of law and the charter.
Section 2. CONTINGENCIES. Before payment of any dividends or other
distributions, there may be set aside out of any assets of the Corporation
available for dividends or other distributions such sum or sums as the Board of
Directors may from time to time, in its absolute discretion, think proper as a
reserve fund for contingencies, for equalizing dividends or other distributions,
for repairing or maintaining any property of the Corporation or for such other
purpose as the Board of Directors shall determine to be in the best interest of
the Corporation, and the Board of Directors may modify or abolish any such
reserve in the manner in which it was created.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the charter of the Corporation, the Board of
Directors may from time to time adopt, amend, revise or terminate any policy or
policies with respect to investments by the Corporation as it shall deem
appropriate in its sole discretion.
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ARTICLE XI
SEAL
Section 1. SEAL. The Board of Directors may authorize the adoption of a
seal by the Corporation. The seal shall contain the name of the Corporation and
the year of its incorporation and the words "Incorporated Maryland." The Board
of Directors may authorize one or more duplicate seals and provide for the
custody thereof.
Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation relating to a seal to place the word
"(SEAL)" adjacent to the signature of the person authorized to execute the
document on behalf of the Corporation.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES
To the maximum extent permitted by Maryland Law in effect from time to
time, the Corporation shall indemnify and, without requiring a preliminary
determination of the ultimate entitlement to indemnification, shall pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any individual who is a present or former director or officer of the
Corporation and who is made a party to the proceeding by reason of his service
in that capacity, or (b) any individual who, while a director of the Corporation
and at the request of the Corporation, serves or has served another corporation,
real estate investment trust, partnership, joint venture, trust, employee
benefit plan or other enterprise and who is made a party to the proceeding by
reason of his service in that capacity. The Corporation may, with the approval
of its Board of Directors, provide such indemnification and advance for expenses
to a person who served a predecessor of the Corporation in any of the capacities
described in (a) or (b) above and to any employee or agent of the Corporation or
a predecessor of the Corporation.
Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the Bylaws or charter of the Corporation
inconsistent with this Article, shall apply to or affect in any respect the
applicability of the preceding paragraph with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
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ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the charter of the
Corporation or these Bylaws or pursuant to applicable law, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at nor the purpose of any
meeting need be set forth in the waiver of notice, unless specifically required
by statute. The attendance of any person at any meeting shall constitute a
waiver of notice of such meeting, except where such person attends a meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
ARTICLE XIV
AMENDMENT OF BYLAWS
The Board of Directors shall have the exclusive power to adopt, alter or
repeal any provision of these Bylaws and to make new Bylaws.
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Exhibit 10.1
FORM OF
AMENDMENT AND RESTATEMENT OF
AGREEMENT OF LIMITED PARTNERSHIP
OF
TOWER REALTY OPERATING PARTNERSHIP, L.P.
______ __, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
ARTICLE 1 DEFINED TERMS...................................................................................1
ARTICLE 2 ORGANIZATIONAL MATTERS.........................................................................13
2.1 Formation.............................................................................13
2.2 Name..................................................................................14
2.3 Registered Office and Agent; Principal Office.........................................14
2.4 Power of Attorney.....................................................................14
2.5 Term..................................................................................16
ARTICLE 3 PURPOSE........................................................................................16
3.1 Purpose and Business..................................................................16
3.2 Powers................................................................................17
ARTICLE 4 CAPITAL CONTRIBUTIONS..........................................................................18
4.1 Capital Contributions of the Partners.................................................18
4.2 Additional Funds; Restrictions on the General Partner.................................18
4.3 Issuance of Additional Partnership Interests; Admission
of Additional Limited Partners........................................................20
4.4 Contribution of Proceeds of Issuance of REIT Stock....................................21
4.5 Repurchase of REIT Stock; Shares-In-Trust.............................................21
4.6 No Third-Party Beneficiary............................................................22
4.7 No Interest; No Return................................................................22
4.8 No Preemptive Rights..................................................................23
ARTICLE 5 DISTRIBUTIONS..................................................................................23
5.1 Regular Distributions.................................................................23
5.2 Qualification as a REIT...............................................................23
5.3 Withholding...........................................................................24
5.4 Additional Partnership Interests......................................................24
5.5 Distributions Upon Liquidation........................................................24
ARTICLE 6 ALLOCATIONS....................................................................................24
6.1 Allocations...........................................................................24
6.2 Revisions to Allocations to Reflect Issuance of Partnership Interests.................24
ARTICLE 7 MANAGEMENT AND OPERATIONS OF BUSINESS..........................................................25
7.1 Management............................................................................25
7.2 Certificate of Limited Partnership....................................................29
7.3 Reimbursement of the General Partner..................................................30
i
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<PAGE> 3
<TABLE>
<CAPTION>
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<S> <C> <C>
7.4 Outside Activities of the General Partner.............................................31
7.5 Contracts with Affiliates.............................................................31
7.6 Indemnification.......................................................................32
7.7 Liability of the General Partner......................................................34
7.8 Other Matters Concerning the General Partner..........................................35
7.9 Title to Partnership Assets...........................................................36
7.10 Reliance by Third Parties.............................................................36
ARTICLE 8 RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS.....................................................37
8.1 Limitation of Liability...............................................................37
8.2 Management of Business................................................................37
8.3 Outside Activities of Limited Partners................................................38
8.4 Return of Capital.....................................................................38
8.5 Rights of Limited Partners Relating to the Partnership................................39
8.6 Exchange Rights Agreement.............................................................40
ARTICLE 9 BOOKS, RECORDS, ACCOUNTING AND REPORTS.........................................................40
9.1 Records and Accounting................................................................40
9.2 Fiscal Year...........................................................................40
9.3 Reports...............................................................................41
ARTICLE 10 TAX MATTERS....................................................................................41
10.1 Preparation of Tax Returns............................................................41
10.2 Tax Elections.........................................................................41
10.3 Tax Matters Partner...................................................................42
10.4 Organizational Expenses...............................................................44
10.5 Withholding...........................................................................44
ARTICLE 11 TRANSFERS AND WITHDRAWALS......................................................................45
11.1 Transfer..............................................................................45
11.2 Transfer of the General Partner's General Partner Interest............................46
11.3 Limited Partners' Rights to Transfer..................................................48
11.4 Substituted Limited Partners..........................................................49
11.5 Assignees.............................................................................50
11.6 General Provisions....................................................................51
ARTICLE 12 ADMISSION OF PARTNERS..........................................................................52
12.1 Admission of Successor General Partner................................................52
12.2 Admission of Additional Limited Partners..............................................53
12.3 Amendment of Agreement and Certificate of Limited Partnership.........................54
ii
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<TABLE>
<CAPTION>
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ARTICLE 13 DISSOLUTION, LIQUIDATION AND TERMINATION.......................................................54
13.1 Dissolution...........................................................................54
13.2 Winding Up............................................................................55
13.3 No Obligation to Contribute Deficit...................................................57
13.4 Rights of Limited Partners............................................................58
13.5 Notice of Dissolution.................................................................58
13.6 Termination of Partnership and Cancellation of Certificate
of Limited Partnership................................................................58
13.7 Reasonable Time for Winding-Up........................................................58
13.8 Waiver of Partition...................................................................58
ARTICLE 14 AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS...................................................59
14.1 Amendments............................................................................59
14.2 Meetings of the Partners..............................................................61
ARTICLE 15 GENERAL PROVISIONS.............................................................................62
15.1 Addresses and Notice..................................................................62
15.2 Titles and Captions...................................................................62
15.3 Pronouns and Plurals..................................................................63
15.4 Further Action........................................................................63
15.5 Binding Effect........................................................................63
15.6 Creditors.............................................................................63
15.7 Waiver................................................................................63
15.8 Counterparts..........................................................................63
15.9 Applicable Law........................................................................63
15.10 Invalidity of Provisions..............................................................64
15.11 Entire Agreement......................................................................64
15.12 Merger................................................................................64
15.13 No Rights as Stockholders.............................................................64
iii
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<PAGE> 5
AMENDMENT AND RESTATEMENT
OF
AGREEMENT OF LIMITED PARTNERSHIP
OF
TOWER REALTY OPERATING PARTNERSHIP, L.P.
THIS AMENDMENT AND RESTATEMENT OF AGREEMENT OF LIMITED
PARTNERSHIP OF TOWER REALTY OPERATING PARTNERSHIP, L.P. (this
"AGREEMENT"), dated as of ________ __, 1997, is entered into by and among Tower
Realty Trust, Inc., a Maryland corporation, as general partner (the "GENERAL
PARTNER"), and the Limited Partners;
WHEREAS, the General Partner and the Limited Partners desire to amend
and restate the Agreement of Limited Partnership of Tower Realty Operating
Partnership, L.P., dated as of March 24, 1997 (the "Original Agreement") in its
entirety;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties do hereby agree that the Original
Agreement is amended and restated as follows:
ARTICLE 1
DEFINED TERMS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"ACT" means the Delaware Revised Uniform Limited Partnership Act, as
amended from time to time, and any successor to such statute.
"ADDITIONAL LIMITED PARTNER" means a Person that has executed and
delivered an additional limited partner signature page in the form attached
hereto, has been admitted to the Partnership as a Limited Partner pursuant to
Section 4.3 hereof and that is shown as such on the books and records of the
Partnership. The Initial Limited Partner may also be an Additional Limited
Partner.
"ADJUSTED CAPITAL ACCOUNT DEFICIT" means with respect to any Partner,
the negative balance, if any, in such Partner's Capital Account as of the end of
any relevant fiscal year, determined after giving effect to the following
adjustments:
(a) credit to such Capital Account any portion of such
negative balance which such Partner (i) is treated as obligated to
restore to the Partnership pursuant to the
<PAGE> 6
provisions of Section 1.704-1(b)(2)(ii)(c) of the Regulations, or (ii)
is deemed to be obligated to restore to the Partnership pursuant to the
penultimate sentences of Sections 1.704-2(g)(1) and 1.704-2(i)(5) of
the Regulations; and
(b) debit to such Capital Account the items described in
Sections 1.704- 1(b)(2)(ii)(d)(4), (5) and (6) of the Regulations.
"ADJUSTED CONTRIBUTION" means the Capital Contributions of any Partner
reduced by the total distributions to such Partner from Capital Events. With
respect to the General Partner, the Adjusted Contribution shall include the
difference, if any, between gross proceeds from the future issuance of REIT
Stock, if any, and the proceeds actually received by the General Partner.
"AFFILIATE" means,
(a) with respect to any individual Person, any member of the
Immediate Family of such Person or a trust established for the benefit
of such member, or
(b) with respect to any Entity, any Person which, directly or
indirectly through one or more intermediaries, controls, is controlled
by, or is under common control with, any such Entity.
"AGREEMENT" means this Agreement of Limited Partnership, as originally
executed and as amended, modified, supplemented or restated from time to time,
as the context requires.
"ARTICLES OF INCORPORATION" means the General Partner's Articles of
Incorporation, filed with the Maryland State Department of Assessments and
Taxation, as amended, modified, supplemented or restated from time to time, as
the context requires.
"ASSIGNEE" means a Person to whom one or more OP Units have been
transferred in a manner permitted under this Agreement, but who has not become a
Substituted Limited Partner, and who has the rights set forth in Section 11.5.
"AVAILABLE CASH" means, with respect to the applicable period of
measurement (i.e., any period beginning on the first day of the fiscal year,
quarter or other period commencing immediately after the last day of the fiscal
year, quarter or other applicable period for purposes of the prior calculation
of Available Cash for or with respect to which a distribution has been made, and
ending on the last day of the fiscal year, quarter or other applicable period
immediately preceding the date of the calculation), the excess, if any, as of
such date, of
(a) the gross cash receipts of the Partnership for such period
from all sources whatsoever, including, without limitation, the
following:
2
<PAGE> 7
(i) all rents, revenues, income and proceeds derived
by the Partnership from its operations, including, without
limitation, distributions received by the Partnership from any
Entity in which the Partnership has an interest;
(ii) all proceeds and revenues received by the
Partnership on account of any sales of office buildings,
development parcels or other property of the Partnership or as
a refinancing of or payment of principal, interest, costs,
fees, penalties or otherwise on account of any borrowings or
loans made by the Partnership or financings or refinancings of
any property of the Partnership;
(iii) the amount of any insurance proceeds and
condemnation awards received by the Partnership;
(iv) all capital contributions or loans received by
the Partnership from its Partners;
(v) all cash amounts previously reserved by the
Partnership, to the extent such amounts are no longer needed
for the specific purposes for which such amounts were
reserved; and
(vi) the proceeds of liquidation of the Partnership's
property in accordance with this Agreement;
over
(b) the sum of:
(i) all operating costs and expenses, including taxes
and other expenses of the properties directly and indirectly
held by the Partnership and capital expenditures made during
such period (without deduction, however, for any capital
expenditures, charges for Depreciation or other expenses not
paid in cash or expenditures from reserves described in (viii)
below);
(ii) all costs and expenses expended or paid during
such period in connection with the sale or other disposition,
or financing or refinancing, of the property directly or
indirectly held by the Partnership or the recovery of
insurance or condemnation proceeds;
(iii) all fees provided for under this Agreement;
(iv) all debt service, including principal and
interest, paid during such period on all indebtedness
(including under any line of credit) of the Partnership;
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<PAGE> 8
(v) all capital contributions, advances,
reimbursements, loans or similar payments made to any Person
in which the Partnership has an interest;
(vi) all loans made by the Partnership in accordance
with the terms of this Agreement;
(vii) all reimbursements to the General Partner or
its Affiliates during such period; and
(viii) any new reserves or increases in reserves
determined by the General Partner in its sole and absolute
discretion to be necessary for working capital, capital
improvements, payments of periodic expenditures, debt service
or other purposes for the Partnership or any Person in which
the Partnership has an interest.
Notwithstanding the foregoing, Available Cash shall not include any cash
received or reductions in reserves, or take into account any disbursements made
or reserves established, after commencement of the dissolution and liquidation
of the Partnership.
"CAPITAL ACCOUNT" means with respect to any Partner, the Capital
Account maintained for such Partner in accordance with the following provisions:
(a) to each Partner's Capital Account there shall be credited
(i) such Partner's Capital Contributions,
(ii) such Partner's distributive share of Net Income
and any items in the nature of income or gain which are
specially allocated to such Partner pursuant to Paragraphs 1
and 2 of Exhibit B and
(iii) the amount of any Partnership liabilities
assumed by such Partner or which are secured by any asset
distributed to such Partner;
(b) to each Partner's Capital Account there shall be debited
(i) the amount of cash and the Gross Asset Value of
any property distributed to such Partner pursuant to any
provision of this Agreement,
(ii) such Partner's distributive share of Net Losses
and any items in the nature of expenses or losses which are
specially allocated to such Partner pursuant to Paragraphs 1
and 2 of Exhibit B and
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<PAGE> 9
(iii) the amount of any liabilities of such Partner
assumed by the Partnership or which are secured by any asset
contributed by such Partner to the Partnership; and
(c) in the event all or a portion of a Partnership Interest is
transferred in accordance with the terms of this Agreement, the
transferee shall succeed to the Capital Account of the transferor to
the extent it relates to the transferred Partnership Interest.
The foregoing provisions and the other provisions of this Agreement relating to
the maintenance of Capital Accounts are intended to comply with Sections
1.704-1(b) and 1.704-2 of the Regulations, and shall be interpreted and applied
in a manner consistent with such Regulations. In the event the General Partner
shall reasonably determine that it is prudent to modify the manner in which the
Capital Accounts, or any debits or credits thereto (including, without
limitation, debits or credits relating to liabilities which are secured by
contributed or distributed assets or which are assumed by the Partnership, the
General Partner or any Limited Partner) are computed in order to comply with
such Regulations, the General Partner may make such modification; provided that
it would not cause the amounts distributable to any Partner pursuant to Article
13 hereof upon the dissolution of the Partnership to vary from the amount
contemplated as set forth in Section 2(g) of Exhibit B.
"CAPITAL CONTRIBUTION" means, with respect to any Partner, any cash,
cash equivalents or the Gross Asset Value of property which such Partner
contributes or is deemed to contribute to the Partnership pursuant to Article 4
hereof.
"CAPITAL EVENT" means any Partnership transaction not in the ordinary
course of its business including, without limitation, principal payments,
prepayments, the incurrence of prepayment penalties, sales, exchanges,
foreclosures or other dispositions of property directly or indirectly owned by
the Partnership, recoveries of damage awards and insurance proceeds not used to
rebuild (other than the receipt of contributions to the capital of the
Partnership and business or rental interruption insurance proceeds not used to
rebuild).
"CERTIFICATE" means the Certificate of Limited Partnership relating to
the Partnership to be filed in the form of Exhibit C hereto as soon as
practicable after the date hereof in the office of the Delaware Secretary of
State, as amended from time to time in accordance with the terms hereof and the
Act.
"CODE" means the Internal Revenue Code of 1986, as amended and in
effect from time to time, as interpreted by the applicable regulations
thereunder. Any reference herein to a specific section or sections of the Code
shall be deemed to include a reference to any corresponding provision of future
law.
"CONSENT" means the consent or approval of a proposed action by a
Partner given in accordance with Section 14.2 hereof.
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<PAGE> 10
"CONTRIBUTED PROPERTY" means each property, partnership interest,
contract right or other asset, in such form as may be permitted by the Act,
contributed or deemed contributed to the Partnership by any Partner (including
deemed contributions to the Partnership on termination and reconstitution
thereof pursuant to Section 708 of the Code).
"DEPRECIATION" means, with respect to any asset of the Partnership for
any fiscal year or other period, the depreciation, depletion, amortization or
other cost recovery deduction, as the case may be, allowed or allowable for
federal income tax purposes in respect of such asset for such fiscal year or
other period; provided, however, that except as otherwise provided in Section
1.704-2 of the Regulations, if there is a difference between the Gross Asset
Value (including the Gross Asset Value, as increased pursuant to paragraph (d)
of the definition of Gross Asset Value) and the adjusted tax basis of such asset
at the beginning of such fiscal year or other period, Depreciation for such
asset shall be an amount that bears the same ratio to the beginning Gross Asset
Value of such asset as the federal income tax depreciation, depletion,
amortization or other cost recovery deduction for such fiscal year or other
period bears to the beginning adjusted tax basis of such asset; provided,
further, that if the federal income tax depreciation, depletion, amortization or
other cost recovery deduction for such asset for such fiscal year or other
period is zero, Depreciation of such asset shall be determined with reference to
the beginning Gross Asset Value of such asset using any reasonable method
selected by the General Partner.
"EFFECTIVE DATE" means the date of closing of the initial offering of
REIT Stock by the General Partner.
"ENTITY" means any general partnership, limited partnership,
corporation, joint venture, trust, business trust, real estate investment trust,
limited liability company, limited liability partnership, cooperative or
association.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time (or any corresponding provisions of succeeding laws).
"EXCHANGE FACTOR" has the meaning set forth in the Exchange Rights
Agreement.
"EXCHANGE RIGHT" has the meaning set forth in the Exchange Rights
Agreement.
"EXCHANGE RIGHTS AGREEMENT" has the meaning set forth in Section 8.6.
"GAAP" means United States generally accepted accounting principles, as
in effect from time to time.
"GENERAL PARTNER" means Tower Realty Trust, Inc., a Maryland
corporation, and any successor as general partner of the Partnership.
6
<PAGE> 11
"GENERAL PARTNER INTEREST" means a Partnership Interest held by the
General Partner, in its capacity as general partner. A General Partner Interest
may be expressed as a number of OP Units.
"GROSS ASSET VALUE" means, with respect to any asset of the
Partnership, such asset's adjusted basis for federal income tax purposes, except
as follows:
(a) the initial Gross Asset Value of any asset contributed by
a Partner to the Partnership shall be the gross fair market value of
such asset, without reduction for liabilities, as determined by the
contributing Partner and the Partnership on the date of contribution
thereof;
(b) if the General Partner reasonably determines that an
adjustment is necessary or appropriate to reflect the relative economic
interests of the Partners, the Gross Asset Values of all Partnership
assets shall be adjusted in accordance with Sections
1.704-1(b)(2)(iv)(f) and (g) of the Regulations to equal their
respective gross fair market values, without reduction for liabilities,
as reasonably determined by the General Partner, as of the following
times:
(i) a Capital Contribution (other than a de minimis
Capital Contribution) to the Partnership by a new or existing
Partner as consideration for a Partnership Interest; or
(ii) the distribution by the Partnership to a Partner
of more than a de minimis amount of Partnership assets as
consideration for the repurchase of a Partnership Interest; or
(iii) the liquidation of the Partnership within the
meaning of Section 1.704-1(b)(2)(ii)(g) of the Regulations;
(c) the Gross Asset Values of Partnership assets distributed
to any Partner shall be the gross fair market values of such assets
(taking Section 7701(g) of the Code into account) without reduction for
liabilities, as reasonably determined by the General Partner as of the
date of distribution; and
(d) the Gross Asset Values of Partnership assets shall be
increased (or decreased) to reflect any adjustments to the adjusted
basis of such assets pursuant to Sections 734(b) or 743(b) of the Code,
but only to the extent that such adjustments are taken into account in
determining Capital Accounts pursuant to Section 1.704- 1(b)(2)(iv)(m)
of the Regulations (as set forth in Exhibit B); provided, however, that
Gross Asset Values shall not be adjusted pursuant to this paragraph (d)
to the extent that the General Partner reasonably determines that an
adjustment pursuant to paragraph (b) above is necessary or appropriate
in connection with a transaction that would otherwise result in an
adjustment pursuant to this paragraph (d).
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<PAGE> 12
At all times, Gross Asset Values shall be adjusted by any Depreciation taken
into account with respect to the Partnership's assets for purposes of computing
Net Income and Net Loss.
"IMMEDIATE FAMILY" means, with respect to any individual, such
individual's spouse, parents, parents-in-law, children, nephews, nieces,
brothers, sisters, brothers-in-law, sisters-in-law, stepchildren, sons-in-law
and daughters-in-law or any trust solely for the benefit of any of the foregoing
family members whose sole beneficiaries include the foregoing family members.
"INCAPACITY" or "INCAPACITATED" means,
(a) as to any individual Partner, death, total physical
disability or entry by a court of competent jurisdiction adjudicating
him incompetent to manage his person or his estate;
(b) as to any corporation which is a Partner, the filing of a
certificate of dissolution, or its equivalent, for the corporation or
the revocation of its charter;
(c) as to any partnership which is a Partner, the dissolution
and commencement of winding up of the partnership;
(d) as to any estate which is a Partner, the distribution by
the fiduciary of the estate's entire interest in the Partnership;
(e) as to any trustee of a trust which is a Partner, the
termination of the trust (but not the substitution of a new trustee);
or
(f) as to any Partner, the bankruptcy of such Partner, which
shall be deemed to have occurred when
(i) the Partner commences a voluntary proceeding seeking
liquidation, reorganization or other relief under any bankruptcy,
insolvency or other similar law now or hereafter in effect;
(ii) the Partner is adjudged as bankrupt or
insolvent, or a final and nonappealable order for relief under
any bankruptcy, insolvency or similar law now or hereafter in
effect has been entered against the Partner;
(iii) the Partner executes and delivers a general
assignment for the benefit of the Partner's creditors;
(iv) the Partner files an answer or other pleading
admitting or failing to contest the material allegations of a
petition filed against the Partner in any proceeding of the
nature described in clause (ii) above;
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<PAGE> 13
(v) the Partner seeks, consents to or acquiesces in
the appointment of a trustee, receiver or liquidator for the
Partner or for all or any substantial part of the Partner's
properties;
(vi) any proceeding seeking liquidation,
reorganization or other relief of or against such Partner
under any bankruptcy, insolvency or other similar law now or
hereafter in effect has not been dismissed within one hundred
twenty (120) days after the commencement thereof;
(vii) the appointment without the Partner's consent
or acquiescence of a trustee, receiver or liquidator has not
been vacated or stayed within ninety (90) days of such
appointment; or
(viii) an appointment referred to in clause (vii)
which has been stayed is not vacated within ninety (90) days
after the expiration of any such stay.
"INDEMNITEE" means
(a) any Person made a party to a proceeding by reason of
(i) such Person's status as
(A) the General Partner,
(B) a director, trustee or officer of the
Partnership or the General Partner, or
(C) a director, trustee, member or officer
of any other Entity, each Person serving in such
capacity at the request of the Partnership or the
General Partner, or
(ii) his or its liabilities, pursuant to a loan
guarantee or otherwise, for any indebtedness of the
Partnership or any Subsidiary of the Partnership (including,
without limitation, any indebtedness which the Partnership or
any Subsidiary of the Partnership has assumed or taken assets
subject to); and
(b) such other Persons (including Affiliates of the General
Partner or the Partnership) as the General Partner may designate from
time to time (whether before or after the event giving rise to
potential liability), in its sole and absolute discretion.
"IRS" shall mean the Internal Revenue Service of the United States.
"LIEN" means any lien, security interest, mortgage, deed of trust,
charge, claim, encumbrance, pledge, option, right of first offer or first
refusal and any other right or interest of others of any kind or nature, actual
or contingent, or other similar encumbrance of any nature whatsoever.
9
<PAGE> 14
"LIMITED PARTNER" means, prior to the admission of the first Additional
Limited Partner to the Partnership, the Initial Limited Partner, and thereafter
any Person named as a Limited Partner in Exhibit A, as such Exhibit may be
amended from time to time, upon the execution and delivery by such Person of an
additional limited partner signature page, or any Substituted Limited Partner or
Additional Limited Partner, in such Person's capacity as a Limited Partner of
the Partnership.
"LIMITED PARTNER INTEREST" means a Partnership Interest of a Limited
Partner in the Partnership representing a fractional part of the Partnership
Interests of all Partners and includes any and all benefits to which the holder
of such a Partnership Interest may be entitled, as provided in this Agreement,
together with all obligations of such Person to comply with the terms and
provisions of this Agreement. A Limited Partner Interest may be expressed as a
number of OP Units.
"LIQUIDATING EVENT" has the meaning set forth in Section 13.1 hereof.
"LIQUIDATOR" has the meaning set forth in Section 13.2 hereof.
"LOCK-UP AGREEMENT" means each letter issued by certain Limited
Partners to the Partnership and Merrill Lynch & Co.
"NET INCOME" or "NET LOSS" means, for each fiscal year or other
applicable period, an amount equal to the Partnership's taxable income or loss
for such year or period as determined for federal income tax purposes by the
General Partner, determined in accordance with Section 703(a) of the Code (for
this purpose, all items of income, gain, loss or deduction required to be stated
separately pursuant to Section 703(a) of the Code shall be included in taxable
income or loss), adjusted as follows:
(a) by including as an item of gross income any tax-exempt
income received by the Partnership and not otherwise taken into account
in computing Net Income or Net Loss;
(b) by treating as a deductible expense any expenditure of the
Partnership described in Section 705(a)(2)(B) of the Code (or which is
treated as a Section 705(a)(2)(B) expenditure pursuant to Section
1.704-1(b)(2)(iv)(i) of the Regulations) and not otherwise taken into
account in computing Net Income or Net Loss, including amounts paid or
incurred to organize the Partnership (unless an election is made
pursuant to Section 709(b) of the Code) or to promote the sale of
interests in the Partnership and by treating deductions for any losses
incurred in connection with the sale or exchange of Partnership
property disallowed pursuant to Section 267(a)(1) or 707(b) of the Code
as expenditures described in Section 705(a)(2)(B) of the Code;
(c) by taking into account Depreciation in lieu of
depreciation, depletion, amortization and other cost recovery
deductions taken into account in computing taxable income or loss;
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<PAGE> 15
(d) by computing gain or loss resulting from any disposition
of Partnership property with respect to which gain or loss is
recognized for federal income tax purposes by reference to the Gross
Asset Value of such property rather than its adjusted tax basis;
(e) in the event of an adjustment of the Gross Asset Value of
any Partnership asset which requires that the Capital Accounts of the
Partnership be adjusted pursuant to Sections 1.704-1(b)(2)(iv)(e), (f)
and (g) of the Regulations, by taking into account the amount of such
adjustment as if such adjustment represented additional Net Income or
Net Loss pursuant to Exhibit B; and
(f) by not taking into account in computing Net Income or Net
Loss items separately allocated to the Partners pursuant to Paragraphs
1 and 2 of Exhibit B.
"NONRECOURSE DEDUCTIONS" has the meaning set forth in Sections
1.704-2(b)(1) and 1.704-2(c) of the Regulations.
"NONRECOURSE LIABILITIES" has the meaning set forth in Section
1.704-2(b)(3) of the Regulations.
"OP UNIT" means a fractional, undivided share of the Partnership
Interests of all Partners issued pursuant to Sections 4.1, 4.2 and 4.3. The
number of OP Units outstanding and the Percentage Interests in the Partnership
represented by such OP Units are set forth in Exhibit A, as such Exhibit may be
amended from time to time. The ownership of OP Units shall be evidenced by such
form of certificate for OP Units as the General Partner adopts from time to time
unless the General Partner determines that the OP Units shall be uncertificated
securities.
"PARTNER" means a General Partner or a Limited Partner, and "Partners"
means the General Partner and the Limited Partners collectively.
"PARTNER MINIMUM GAIN" means an amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i)(3).
"PARTNER NONRECOURSE DEBT" has the meaning set forth in Regulations
Section 1.704-2(b)(4).
"PARTNER NONRECOURSE DEDUCTIONS" has the meaning set forth in
Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse
Deductions with respect to a Partner Nonrecourse Debt for a Partnership taxable
year shall be determined in accordance with the rules of Regulations Section
1.704-2(i)(2).
"PARTNERSHIP" means the limited partnership formed under the Act and
pursuant to this Agreement, and any successor thereto.
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<PAGE> 16
"PARTNERSHIP INTEREST" means an ownership interest in the Partnership
representing a Capital Contribution by either a Limited Partner or the General
Partner and includes any and all benefits to which the holder of such a
Partnership Interest may be entitled as provided in this Agreement, together
with all obligations of such Person to comply with the terms and provisions of
this Agreement. A Partnership Interest may be expressed as a number of OP Units.
"PARTNERSHIP MINIMUM GAIN" has the meaning set forth in Regulations
Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as
any net increase or decrease in a Partnership Minimum Gain, for a Partnership
taxable year shall be determined in accordance with the rules of Regulations
Section 1.704-2(d).
"PARTNERSHIP RECORD DATE" means the record date established by the
General Partner for the distribution of Available Cash pursuant to Section 5.1
hereof, which record date shall be the same as the record date established by
the General Partner for a distribution to its stockholders of some or all of its
portion of such distribution.
"PARTNERSHIP YEAR" means the fiscal year of the Partnership, as set
forth in Section 9.2 hereof.
"PERCENTAGE INTEREST" means, as to a Partner, the fractional part of
the Partnership Interests owned by such Partner and expressed as a percentage as
specified in Exhibit A, as such Exhibit may be amended from time to time.
"PERMITTED PARTNERS" has the meaning set forth in subparagraph 1(b) of
Exhibit B.
"PERMITTED TRANSFEREE" means any person to whom OP Units are
Transferred in accordance with Section 11.3 of this Agreement.
"PERSON" means an individual or Entity.
"PRECONTRIBUTION GAIN" has the meaning set forth in subparagraph 3(c)
of Exhibit B.
"QUARTER" means each of the three-month periods ending on March 31,
June 30, September 30 and December 31.
"REGISTRATION STATEMENT" means the Registration Statement on Form S-11
to be filed by the General Partner with the Securities and Exchange Commission,
and any amendments at any time made thereto.
"REGULATIONS" means the final, temporary or proposed Income Tax
Regulations promulgated under the Code, as such regulations may be amended from
time to time (including corresponding provisions of succeeding regulations).
"REIT" means a real estate investment trust as defined in Section 856
of the Code.
"REIT REQUIREMENTS" has the meaning set forth in Section 5.2.
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<PAGE> 17
"REIT STOCK" means a share of stock of the General Partner.
"REIT STOCK AMOUNT" has the meaning set forth in the Exchange Rights
Agreement.
"RESTRICTED PARTNER" has the meaning set forth in Section 1(b) of
Exhibit B.
"STOCK OPTION PLANS" means collectively, the General Partner's 1997
Incentive Plan and Non-Employee Directors' Incentive Plan and any other plan
adopted from time to time by the General Partner pursuant to which REIT Stock is
issued, or options to acquire REIT Stock are granted, to employees or directors
of the General Partner, employees of the Partnership or employees of their
respective Affiliates in consideration for services or future services.
"SUBSIDIARY" means, with respect to any Person, any corporation,
partnership, limited liability company or other entity of which a majority of
(a) the voting power of the voting equity securities; or
(b) the outstanding equity interests, is owned, directly or
indirectly, by such Person.
"SUBSTITUTED LIMITED PARTNER" means a Person who is admitted as a
Limited Partner to the Partnership pursuant to Section 11.4 hereof.
"TAX ITEMS" has the meaning set forth in Exhibit B.
"TERMINATING CAPITAL TRANSACTION" means any sale or other disposition
of all or substantially all of the assets of the Partnership or a related series
of transactions that, taken together, result in the sale or other disposition of
all or substantially all of the assets of the Partnership.
"TRANSFER" as a noun, means any sale, assignment, conveyance, pledge,
hypothecation, gift, encumbrance or other transfer, and as a verb, means to
sell, assign, convey, pledge, hypothecate, give, encumber or otherwise transfer.
Certain additional terms and phrases have the meanings set forth in
Exhibit B.
ARTICLE 2
ORGANIZATIONAL MATTERS
2.1 Formation
The Partners have agreed to form the Partnership under and pursuant to
the Act. Except as expressly provided herein to the contrary, the rights and
obligations of the Partners and the administration and termination of the
Partnership shall be governed by the Act. The Partnership Interest of each
Partner shall be personal property for all purposes.
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<PAGE> 18
2.2 Name
The name of the Partnership shall be Tower Realty Operating
Partnership, L.P. The Partnership's business may be conducted under any other
name or names deemed advisable by the General Partner, including the name of the
General Partner or any Affiliate thereof. The words "Limited
Partnership,""L.P.,""Ltd." or similar words or letters shall be included in the
Partnership's name where necessary for the purposes of complying with the laws
of any jurisdiction that so requires. The General Partner in its sole and
absolute discretion may change the name of the Partnership and shall notify the
Limited Partners of such change in the next regular communication to the Limited
Partners.
2.3 Registered Office and Agent; Principal Office
The address of the registered office of the Partnership in the State of
Delaware and the name and address of the registered agent for service of process
on the Partnership in the State of Delaware is United Corporate Services, Inc.,
15 East North Street, Dover (Kent County), Delaware 19901. The principal office
of the Partnership shall be 120 West 45th Street, New York, New York 10036-4003,
or such other place as the General Partner may from time to time designate by
notice to the Limited Partners. The Partnership may maintain offices at such
other place or places within or outside the State of Delaware as the General
Partner deems advisable.
2.4 Power of Attorney
(a) Each Limited Partner and each Assignee is deemed to
irrevocably constitute and appoint the General Partner, any Liquidator,
and authorized officers and attorneys-in-fact of each, and each of
those acting singly, in each case with full power of substitution, as
its true and lawful agent and attorney-in-fact, with full power and
authority in its name, place and stead to:
(i) execute, swear to, acknowledge, deliver, file and
record in the appropriate public offices
(A) all certificates, documents and other
instruments (including, without limitation, this
Agreement and the Certificate and all amendments or
restatements thereof) that the General Partner or the
Liquidator deems appropriate or necessary to form,
qualify or continue the existence or qualification of
the Partnership as a limited partnership (or a
partnership in which the Limited Partners have
limited liability) in the State of Delaware and in
all other jurisdictions in which the Partnership may
or plans to conduct business or own property,
including, without limitation, any documents
necessary or advisable to convey any Contributed
Property to the Partnership;
(B) all instruments that the General Partner
deems appropriate or necessary to reflect any
amendment, change, modification or restatement of
this Agreement in accordance with its terms;
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<PAGE> 19
(C) all conveyances and other instruments or
documents that the General Partner or the Liquidator
deems appropriate or necessary to reflect the
dissolution and liquidation of the Partnership
pursuant to the terms of this Agreement, including,
without limitation, a certificate of cancellation;
(D) all instruments relating to the
admission, withdrawal, removal or substitution of any
Partner pursuant to, or other events described in,
Article 11, 12 or 13 hereof or the Capital
Contribution of any Partner;
(E) all certificates, documents and other
instruments relating to the determination of the
rights, preferences and privileges of Partnership
Interest; and
(F) amendments to this Agreement as provided
in Article 14 hereof; and
(ii) execute, swear to, seal, acknowledge and file
all ballots, consents, approvals, waivers, certificates and
other instruments appropriate or necessary, in the sole and
absolute discretion of the General Partner or any Liquidator,
to make, evidence, give, confirm or ratify any vote, consent,
approval, agreement or other action which is made or given by
the Partners hereunder or is consistent with the terms of this
Agreement or appropriate or necessary, in the sole discretion
of the General Partner or any Liquidator, to effectuate the
terms or intent of this Agreement.
Nothing contained herein shall be construed as authorizing the General
Partner or any Liquidator to amend this Agreement except in accordance
with Article 14 hereof or as may be otherwise expressly provided for in
this Agreement.
(b) (i) The foregoing power of attorney is hereby declared to
be irrevocable and a power coupled with an interest, in
recognition of the fact that each of the Partners will be
relying upon the power of the General Partner and any
Liquidator to act as contemplated by this Agreement in any
filing or other action by it on behalf of the Partnership, and
it shall survive and not be affected by the subsequent
Incapacity of any Limited Partner or Assignee and the Transfer
of all or any portion of such Limited Partner's or Assignee's
OP Units and shall extend to such Limited Partner's or
Assignee's heirs, successors, assigns and personal
representatives.
(ii) Each such Limited Partner or Assignee hereby
agrees to be bound by any representation made by the General
Partner or any Liquidator, acting in good faith pursuant to
such power of attorney, and each such Limited Partner or
Assignee hereby waives any and all defenses which may be
available to contest,
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<PAGE> 20
negate or disaffirm the action of the General Partner or any
Liquidator, taken in good faith under such power of attorney.
(iii) Each Limited Partner or Assignee shall execute
and deliver to the General Partner or the Liquidator, within
fifteen (15) days after receipt of the General Partner's or
Liquidator's request therefor, such further designation,
powers of attorney and other instruments as the General
Partner or the Liquidator, as the case may be, deems necessary
to effectuate this Agreement and the purposes of the
Partnership.
2.5 Term
The term of the Partnership shall commence on the date hereof and shall
continue until December 31, 2047, unless the Partnership is dissolved sooner
pursuant to the provisions of Article 13 or as otherwise provided by law.
ARTICLE 3
PURPOSE
3.1 Purpose and Business
(a) The purpose and nature of the business to be conducted by
the Partnership is to conduct any business that may be lawfully
conducted by a limited partnership organized pursuant to the Act
including, without limitation, to engage in the following activities:
(i) to acquire, hold, own, develop, construct,
improve, maintain, operate, sell, lease, transfer, encumber,
convey, exchange, and otherwise dispose of or deal with the
properties described in the prospectus contained in the
Registration Statement;
(ii) to acquire, hold, own, develop, construct,
improve, maintain, operate, sell, lease, transfer, encumber,
convey, exchange, and otherwise dispose of or deal with real
and personal property of all kinds;
(iii) to enter into any partnership, joint venture or
other similar arrangement to engage in any of the foregoing;
(iv) to undertake such other activities as may be
necessary, advisable, desirable or convenient to the business
of the Partnership; and
(v) to engage in such other ancillary activities as
shall be necessary or desirable to effectuate the foregoing
purposes;
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provided, however, that such business shall be limited to and conducted in such
a manner as to permit the General Partner at all times to be classified as a
REIT, unless the General Partner ceases to qualify as a REIT for any reason not
related to the business conducted by the Partnership.
(b) The Partnership shall have all powers necessary or
desirable to accomplish the purposes enumerated.
(c) In connection with the foregoing, but subject to all of
the terms, covenants, conditions and limitations contained in this
Agreement and any other agreement entered into by the Partnership, the
Partnership shall have full power and authority to enter into, perform,
and carry out contracts of any kind, to borrow money and to issue
evidences of indebtedness, whether or not secured by mortgage, trust
deed, pledge or other Lien, and, directly or indirectly, to acquire and
construct additional properties necessary or useful in connection with
its business.
3.2 Powers
(a) Subject to paragraph (c) below, the Partnership is
empowered to do any and all acts and things necessary, appropriate,
proper, advisable, incidental to or convenient for the furtherance and
accomplishment of the purposes and business described herein and for
the protection and benefit of the Partnership; provided, that the
Partnership shall not take, or refrain from taking, any action which,
in the judgment of the General Partner, in its sole and absolute
discretion,
(i) could adversely affect the ability of the General
Partner to continue to qualify as a REIT, unless the General
Partner otherwise ceases to qualify as a REIT;
(ii) could subject the General Partner to any
additional taxes under Section 857 or Section 4981 of the
Code; or
(iii) could violate any law or regulation of any
governmental body or agency having jurisdiction over the
General Partner or its securities.
(b) The Partnership also is empowered to do any and all acts
and things necessary, appropriate or advisable to ensure that the
Partnership will not be classified as a "publicly traded partnership"
for the purposes of Section 7704 of the Code.
(c) Prior to the effectiveness of the Registration Statement
and the issuance and sale of the shares of the General Partner's common
stock to be issued and sold thereunder, the affirmative vote or consent
of the General Partner's independent director (as such term is used in
the General Partner's Articles of Incorporation) will be required for
the approval of any of the following actions by or with respect to the
Partnership or any Subsidiary:
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(i) filing or consenting to the filing of a
bankruptcy petition;
(ii) otherwise instituting or causing the Partnership
or such Subsidiary to acquiesce in the institution of an
insolvency proceeding;
(iii) dissolving, liquidating, consolidating, merging
or selling all or substantially all of its assets; or
(iv) amending this Agreement or the articles of
incorporation, limited liability company agreement,
partnership agreement or trust agreement of any Subsidiary.
ARTICLE 4
CAPITAL CONTRIBUTIONS
4.1 Capital Contributions of the Partners
(a) The Partners have made or shall make at the Effective
Date, if applicable, the Capital Contributions as set forth in Exhibit
A to this Agreement.
(b) To the extent the Partnership acquires any property by the
merger of any other Person into the Partnership, Persons who receive
Partnership Interests in exchange for their interests in the Person
merging into the Partnership shall become Partners and shall be deemed
to have made Capital Contributions as provided in the applicable merger
agreement and as set forth in Exhibit A, as amended to reflect such
deemed Capital Contributions.
(c) Each Partner shall own OP Units in the amounts set forth
for such Partner in Exhibit A and shall have a Percentage Interest in
the Partnership as set forth in Exhibit A, which Percentage Interest
shall be adjusted in Exhibit A from time to time by the General Partner
to the extent necessary to reflect accurately exchanges, additional
Capital Contributions, the issuance of additional OP Units or similar
events having an effect on any Partner's Percentage Interest.
(d) The number of OP Units held by the General Partner, in its
capacity as general partner, shall be deemed to be the General Partner
Interest.
(e) Except as provided in Sections 4.2 and 10.5, the Partners
shall have no obligation to make any additional Capital Contributions
or loans to the Partnership.
4.2 Additional Funds; Restrictions on the General Partner
(a) (i) The sums of money required to finance the business and
affairs of the Partnership shall be derived from the initial
capital Contributions made to the Partnership by the Partners
as set forth in Section 4.1 and from funds generated
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from the operation and business of the Partnership, including,
without limitation, rents and distributions directly or
indirectly received by the Partnership from any Subsidiary.
(ii) In the event additional financing is needed from
sources other than as set forth in Section 4.2(a)(i) for any
reason, the General Partner may, in its sole and absolute
discretion, in such amounts and at such times as it solely
shall determine to be necessary or appropriate,
(A) cause the Partnership to issue
additional Partnership Interests and admit additional
Limited Partners to the Partnership in accordance
with Section 4.3;
(B) make additional Capital Contributions to
the Partnership (subject to the provisions of Section
4.2(b));
(C) cause the Partnership to borrow money,
enter into loan arrangements, issue debt securities,
obtain letters of credit or otherwise borrow money on
a secured or unsecured basis;
(D) make a loan or loans to the Partnership
(subject to Section 4.2(b)); or
(E) sell any assets or properties directly
or indirectly owned by the Partnership.
(iii) In no event shall the Limited Partners be
required to make any additional Capital Contributions or any
loan to, or otherwise provide any financial accommodation for
the benefit of, the Partnership.
(b) The General Partner shall not issue any debt securities,
any preferred stock or any common stock (including additional REIT
Stock (other than (i) as payment of the REIT Stock Amount or (ii) in
connection with the conversion or exchange of securities of the General
Partner solely in conversion or exchange for other securities of the
General Partner)) or rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe for or
purchase any of the foregoing (collectively, "SECURITIES"), other than
to all holders of REIT Stock, unless the General Partner shall
(i) in the case of debt securities, lend to the
Partnership the proceeds of or consideration received for such
Securities on the same terms and conditions, including
interest rate and repayment schedule, as shall be applicable
with respect to or incurred in connection with the issuance of
such Securities and the proceeds of, or consideration received
from, any subsequent exercise, exchange or conversion thereof
(if applicable);
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(ii) in the case of equity Securities senior or
junior to the REIT Stock as to dividends and distributions on
liquidation, contribute to the Partnership the proceeds of or
consideration (including any property or other non-cash
assets) received for such Securities and the proceeds of, or
consideration received from, any subsequent exercise, exchange
or conversion thereof (if applicable), and receive from the
Partnership, interests in the Partnership in consideration
therefor with the same terms and conditions, including
dividend, dividend priority and liquidation preference, as are
applicable to such Securities; and
(iii) in the case of REIT Stock or other equity
Securities on a parity with the REIT Stock as to dividends and
distributions on liquidation, (including, without limitation,
REIT Stock or other Securities issued as a stock award or upon
exercise of options issued under the Stock Option Plans),
contribute to the Partnership the proceeds of or consideration
(including any property or other non-cash assets, including
services) received for such Securities and the proceeds of, or
consideration received from, any subsequent exercise, exchange
or conversion thereof (if applicable), and receive from the
Partnership a number of additional OP Units in consideration
therefor equal to the product of
(A) the number of shares of REIT Stock or
other equity Securities issued by the General
Partner, multiplied by
(B) a fraction the numerator of which is one
and the denominator of which is the Exchange Factor
in effect on the date of such contribution.
4.3 Issuance of Additional Partnership Interests; Admission of
Additional Limited Partners
(a) In addition to any Partnership Interests issuable by the
Partnership pursuant to Section 4.2, the General Partner is authorized
to cause the Partnership to issue additional Partnership Interests (or
options therefor) in the form of OP Units or other Partnership
Interests in one or more series or classes, or in one or more series of
any such class senior or junior to the OP Units to any Persons at any
time or from time to time, on such terms and conditions, as the General
Partner shall establish in each case in its sole and absolute
discretion subject to Delaware law, including, without limitation, (i)
the allocations of items of Partnership income, gain, loss, deduction
and credit to each class or series of Partnership Interests, (ii) the
right of each class or series of Partnership Interests to share in
Partnership distributions, and (iii) the rights of each class or series
of Partnership Interest upon dissolution and liquidation of the
Partnership; provided that, no such Partnership Interests shall be
issued to the General Partner unless either (a) the Partnership
Interests are issued in connection with the grant, award, or issuance
of REIT Stock or other equity interests in the General Partner having
designations, preferences and other rights such that the economic
interests attributable to such REIT Stock or other equity interests are
substantially similar to the designations, preferences and other rights
(except voting rights) of the Partnership Interests issued to the
General Partner in
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accordance with this Section 4.3(a) or (b) the additional Partnership
Interests are issued to all Partners holding Partnership Interests in
the same class in proportion to their respective Percentage interests
in such class, without any approval being required from any Limited
Partner or any other Person; provided, however, that
(i) such issuance does not cause the Partnership to
become, with respect to any employee benefit plan subject to
Title I of ERISA or Section 4975 of the Code, a "party in
interest" (as defined in Section 3(14) of ERISA) or a
"disqualified person" (as defined in Section 4975(e) of the
Code); and
(ii) such issuance would not cause any portion of the
assets of the Partnership to constitute assets of any employee
benefit plan pursuant to Section 2510.3-101 of the
regulations of the United States Department of Labor.
(b) Subject to the limitations set forth in Section 4.3(a),
the General Partner may take such steps as it, in its sole and absolute
discretion, deems necessary or appropriate to admit any Person as a
Limited Partner of the Partnership or to issue any Partnership
Interests, including, without limitation, amending the Certificate,
Exhibit A or any other provision of this Agreement.
4.4 Contribution of Proceeds of Issuance of REIT Stock
In connection with the initial offering of common stock by the General
Partner, and any other offering, grant, award, or issuance of REIT Stock or
securities, rights, options, warrants or convertible or exchangeable securities
pursuant to Section 4.2, the General Partner shall make aggregate Capital
Contributions to the Partnership of the proceeds raised in connection with such
offering, grant, award, or issuance; provided, however, that if the proceeds
actually received by the General Partner are less than the gross proceeds of
such offering, grant, award, or issuance as a result of any underwriter's
discount, commission, or fee or other expenses paid or incurred in connection
with such offering, grant, award, or issuance, then the General Partner shall be
deemed to have made a Capital Contribution to the Partnership in the amount of
the gross proceeds of such issuance and the Partnership shall be deemed
simultaneously to have paid pursuant to Section 7.3(c) for the amount of such
underwriter's discount or other expenses.
4.5 Repurchase of REIT Stock; Shares-In-Trust
(a) In the event that the General Partner shall elect to
purchase from its stockholders REIT Stock for the purpose of delivering
such REIT Stock to satisfy an obligation under any dividend
reinvestment program adopted by the General Partner, any employee stock
purchase plan adopted by the General Partner, or any other obligation
or arrangement undertaken by the General Partner in the future, the
purchase price paid by the General Partner for such REIT Stock and any
other expenses incurred by the General
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Partner in connection with such purchase shall be considered expenses
of the Partnership and shall be reimbursed to the General Partner,
subject to the condition that:
(i) if such REIT Stock subsequently is to be sold by
the General Partner, the General Partner shall pay to the
Partnership any proceeds received by the General Partner from
the sale of such REIT Stock (provided that an exchange of REIT
Stock for OP Units pursuant to the Exchange Rights Agreement
would not be considered a sale for such purposes); and
(ii) if such REIT Stock is not re-transferred by the
General Partner within 30 days after the purchase thereof, the
General Partner shall cause the Partnership to cancel a number
of OP Units held by the General Partner (as applicable) equal
to the product of
(x) the number of shares of such REIT Stock,
multiplied by
(y) a fraction, the numerator of which is
one and the denominator of which is the Exchange
Factor in effect on the date of such cancellation.
(b) In the event the General Partner purchases Shares-in-Trust
(as from time to time defined in the Articles of Incorporation), the
Partnership will purchase from the General Partner a number of OP Units
equal to the product of
(i) the number of Shares-in-Trust purchased by the
General Partner, multiplied by
(ii) a fraction, the numerator of which is one and
the denominator of which is the Exchange Factor in effect on
the date of such purchase.
4.6 No Third-Party Beneficiary
No creditor or other third party having dealings with the Partnership
shall have the right to enforce the right or obligations of any Partner to make
Capital Contributions or loans or to pursue any other right or remedy hereunder
or at law or in equity, it being understood and agreed that the provisions of
this Agreement shall be solely for the benefit of, and may be enforced solely
by, the parties hereto and their respective successors and assigns.
4.7 No Interest; No Return
(a) No Partner shall be entitled to interest on its Capital
Contribution or on such Partner's Capital Account.
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(b) Except as provided herein or by law, no Partner shall have
any right to demand or receive the return of its Capital Contribution
from the Partnership.
4.8 No Preemptive Rights
Subject to any preemptive rights that may be granted pursuant to
Section 4.3 hereof, no Person shall have any preemptive or other similar right
with respect to
(a) additional Capital Contributions or loans to the
Partnership; or
(b) issuance or sale of any OP Units or other Partnership
Interests.
ARTICLE 5
DISTRIBUTIONS
5.1 Regular Distributions
Except for distributions pursuant to Section 13.2 in connection with
the dissolution and liquidation of the Partnership, and subject to the
provisions of Sections 5.3, 5.4, 5.5 and 12.2(c), the General Partner shall
cause the Partnership to distribute, on a quarterly basis (or, at the election
of the General Partner, more frequently), an amount of Available Cash,
determined by the General Partner in its sole discretion to the Partners, as of
the applicable Partnership Record Date, in accordance with each Partner's
respective Percentage Interest; provided, however, that in no event may a
Partner receive a distribution of Available Cash with respect to an OP Unit if
such Partner is entitled to receive a distribution out of such Available Cash
with respect to REIT Stock for which such OP Unit has been exchanged.
5.2 Qualification as a REIT
The General Partner shall use its best efforts to cause the Partnership
to distribute sufficient amounts under this Article 5 to enable the General
Partner to pay stockholder dividends that will enable the General Partner to
(a) satisfy the requirements for qualification as a REIT under
the Code and Regulations ("REIT Requirements"), and
(b) avoid any federal income or excise tax liability;
provided, however, the General Partner shall not be bound to comply with this
covenant to the extent such distributions would
(x) violate applicable Delaware law or
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(y) contravene the terms of any notes, mortgages or other
types of debt obligations to which the Partnership may be subject in
conjunction with borrowed funds.
5.3 Withholding
With respect to any withholding tax or other similar tax liability or
obligation to which the Partnership may be subject as a result of any act or
status of any Partner or to which the Partnership becomes subject with respect
to any OP Unit, the Partnership shall have the right to withhold amounts of
Available Cash distributable to such Partner or with respect to such OP Units,
to the extent of the amount of such withholding tax or other similar tax
liability or obligation pursuant to the provisions contained in Section 10.5.
5.4 Additional Partnership Interests
If the Partnership issues Partnership Interests in accordance with
Section 4.2 or 4.3, the distribution priorities set forth in Section 5.1 shall
be amended, as necessary, to reflect the distribution priority of such
Partnership Interests and corresponding amendments shall be made to the
provisions of Exhibit B.
5.5 Distributions Upon Liquidation
Proceeds from a Terminating Capital Transaction and any other cash
received or reductions in reserves made after commencement of the liquidation of
the Partnership shall be distributed to the Partners in accordance with Section
13.2.
ARTICLE 6
ALLOCATIONS
6.1 Allocations
The Net Income, Net Loss and other Partnership items shall be allocated
pursuant to the provisions of Exhibit B.
6.2 Revisions to Allocations to Reflect Issuance of Partnership
Interests
If the Partnership issues Partnership Interests to the General Partner
or any additional Limited Partner pursuant to Article IV, the General Partner
shall make such revisions to this Article 6 and Exhibit B as it deems necessary
to reflect the terms of the issuance of such Partnership Interests, including
making preferential allocations to classes of Partnership Interests that are
entitled thereto. Such revisions shall not require the consent or approval of
any other Partner.
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ARTICLE 7
MANAGEMENT AND OPERATIONS OF BUSINESS
7.1 Management
(a) (i) Except as otherwise expressly provided in this
Agreement, full, complete and exclusive discretion to manage
and control the business and affairs of the Partnership are
and shall be vested in the General Partner, and no Limited
Partner shall have any right to participate in or exercise
control or management power over the business and affairs of
the Partnership.
(ii) The General Partner may not be removed by the
Limited Partners with or without cause.
(iii) In addition to the powers now or hereafter
granted a general partner of a limited partnership under
applicable law or which are granted to the General Partner
under any other provision of this Agreement, the General
Partner shall have full power and authority to do all things
deemed necessary or desirable by it to conduct the business of
the Partnership, to exercise all powers set forth in Section
3.2 hereof and to effectuate the purposes set forth in Section
3.1 hereof, including, without limitation:
(A) (I) the making of any expenditures, the
lending or borrowing of money, including,
without limitation, making prepayments on
loans and borrowing money to permit the
Partnership to make distributions to its
Partners in such amounts as will permit the
General Partner (so long as the General
Partner qualifies as a REIT) to avoid the
payment of any federal income tax
(including, for this purpose, any excise tax
pursuant to Section 4981 of the Code) and
to make distributions to its stockholders in
amounts sufficient to permit the General
Partner to maintain REIT status,
(II) the assumption or guarantee of,
or other contracting for, indebtedness and
other liabilities,
(III) the issuance of evidence of
indebtedness (including the securing of the
same by deed, mortgage, deed of trust or
other lien or encumbrance on the
Partnership's assets) and
(IV) the incurring of any
obligations it deems necessary for the
conduct of the activities of the
Partnership, including the payment of all
expenses associated with the General
Partner;
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(B) the making of tax, regulatory and other
filings, or rendering of periodic or other reports to
governmental or other agencies having jurisdiction
over the business or assets of the Partnership or the
General Partner;
(C) the acquisition, disposition, mortgage,
pledge, encumbrance, hypothecation or exchange of any
assets of the Partnership (including the exercise or
grant of any conversion, option, privilege, or
subscription right or other right available in
connection with any assets at any time held by the
Partnership) or the merger or other combination of
the Partnership with or into another entity;
(D) the use of the assets of the Partnership
(including, without limitation, cash on hand) for any
purpose consistent with the terms of this Agreement
and on any terms it sees fit, including, without
limitation,
(I) the financing of the conduct of
the operations of the General Partner, the
Partnership or any of the Partnership's
Subsidiaries,
(II) the lending of funds to other
Persons (including, without limitation, the
Subsidiaries of the Partnership and/or the
General Partner) and the repayment of
obligations of the Partnership and its
Subsidiaries and any other Person in which
it has an equity investment, and
(III) the making of capital
contributions to its Subsidiaries;
(E) the expansion, development,
construction, leasing, repair, alteration, demolition
or improvement of any property in which the
Partnership or any Subsidiary of the Partnership owns
an interest;
(F) the negotiation, execution, and
performance of any contracts, conveyances or other
instruments that the General Partner considers useful
or necessary to the conduct of the Partnership's
operations or the implementation of the General
Partner's powers under this Agreement, including
contracting with contractors, developers,
consultants, accountants, legal counsel, other
professional advisors and other agents and the
payment of their expenses and compensation out of the
Partnership's assets;
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(G) the distribution of Partnership cash or
other Partnership assets in accordance with this
Agreement;
(H) holding, managing, investing and
reinvesting cash and other assets of the Partnership;
(I) the collection and receipt of revenues
and income of the Partnership;
(J) the establishment of one or more
divisions of the Partnership, the selection and
dismissal of employees of the Partnership (including,
without limitation, employees having titles such as
"president," "vice president," "secretary" and
"treasurer" of the Partnership), and agents, outside
attorneys, accountants, consultants and contractors
of the Partnership, and the determination of their
compensation and other terms of employment or
engagement;
(K) the maintenance of such insurance for
the benefit of the Partnership and the Partners as it
deems necessary or appropriate;
(L) the formation of, or acquisition of an
interest in, and the contribution of property to, any
further Entities or other relationships that it deems
desirable, including, without limitation, the
acquisition of interests in, and the contributions of
property to, its Subsidiaries and any other Person
from time to time;
(M) the control of any matters affecting the
rights and obligations of the Partnership, including
(I) the settlement, compromise,
submission to arbitration or any other form
of dispute resolution, or abandonment of,
any claim, cause of action, liability, debt
or damages, due or owing to or from the
Partnership,
(II) the commencement or defense of
suits, legal proceedings, administrative
proceedings, arbitration or other forms of
dispute resolution, and
(III) the representation of the
Partnership in all suits or legal
proceedings, administrative proceedings,
arbitrations or other forms of dispute
resolution, the incurring of legal expenses,
and the indemnification of any Person
against liabilities and contingencies to the
extent permitted by law;
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(N) the undertaking of any action in
connection with the Partnership's direct or indirect
investment in its Subsidiaries or any other Person
(including, without limitation, the contribution or
loan of funds by the Partnership to such Persons);
(O) the determination of the fair market
value of any Partnership property distributed in kind
using such reasonable method of valuation as the
General Partner, in its sole discretion, may adopt;
(P) the exercise, directly or indirectly,
through any attorney-in-fact acting under a general
or limited power of attorney, of any right, including
the right to vote, appurtenant to any asset or
investment held by the Partnership;
(Q) the exercise of any of the powers of the
General Partner enumerated in this Agreement on
behalf of or in connection with any Subsidiary of the
Partnership or any other Person in which the
Partnership has a direct or indirect interest, or
jointly with any such Subsidiary or other Person;
(R) the exercise of any of the powers of the
General Partner enumerated in this Agreement on
behalf of any Person in which the Partnership does
not have an interest pursuant to contractual or other
arrangements with such Person;
(S) the making, execution and delivery of
any and all deeds, leases, notes, mortgages, deeds of
trust, security agreements, conveyances, contracts,
guarantees, warranties, indemnities, waivers,
releases or legal instruments or agreements in
writing necessary or appropriate, in the judgment of
the General Partner, for the accomplishment of any of
the foregoing;
(T) the issuance of additional OP Units in
connection with Capital Contributions by Additional
Limited Partners and additional Capital Contributions
by Partners pursuant to Article 4 hereof; and
(U) The opening of bank accounts on behalf
of, and in the name of, the Partnership and its
Subsidiaries.
(b) (i) Each of the Limited Partners agrees that the General
Partner is authorized to execute, deliver and perform the
above-mentioned agreements and transactions on behalf of the
Partnership without any further act, approval or vote
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of the Partners, notwithstanding any other provision of this
Agreement to the fullest extent permitted under the Act or
other applicable law, rule or regulation.
(ii) The execution, delivery or performance by the
General Partner or the Partnership of any agreement authorized
or permitted under this Agreement shall not constitute a
breach by the General Partner of any duty that the General
Partner may owe the Partnership or the Limited Partners or any
other Persons under this Agreement or of any duty stated or
implied by law or equity.
(c) At all times from and after the date hereof, the General
Partner at the expense of the Partnership, may or may not, cause the
Partnership to obtain and maintain
(i) casualty, liability and other insurance on the
properties of the Partnership and
(ii) liability insurance for the Indemnities
hereunder.
(d) At all times from and after the date hereof, the General
Partner may cause the Partnership to establish and maintain at any and
all times working capital accounts and other cash or similar balances
in such amount as the General Partner, in its sole and absolute
discretion, deems appropriate and reasonable from time to time.
(e) (i) In exercising its authority under this Agreement, the
General Partner may, but shall be under no obligation to, take
into account the tax consequences to any Partner of any action
taken (or not taken) by it. The General Partner and the
Partnership shall not have liability to a Limited Partner for
monetary damages or otherwise for losses sustained,
liabilities incurred or benefits not delivered by such Limited
Partner in connection with such decisions, provided that the
General Partner has acted in good faith pursuant to its
authority under this Agreement
(ii) The General Partner and the Partnership shall
not have liability to a Limited Partner under any
circumstances as a result of an income tax liability incurred
by such Limited Partner as a result of an action (or inaction)
by the General Partner taken pursuant to its authority under
and in accordance with this Agreement.
7.2 Certificate of Limited Partnership
(a) Promptly after the execution and delivery of this
Agreement by the General Partner and the Initial Limited Partner, the
General Partner will file the Certificate with the Secretary of State
of Delaware as required by the Act.
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(b) (i) The General Partner shall use all reasonable efforts
to cause to be filed such other certificates or documents as
may be reasonable and necessary or appropriate for the
formation, continuation, qualification and operation of a
limited partnership (or a partnership in which the limited
partners have limited liability) in the State of Delaware and
any other state, or the District of Columbia, in which the
Partnership may elect to do business or own property.
(ii) To the extent that such action is determined by
the General Partner to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and
restatements of the Certificate and do all of the things to
maintain the Partnership as a limited partnership (or a
partnership in which the limited partners have limited
liability) under the laws of the State of Delaware and each
other state, or the District of Columbia, in which the
Partnership may elect to do business or own property.
(iii) Subject to the terms of Section 8.5(a)(iv)
hereof, the General Partner shall not be required, before or
after filing, to deliver or mail a copy of the Certificate or
any amendment thereto to any Limited Partner.
7.3 Reimbursement of the General Partner
(a) Except as provided in this Section 7.3 and elsewhere in
this Agreement (including the provisions of Articles 5 and 6 regarding
distributions, payments, and allocations to which it may be entitled),
the General Partner shall not be compensated for its services as
general partner of the Partnership.
(b) (i) The General Partner shall be reimbursed on a monthly
basis, or such other basis as it may determine in its sole and
absolute discretion, for all expenses that it incurs on behalf
of the Partnership relating to the ownership and operation of
the Partnership's assets, or for the benefit of the
Partnership, including all expenses associated with compliance
by the General Partner and the Initial Limited Partner with
laws, rules and regulations promulgated by any regulatory body
and any and all salaries, compensation and expenses of
officers and employees of the General Partner; provided, that
the amount of any such reimbursement shall be reduced by any
interest earned by the General Partner with respect to bank
accounts or other instruments or accounts held by it in its
name.
(ii) Such reimbursement shall be in addition to any
reimbursement made as a result of indemnification pursuant to
Section 7.6 hereof.
(iii) Notwithstanding any provisions to the contrary
set forth herein, the General Partner shall not be entitled to
reimbursement for the ratable portion of
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any administrative costs and expenses incurred by it with
respect to, or that are attributable to, properties or
partnership interests in a Subsidiary of the Partnership that
are owned by the General Partner directly. If certain expenses
are incurred for the benefit of the Partnership and other
entities (including the General Partner), such expenses will
be allocated to the Partnership and such other entities in
such a manner as the General Partner, it its sole and absolute
discretion, deems fair and reasonable.
(c) (i) Expenses incurred by the General Partner relating to
the organization or reorganization of the Partnership and the
General Partner, the initial public offering of REIT Stock by
the General Partner and any other issuance of additional
Partnership Interests, REIT Stock or rights, options,
warrants, or convertible or exchangeable securities pursuant
to Section 4.2 hereof and all costs and expenses associated
with the preparation and filing of any periodic reports by the
General Partner under federal, state or local laws or
regulations (including, without limitation, all costs,
expenses, damages, and other payments resulting from or
arising in connection with litigation related to any of the
foregoing) are primarily obligations of the Partnership.
(ii) To the extent the General Partner pays or incurs
such expenses, the General Partner shall be reimbursed for
such expenses.
7.4 Outside Activities of the General Partner
(a) Without the Consent of Limited Partners holding a majority
of the Partnership Interests not held by the General Partner, the
General Partner shall not directly or indirectly enter into or conduct
any business other than in connection with the ownership, acquisition,
and disposition of Partnership Interests and the management of the
business of the Partnership, and such activities as are incidental
thereto.
(b) The General Partner and any Affiliates of the General
Partner may acquire Limited Partner Interests and shall be entitled to
exercise all rights of a Limited Partner relating to such Limited
Partner Interests.
7.5 Contracts with Affiliates
(a) (i) The Partnership may lend or contribute funds or other
assets to its Subsidiaries or other Persons in which it has an
equity investment and such Subsidiaries and Persons may borrow
funds from the Partnership, on terms and conditions
established in the sole and absolute discretion of the General
Partner.
(ii) The foregoing authority shall not create any
right or benefit in favor of any Subsidiary or any other
Person.
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(b) Except as provided in Section 7.4, the Partnership may
Transfer assets to Entities in which it is or thereby becomes a
participant upon such terms and subject to such conditions consistent
with this Agreement and applicable law as the General Partner, in its
sole and absolute discretion, may determine.
(c) Except as expressly permitted by this Agreement, neither
the General Partner nor any of its Affiliates shall sell, Transfer or
convey any property to, or purchase any property from, the Partnership,
directly or indirectly, except pursuant to transactions that are
determined by the General Partner in good faith to be fair and
reasonable.
(d) The General Partner, in its sole and absolute discretion
and without the approval of the Limited Partners, may propose and
adopt, on behalf of the Partnership, employee benefit plans, stock
option plans, and similar plans funded by the Partnership for the
benefit of employees of the Partnership, the General Partner, any
Subsidiaries of the Partnership or any Affiliate of any of them in
respect of services performed, directly or indirectly, for the benefit
of the Partnership, the General Partner, any Subsidiaries of the
Partnership or any Affiliate of any of them.
(e) The General Partner is expressly authorized to enter into,
in the name and on behalf of the Partnership, a "right of first
opportunity" or "right of first offer" arrangement, non-competition
agreements and other conflict avoidance agreements with various
Affiliates of the Partnership and the General Partner, on such terms as
the General Partner, in its sole and absolute discretion, believes are
advisable.
7.6 Indemnification
(a) (i) To the fullest extent permitted by Delaware law, the
Partnership shall indemnify each Indemnitee from and against
any and all losses, claims, damages, liabilities, joint or
several, expenses (including, without limitation, reasonable
attorneys' fees and other legal fees and expenses), judgments,
fines, settlements, and other amounts arising from any and all
claims, demands, actions, suits or proceedings, civil,
criminal, administrative or investigative, that relate to the
operations of the Partnership or the General Partner as set
forth in this Agreement, in which such Indemnitee may be
involved, or is threatened to be involved, as a party or
otherwise, except to the extent it is finally determined by a
court of competent jurisdiction, from which no further appeal
may be taken, that such Indemnitee's action constituted
intentional acts or omissions constituting willful misconduct
or fraud.
(ii) Without limitation, the foregoing indemnity
shall extend to any liability of any Indemnitee, pursuant to a
loan guaranty or otherwise for any indebtedness of the
Partnership or any Subsidiary of the Partnership (including,
without limitation, any indebtedness which the Partnership or
any Subsidiary of
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the Partnership has assumed or taken subject to), and the
General Partner is hereby authorized and empowered, on behalf
of the Partnership, to enter into one or more indemnity
agreements consistent with the provisions of this Section 7.6
in favor of any Indemnitee having or potentially having
liability for any such indebtedness.
(iii) Any indemnification pursuant to this Section
7.6 shall be made only out of the assets of the Partnership,
and neither the General Partner nor any Limited Partner shall
have any obligation to contribute to the capital of the
Partnership, or otherwise provide funds, to enable the
Partnership to fund its obligations under this Section 7.6.
(b) Reasonable expenses incurred by an Indemnitee who is
a party to a proceeding shall be paid or reimbursed
by the Partnership in advance of the final
disposition of the proceeding.
(c) The indemnification provided by this Section 7.6 shall be
in addition to any other rights to which an Indemnitee or any other
Person may be entitled under any agreement, pursuant to any vote of the
Partners, as a matter of law or otherwise, and shall continue as to an
Indemnitee who has ceased to serve in such capacity unless otherwise
provided in a written agreement pursuant to which such Indemnities are
indemnified.
(d) The Partnership may, but shall not be obligated to,
purchase and maintain insurance, on behalf of the Indemnities and such
other Persons as the General Partner shall determine, against any
liability that may be asserted against or expenses that may be incurred
by such Person in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify
such Person against such liability under the provisions of this
Agreement.
(e) For purposes of this Section 7.6, the Partnership shall be
deemed to have requested an Indemnitee to serve as fiduciary of an
employee benefit plan whenever the performance by such Indemnitee of
its duties to the Partnership also imposes duties on, or otherwise
involves services by, such Indemnitee to the plan or participants or
beneficiaries of the plan; excise taxes assessed on an Indemnitee with
respect to an employee benefit plan pursuant to applicable law shall
constitute fines within the meaning of this Section 7.6; and actions
taken or omitted by the Indemnitee with respect to an employee benefit
plan in the performance of its duties for a purpose reasonably believed
by it to be in the interest of the participants and beneficiaries of
the plan shall be deemed to be for a purpose which is not opposed to
the best interests of the Partnership.
(f) In no event may an Indemnitee subject any of the Partners
to personal liability by reason of the indemnification provisions set
forth in this Agreement.
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(g) An Indemnitee shall not be denied indemnification in whole
or in part under this Section 7.6 because the Indemnitee had an
interest in the transaction with respect to which the indemnification
applies if the transaction was otherwise permitted by the terms of this
Agreement.
(h) (i) The provisions of this Section 7.6 are for the benefit
of the Indemnities, their heirs, successors, assigns and
administrators and shall not be deemed to create any rights
for the benefit of any other Persons.
(ii) Any amendment, modification or repeal of this
Section 7.6 or any provision hereof shall be prospective only
and shall not in any way affect the Partnership's liability to
any Indemnitee under this Section 7.6, as in effect
immediately prior to such amendment, modification, or repeal
with respect to claims arising from or relating to matters
occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may
arise or be asserted.
7.7 Liability of the General Partner
(a) Notwithstanding anything to the contrary set forth in this
Agreement, the General Partner and its officers and directors shall not
be liable for monetary damages to the Partnership, any Partners or any
Assignees for losses sustained or liabilities incurred as a result of
errors in judgment or mistakes of fact or law or of any act or omission
unless the General Partner acted in bad faith and the act or omission
was material to the matter giving rise to the loss, liability or
benefit not derived.
(b) (i) The Limited Partners expressly acknowledge that the
General Partner is acting on behalf of the Partnership and the
shareholders of the General Partner collectively, that the
General Partner, subject to the provisions of Section 7.1(e)
hereof, is under no obligation to consider the separate
interest of the Limited Partners (including, without
limitation, the tax consequences to Limited Partners or
Assignees) in deciding whether to cause the Partnership to
take (or decline to take) any actions, and that the General
Partner shall not be liable for monetary damages for losses
sustained, liabilities incurred, or benefits not derived by
Limited Partners in connection with such decisions; provided
that the General Partner has acted in good faith.
(ii) With respect to any indebtedness of the
Partnership which any Limited Partner may have guaranteed, the
General Partner shall have no duty to keep such indebtedness
outstanding.
(c) (i) Subject to its obligations and duties as General
Partner set forth in Section 7.1(a) hereof, the General
Partner may exercise any of the powers granted
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to it by this Agreement and perform any of the duties imposed
upon it hereunder either directly or by or through its agent.
(ii) The General Partner shall not be responsible for
any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(d) The Limited Partners expressly acknowledge that in the
event of any conflict in the fiduciary duties owed by the General
Partner to its stockholders and by the General Partner, in its capacity
as a general partner of the Partnership, to the Limited Partners, the
General Partner may act in the best interests of the General Partner's
stockholders without violating its fiduciary duties to the Limited
Partners, and that the General Partner shall not be liable for monetary
damages for losses sustained, liabilities incurred, or benefits not
derived by the Limited Partners in connection with any such violation.
(e) Any amendment, modification or repeal of this Section 7.7
or any provision hereof shall be prospective only and shall not in any
way affect the limitations on the General Partner's and its officers'
and directors' liability to the Partnership and the Limited Partners
under this Section 7.7 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from
or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may
arise or be asserted.
7.8 Other Matters Concerning the General Partner
(a) The General Partner may rely and shall be protected in
acting, or refraining from acting, upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent,
order, bond, debenture, or other paper or document believed by it in
good faith to be genuine and to have been signed or presented by the
proper party or parties.
(b) The General Partner may consult with legal counsel,
accountants, appraisers, management consultants, investment bankers,
architects, engineers, environmental consultants and other consultants
and advisers selected by it, and any act taken or omitted to be taken
in reliance upon the opinion of such Persons as to matters which such
General Partner reasonably believes to be within such Person's
professional or expert competence shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such
opinion.
(c) (i) The General Partner shall have the right, in respect
of any of its powers or obligations hereunder, to act through
any of its duly authorized officers and duly appointed
attorneys-in-fact.
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(ii) Each such attorney shall, to the extent provided
by the General Partner in the power of attorney, have full
power and authority to do and perform each and every act and
duty which is permitted or required to be done by the General
Partner hereunder.
(d) Notwithstanding any other provisions of this Agreement or
the Act, any action of the General Partner on behalf of the Partnership
or any decision of the General Partner to refrain from acting on behalf
of the Partnership, undertaken in the good faith belief that such
action or omission is necessary or advisable in order
(i) to protect the ability of the General Partner to
continue to qualify as a REIT; or
(ii) to avoid the General Partner incurring any taxes
under Section 857 or Section 4981 of the Code,
is expressly authorized under this Agreement and is deemed approved by
all of the Limited Partners.
7.9 Title to Partnership Assets
(a) Title to Partnership assets, whether real, personal or
mixed and whether tangible or intangible, shall be deemed to be owned
by the Partnership as an entity, and no Partner, individually or
collectively, shall have any ownership interest in such Partnership
assets or any portion thereof.
(b) (i) Title to any or all of the Partnership assets may be
held in the name of the Partnership, the General Partner or
one or more nominees, as the General Partner may determine,
including Affiliates of the General Partner.
(ii) The General Partner hereby declares and warrants
that any Partnership asset for which legal title is held in
the name of the General Partner or any nominee or Affiliate of
the General Partner shall be held by the General Partner for
the use and benefit of the Partnership in accordance with the
provisions of this Agreement; provided, that the General
Partner shall use its best efforts to cause beneficial and
record title to such assets to be vested in the Partnership as
soon as reasonably practicable.
(iii) All Partnership assets shall be recorded as the
property of the Partnership in its books and records,
irrespective of the name in which legal title to such
Partnership assets is held.
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7.10 Reliance by Third Parties
(a) Notwithstanding anything to the contrary in this
Agreement, any Person dealing with the Partnership shall be entitled to
assume that the General Partner has full power and authority, without
consent or approval of any other Partner or Person, to encumber, sell
or otherwise use in any manner any and all assets of the Partnership
and to enter into any contracts on behalf of the Partnership, and take
any and all actions on behalf of the Partnership, and such Person shall
be entitled to deal with the General Partner as if the General Partner
were the Partnership's sole party in interest, both legally and
beneficially.
(b) Each Limited Partner hereby waives any and all defenses
or other remedies which may be available against such Person to
contest, negate or disaffirm any action of the General Partner in
connection with any such dealing.
(c) In no event shall any Person dealing with the General
Partner or its representatives be obligated to ascertain that the terms
of this Agreement have been complied with or to inquire into the
necessity or expediency of any act or action of the General Partner or
its representatives.
(d) Each and every certificate, document or other instrument
executed on behalf of the Partnership by the General Partner or its
representatives shall be conclusive evidence in favor of any and every
Person relying thereon or claiming thereunder that
(i) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in
full force and effect;
(ii) the Person executing and delivering such
certificate, document or instrument was duly authorized and
empowered to do so for and on behalf of the Partnership; and
(iii) such certificate, document or instrument was
duly executed and delivered in accordance with the terms and
provisions of this Agreement and is binding upon the
Partnership.
ARTICLE 8
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
8.1 Limitation of Liability
The Limited Partners shall have no liability under this Agreement
except as expressly provided in this Agreement, including Section 10.5 hereof,
or under the Act.
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8.2 Management of Business
(a) No Limited Partner or Assignee (other than the General
Partner, any of its Affiliates or any officer, director, employee,
agent or trustee of the General Partner, the Partnership or any of
their Affiliates, in their capacity as such) shall take part in the
operation, management or control (within the meaning of the Act) of the
Partnership's business, transact any business in the Partnership's name
or have the power to sign documents for or otherwise bind the
Partnership.
(b) The transaction of any such business by the General
Partner, any of its Affiliates or any officer, director, employee,
partner, agent or trustee of the General Partner, the Partnership or
any of their Affiliates, in their capacity as such, shall not affect,
impair or eliminate the limitations on the liability of the Limited
Partners or Assignees under this Agreement.
8.3 Outside Activities of Limited Partners
(a) Subject to any agreements entered into pursuant to Section
7.5 hereof and any other agreements entered into by a Limited Partner
or its Affiliates with the Partnership or any of its Subsidiaries, any
Limited Partner and any officer, director, employee, agent, trustee,
Affiliate or shareholder of any Limited Partner shall be entitled to
and may have business interests and engage in business activities in
addition to those relating to the Partnership, including business
interests and activities that are in direct competition with the
Partnership or that are enhanced by the activities of the Partnership.
(b) Neither the Partnership nor any Partners shall have any
rights by virtue of this Agreement in any business ventures of any
Limited Partner or Assignee.
(c) None of the Limited Partners nor any other Person shall
have any rights by virtue of this Agreement or the Partnership
relationship established hereby in any business ventures of any other
Person and such Person shall have no obligation pursuant to this
Agreement to offer any interest in any such business ventures to the
Partnership, any Limited Partner or any such other Person, even if such
opportunity is of a character which, if presented to the Partnership,
any Limited Partner or such other Person, could be taken by such
Person.
8.4 Return of Capital
(a) Except pursuant to the Exchange Rights Agreement, no
Limited Partner shall be entitled to the withdrawal or return of its
Capital Contribution, except to the extent of distributions made
pursuant to this Agreement or upon termination of the Partnership as
provided herein.
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(b) Except to the extent provided by Exhibit B, or as
otherwise expressly provided in this Agreement, no Limited Partner or
Assignee shall have priority over any other Limited Partner or
Assignee, either as to the return of Capital Contributions or as to
profits, losses or distributions.
8.5 Rights of Limited Partners Relating to the Partnership
(a) In addition to the other rights provided by this Agreement
or by the Act, and except as limited by Section 8.5(b) hereof, each
Limited Partner shall have the right, for a purpose reasonably related
to such Limited Partner's interest as a limited partner in the
Partnership, upon written demand with a statement of the purpose of
such demand and at such Limited Partner's own expense (including such
reasonable copying and administrative charges as the General Partner
may establish from time to time):
(i) to obtain a copy of the most recent annual and
quarterly reports filed with the Securities and Exchange
Commission by the General Partner pursuant to the Securities
Exchange Act of 1934;
(ii) to obtain a copy of the Partnership's federal,
state and local income tax returns for each Partnership Year;
(iii) to obtain a current list of the name and last
known business, residence or mailing address of each Partner;
(iv) to obtain a copy of this Agreement and the
Certificate and all amendments or restatements thereto,
together with executed copies of all powers of attorney
pursuant to which this Agreement, the Certificate and all
amendments and/or restatements thereto have been executed; and
(v) to obtain true and full information regarding the
amount of cash and a description and statement of any other
property or services contributed by each Partner and which
each Partner has agreed to contribute in the future, and the
date on which each became a Partner.
(b) Notwithstanding any other provision of this Section 8.5,
the General Partner may keep confidential from the Limited Partners,
for such period of time as the General Partner determines in its sole
and absolute discretion to be reasonable, any information that
(i) the General Partner reasonably believes to be in
the nature of trade secrets or other information, the
disclosure of which the General Partner in good faith believes
is not in the best interests of the Partnership or could
damage the Partnership or its business; or
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(ii) the Partnership is required by law or by
agreements with an unaffiliated third party to keep
confidential.
8.6 Exchange Rights Agreement
(a) The Limited Partners have been granted the right, but not
the obligation, to exchange all or a portion of their OP Units for cash
or, at the option of the General Partner, for shares of REIT Stock on
the terms and subject to the conditions and restrictions contained in
that certain Exchange Rights Agreement among the General Partners and
the Limited Partners (as amended from time to time, the "Exchange
Rights Agreement"), the form of which is attached hereto as Exhibit E.
(b) The Limited Partners and all successors, assignees and
transferees (whether by operation of law, including by merger or
consolidation, dissolution or liquidation of an entity that is a
Limited Partner, or otherwise) shall be bound by the provisions of the
Exchange Rights Agreement.
ARTICLE 9
BOOKS, RECORDS, ACCOUNTING AND REPORTS
9.1 Records and Accounting
(a) The General Partner shall keep or cause to be kept at the
principal office of the Partnership those records and documents
required to be maintained by the Act and other books and records deemed
by the General Partner to be appropriate with respect to the
Partnership's business, including, without limitation, all books and
records necessary for the General Partner to comply with applicable
REIT Requirements and to provide to the Limited Partners any
information, lists and copies of documents required to be provided
pursuant to Sections 8.5(a) and 9.3 hereof.
(b) Any records maintained by or on behalf of the Partnership
in the regular course of its business may be kept on, or be in the form
of, punch cards, magnetic tape, photographs, micrographics or any other
information storage device, provided that the records so maintained are
convertible into clearly legible written form within a reasonable
period of time.
(c) The books of the Partnership shall be maintained, for
financial and tax reporting purposes, on an accrual basis in accordance
with generally accepted accounting principles, or such other basis as
the General Partner determines to be necessary or appropriate.
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9.2 Fiscal Year
The fiscal year of the Partnership shall be the calendar year.
9.3 Reports
(a) As soon as practicable, but in no event later than the
date on which the General Partner mails its annual report to its
Stockholders, the General Partner shall cause to be mailed to each
Limited Partner as of the close of the Partnership Year, an annual
report containing financial statements of the Partnership, or of the
General Partner, if such statements are prepared on a consolidated
basis with the Partnership, for such Partnership Year, presented in
accordance with GAAP, such statements to be audited by a nationally
recognized firm of independent public accountants selected by the
General Partner in its sole discretion.
(b) If and to the extent that the General Partner mails
quarterly reports to its Stockholders, then as soon as practicable, but
in no event later than the date such reports are mailed, the General
Partner shall cause to be mailed to each Limited Partner a report
containing unaudited financial statements as of the last day of the
calendar quarter of the Partnership, or of the General Partner, if such
statements are prepared on a consolidated basis with the Partnership,
and such other information as may be required by applicable law or
regulation, or as the General Partner determines to be appropriate.
ARTICLE 10
TAX MATTERS
10.1 Preparation of Tax Returns
The General Partner shall arrange for the preparation and timely filing
of all returns of Partnership income, gains, deductions, losses and other items
required of the Partnership for federal and state income tax purposes and shall
use all reasonable efforts to furnish, within ninety (90) days of the close of
each taxable year, the tax information reasonably required by Limited Partners
for federal and state income tax reporting purposes.
10.2 Tax Elections
(a) Except as otherwise provided herein, the General Partner
shall, in its sole and absolute discretion, determine whether to make
any available election pursuant to the Code; provided, however, that
the General Partner shall make the election under Section 754 of the
Code in accordance with applicable regulations thereunder effective for
the first calendar year following the Effective Date.
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(b) The General Partner shall elect a permissible method of
eliminating the disparity between the book value and the tax basis of
property contributed to the Partnership or to a Subsidiary of the
Partnership pursuant to the regulations promulgated under the
provisions of Section 704(c) of the Code.
(c) The General Partner shall have the right to seek to revoke
any tax election it makes, including, without limitation, the election
under Section 754 of the Code, upon the General Partner's
determination, in its sole and absolute discretion, that such
revocation is in the best interests of the Partners.
10.3 Tax Matters Partner
(a) (i) The General Partner shall be the "tax matters partner"
of the Partnership for federal income tax purposes.
(ii) Pursuant to Section 6230(e) of the Code, upon
receipt of notice from the Internal Revenue Service of the
beginning of an administrative proceeding with respect to the
Partnership, the tax matters partner shall furnish the
Internal Revenue Service with the name, address, taxpayer
identification number, and profit interest of each of the
Limited Partners and the Assignees; provided, that such
information is provided to the Partnership by the Limited
Partners and the Assignees.
(iii) The tax matters partner is authorized, but not
required:
(A) to enter into any settlement with the
Internal Revenue Service with respect to any
administrative or judicial proceedings for the
adjustment of Partnership items required to be taken
into account by a Partner for income tax purposes
(such administrative proceedings being referred to as
a "tax audit" and such judicial proceedings being
referred to as "judicial review"), and in the
settlement agreement the tax matters partner may
expressly state that such agreement shall bind all
Partners, except that such settlement agreement shall
not bind any Partner
(I) who (within the time prescribed
pursuant to the Code and Regulations) files
a statement with the Internal Revenue
Service providing that the tax matters
partner shall not have the authority to
enter into a settlement agreement on behalf
of such Partner; or
(II) who is a "notice partner" (as
defined in Section 6231(a)(8) of the Code)
or a member of a "notice group" (as defined
in Section 6223(b)(2) of the Code);
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(B) in the event that a notice of a final
administrative adjustment at the Partnership level of
any item required to be taken into account by a
Partner for tax purposes (a "final adjustment") is
mailed to the tax matters partner, to seek judicial
review of such final adjustment, including the filing
of a petition for readjustment with the Tax Court or
the filing of a complaint for refund with the United
States Claims Court or the District Court of the
United States for the district in which the
Partnership's principal place of business is located;
(C) to intervene in any action brought by
any other Partner for judicial review of a final
adjustment;
(D) to file a request for an administrative
adjustment with the Internal Revenue Service and, if
any part of such request is not allowed by the
Internal Revenue Service, to file an appropriate
pleading (petition or complaint) for judicial review
with respect to such request;
(E) to enter into an agreement with the
Internal Revenue Service to extend the period for
assessing any tax which is attributable to any item
required to be taken account of by a Partner for tax
purposes, or an item affected by such item; and
(F) to take any other action on behalf of
the Partners or the Partnership in connection with
any tax audit or judicial review proceeding to the
extent permitted by applicable law or regulations.
The taking of any action and the incurring of any expense by
the tax matters partner in connection with any such
proceeding, except to the extent required by law, is a matter
in the sole and absolute discretion of the tax matters partner
and the provisions relating to indemnification of the General
Partner set forth in Section 7.6 of this Agreement shall be
fully applicable to the tax matters partner in its capacity as
such.
(c) (i) The tax matters partner shall receive no compensation
for its services.
(ii) All third party costs and expenses incurred by
the tax matters partner in performing its duties as such
(including legal and accounting fees and expenses) shall be
borne by the Partnership.
(iii) Nothing herein shall be construed to restrict
the Partnership from engaging an accounting firm to assist the
tax matters partner in discharging its
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duties hereunder, so long as the compensation paid by the
Partnership for such services is reasonable.
10.4 Organizational Expenses
The Partnership shall elect to deduct expenses, if any, incurred by it
in organizing the Partnership ratably over a sixty (60) month period as provided
in Section 709 of the Code.
10.5 Withholding
(a) Each Limited Partner hereby authorizes the Partnership to
withhold from, or pay on behalf of or with respect to, such Limited
Partner any amount of federal, state, local, or foreign taxes that the
General Partner determines that the Partnership is required to withhold
or pay with respect to any amount distributable or allocable to such
Limited Partner pursuant to this Agreement, including, without
limitation, any taxes required to be withheld or paid by the
Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code.
(b) (i) Any amount paid on behalf of or with respect to a
Limited Partner shall constitute a loan by the Partnership to
such Limited Partner, which loan shall be repaid by such
Limited Partner within fifteen (15) days after notice from the
General Partner that such payment must be made unless
(A) the Partnership withholds such payment
from a distribution which would otherwise be made to
the Limited Partner; or
(B) the General Partner determines, in its
sole and absolute discretion, that such payment may
be satisfied out of the available funds of the
Partnership which would, but for such payment, be
distributed to the Limited Partner.
(ii) Any amounts withheld pursuant to the foregoing
clauses (i)(A) or (B) shall be treated as having been
distributed to such Limited Partner.
(c) (i) Each Limited Partner hereby unconditionally and
irrevocably grants to the Partnership a security interest in
such Limited Partner's Partnership Interest to secure such
Limited Partner's obligation to pay to the Partnership any
amounts required to be paid pursuant to this Section 10.5.
(ii) (A) In the event that a Limited Partner fails to
pay when due any amounts owed to the Partnership
pursuant to this Section 10.5, the General Partner
may, in its sole and absolute discretion, elect to
make the payment to the Partnership on behalf of such
defaulting Limited Partner,
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and in such event shall be deemed to have loaned such
amount to such defaulting Limited Partner and shall
succeed to all rights and remedies of the Partnership
as against such defaulting Limited Partner.
(B) Without limitation, in such event, the
General Partner shall have the right to receive
distributions that would otherwise be distributable
to such defaulting Limited Partner until such time as
such loan, together with all interest thereon, has
been paid in full, and any such distributions so
received by the General Partner shall be treated as
having been distributed to the defaulting Limited
Partner and immediately paid by the defaulting
Limited Partner to the General Partner in repayment
of such loan.
(iii) Any amount payable by a Limited Partner
hereunder shall bear interest at the highest base or prime
rate of interest published from time to time by any of
Citibank, N.A., Chemical Bank, Morgan Guaranty Trust Company
of New York and Chase Manhattan Bank, N.A., plus four (4)
percentage points, but in no event higher than the maximum
lawful rate of interest on such obligation, such interest to
accrue from the date such amount is due (i.e., fifteen (15)
days after demand) until such amount is paid in full.
(iv) Each Limited Partner shall take such actions as
the Partnership or the General Partner shall request in order
to perfect or enforce the security interest created hereunder.
ARTICLE 11
TRANSFERS AND WITHDRAWALS
11.1 Transfer
(a) (i) The term "Transfer," when used in this Article 11 with
respect to an OP Unit, shall be deemed to refer to a
transaction by which
(A) the General Partner purports to assign
all or any part of its General Partner Interest to
another Person or
(B) a Limited Partner purports to assign all
or any part of its Limited Partner Interest to
another Person.
(ii) The term "Transfer" when used in this Article 11
does not include any exchange of OP Units for cash or REIT
Stock pursuant to the Exchange Rights Agreement.
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(b) (i) No Partnership Interest shall be Transferred, in whole
or in part, except in accordance with the terms and conditions
set forth in this Article 11.
(ii) Any Transfer or purported Transfer of a
Partnership Interest not made in accordance with this Article
11 shall be null and void.
11.2 Transfer of the General Partner's General Partner Interest
(a) The General Partner may not Transfer any of its General
Partner Interest or withdraw as General Partner, or Transfer any of its
Limited Partner Interest, except
(i) if Limited Partners holding at least a majority
of the Percentage Interests of the Limited Partners (other
than Limited Partner Interests held by the General Partner or
any Affiliate thereof) consent to such Transfer or withdrawal,
(ii) if such Transfer is to an entity which is wholly
owned by the General Partner and is a Qualified REIT
Subsidiary as defined in Section 856(i) of the Code or
(iii) in connection with a transaction described in
Section 11.2(c) or 11.2(d) (as applicable).
(b) In the event the General Partner withdraws as general
partner of the Partnership in accordance with Section 11.2(a), the
General Partner's General Partner Interest shall immediately be
converted into a Limited Partner Interest.
(c) Except as otherwise provided in Section 11.2(d), the
General Partner shall not engage in any merger, consolidation or other
combination with or into another Person or sale of all or substantially
all of its assets, or any reclassification, or any recapitalization or
change of outstanding REIT Stock (other than a change in par value, or
from par value to no par value, or as a result of a subdivision or
combination of REIT Stock) (a "Transaction"), unless
(i) in connection with the Transaction all Limited
Partners will either receive, or will have the right to elect
to receive, for each OP Unit an amount of cash, securities, or
other property equal to the product of the Exchange Factor and
the greatest amount of cash, securities or other property or
value paid in the Transaction to or received by a holder of
one share of REIT Stock in consideration of one share of REIT
Stock at any time during the period from and after the date on
which the Transaction is consummated; provided that if, in
connection with the Transaction, a purchase, tender or
exchange offer ("Offer") shall have been made to and accepted
by the holders of more than 50% of the outstanding REIT Stock,
each holder of OP Units shall be given the option to
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exchange its OP Units for the greatest amount of cash,
securities, or other property which a Limited Partner would
have received had it
(A) exercised its Exchange Right and
(B) sold, tendered or exchanged pursuant to
the Offer the REIT Stock received upon exercise of
the Exchange Right immediately prior to the
expiration of the Offer; and
(ii) no more than 75% of the equity securities of the
acquiring Person in such Transaction shall be owned, after
consummation of such Transaction, by the General Partner or
Persons who were Affiliates of the Partnership or the General
Partner immediately prior to the date on which the Transaction
is consummated.
(d) (i) Notwithstanding Section 11.2(c), the General Partner
may merge into or consolidate with another entity if
immediately after such merger or consolidation
(A) substantially all of the assets of the
successor or surviving entity (the "Surviving General
Partner"), other than OP Units held by the General
Partner, are contributed to the Partnership as a
Capital Contribution in exchange for OP Units with a
fair market value equal to the value of the assets so
contributed as determined by the Surviving General
Partner in good faith and
(B) the Surviving General Partner expressly
agrees to assume all obligations of the General
Partner hereunder.
(ii) (A) Upon such contribution and assumption, the
Surviving General Partner shall have the right and duty to
amend this Agreement and the Exchange Rights Agreement as set
forth in this Section 11.2(d).
(B) (I) The Surviving General Partner shall
in good faith arrive at a new method for the
calculation of the Exchange Factor for an OP
Unit after any such merger or consolidation
so as to approximate the existing method for
such calculation as closely as reasonably
possible.
(II) Such calculation shall take
into account, among other things, the kind
and amount of securities, cash and other
property that was receivable upon such
merger or consolidation by a holder of REIT
Stock or options, warrants or other rights
relating
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thereto, and which a holder of OP Units
could have acquired had such OP Units been
redeemed for REIT Stock immediately prior to
such merger or consolidation.
(C) Such amendment to this Agreement shall
provide for adjustment to such method of calculation,
which shall be as nearly equivalent as may be
practicable to the adjustments provided for with
respect to the Exchange Factor.
(iii) The above provisions of this Section 11.2(d)
shall similarly apply to successive mergers or consolidations
permitted hereunder.
11.3 Limited Partners' Rights to Transfer
(a) Subject to the provisions of Sections 11.3(c), 11.3(d),
11.3(e) and 11.4 and the restrictions included in the applicable
Lock-up Agreement, a Limited Partner may, without the consent of the
General Partner, Transfer all or any portion of its Limited Partnership
Interest.
(b) (i) If a Limited Partner is Incapacitated, the executor,
administrator, trustee, committee, guardian, conservator or
receiver of such Limited Partner's estate shall have all of
the rights of a Limited Partner, but not more rights than
those enjoyed by other Limited Partners, for the purpose of
settling or managing the estate and such power as the
Incapacitated Limited Partner possessed to Transfer all or any
part of his or its interest in the Partnership.
(ii) The Incapacity of a Limited Partner, in and of
itself, shall not dissolve or terminate the Partnership.
(c) The General Partner may prohibit any Transfer by a Limited
Partner of its OP Units if, in the opinion of legal counsel to the
Partnership, such Transfer would require filing of a registration
statement under the Securities Act of 1933, as amended, or would
otherwise violate any federal or state securities laws or regulations
applicable to the Partnership or the OP Units.
(d) No Transfer by a Limited Partner of its OP Units may be
made to any Person if
(i) in the opinion of legal counsel of the
Partnership, it would adversely affect the ability of the
General Partner to continue to qualify as a REIT or would
subject the General Partner to any additional taxes under
Section 857 or Section 4981 of the Code;
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(ii) in the opinion of legal counsel for the
Partnership, it would result in the Partnership being treated
as an association taxable as a corporation for federal income
tax purposes;
(iii) such Transfer would cause the Partnership to
become, with respect to any employee benefit plan subject to
Title I of ERISA, a "party-in-interest" (as defined in Section
3(14) of ERISA) or a "disqualified person" (as defined in Sec-
tion 4975(c) of the Code);
(iv) such Transfer would, in the opinion of legal
counsel for the Partnership, cause any portion of the assets
of the Partnership to constitute assets of any employee
benefit plan pursuant to Department of Labor Regulations Sec
tion 2510.2-101;
(v) such Transfer would subject the Partnership to
regulation under the Investment Company Act of 1940, the
Investment Advisors Act of 1940 or the Employee Retirement
Income Security Act of 1974, each as amended;
(vi) without the consent of the General Partner,
which consent may be withheld in its sole and absolute
discretion, such Transfer is a sale or exchange, and such sale
or exchange would, when aggregated with all other sales and
exchanges during the 12-month period ending on the date of the
proposed Transfer, result in 50% or more of the interests in
Partnership capital and profits being sold or exchanged during
such 12-month period; or
(vii) such Transfer is effectuated through an
"established securities market" or a "secondary market (or the
substantial equivalent thereof)" within the meaning of Section
7704 of the Code.
(e) No transfer of any OP Units may be made to a lender to the
Partnership or any Person who is related (within the meaning of
Regulations Section 1.752-4(b)) to any lender to the Partnership whose
loan constitutes a nonrecourse liability (within the meaning of
Regulations Section 1.752-1(a)(2)), without the consent of the General
Partner, which may be withheld in its sole and absolute discretion,
provided that as a condition to such consent the lender will be
required to enter into an arrangement with the Partnership and the
General Partner to exchange for the Cash Amount (as such term is
defined in the Exchange Rights Agreement) any OP Units in which a
security interest is held simultaneously with the time at which such
lender would be deemed to be a partner in the Partnership for purposes
of allocating liabilities to such lender under Section 752 of the Code.
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(f) Any Transfer in contravention of any of the provisions of
this Section 11.3 shall be void and ineffectual and shall not be
binding upon, or recognized by, the Partnership.
11.4 Substituted Limited Partners
(a) (i) No Limited Partner shall have the right to substitute
a Permitted Transferee for a Limited Partner in his place.
(ii) The General Partner shall, however, have the
right to consent to the admission of a Permitted Transferee of
the Partnership Interest of a Limited Partner pursuant to this
Section 11.4 as a Substitute Limited Partner, which consent
may be given or withheld by the General Partner in its sole
and absolute discretion.
(iii) The General Partner's failure or refusal to
permit such transferee to become a Substituted Limited Partner
shall not give rise to any cause of action against the
Partnership or any Partner.
(b) A transferee who has been admitted as a Substituted
Limited Partner in accordance with this Article 11 shall have all the
rights and powers and be subject to all the restrictions and
liabilities of a Limited Partner under this Agreement.
(c) (i) No Permitted Transferee will be admitted as a
Substituted Limited Partner unless such transferee has
furnished to the General Partner
(A) evidence of acceptance in form
satisfactory to the General Partner of all of the
terms and conditions of this Agreement and the
Exchange Rights Agreement, including, without
limitation, the power of attorney granted in Section
2.4 hereof, and
(B) such other documents or instruments as
may be required in the reasonable discretion of the
General Partner in order to effect such Person's
admission as a Substituted Limited Partner.
(ii) Upon the admission of a Substituted Limited
Partner, the General Partner shall amend Exhibit A to reflect
the name, address, number of OP Units, and Percentage Interest
of such Substituted Limited Partner and to eliminate or
adjust, if necessary, the name, address and interest of the
predecessor of such Substituted Limited Partner.
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11.5 Assignees
(a) If the General Partner, in its sole and absolute
discretion, does not consent to the admission of any transferee as a
Substituted Limited Partner, as described in Sec tion 11.4(a), such
transferee shall be considered an Assignee for purposes of this
Agreement.
(b) An Assignee shall be deemed to have had assigned to it,
and shall be entitled to receive distributions from the Partnership and
the share of Net Income, Net Losses and any other items, gain, loss
deduction and credit of the Partnership attributable to the OP Units
assigned to such transferee, but shall not be deemed to be a holder of
OP Units for any other purpose under this Agreement, and shall not be
entitled to vote such OP Units in any matter presented to the Limited
Partners for a vote (such OP Units being deemed to have been voted on
such matter in the same proportion as all other OP Units held by
Limited Partners are voted).
(c) In the event any such transferee desires to make a further
assignment of any such OP Units, such transferee shall be subject to
all of the provisions of this Article 11 to the same extent and in the
same manner as any Limited Partner desiring to make an assignment of OP
Units.
11.6 General Provisions
(a) No Limited Partner may withdraw from the Partnership other
than as a result of a permitted Transfer of all of such Limited
Partner's OP Units in accordance with this Article 11 or pursuant to
exchange of all of its OP Units pursuant to the Exchange Rights
Agreement.
(b) (i) Any Limited Partner which shall Transfer all of its OP
Units in a Transfer permitted pursuant to this Article 11
shall cease to be a Limited Partner upon the admission of all
Assignees of such OP Units as Substituted Limited Partners.
(ii) Similarly, any Limited Partner which shall
Transfer all of its OP Units pursuant to an exchange of all of
its OP Units pursuant to the Exchange Rights Agreement shall
cease to be a Limited Partner.
(c) Other than pursuant to the Exchange Rights Agreement or
without the consent of the General Partner, transfers pursuant to this
Article 11 may only be made as of the first day of a fiscal quarter of
the Partnership.
(d) (i) If any Partnership Interest is transferred or assigned
during the Partnership's fiscal year in compliance with the
provisions of this Article 11 or
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exchanged pursuant to the Exchange Rights Agreement on any day
other than the first day of a Partnership Year, then Net
Income, Net Losses, each item thereof and all other items
attributable to such interest for such Partnership Year shall
be divided and allocated between the transferor Partner and
the transferee Partner by taking into account their varying
interests during the Partnership Year in accordance with
Section 706(d) of the Code, using the interim closing of the
books method.
(ii) Solely for purposes of making such allocations,
each of such items for the calendar month in which the
Transfer or assignment occurs shall be allocated to the
transferee Partner, and none of such items for the calendar
month in which an exchange occurs shall be allocated to the
exchanging Partner, provided, however, that the General
Partner may adopt such other conventions relating to
allocations in connection with transfers, assignments, or
exchanges as it determines are necessary or appropriate.
(iii) All distributions of Available Cash
attributable to OP Units, with respect to which the
Partnership Record Date is before the date of such transfer,
assignment, or exchange of such OP Units, shall be made to the
transferor Partner or the exchanging Partner, as the case may
be, and in the case of a transfer or assignment other than an
exchange, all distributions of Available Cash thereafter
attributable to such OP Units shall be made to the transferee
Partner.
ARTICLE 12
ADMISSION OF PARTNERS
12.1 Admission of Successor General Partner
(a) (i) A successor to all of the General Partner Interest
pursuant to Sec tion 11 hereof who is proposed to be admitted as a
successor General Partner shall be admitted to the Partnership as the
General Partner, effective immediately following such transfer and the
admission of such successor General Partner as a general partner of the
Partnership upon the satisfaction of the terms and conditions set forth
in Section 12.1(b).
(ii) Any such transferee shall carry on the business
of the Partnership without dissolution.
(b) A Person shall be admitted as a substitute or successor
General Partner of the Partnership only if the following terms and
conditions are satisfied:
(i) the Person to be admitted as a substitute or
additional General Partner shall have accepted and agreed to
be bound by all the terms and provisions
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of this Agreement by executing a counterpart thereof and such
other documents or instruments as may be required or
appropriate in order to effect the admission of such Person as
a General Partner;
(ii) if the Person to be admitted as a substitute or
additional General Partner is a corporation or a partnership
it shall have provided the Partnership with evidence
satisfactory to counsel for the Partnership of such Person's
authority to become a General Partner and to be bound by the
terms and provisions of this Agreement; and
(iii) counsel for the Partnership shall have rendered
an opinion (relying on such opinions from other counsel as may
be necessary) that the admission of the person to be admitted
as a substitute or additional General Partner is in conformity
with the Act, that none of the actions taken in connection
with the admission of such Person as a substitute or
additional General Partner will cause
(A) the Partnership to be classified other
than as a partnership for federal income tax
purposes, or
(B) the loss of any Limited Partner's
limited liability.
(c) In the case of such admission on any day other than the
first day of a Partnership Year, all items attributable to the General
Partner Interest for such Partnership Year shall be allocated between
the transferring General Partner and such successor as provided in
Section 11.6(d) hereof.
12.2 Admission of Additional Limited Partners
(a) A Person who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to
the General Partner
(i) evidence of acceptance in form satisfactory to
the General Partner of all of the terms and conditions of this
Agreement and the Exchange Rights Agreement, including,
without limitation, the power of attorney granted in Sec tion
2.4 hereof, and
(ii) such other documents or instruments as may be
required in the discretion of the General Partner in order to
effect such Person's admission as an Additional Limited
Partner.
(b) (i) Notwithstanding anything to the contrary in this
Section 12.2, no Person shall be admitted as an Additional
Limited Partner without the consent of
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the General Partner, which consent may be given or withheld in
the General Partner's sole and absolute discretion.
(ii) The admission of any Person as an Additional
Limited Partner shall become effective on the date upon which
the name of such Person is recorded on the books and records
of the Partnership, following the consent of the General
Partner to such admission.
(c) (i) If any Additional Limited Partner is admitted to the
Partnership on any day other than the first day of a
Partnership Year, then Net Income, Net Losses, each item
thereof and all other items allocable among Partners and
Assignees for such Partnership Year shall be allocated among
such Additional Limited Partner and all other Partners and
Assignees by taking into account their varying interests
during the Partnership Year in accordance with Section 706(d)
of the Code, using the interim closing of the books method.
(ii) (A) Solely for purposes of making such
allocations, each of such items for the calendar
month in which an admission of any Additional Limited
Partner occurs shall be allocated among all of the
Partners and Assignees, including such Additional
Limited Partner.
(B) distributions of Available Cash with
respect to which the Partnership Record Date is
before the date of such admission shall be made
solely to Partners and Assignees, other than the
Additional Limited Partner, and all distributions of
Available Cash thereafter shall be made to all of the
Partners and Assignees, including such Additional
Limited Partner.
(d) Upon the admission of the first Additional Limited Partner
to the Partnership, the Initial Limited Partner's original
interest in the Partnership shall automatically, and without
further action on the part of the Initial Limited Partner or
the Partnership, be withdrawn.
12.3 Amendment of Agreement and Certificate of Limited Partnership
For the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Act to amend
the records of the Partnership and, if necessary, to prepare as soon as
practical an amendment of this Agreement (including an amendment of Exhibit A)
and, if required by law, shall prepare and file an amendment to the Certificate
and may for this purpose exercise the power of attorney granted pursuant to Sec
tion 2.4 hereof.
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ARTICLE 13
DISSOLUTION, LIQUIDATION AND TERMINATION
13.1 Dissolution
(a) The Partnership shall not be dissolved by the admission of
Substituted Limited Partners or Additional Limited Partners or by the
admission of a successor General Partner in accordance with the terms
of this Agreement.
(b) The Partnership shall dissolve, and its affairs shall be
wound up, only upon the first to occur of any of the following
("Liquidating Events"):
(i) the expiration of its term as provided in Section
2.5 hereof;
(ii) an event of withdrawal of the General Partner,
as defined in the Act (other than an event of bankruptcy),
unless, within ninety (90) days after such event of
withdrawal, a majority in interest of the remaining Partners
agree in writing to continue the business of the Partnership
and to the appointment, effective as of the date of
withdrawal, of a successor General Partner;
(iii) from and after the date of this Agreement
through December 31, 2047, an election to dissolve the
Partnership made by the General Partner, with the Consent of
Limited Partners holding at least a majority of the Percentage
Interest of the Limited Partners (including Limited Partner
Interests held by the General Partner);
(iv) on or after January 1, 2048, an election to
dissolve the Partnership made by the General Partner, in its
sole and absolute discretion;
(v) entry of a decree of judicial dissolution of the
Partnership pursuant to the provisions of the Act;
(vi) the sale of all or substantially all of the
assets and properties of the Partnership;
(vii) a final and non-appealable judgment is entered
by a court of competent jurisdiction ruling that the General
Partner is bankrupt or insolvent, or a final and
non-appealable order for relief is entered by a court with
appropriate jurisdiction against the General Partner, in each
case under any federal or state bankruptcy or insolvency laws
as now or hereafter in effect, unless prior to the entry of
such order or judgment all of the remaining Partners agree in
writing to continue the business of the Partnership and to the
appointment, effective as of a date prior to the date of such
order or judgment, of a substitute General Partner.
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13.2 Winding Up
(a) (i) Upon the occurrence of a Liquidating Event, the
Partnership shall continue solely for the purposes of winding
up its affairs in an orderly manner, liquidating its assets,
and satisfying the claims of its creditors and Partners.
(ii) No Partner shall take any action that is
inconsistent with, or not necessary to or appropriate for, the
winding up of the Partnership's business and affairs.
(iii) The General Partner, or, in the event there is
no remaining General Partner, any Person elected by Limited
Partners holding at least a majority of the Limited
Partnership Interests (the General Partner or such other
Person being referred to herein as the "Liquidator"), shall be
responsible for overseeing the winding up and dissolution of
the Partnership and shall take full account of the
Partnership's liabilities and property and the Partnership
property shall be liquidated as promptly as is consistent with
obtaining the fair value thereof, and the proceeds therefrom
(which may, to the extent determined by the General Partner,
include shares of common stock or other securities of the
General Partner) shall be applied and distributed in the
following order:
(A) First, to the payment and discharge of
all of the Partnership's debts and liabilities to
creditors other than the Partners;
(B) Second, to the payment and discharge of
all of the Partnership's debts and liabilities to the
General Partner;
(C) Third, to the payment and discharge of
all of the Partnership's debts and liabilities to the
other Partners; and
(D) The balance, if any, to the General
Partner and Limited Partners to the extent of and in
accordance with the positive balances in their
Capital Accounts, after giving effect to all
contributions, distributions, and allocations for all
periods.
(iv) The General Partner shall not receive any
additional compensation for any services performed pursuant to
this Article 13.
(v) Any distributions pursuant to this Section
13.2(a) shall be made by the end of the Partnership's taxable
year in which the liquidation occurs (or, if later, within 90
days after the date of the liquidation).
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(b) (i) Notwithstanding the provisions of Section 13.2(a)
hereof which require liquidation of the assets of the
Partnership, but subject to the order of priorities set forth
therein, if prior to or upon dissolution of the Partnership
the Liquidator determines that an immediate sale of part or
all of the Partnership's assets would be impractical or would
cause undue loss to the Partners, the Liquidator may, in its
sole and absolute discretion, defer for a reasonable time the
liquidation of any asset except those necessary to satisfy
liabilities of the Partnership (including to those Partners as
creditors) or distribute to the Partners, in lieu of cash, as
tenants in common and in accordance with the provisions of
Section 13.2(a) hereof, undivided interests in such
Partnership assets as the Liquidator deems not suitable for
liquidation.
(ii) Any such distributions in kind shall be made
only if, in the good faith judgment of the Liquidator, such
distributions in kind are in the best interests of the
Partners, and shall be subject to such conditions relating to
the disposition and management of such properties as the
Liquidator deems reasonable and equitable and to any
agreements governing the operation of such properties at such
time.
(iii) The Liquidator shall determine the fair market
value of any property distributed in kind using such
reasonable method of valuation as it may adopt.
(c) In the discretion of the Liquidator, a pro rata portion of
the distributions that would otherwise be made to the General
Partner and Limited Partners pursuant to this Article 13 may
be:
(A) distributed to a trust established for
the benefit of the General Partner and Limited
Partners for the purposes of liquidating Partnership
assets, collecting amounts owed to the Partnership,
and paying any contingent or unforeseen liabilities
or obligations of the Partnership or the General
Partner arising out of or in connection with the
Partnership; the assets of any such trust shall be
distributed to the General Partner and Limited
Partners from time to time, in the reasonable
discretion of the Liquidator, in the same proportions
as the amount distributed to such trust by the
Partnership would otherwise have been distributed to
the General Partner and Limited Partners pursuant to
this Agreement; or
(B) withheld or escrowed to provide a
reasonable reserve for Partnership liabilities
(contingent or otherwise) and to reflect the
unrealized portion of any installment obligations
owed to the Partnership, provided that such withheld
or escrowed amounts shall be distributed to
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the General Partner and Limited Partners in the
manner and order of priority set forth in Section
13.2(a) as soon as practicable.
13.3 No Obligation to Contribute Deficit
If any Partner has a deficit balance in his Capital Account (after
giving effect to all contributions, distributions and allocations for all
taxable years, including the year during which such liquidation occurs), such
Partner shall have no obligation to make any contribution to the capital of the
Partnership with respect to such deficit, and such deficit shall not be
considered a debt owed to the Partnership or to any other Person for any purpose
whatsoever.
13.4 Rights of Limited Partners
(a) Except as otherwise provided in this Agreement, each
Limited Partner shall look solely to the assets of the Partnership for
the return of its Capital Contributions and shall have no right or
power to demand or receive property other than cash from the
Partnership.
(b) Except as otherwise provided in this Agreement, no Limited
Partner shall have priority over any other Partner as to the return of
its Capital Contributions, distributions, or allocations.
13.5 Notice of Dissolution
In the event a Liquidating Event occurs or an event occurs that would,
but for the provisions of an election or objection by one or more Partners
pursuant to Section 13.1, result in a dissolution of the Partnership, the
General Partner shall, within thirty (30) days thereafter, provide written
notice thereof to each of the Partners.
13.6 Termination of Partnership and Cancellation of Certificate of
Limited Partnership
Upon the completion of the liquidation of the Partnership's assets, as
provided in Sec tion 13.2 hereof, the Partnership shall be terminated, a
certificate of cancellation shall be filed, and all qualifications of the
Partnership as a foreign limited partnership in jurisdictions other than the
state of Delaware shall be canceled and such other actions as may be necessary
to terminate the Partnership shall be taken.
13.7 Reasonable Time for Winding-Up
A reasonable time shall be allowed for the orderly winding-up of the
business and affairs of the Partnership and the liquidation of its assets
pursuant to Section 13.2 hereof in order to minimize any losses otherwise
attendant upon such winding-up, and the provisions of this Agreement shall
remain in effect among the Partners during the period of liquidation.
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13.8 Waiver of Partition
Each Partner hereby waives any right to partition of the Partnership
property.
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS
14.1 Amendments
(a) (i) Amendments to this Agreement may be proposed by the
General Partner or by any Limited Partners holding in the
aggregate 25 percent or more of the Partnership Interests.
(ii) (A) Following such proposal, the General Partner
shall submit any proposed amendment to the Limited
Partners.
(B) The General Partner shall seek the written
vote of the Partners on the proposed amendment or
shall call a meeting to vote thereon and to
transact any other business that it may deem
appropriate.
(C) For purposes of obtaining a written vote,
the General Partner may require a response within a
reasonable specified time, but not less than fifteen
(15) days, and failure to respond in such time
period shall constitute a vote which is consistent
with the General Partner's recommendation with
respect to the proposal.
(D) Except as provided in Section 14.1(b),
14.1(c) or 14.1(d), a proposed amendment shall be
adopted and be effective as an amendment hereto if it
is approved by the General Partner and it receives
the Consent of Limited Partners holding at least a
majority of the Percentage Interests of the Limited
Partners (including Limited Partner Interests held by
the General Partner).
(b) (i) Notwithstanding Section 14.1(a), the General Partner
shall have the power, without the consent of the Limited
Partners, to amend this Agreement as may be required to
facilitate or implement any of the following purposes:
(A) to add to the obligations of the General
Partner or surrender any right or power granted to
the General Partner or any Affiliate of the General
Partner for the benefit of the Limited Partners;
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(B) to reflect the admission, substitution,
termination, or withdrawal of Partners in accordance
with this Agreement (which may be effected through
the amendment or replacement of Exhibit A);
(C) to set forth the designations, rights,
powers, duties, and preferences of the holders of any
additional Partnership Interests issued pursuant to
Section 4.3 hereof;
(D) to reflect a change that does not
adversely affect the Limited Partners in any material
respect, or to cure any ambiguity, correct or
supplement any provision in this Agreement not
inconsistent with law or with other provisions, or
make other changes with respect to matters arising
under this Agreement that will not be inconsistent
with law or with the provisions of this Agreement;
and
(E) to satisfy any requirements, conditions,
or guidelines contained in any order, directive,
opinion, ruling or regulation of a federal or state
agency or contained in federal or state law.
(ii) The General Partner shall provide notice to the
Limited Partners when any action under this Section 14.1(b) is
taken in the next regular communication to the Limited
Partners.
(c) Notwithstanding Section 14.1(a) and 14.1(b) hereof, this
Agreement shall not be amended with respect to any Partner adversely
affected without the Consent of such Partner adversely affected if such
amendment would
(i) convert a Limited Partner's interest in the
Partnership into a General Partner Interest;
(ii) modify the limited liability of a Limited
Partner in a manner adverse to such Limited Partner; or
(iii) amend this Section 14.1(c).
This Section 14.1(c) does not require unanimous consent of all Partners
adversely affected unless the amendment is to be effective against all Partners
adversely affected.
(d) Notwithstanding Section 14.1(a) or Section 14.1(b) hereof,
the General Partner shall not amend, without the Consent of Limited
Partners holding a majority of the Percentage Interests of the Limited
Partners, Section 4.3 (a), Article 5, Article 6 (except that Articles V
and VI may be amended as permitted pursuant to Sections 4.3, 5.4, 6.2
and 14.1(b)(i)(c)), Section 7.4, 7.5, 11.2, or 13.1.
60
<PAGE> 65
14.2 Meetings of the Partners
(a) (i) Meetings of the Partners may be called by the General
Partner and shall be called upon the receipt by the General
Partner of a written request by Limited Partners holding 25
percent or more of the Partnership Interests.
(ii) The request shall state the nature of the
business to be transacted.
(iii) Notice of any such meeting shall be given to
all Partners not less than seven (7) days nor more than thirty
(30) days prior to the date of such meeting.
(iv) Partners may vote in person or by proxy at such
meeting.
(v) Whenever the vote or Consent of the Limited
Partners is permitted or required under this Agreement, such
vote or Consent may be given at a meeting of the Partners or
may be given in accordance with the procedure prescribed in
Section 14.1(a) hereof.
(vi) Except as otherwise expressly provided in this
Agreement, the Consent of holders of a majority of the
Percentage Interests held by Partners (including the General
Partner) shall control.
(b) (i) Any action required or permitted to be taken at a
meeting of the Partners may be taken without a meeting if a
written consent setting forth the action so taken is signed by
a majority of the Percentage Interests of the Partners (or
such other percentage as is expressly required by this
Agreement).
(ii) Such consent may be in one instrument or in
several instruments, and shall have the same force and effect
as a vote of a majority of the Percentage Interests of the
Partners (or such other percentage as is expressly required by
this Agreement).
(iii) Such consent shall be filed with the General
Partner.
(iv) An action so taken shall be deemed to have been
taken at a meeting held on the effective date of the consent
as certified by the General Partner.
(c) (i) Each Limited Partner may authorize any Person or
Persons to act for him by proxy on all matters in which a
Limited Partner is entitled to participate, including waiving
notice of any meeting, or voting or participating at a
meeting.
61
<PAGE> 66
(ii) Every proxy must be signed by the Limited
Partner or his attorney-in-fact and a copy thereof delivered
to the Partnership.
(iii) No proxy shall be valid after the expiration of
eleven (11) months from the date thereof unless otherwise
provided in the proxy.
(iv) Every proxy shall be revocable at the pleasure
of the Limited Partner executing it, such revocation to be
effective upon the General Partner's receipt of written notice
of such revocation from the Limited Partner executing such
proxy.
(d) (i) Each meeting of the Partners shall be conducted by the
General Partner or such other Person as the General Partner
may appoint pursuant to such rules for the conduct of the
meeting as the General Partner or such other Person deems
appropriate.
(ii) Meetings of Partners may be conducted in the
same manner as meetings of the stockholders of the General
Partner and may be held at the same time, and as part of,
meetings of the stockholders of the General Partner.
ARTICLE 15
GENERAL PROVISIONS
15.1 Addresses and Notice
Any notice, demand, request or report required or permitted to be given
or made to a Partner or Assignee under this Agreement shall be in writing and
shall be deemed given or made when delivered in person or when sent by first
class United States mail or by overnight delivery or via facsimile to the
Partner or Assignee at the address set forth in Exhibit A or such other address
of which the Partner shall notify the General Partner in writing.
15.2 Titles and Captions
All article or section titles or captions in this Agreement are for
convenience only, shall not be deemed part of this Agreement and shall in no way
define, limit, extend or describe the scope or intent of any provisions hereof.
Except as specifically provided otherwise, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement.
62
<PAGE> 67
15.3 Pronouns and Plurals
Whenever the context may require, any pronoun used in this Agreement
shall include the corresponding masculine, feminine or neuter forms, and the
singular form of nouns, pronouns and verbs shall include the plural and vice
versa.
15.4 Further Action
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
15.5 Binding Effect
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
15.6 Creditors
Other than as expressly set forth herein with respect to the
Indemnities, none of the provisions of this Agreement shall be for the benefit
of, or shall be enforceable by, any creditor of the Partnership.
15.7 Waiver
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach or any other covenant, duty, agreement or condition.
15.8 Counterparts
This Agreement may be executed in counterparts, all of which together
shall constitute one agreement binding on all of the parties hereto,
notwithstanding that all such parties are not signatories to the original or the
same counterpart. Each party shall become bound by this Agreement immediately
upon affixing its signature hereto.
15.9 Applicable Law
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Delaware, without regard to the principles
of conflicts of laws thereof.
63
<PAGE> 68
15.10 Invalidity of Provisions
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
15.11 Entire Agreement
This Agreement contains the entire understanding and agreement among
the Partners with respect to the subject matter hereof and supersedes any other
prior written or oral understandings or agreements among them with respect
thereto.
15.12 Merger
Subject to Section 4.2 herein, the Partnership may merge with, or
consolidate into, any Person or Entity in accordance with Section 17-211 of the
Act.
15.13 No Rights as Stockholders
Nothing contained in this Agreement shall be construed as conferring
upon the holders of the OP Units any rights whatsoever as stockholders of the
General Partner, including, without limitation, any right to receive dividends
or other distributions made to shareholders or to vote or to consent or receive
notice as shareholders in respect to any meeting or shareholders for the
election of directors of the General Partner or any other matter.
64
<PAGE> 69
Signature Page to Agreement of Limited Partnership of Tower
Realty Operating Partnership, L.P., by and among the undersigned and the other
parties thereto.
GENERAL PARTNER:
TOWER REALTY TRUST, INC.
By:
---------------------------
Name:
Title:
LIMITED PARTNER:
By:
---------------------------
Name:
Title:
<PAGE> 70
CORPORATE/LIMITED LIABILITY COMPANY ADDITIONAL LIMITED PARTNER SIGNATURE PAGE TO
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF TOWER REALTY OPERATING
PARTNERSHIP, L.P., BY AND AMONG THE UNDERSIGNED AND THE OTHER
PARTIES THERETO.
Dated: __________ __, 1997 [Name of Corporation/LLC]
By: ________________________
Name:
Title:
<PAGE> 71
Exhibit A
Partners' Contributions and Partnership Interests
<TABLE>
<CAPTION>
Type of Capital Number of Percentage Security
Name and Address of Partner Interest Contribution1 OP Units Interest Interests2
- --------------------------- -------- ------------ -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Tower Realty Trust, Inc. General page A-2 8,154 1.00 page A-20
Tower Realty Trust, Inc. Limited page A-2 151,846 18.62 page A-20
Lawrence Feldman Limited pages A-3,4 236,870 29.05 page A-20
Tower Equities and Realty Corp. Limited page A-5 153,570 18.83
Reuben Frieberg Limited page A-6 9,910 1.22
Robert Cox Limited page A-7 9,910 1.22
Eric Reimer Limited page A-8 9,910 1.22
2800 Company, L.L.C. Limited page A-9 40,790 5.00
Hannah Properties, Inc. Limited page A-10 62,740 7.69
Robert Adams Limited page A-11 33,710 4.13
Forum Management & Realty Corp. Limited page A-12 24,000 2.94
Madison 40/41 Management Corp. Limited page A-13 24,000 2.94
CXX Mineola Management Corp. Limited page A-14 24,000 2.94
Tower Equities of Arizona, L.L.C. Limited page A-15 24,000 2.94
Corporate-Partners, L.L.C. Limited page A-16 200 2.02
Corporate-Feldman, L.L.C. Limited page A-17 800 .10
FSA Associates, L.P. Limited page A-18 889 .11
</TABLE>
A-1
<PAGE> 72
<TABLE>
<CAPTION>
Type of Capital Number of Percentage Security
Name and Address of Partner Interest Contribution1 OP Units Interest Interests(2)
- --------------------------- -------- ------------ -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Feldman Mot Portfolio Corp. Limited page A-19 111 .01
</TABLE>
1. The Capital Contribution of each Partner is set forth on the page
referenced hereunder.
2. Security Interests are set forth on page A-21.
A-2
<PAGE> 73
Exhibit B
Allocations
1. Allocation of Net Income and Net Loss.
(a) Net Income. Except as otherwise provided in this Exhibit B, Net
Income (or items thereof) (other than Net Income, or items thereof, arising in
connection with a Terminating Capital Transaction) for any fiscal year or other
applicable period shall be allocated to the Partners in accordance with their
respective Percentage Interests.
(b) Net Loss. Except as otherwise provided in this Exhibit B, Net Loss
(or items thereof) of the Partnership for each fiscal year or other applicable
period shall be allocated to the Partners in accordance with the Partners'
respective Percentage Interests. Notwithstanding the preceding sentence, to the
extent any Net Loss (or items thereof) allocated to a Partner under this
subparagraph (b) would cause such Partner (hereinafter, a "Restricted Partner")
to have an Adjusted Capital Account Deficit, or increase the amount of an
existing Adjusted Capital Account Deficit, as of the end of the fiscal year or
other applicable period to which such Net Loss relates, such Net Loss shall not
be allocated to such Restricted Partner and instead shall be allocated to the
other Partner(s) (hereinafter, the "Permitted Partners") pro rata in accordance
with each Permitted Partner's Percentage Interest.
(c) Terminating Capital Transaction; Liquidation. Allocations of Net
Income or Net Loss (or items thereof) in connection with a Terminating Capital
Transaction or liquidation of the Partnership shall first be made so that, to
the extent possible, each Partner's Capital Account balance is equal to such
Partner's Adjusted Contribution, and the remainder of such Net Income or Net
Loss (or items thereof) shall be allocated to the Partners in accordance with
their Percentage Interests. Notwithstanding the preceding sentence, to the
extent any Net Loss (or items thereof) would be allocated to a Restricted
Partner under this subparagraph (c), such Net Loss shall not be allocated to
such Restricted Partner and instead shall be allocated to the Permitted Partners
pro rata in accordance with each Permitted Partner's Percentage Interest.
(d) Rules of Construction.
(1) Capital Account Increases. For purposes of making
allocations pursuant to subparagraph 1(c) of this Exhibit B, a Partner's Capital
Account balance shall be deemed to be increased by such Partner's share of any
Partnership Minimum Gain and Partner Minimum Gain remaining at the close of the
fiscal period in respect of which such allocations are being made.
(2) Change in Percentage Interests. In the event any Partner's
Percentage Interest changes during a fiscal year for any reason, including
without limitation, the Transfer of any interest in the Partnership, the tax
allocations contained in this Exhibit B shall be applied as necessary to reflect
the varying interests of the Partners during such year.
B-1
<PAGE> 74
2. Special Allocations. Notwithstanding any provisions of paragraph 1 of this
Exhibit B, the following special allocations shall be made.
(a) Minimum Gain Chargeback (Nonrecourse Liabilities). Except as
otherwise provided in Section 1.704-2(f) of the Regulations, if there is a net
decrease in Partnership Minimum Gain for any Partnership fiscal year, each
Partner shall be specially allocated items of Partnership income and gain for
such year (and, if necessary, subsequent years) in an amount equal to such
Partner's share of the net decrease in Partnership Minimum Gain to the extent
required by Regulations Section 1.704-2(f). The items to be so allocated shall
be determined in accordance with Sections 1.704-2(f) and (i) of the Regulations.
This subparagraph 2(a) is intended to comply with the minimum gain chargeback
requirement in said section of the Regulations and shall be interpreted
consistently therewith. Allocations pursuant to this subparagraph 2(a) shall be
made in proportion to the respective amounts required to be allocated to each
Partner pursuant hereto.
(b) Partner Minimum Gain Chargeback. Except as otherwise provided in
Sec tion 1.704-2(i)(4) of the Regulations, if there is a net decrease in Partner
Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year,
each Partner who has a share of the Partner Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of
the Regulations, shall be specially allocated items of Partnership income and
gain for such year (and, if necessary, subsequent years) in an amount equal to
that Partner's share of the net decrease in the Partner Minimum Gain
attributable to such Partner Nonrecourse Debt to the extent and in the manner
required by Section 1.704-2(i) of the Regulations. The items to be so allocated
shall be determined in accordance with Sections 1.704-2(i)(4) and (j)(2) of the
Regulations. This subparagraph 2(b) is intended to comply with the minimum gain
chargeback requirement with respect to Partner Nonrecourse Debt contained in
said section of the Regulations and shall be interpreted consistently therewith.
Allocations pursuant to this subparagraph 2(b) shall be made in proportion to
the respective amounts required to be allocated to each Partner pursuant hereto.
(c) Qualified Income Offset. In the event a Partner unexpectedly
receives any adjustments, allocations or distributions described in Sections
1.704-1(b)(2)(ii)(d)(4), (5) or (6) of the Regulations, and such Partner has an
Adjusted Capital Account Deficit, items of Partnership income (including gross
income) and gain shall be specially allocated to such Partner in an amount and
manner sufficient to eliminate the Adjusted Capital Account Deficit as quickly
as possible as required by the Regulations. This subparagraph 2(c) is intended
to constitute a "qualified income offset" under Section 1.704-1(b)(2)(ii)(d) of
the Regulations and shall be interpreted consistently therewith.
(d) Other Chargeback of Impermissible Negative Capital Account. To the
extent any Partner has an Adjusted Capital Account Deficit at the end of any
Partnership fiscal year, each such Partner shall be specially allocated items of
Partnership income (including gross income) and gain in the amount of such
excess as quickly as possible, provided that an allocation pursuant to this
paragraph 2(d) shall be made if and only to the extent that such Partner would
have an
B-2
<PAGE> 75
Adjusted Capital Account Deficit after all other allocations provided for in
this Exhibit B have been tentatively made as if this paragraph 2(d) were not in
the Agreement.
(e) Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year
or other applicable period shall be allocated to the Partners in accordance with
their respective Percentage Interests.
(f) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for
any fiscal year or other applicable period with respect to a Partner Nonrecourse
Debt shall be specially allocated to the Partner that bears the economic risk
of loss for such Partner Nonrecourse Debt (as determined under Sections
1.704-2(b)(4) and 1.704-2(i)(1) of the Regulations).
(g) Intent of Allocations. The parties intend that the allocation
provisions of this Exhibit B shall result in final Capital Account balances of
the Partners that initially are equal to each Partner's Adjusted Contribution
and are then in proportion to the Partners' respective Percentage Interests, so
that when liquidating distributions are made in accordance with such final
Capital Account balances under Section 13.2A(4) hereof, such distributions will
be able to return to each Partner its Adjusted Contribution and then will be
made in proportion to the Partners' respective Percentage Interests. To the
extent that such final Capital Account balances do not so reflect the provisions
of this Exhibit B, income and loss of the Partnership for the current year and
future years, as computed for book purposes, shall be allocated among the
Partners so as to result in final Capital Account balances reflecting the
provisions of this Exhibit B and to the extent such allocations of items of
income (including gross income) and deduction do not result in such final
Capital Account balances, then, income and loss of the Partnership for prior
open years, as computed for book purposes (or items of gross income and
deduction of the Partnership for such years, as computed for book purposes)
shall be reallocated among the Partners consistent with the foregoing. This
subparagraph shall control notwithstanding any reallocation of income, loss, or
items thereof, as computed for book purposes, by the Internal Revenue Service or
any other taxing authority.
(h) Section 754 Adjustment. To the extent an adjustment to the adjusted
tax basis of any asset of the Partnership pursuant to Section 734(b) of the Code
or Section 743(b) of the Code is required, pursuant to Section 1.704-1(b)(2)
(iv)(m) of the Regulations, to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the asset)
or loss (if the adjustment decreases such basis) and such gain or loss shall be
specially allocated among the Partners in a manner consistent with the manner in
which each of their respective Capital Accounts are required to be adjusted
pursuant to such section of the Regulations.
(i) Gross Income Allocation. There shall be specially allocated to the
General Partner an amount of Partnership income and gain during each Partnership
Year or portion thereof, before any other allocations are made hereunder, which
is equal to the excess, if any, of the cumulative distributions of cash made to
the General Partner under Section 7.3B hereof over
B-3
<PAGE> 76
the cumulative allocations of Partnership income and gain to the General Partner
pursuant to this Section 2(i) of this Exhibit B.
3. Tax Allocations.
(a) Items of Income or Loss. Except as is otherwise provided in this
Exhibit B, an allocation of Partnership Net Income or Net Loss to a Partner
shall be treated as an allocation to such Partner of the same share of each item
of income, gain, loss, deduction and item of tax-exempt income or Section
705(a)(2)(B) expenditure (or item treated as such expenditure pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i)) ("Tax Items") that is taken into
account in computing Net Income or Net Loss.
(b) Section 1245/1250 Recapture. If any portion of gain from the sale
of Partnership assets is treated as gain which is ordinary income by virtue of
the application of Code Sections 1245 or 1250 ("Affected Gain"), then such
Affected Gain shall be allocated among the Partners in the same proportion that
the depreciation and amortization deductions giving rise to the Affected Gain
were allocated. This subparagraph 3(b) shall not alter the amount of Net Income
(or items thereof) allocated among the Partners, but merely the character of
such Net Income (or items thereof). For purposes hereof, in order to determine
the proportionate allocations of depreciation and amortization deductions for
each fiscal year or other applicable period, such deductions shall be deemed
allocated on the same basis as Net Income and Net Loss for such respective
period.
(c) Precontribution Gain, Revaluations. With respect to any Contributed
Property, the Partnership shall use any permissible method contained in the
Regulations promulgated under Section 704(c) of the Code selected by the General
Partner, in its sole discretion, to take into account any variation between the
adjusted basis of such asset and the fair market value of such asset as of the
time of the contribution ("Precontribution Gain"). Each Partner hereby agrees to
report income, gain, loss and deduction on such Partner's federal income tax
return in a manner consistent with the method used by the Partnership. If any
asset has a Gross Asset Value which is different from the Partnership's adjusted
basis for such asset for federal income tax purposes because the Partnership has
revalued such asset pursuant to Regulations Section 1.704- 1(b)(2)(iv)(f), the
allocations of Tax Items shall be made in accordance with the principles of
Section 704(c) of the Code and the Regulations and the methods of allocation
promulgated thereunder. The intent of this subparagraph 3(c) is that each
Partner who contributed to the capital of the Partnership a Contributed Property
will bear, through reduced allocations of depreciation, increased allocations of
gain or other items, the tax detriments associated with any Precontribution
Gain. This subparagraph 3(c) is to be interpreted consistently with such intent.
(d) Excess Nonrecourse Liability Safe Harbor. Pursuant to Regulations
Sec tion 1.752-3(a)(3), solely for purposes of determining each Partner's
proportionate share of the "excess nonrecourse liabilities" of the Partnership
(as defined in Regulations Section 1.752- 3(a)(3)), the Partners' respective
interests in Partnership profits shall be determined in accordance with each
Partner's Percentage Interest; provided, however, that each Partner who has
contributed
B-4
<PAGE> 77
an asset to the Partnership shall be allocated, to the extent possible, a share
of "excess nonrecourse liabilities" of the Partnership which results in such
Partner being allocated nonrecourse liabilities in an amount which is at least
equal to the amount of income pursuant to Section 704(c) of the Code and the
Regulations promulgated thereunder (the "Liability Shortfall"). In the event
there is an insufficient amount of nonrecourse liabilities to allocate to each
Partner an amount of nonrecourse liabilities equal to the Liability Shortfall,
then an amount of nonrecourse liabilities in proportion to, and to the extent
of, the Liability Shortfall shall be allocated to each Partner.
(e) References to Regulations. Any reference in this Exhibit B or the
Agreement to a provision of proposed and/or temporary Regulations shall, in the
event such provision is modified or renumbered, be deemed to refer to the
successor provision as so modified or renumbered, but only to the extent such
successor provision applies to the Partnership under the effective date rules
applicable to such successor provision.
(f) Successor Partners. For purposes of this Exhibit B, a transferee of
a Partnership Interest shall be deemed to have been allocated the Net Income,
Net Loss and other items of Partnership income, gain, loss, deduction and credit
allocable to the transferred Partnership Interest that previously have been
allocated to the transferor Partner pursuant to this Agreement.
B-5
<PAGE> 1
EXHIBIT 10.2
FORM OF
EXCHANGE RIGHTS AGREEMENT
THIS EXCHANGE RIGHTS AGREEMENT (this "AGREEMENT"), dated as of __________
__, 1997, is entered into by and among Tower Realty Trust, Inc., a Maryland
corporation (the "COMPANY"), Tower Realty Operating Partnership, L.P., a
Delaware limited partnership (the "OPERATING PARTNERSHIP"), and the Persons
whose names are set forth on Exhibit A attached hereto (as it may be amended
from time to time).
R E C I T A L S:
(a) The Company, together with certain other limited partners, has
formed the Operating Partnership pursuant to the Agreement of
Limited Partnership of the Operating Partnership dated
__________ __, 1997 (as such agreement may be amended or
amended and restated from time to time, the "PARTNERSHIP
AGREEMENT").
(b) Pursuant to the Partnership Agreement, the Limited Partners
(as defined below) directly or indirectly hold units of
limited partnership interest ("OP UNITS") in the Operating
Partnership.
(c) The Operating Partnership has agreed to provide the Limited
Partners with certain direct or indirect rights to exchange
their OP Units for cash or, at the election of the Company,
for shares of the Company's common stock, par value $0.01 per
share (the "REIT STOCK").
Accordingly, the parties hereto do hereby agree as follows:
ARTICLE I
DEFINED TERMS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"ASSIGNEE" means a Person to whom one or more OP Units have been
transferred in a manner permitted under the Partnership Agreement, but who has
not become a substituted Limited Partner in accordance therewith.
-1-
<PAGE> 2
"BUSINESS DAY" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York are authorized or required by law
to close.
"CASH AMOUNT" means an amount of cash per OP Unit equal to the Value on
the Valuation Date of the REIT Stock Amount.
"EXCHANGE FACTOR" means 1.0, provided, that in the event that the Company
(i) declares or pays a dividend on its outstanding REIT Stock in REIT Stock or
makes a distribution to all holders of its outstanding REIT Stock in REIT Stock;
(ii) subdivides its outstanding REIT Stock; or (iii) combines its outstanding
REIT Stock into a smaller number of shares of REIT Stock, the Exchange Factor
shall be adjusted by multiplying the Exchange Factor by a fraction, the
numerator of which shall be the number of shares of REIT Stock issued and
outstanding on the record date for such dividend, contribution, subdivision or
combination assuming for such purpose that such dividend, distribution,
subdivision or combination has occurred as of such time, and the denominator of
which shall be the actual number of shares of REIT Stock (determined without the
above assumption) issued and outstanding on the record date for such dividend,
distribution, subdivision or combination. Any adjustment to the Exchange Factor
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
"EXCHANGING PARTNER" has the meaning set forth in Section 2.1 hereof.
"EXCHANGE RIGHT" has the meaning set forth in Section 2.1 hereof.
"IPO" means an initial public offering by the Company of the REIT Stock
pursuant to a Registration Statement on Form S-11, filed with and declared
effective by the SEC.
"LIEN" means any lien, security interest, mortgage, deed of trust, charge,
claim, encumbrance, pledge, option, right of first offer or first refusal and
any other right or interest of others of any kind or nature, actual or
contingent, or other similar encumbrance of any nature whatsoever.
"LIMITED PARTNER" means any Person, other than the Company, named as a
Limited Partner on Exhibit A, as such Exhibit may be amended from time to time.
"LOCK-UP AGREEMENT" means, collectively, the several Lock-up Agreements
executed by each of the Limited Partners other than the Company, dated the date
hereof, which prohibit the transfer of the OP Units held by such Limited Partner
without the consent of Merrill Lynch, Pierce, Fenner & Smith, Incorporated
and/or the Operating Partnership
"NOTICE OF EXCHANGE" means the Notice of Exchange substantially in the
form of Exhibit B to this Agreement.
-2-
<PAGE> 3
"PERSON" shall mean an individual, partnership, corporation, limited
liability company, trust, estate, or unincorporated organization, or other
entity, or a government or agency or political subdivision thereof.
"REIT STOCK AMOUNT" means that number of shares of REIT Stock equal to the
product of the number of OP Units offered for exchange by an Exchanging Partner,
multiplied by the Exchange Factor as of the Valuation Date, provided, that in
the event the Company or the Operating Partnership issues to all holders of REIT
Stock rights, options, warrants or convertible or exchangeable securities
entitling the stockholders to subscribe for or purchase REIT Stock, or any other
securities or property (collectively, the "rights"), then the REIT Stock Amount
shall also include such rights that a holder of that number of shares of REIT
Stock would be entitled to receive.
"SEC" means the Securities and Exchange Commission.
"SPECIFIED EXCHANGE DATE" means the tenth (10th) Business Day after
receipt by the Operating Partnership and the Company of a Notice of Exchange.
"VALUATION DATE" means the date of receipt by the Operating Partnership
and the Company of a Notice of Exchange or, if such date is not a Business Day,
the first Business Day thereafter.
"VALUE" means, with respect to shares of REIT Stock, the average of the
daily market price for the five (5) consecutive trading days immediately
preceding the Valuation Date. The market price for each such trading day shall
be:
(i) if the REIT Stock are listed or admitted to trading on the New
York Stock Exchange (the "NYSE"), any other national securities exchange
or the Nasdaq Stock Market ("Nasdaq"), the closing price on such day, or
if no such sale takes place on such day, the average of the closing bid
and asked prices on such day; or
(ii) if the REIT Stock are not listed or admitted to trading on the
NYSE, any national securities exchange or Nasdaq, the last reported sale
price on such day or, if no sale takes place on such day, the average of
the closing bid and asked prices on such day, as reported by a reliable
quotation source designated by the Company.
In the event the REIT Stock Amount includes rights that a holder of REIT Stock
would be entitled to receive, then the Value of such rights shall be determined
by the independent directors of the Company acting in good faith on the basis of
such quotations and other information as they consider, in their reasonable
judgment, appropriate.
-3-
<PAGE> 4
ARTICLE II
EXCHANGE RIGHT
2.1 Exchange Right. (a) Subject to Sections 2.2, 2.3, 2.4 and 2.5 hereof,
and subject to any limitations under applicable law, the Operating Partnership
hereby grants to each Limited Partner and each Limited Partner hereby accepts
the right (the "EXCHANGE RIGHT"), exercisable on or after the date that is one
(1) year after the closing of the IPO, to exchange on a Specified Exchange Date
all or a portion of the OP Units held by such Limited Partner at an exchange
price equal to the Cash Amount.
(b) The Exchange Right shall be exercised pursuant to a Notice of Exchange
delivered to the Operating Partnership, with a copy delivered to the Company, by
the Limited Partner who is exercising the Exchange Right (the "EXCHANGING
PARTNER"); provided, however, that the Company, on behalf of the Operating
Partnership, may elect, after a Notice of Exchange is delivered, to satisfy the
Exchange Right which is the subject of such notice in accordance with Section
2.2.
(c) A Limited Partner may not exercise the Exchange Right for less than
one thousand (1,000) OP Units or, if such Limited Partner holds less than one
thousand (1,000) OP Units, all of the OP Units held by such Limited Partner.
(d) Any Assignee of a Limited Partner may exercise the rights of such
Limited Partner pursuant to this Article 2, and such Limited Partner shall be
deemed to have assigned such rights to such Assignee and shall be bound by the
exercise of such rights by such Assignee.
(e) In connection with any exercise of such rights by an Assignee on
behalf of a Limited Partner, the Cash Amount or the REIT Stock Amount, as the
case may be, shall be satisfied by the Operating Partnership or the Company, as
the case may be, directly to such Assignee and not to such Limited Partner.
2.2 Option of Company to Exchange for REIT Stock. (a) Notwithstanding the
provisions of Section 2.1, the Company may, on behalf of the Operating
Partnership, in its sole and absolute discretion, elect to satisfy an Exchanging
Partner's Exchange Right by exchanging REIT Stock and rights equal to the REIT
Stock Amount on the Specified Exchange Date for the OP Units offered for
exchange by the Exchanging Partner.
(b) In the event the Company shall elect to satisfy, on behalf of the
Operating Partnership, an Exchanging Partner's Exchange Right by exchanging REIT
Stock for the OP Units offered for exchange,
(i) the Company hereby agrees so to notify the Exchanging Partner
within five (5) Business Days after the receipt by the Company of such
Notice of Exchange,
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(ii) each Exchanging Partner hereby agrees to execute such documents
and instruments as the Company may reasonably require in connection with
the issuance of REIT Stock upon exercise of the Exchange Right, and
(iii) the Company hereby agrees to deliver stock certificates
representing fully paid and nonassessable shares of REIT Stock.
2.3 Prohibition of Exchange for REIT Stock. Notwithstanding anything
herein to the contrary, the Company shall not be entitled to satisfy an
Exchanging Partner's Exchange Right pursuant to Section 2.2 if the delivery of
REIT Stock to such Limited Partner by the Company pursuant to Section 2.2
(regardless of the Operating Partnership's obligations to the Limited Partner
under Section 2.1)
(a) would be prohibited under the Articles of Incorporation of the
Company,
(b) would otherwise jeopardize the REIT status of the Company, or
(c) would cause the acquisition of the REIT Stock by the Limited
Partner to be "integrated" with any other distribution of REIT Stock by
the Company for purposes of complying with the registration provisions of
the Securities Act.
2.4 Payment Date. Any Cash Amount to be paid to an Exchanging Partner
shall be paid on the Specified Exchange Date; provided, however, that the
Operating Partnership may elect to cause the Specified Exchange Date to be
delayed for up to an additional 180 days to the extent required for the Company
to cause additional REIT Shares to be issued to provide financing to be used to
make such payment of the Cash Amount by the Operating Partnership.
2.5 Exercise by Pledgee. Notwithstanding the provisions of this Article 2,
any person to whom OP Units have been pledged, in compliance with the terms of
the Lock-up Agreement, may exercise its Exchange Right prior to the date that is
one (1) year after the closing of the IPO, provided, however, such OP Units
shall only be exchangeable for the Cash Amount.
2.6 Expiration of Exchange Right. The Exchange Right shall expire with
respect to any OP Units for which an Exchange Notice has not been delivered to
the Operating Partnership and the Company on or before December 31, 2047.
2.7 Effect of Exchange. (a) Any exchange of OP Units pursuant to this
Article 2 shall be deemed to have occurred as of the Specified Exchange Date for
all purposes, including without limitation the payment of distributions or
dividends in respect of OP Units or REIT Stock, as applicable.
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(b) Any OP Units acquired by the Company pursuant to an exercise by any
Limited Partner of an Exchange Right shall be deemed to be acquired by and
reallocated or reissued to the Company.
(c) The Company, as general partner of the Operating Partnership, shall
amend the Partnership Agreement to reflect each such exchange and reallocation
or reissuance of OP Units and each corresponding recalculation of the OP Units
of the Limited Partners.
ARTICLE III
OTHER PROVISIONS
3.1 Covenants of the Company. (a) At all times during the pendency of the
Exchange Right, the Company shall reserve for issuance such number of shares of
REIT Stock as may be necessary to enable the Company to issue such shares in
full payment of the REIT Stock Amount in regard to all OP Units held by Limited
Partners which are from time to time outstanding.
(b) During the pendency of the Exchange Right, the Company shall deliver
to Limited Partners in a timely manner all reports filed by the Company with the
SEC to the extent the Company also transmits such reports to its stockholders
and all other communications transmitted from time to time by the Company to its
stockholders generally.
(c) The Company shall notify each Limited Partner, upon request, of the
then current Exchange Factor and such notice will include a reasonable
explanation of the Exchange Factor calculation to be applied at such time.
3.2 Fractional Shares. (a) No fractional shares of REIT Stock shall be
issued upon exchange of OP Units.
(b) The number of full shares of REIT Stock which shall be issuable upon
exchange of OP Units (or the cash equivalent amount thereof if the Cash Amount
is paid) shall be computed on the basis of the aggregate amount of OP Units so
surrendered.
(c) Instead of any fractional shares of REIT Stock which would otherwise
be issuable upon exchange of any OP Units, the Operating Partnership shall pay a
cash adjustment in respect of such fraction in an amount equal to the Cash
Amount of an OP Unit multiplied by such fraction.
3.3 Investment Representations and Warranties. By delivering to the
Company a Notice of Exchange, each Exchanging Partner will be deemed to
represent and warrant to the Company and the Operating Partnership that such
Exchanging Partner is aware of the Company's option to exchange such Exchanging
Partner's OP Units for REIT Stock pursuant to Section 2.2 hereof and that:
(a) (i) Such Exchanging Partner has received and reviewed
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(A) a copy of the prospectus contained in the Registration
Statement on Form S-11 filed by the Company in connection with the
IPO, any prospectus contained in any Registration Statement
subsequently filed by the Company, and any supplement or amendment
thereto (each, a "PROSPECTUS"), and
(B) copies of all reports and other filings (the "SEC
REPORTS"), including Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K, made by the Company
with the SEC pursuant to the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder,
and understands the risks of, and other considerations relating to, an
investment in REIT Stock.
(ii) Such Exchanging Partner, by reason of its business and
financial experience, together with the business and financial experience
of those persons, if any, retained by it to represent or advise it with
respect to its investment in REIT Stock,
(A) has such knowledge, sophistication and experience in
financial and business matters and in making investment decisions of
this type that it is capable of evaluating the merits and risks of
and of making an informed investment decision with respect to an
investment in REIT Stock,
(B) is capable of protecting its own interest or has engaged
representatives or advisors to assist it in protecting its interests
and
(C) is capable of bearing the economic risk of such
investment.
(iii) (A) Such Exchanging Partner is an "accredited investor" as
defined in Rule 501 of the regulations promulgated under the
Securities Act.
(B) If such Exchanging Partner has retained or retains a
person to represent or advise it with respect to its investment in
REIT Stock, such Exchanging Partner will advise the Company of such
retention and, at the Company's request, such Exchanging Partner
shall, prior to or at delivery of the REIT Stock hereunder,
(I) acknowledge in writing such representation and
(II) cause such representative or advisor to deliver a
certificate to the Company containing such representations as
may be reasonably requested by the Company.
(b) (i) Such Exchanging Partner understands that an investment in the
Company involves substantial risks.
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(ii) Such Exchanging Partner has been given the opportunity to make
a thorough investigation of the activities of the Company and has been
furnished with materials relating to the Company and its activities,
including, without limitation, each Prospectus and the SEC Reports.
(iii) Such Exchanging Partner has relied and is making its
investment decision based upon the Prospectus relating to the IPO and any
subsequent Prospectus, the SEC Reports and other written information
provided to the Exchanging Partner by or on behalf of the Company and, as
applicable, such Exchanging Partner's position as a director or executive
officer of the Company.
(c) (i) The REIT Stock to be issued to such Exchanging Partner hereunder
will be acquired by such Exchanging Partner for its own account, for
investment only and not with a view to, or with any intention of, a
distribution or resale thereof, in whole or in part, or the grant of any
participation therein.
(ii) Such Exchanging Partner was not formed for the specific purpose
of acquiring an interest in the Company.
(d) (i) Such Exchanging Partner acknowledges that
(A) the shares of REIT Stock to be issued to such Exchanging
Partner hereunder have not been registered under the Securities Act
or state securities laws by reason of a specific exemption or
exemptions from registration under the Securities Act and applicable
state securities laws and, the certificates representing such shares
of REIT Stock will bear a legend to such effect,
(B) the Company's and the Operating Partnership's reliance on
such exemptions is predicated in part on the accuracy and
completeness of the representations and warranties of such
Exchanging Partner contained herein,
(C) the REIT Stock to be issued to such Exchanging Partner
hereunder may not be resold or otherwise distributed unless
registered under the Securities Act and applicable state securities
laws, or unless an exemption from registration is available,
(D) there may be no market for unregistered shares of REIT
Stock, and
(E) the Company has no obligation or intention to register
such REIT Stock under the Securities Act or any state securities
laws or to take any action that would make available any exemption
from the registration requirements of such laws, except as provided
in the Registration Rights Agreement entered into by the Company and
the Exchanging Partner (the "REGISTRATION RIGHTS AGREEMENT").
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(ii) Such Exchanging Partner acknowledges that because of the
restrictions on transfer or assignment of such REIT Stock to be issued
hereunder, such Exchanging Partner may have to bear the economic risk of
its investment in REIT Stock issued hereunder for an indefinite period of
time, although the holder of any such REIT Stock will be afforded certain
rights to have such REIT Stock registered under the Securities Act and
applicable state securities laws pursuant to the Registration Rights
Agreement.
(e) The address set forth under such Exchanging Partner's name in the
Notice of Exchange is the address of the Exchanging Partner's principal place of
business or, if a natural person, the address of the Exchanging Partner's
residence, and such Exchanging Partner has no present intention of becoming a
resident of any country, state or jurisdiction other than the country and state
in which such principal place of business or residence is situated.
ARTICLE IV
GENERAL PROVISIONS
4.1 Addresses and Notice. Any notice, demand, request or report required
or permitted to be given or made to the Operating Partnership, the Company, a
Limited Partner or Assignee, as the case may be, under this Agreement shall be
in writing and shall be deemed given or made when delivered in person or when
sent by first class United States mail or by other similarly reliable means of
written communication to the Operating Partnership, the Company, a Limited
Partner or Assignee, as the case may be, (i) at the address listed on the
records of the Operating Partnership, with respect to a Limited Partner or
Assignee, and (ii) at 120 West 45th Street, New York, New York 10036-4003, Attn:
President, with respect to the Operating Partnership or the Company.
4.2 Titles and Captions. All article or section titles or captions in this
Agreement are for convenience only. They shall not be deemed part of this
Agreement and in no way define, limit, extend or describe the scope or intent of
any provisions hereof. Except as specifically provided otherwise, references to
"Articles" and "Sections" are to Articles and Sections of this Agreement.
4.3 Pronouns and Plurals. Whenever the context may require, any pronoun
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa.
4.4 Further Action and Additional Restrictions. The parties shall execute
and deliver all documents, provide all information and take or refrain from
taking action as may be necessary or appropriate to achieve the purposes of this
Agreement.
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4.5 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, executors,
administrators, successors, legal representatives and permitted assigns.
4.6 Waiver. No failure by any party to insist upon the strict performance
of any covenant, duty, agreement or condition of this Agreement or to exercise
any right or remedy consequent upon a breach thereof shall constitute waiver of
any such breach or any other covenant, duty, agreement or condition.
4.7 Counterparts. This Agreement may be executed in counterparts, all of
which together shall constitute one agreement binding on all of the parties
hereto, notwithstanding that all such parties are not signatories to the
original or the same counterpart. Each party shall become bound by this
Agreement immediately upon affixing its signature hereto.
4.8 Applicable Law. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Maryland, without
regard to the principles of conflicts of law thereof.
4.9 Invalidity of Provisions. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the validity, legality
and enforceability of the remaining provisions contained herein shall not be
affected thereby.
4.10 Entire Agreement. This Agreement contains the entire understanding
and agreement among the Limited Partners, the Operating Partnership and the
Company with respect to the subject matter hereof and supersedes any other prior
written or oral understandings or agreements among them with respect thereto.
4.11 Amendment. This Agreement may be amended from time to time with the
consent of the Company by a vote of the Limited Partners in the same manner as
the Partnership Agreement (in accordance with Section 14.1(a) thereof) may be
amended as provided therein, provided, however, that the Company shall vote its
limited partnership interests in proportion to the votes of the other Limited
Partners.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
THE COMPANY:
TOWER REALTY TRUST, INC.
By:_________________________________
Name:
Title:
OPERATING PARTNERSHIP:
TOWER REALTY OPERATING PARTNERSHIP, L.P.
BY: Tower Realty Trust, Inc.,
its general partner
By:_________________________________
Name:
Title:
LIMITED PARTNERS:
_________________________________
Signature
_________________________________
Name (Please Print or Type)
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Exhibit A
Name and Address of Limited Partners
[To be attached]
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Exhibit B
Notice of Exchange
The undersigned Limited Partner hereby irrevocably (i) exchanges
___________ OP Units in Tower Realty Operating Partnership, L.P., in accordance
with the terms of the Exchange Rights Agreement, dated as of _________ __, 1997
(the "EXCHANGE RIGHTS AGREEMENT"), and the Exchange Right referred to therein;
(ii) surrenders such OP Units and all right, title and interest therein; and
(iii) directs that the Cash Amount or REIT Stock Amount (as determined by the
Company) deliverable upon exercise of the Exchange Right be delivered to the
address specified below, and if REIT Stock is to be delivered, such REIT Stock
will be registered or placed in the name(s) and at the address(es) specified
below.
The undersigned hereby represents, warrants, and certifies that the
undersigned (a) has marketable and unencumbered title to such OP Units, free and
clear, other than any encumbrance arising pursuant to the Partnership Agreement,
of the rights or interests of any other person or entity; (b) has the full
right, power, and authority to exchange and surrender such OP Units as provided
herein; and (c) has obtained the consent or approval of all persons or entities,
if any, (other than consent or approval that may be required of the Company or
the Operating Partnership) having the right to consent or approve such exchange
and surrender on the part of the undersigned.
The undersigned hereby makes the representations and warranties contained
in Section 3.3 of the Exchange Rights Agreement as if such representations and
warranties had been set forth in full in this Notice of Exchange.
Dated: __________________________
______________________________________
Name of Limited Partner (Please Print)
Signature guaranteed by:
Signature of Limited Partner)
_____________________________
(Street Address)
(City) (State) (Zip Code)
If REIT Stock is to be issued, issue to:
Name:
Limited Partner's social security or tax
identification number:
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EXHIBIT 10.3
FORM OF
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT") is made and
entered into as of _______ __, 1997 by and among Tower Realty Trust, Inc., a
Maryland corporation, which operates as a real estate investment trust (the
"COMPANY"), Tower Realty Operating Partnership, L.P., a Delaware limited
partnership (the "OPERATING PARTNERSHIP"), and the other parties which are
signatories hereto (together with their respective successors, transferees and
assigns, each a "HOLDER" and collectively the "HOLDERS").
WHEREAS, on the date hereof, the Operating Partnership is acquiring,
among other things, certain partnership interests or assets of various
partnerships, joint ventures, limited liability companies, corporations and
other entities which are Holders or in which the Holders own direct or indirect
interests (the "PROPERTY PARTNERSHIPS") pursuant to Option or Contribution
Agreements (the "OPTION AGREEMENTS") among the Operating Partnership and the
Grantors named therein, and in connection therewith the Holders will receive
units of limited partnership interest in the Operating Partnership (such units
of limited partnership interest being referred to hereinafter as the "OP
UNITS");
WHEREAS, the Company, the Operating Partnership and the Holders are
parties to an Exchange Rights Agreement which provides the Holders, among other
things, with the right to demand that the Operating Partnership redeem their OP
Units for cash and, at the option of the Company, the Company may satisfy that
redemption request on behalf of the Operating Partnership through the issuance
of the Company's Common Stock, par value $0.01 per share; and
WHEREAS, in order to induce the Property Partnerships and the Holders
to consummate the closings contemplated under the Option Agreements, the Company
has agreed to grant to the Holders the registration rights set forth in Section
2 hereof.
NOW, THEREFORE, the parties hereto, in consideration of the foregoing,
the mutual covenants and agreements hereinafter set forth, and other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, hereby agree as follows:
I Definitions.
<PAGE> 2
As used in this Agreement, the following capitalized defined terms
shall have the following meanings:
"COMMON STOCK" shall mean shares of common stock, par value $0.01 per
share, of the Company.
"COMPANY" shall have the meaning set forth in the Preamble and also
shall include the Company's successors.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"EXCHANGE RIGHTS AGREEMENT" shall mean the Exchange Rights Agreement,
dated the date hereof, among the Company, the Operating Partnership and the
other parties thereto.
"EXCHANGE STOCK" shall mean any Common Stock issued or to be issued to
the Holders upon the exchange of their OP Units pursuant to the Exchange Rights
Agreement.
"HOLDER" or "HOLDERS" shall have the meaning set forth in the Preamble.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"OP UNITS" shall have the meaning set forth in the Preamble.
"OPERATING PARTNERSHIP" shall have the meaning set forth in the
Preamble and also shall include the Operating Partnership's successors.
"PERSON" shall mean an individual, partnership, corporation, limited
liability company, trust, estate, or unincorporated organization, or other
entity, or a government or agency or political subdivision thereof.
"PROSPECTUS" shall mean the prospectus included in a Registration
Statement, including any preliminary prospectus, and any such prospectus as
amended or supplemented by any prospectus supplement with respect to the terms
of the offering of any portion of the Registrable Securities covered by a Shelf
Registration Statement, and by all other amendments and supplements to such
prospectus, including post-effective amendments, and in each case including all
material incorporated by reference therein.
"REGISTRABLE SECURITIES" shall mean the Exchange Stock, excluding
(i) Exchange Stock for which a Registration Statement relating
to the sale thereof shall have become effective under the Securities
Act and which have been disposed of under such Registration Statement
or
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(ii) Exchange Stock sold or eligible for sale pursuant to Rule
144(k).
"REGISTRATION EXPENSES" shall mean any and all expenses incident to
performance of or compliance with this Agreement, including, without limitation:
(i) all SEC, stock exchange or NASD registration and filing
fees;
(ii) all fees and expenses incurred in connection with
compliance with state securities or "blue sky" laws (including
reasonable fees and disbursements of counsel in connection with "blue
sky" qualification of any of the Registrable Securities and the
preparation of a Blue Sky Memorandum) and compliance with the rules of
the NASD;
(iii) all expenses of any Persons in preparing or assisting in
preparing, word processing, printing and distributing any Registration
Statement, any Prospectus, certificates and other documents relating to
the performance of and compliance with this Agreement;
(iv) all fees and expenses incurred in connection with the
listing, if any, of any of the Registrable Securities on any securities
exchange or exchanges pursuant to Article III, Section (xii) hereof;
and
(v) the fees and disbursements of counsel for the Company and
of the independent public accountants of the Company, including the
expenses of any special audits or "cold comfort" letters required by or
incident to such performance and compliance.
Registration Expenses shall specifically exclude underwriting discounts and
commissions, the fees and disbursements of counsel representing a selling
Holder, and transfer taxes, if any, relating to the sale or disposition of
Registrable Securities by a selling Holder, all of which shall be borne by such
Holder in all cases.
"REGISTRATION STATEMENT" or "SHELF REGISTRATION STATEMENT" shall mean a
"shelf" registration statement of the Company and any other Person required to
be a registrant with respect to such shelf registration statement pursuant to
the requirements of the Securities Act which covers the issuance or resale of
the Registrable Securities on Form S-3 or otherwise under Rule 415 promulgated
under the Securities Act, or any similar rule that may be adopted by the SEC,
and all amendments and supplements to such registration statement, including
post-effective amendments, in each case including the Prospectus contained
therein, all exhibits thereto and all materials incorporated by reference
therein.
"RULE 144" shall mean Rule 144 promulgated under the Securities Act, as
amended from time to time, and any successor rule or regulation under the
Securities Act.
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"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended from
time to time, and any successor Act.
"SHELF REGISTRATION" shall mean a registration required to be effected
pursuant to Section 2 hereof.
II Shelf Registration Under the Securities Act.
2.1 Filing of Shelf Registration Statement.
(i) Within 15 days after the first anniversary date of the
date hereof, the Company shall cause to be filed a Shelf Registration
Statement providing for the sale by the Holders of the Registrable
Securities and will use its reasonable efforts to cause such Shelf
Registration Statement to be declared effective by the SEC as soon as
practicable.
(ii) The Company agrees to use its reasonable best efforts to
keep the Shelf Registration Statement continuously effective for a
period expiring on the date on which all of the Registrable Securities
covered by the Shelf Registration Statement have been sold pursuant to
the Shelf Registration Statement or have become eligible for sale
pursuant to Rule 144(k) and, subject to Article III hereof, further
agrees to supplement or amend the Shelf Registration Statement, if and
as required by the rules, regulations or instructions applicable to the
registration form used by the Company for such Shelf Registration
Statement or by the Securities Act or by any other rules and
regulations thereunder for shelf registration; provided, however, that
the Company shall not be deemed to have used its reasonable efforts to
keep a Registration Statement effective during the applicable period if
it voluntarily takes any action that would result in selling Holders
covered thereby not being able to sell such Registrable Securities
during that period, unless such action is required under applicable law
or the Company has filed a post-effective amendment to the Registration
Statement and the SEC has not declared it effective.
(iii) Notwithstanding the foregoing, the Company shall not be
required to file a Registration Statement or to keep a Registration
Statement effective if the negotiation or consummation of a transaction
is pending or an event has occurred, which negotiation, consummation or
event would require additional disclosure by the Company in the
Registration Statement of material information which the Company has a
bona fide business purpose for keeping confidential and the
nondisclosure of which in the Registration Statement might cause the
Registration Statement to fail to comply with applicable disclosure
requirements; provided, however, that the Company may not
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delay, suspend or withdraw a Registration Statement for such reason for
more than 60 days or more often than twice during any period of 12
consecutive months.
(iv) The Company is not required to file a separate
Registration Statement, but may file one Registration Statement
covering the Registrable Securities held by more than one Holder.
2.2 Expenses.
(i) The Company shall pay all Registration Expenses in
connection with any registration pursuant to Article II.
(ii) Each Holder shall pay all underwriting discounts, if any,
sales commissions, the fees and disbursements of counsel representing
such Holder and transfer taxes, if any, relating to the sale or
disposition of such Holder's Registrable Securities pursuant to the
Shelf Registration Statement or Rule 144.
2.3 Inclusion in Shelf Registration Statement. Any Holder that does
not, within 10 days after receipt of a reasonable request by the Company for
information in connection with the Shelf Registration Statement, provide such
information to the Company, shall not be entitled to have its Registrable
Securities included in the Shelf Registration Statement.
2.4 Effect of Material Breach. In the event that the Company shall
breach any of its material obligations hereunder in any material respect, any
Holder of Registrable Securities may demand that the Company file a registration
statement covering such Holder's Registrable Securities. The Company agrees to
file such registration statement within 60 days after receipt of such demand and
agrees to use its best efforts to procure the effectiveness of such registration
statement within 60 days after filing.
III Registration Procedures. (a) In connection with the obligations of the
Company with respect to the Registration Statement required to be filed pursuant
to Article 2 hereof, the Company shall, to the extent applicable:
(i) Prepare and file with the SEC, within the time period set
forth in Section 2 hereof, a Shelf Registration Statement, which Shelf
Registration Statement
(A) shall be available for the sale of the
Registrable Securities in accordance with the intended method
or methods of distribution by the selling Holders thereof, and
(B) shall comply as to form in all material respects
with the requirements of the applicable form of registration
statement and include all financial statements required by the
SEC to be filed therewith.
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(ii) (A) Subject to Article III, Section (a)(ii)(B),
(I) prepare and file with the SEC such
amendments and post-effective amendments to each such
Registration Statement as may be necessary to keep
such Registration Statement effective for the
applicable period;
(II) cause each such Prospectus to be
supplemented by any required prospectus supplement,
and as so supplemented to be filed pursuant to Rule
424 or any similar rule that may be adopted under the
Securities Act;
(III) respond as promptly as practicable to
any comments received from the SEC with respect to
the Shelf Registration Statement, or any amendment,
post-effective amendment or supplement relating
thereto; and
(IV) comply with the provisions of the
Securities Act with respect to the disposition of all
securities covered by each Registration Statement
during the applicable period in accordance with the
intended method or methods of distribution by the
selling Holders thereof.
(B) (I) Each Holder shall promptly provide to the
Company such information as the Company reasonably
requests in order to identify such Holder and the
method of distribution in a post-effective amendment
to the Registration Statement or a supplement to the
Prospectus.
(II) Such Holder also shall notify the
Company in writing upon completion of any offer or
sale or at such time as such Holder no longer intends
to make offers or sales under the Registration
Statement.
(iii) Furnish to each Holder of Registrable Securities,
without charge, as many copies of each Prospectus, including each
preliminary Prospectus, and any amendment or supplement thereto and
such other documents as such Holder may reasonably request, in order to
facilitate the public sale or other disposition of the Registrable
Securities; the Company consents to the use of the Prospectus,
including each preliminary Prospectus, by each such Holder of
Registrable Securities in connection with the offering and sale of the
Registrable Securities covered by the Prospectus or the preliminary
Prospectus.
(iv) Use its reasonable efforts to register or qualify the
Registrable Securities by the time the applicable Registration
Statement is declared effective by the SEC under all applicable state
securities or "blue sky" laws of such jurisdictions as any Holder of
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Registrable Securities covered by a Registration Statement shall
reasonably request in writing, keep each such registration or
qualification effective during the period such Registration Statement
is required to be kept effective, and do any and all other acts and
things which may be reasonably necessary or advisable to enable such
Holder to consummate the disposition in each such jurisdiction of such
Registrable Securities owned by such Holder; provided, however, that
the Company shall not be required to
(A) qualify generally to do business in any
jurisdiction or to register as a broker or dealer in such
jurisdiction where it would not otherwise be required to
qualify but for this Article III, Section (a)(iv),
(B) subject itself to taxation in any such
jurisdiction, or
(C) submit to the general service of process in any
such jurisdiction.
(v) Notify each Holder of Registrable Securities promptly and,
if requested by such Holder, confirm such notification in writing
(A) when a Registration Statement has become
effective and when any post-effective amendments and
supplements thereto become effective,
(B) of the issuance by the SEC or any state
securities authority of any stop order suspending the
effectiveness of a Registration Statement or the initiation of
any proceedings for that purpose,
(C) if the Company receives any notification with
respect to the suspension of the qualification of the
Registrable Securities for sale in any jurisdiction or the
initiation of any proceeding for such purpose, and
(D) of the happening of any event during the period a
Registration Statement is effective which is of a type
specified in Article II, Section 2.1(iii) hereof or as a
result of which such Registration Statement or the related
Prospectus contains any untrue statement of a material fact or
omits to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made (in the case of the
Prospectus), not misleading.
(vi) Make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of a Registration Statement at
the earliest possible moment.
(vii) Furnish to each Holder of Registrable Securities,
without charge, at least one conformed copy of each Registration
Statement and any post-effective amendment
-7-
<PAGE> 8
thereto (without documents incorporated therein by reference or
exhibits thereto, unless requested).
(viii) (A) Cooperate with the selling Holders of Registrable
Securities to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold and not
bearing any Securities Act legend; and
(B) enable certificates for such Registrable
Securities to be issued for such numbers of shares of Common
Stock and registered in such names as the selling Holders may
reasonably request at least two business days prior to any
sale of Registrable Securities.
(ix) Subject to Article II, Section 2.1(iii) and Article III,
Section (a)(ii)(B) hereof, upon the occurrence of any event
contemplated by Article III, Section (a)(v)(D) hereof, use its
reasonable efforts promptly to prepare and file a supplement or
prepare, file and obtain effectiveness of a post-effective amendment to
a Registration Statement or the related Prospectus or any document
incorporated therein by reference or file any other required document
so that, as thereafter delivered to the purchasers of the Registrable
Securities, such Prospectus will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(x) Make available for inspection by representatives of the
Holders of the Registrable Securities and any counsel or accountant
retained by such Holders, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the
respective officers, directors and employees of the Company to supply
all information reasonably requested by any such representative,
counsel or accountant in connection with a Registration Statement;
provided, however, that such records, documents or information which
the Company determines, in good faith, to be confidential and notifies
such representatives, counsel or accountants in writing that such
records, documents or information are confidential shall not be
disclosed by such representatives, counsel or accountants unless
(A) the disclosure of such records, documents or
information is necessary to avoid or correct a material
misstatement or omission in a Registration Statement,
(B) the release of such records, documents or
information is ordered pursuant to a subpoena or other order
from a court of competent jurisdiction, or
(C) such records, documents or information have been
generally made available to the public.
-8-
<PAGE> 9
(xi) Within a reasonable time prior to the filing of any
Registration Statement, any Prospectus, any amendment to a Registration
Statement or amendment or supplement to a Prospectus, provide copies of
such document (not including any documents incorporated by reference
therein unless requested) to the Holders of Registrable Securities.
(xii) Use its reasonable efforts to cause all Registrable
Securities to be listed on any securities exchange on which similar
securities issued by the Company are then listed.
(xiii) Provide a CUSIP number for all Registrable Securities,
not later than the effective date of a Registration Statement.
(xiv) Otherwise use its reasonable efforts to comply with all
applicable rules and regulations of the SEC and make available to its
security holders, as soon as reasonably practicable, an earnings
statement covering at least 12 months which shall satisfy the
provisions of Section 11(a) of the Securities Act and Rule 158
promulgated thereunder.
(xv) Use its reasonable efforts to cause the Registrable
Securities covered by a Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be
necessary by virtue of the business and operations of the Company to
enable Holders to consummate the disposition of such Registrable
Securities.
(b) The Company may require each Holder of Registrable Securities to
furnish to the Company in writing such information regarding the
proposed distribution by such Holder of such Registrable Securities as
the Company may from time to time reasonably request in writing.
(c) In connection with and as a condition to the Company's obligations
with respect to the Registration Statement required to be filed
pursuant to Section 2 hereof and this Section 3, each Holder agrees
that
(i) it will not offer or sell its Registrable Securities under
the Registration Statement until it has received copies of the
supplemental or amended Prospectus contemplated by Article III, Section
(a)(ii) hereof and receives notice that any post-effective amendment
has become effective, and
(ii) upon receipt of any notice from the Company of the
happening of any event of the kind described in Article III, Section
(a)(v)(D) hereof, such Holder will forthwith discontinue disposition of
Registrable Securities pursuant to a Registration Statement until such
Holder receives copies of the supplemented or amended Prospectus
contemplated by Article III, Section (a)(ix) hereof and receives notice
that any post-
-9-
<PAGE> 10
effective amendment has become effective, and, if so directed by the
Company, such Holder will deliver to the Company (at the expense of the
Company) all copies in its possession, other than permanent file copies
then in such Holder's possession, of the Prospectus covering such
Registrable Securities current at the time of receipt of such notice.
IV Indemnification; Contribution.
4.1 Indemnification by the Company. The Company agrees to indemnify and
hold harmless each Holder and its officers and directors and each Person, if
any, who controls any Holder (within the meaning of Section 15 of the Securities
Act) as follows:
(a) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of
(A) any untrue statement or alleged untrue statement
of a material fact contained in any Registration Statement (or
any amendment thereto) pursuant to which Registrable
Securities were registered under the Securities Act, including
all documents incorporated therein by reference, or
(B) the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to
make the statements therein not misleading or
(C) arising out of any untrue statement or alleged
untrue statement of a material fact contained in any
Prospectus (or any amendment or supplement thereto), including
all documents incorporated therein by reference, or
(D) the omission or alleged omission therefrom of a
material fact necessary in order to make the statements
therein, in the light of the circumstances under which they
were made, not misleading;
(b) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or investigation or proceeding by
any governmental agency or body, commenced or threatened, or of any
claim whatsoever based upon any such untrue statement or omission, or
any such alleged untrue statement or omission, if such settlement is
effected with the written consent of the Company, which consent shall
not be unreasonably withheld or delayed; and
(c) against any and all expense whatsoever, as incurred
(including reasonable fees and disbursements of counsel), reasonably
incurred in investigating, preparing or defending against any
litigation, or investigation or proceeding by any governmental
-10-
<PAGE> 11
agency or body, commenced or threatened, in each case whether or not a
party, or any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission, to the
extent that any such expense is not paid under subparagraph (a) or (b)
above;
provided, however, that the indemnity provided pursuant to this Article
IV, Section 4.1(c) does not apply to any Holder with respect to any
loss, liability, claim, damage or expense to the extent arising out of
(x) any untrue statement or omission or alleged untrue
statement or omission made in reliance upon and in conformity with
written information furnished to the Company by such Holder expressly
for use in a Registration Statement (or any amendment thereto) or any
Prospectus (or any amendment or supplement thereto) or
(y) such Holder's failure to deliver an amended or
supplemental Prospectus, after having been provided copies of any such
amended or supplemental Prospectus by the Company, if such loss,
liability, claim, damage or expense would not have arisen had such
delivery occurred.
4.2 Indemnification by Holders. Each Holder severally agrees to
indemnify and hold harmless the Company and the other selling Holders, and each
of their respective directors and officers (including each director and officer
of the Company who signed the Registration Statement), and each Person, if any,
who controls the Company or any other selling Holder within the meaning of
Section 15 of the Securities Act, under the same circumstances and to the same
extent as the indemnity contained in Section 4.1(a) hereof (except that any
settlement described in Section 4.1(a)(B) shall be effected with the written
consent of such Holder, which consent shall not be unreasonably withheld or
delayed), but only insofar as such loss, liability, claim, damage or expense
arises out of or is based upon any untrue statement or omission, or alleged
untrue statements or omissions, made in a Registration Statement (or any
amendment thereto) or any Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such selling Holder expressly for use in such Registration Statement
(or any amendment thereto) or such Prospectus (or any amendment or supplement
thereto).
4.3 Conduct of Indemnification Proceedings. (i) Each indemnified party
shall give reasonably prompt notice to each indemnifying party of any action or
proceeding commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party
(A) shall not relieve it from any liability which it
may have under the indemnity agreement provided in Section
4.1(a) or 4.1(b) above, unless and to the extent it did not
otherwise learn of such action and the lack of notice by the
-11-
<PAGE> 12
indemnified party results in the forfeiture by the
indemnifying party of substantial rights and defenses and
(B) shall not, in any event, relieve the indemnifying
party from any obligations to any indemnified party other than
the indemnification obligation provided under Section 4.1(a)
or 4.1(b) above.
(ii) If the indemnifying party so elects within a reasonable
time after receipt of such notice, the indemnifying party may assume
the defense of such action or proceeding at such indemnifying party's
own expense with counsel chosen by the indemnifying party and approved
by the indemnified parties defendant in such action or proceeding,
which approval shall not be unreasonably withheld; provided, however,
that, if such indemnified party or parties reasonably determine that a
conflict of interest exists where it is advisable for such indemnified
party or parties to be represented by separate counsel or that, upon
advice of counsel, there may be legal defenses available to them which
are different from or in addition to those available to the
indemnifying party, then the indemnifying party shall not be entitled
to assume such defense and the indemnified party or parties shall be
entitled to one separate counsel at the indemnifying party's or
parties' expense.
(iii)(A) If an indemnifying party is not entitled to assume
the defense of such action or proceeding as a result of the
proviso to Section 4.1(c), such indemnifying party's counsel
shall be entitled to conduct such indemnifying party's
defense, and counsel for the indemnified party or parties
shall be entitled to conduct the defense of such indemnified
party or parties, it being understood that both such counsel
will cooperate with each other to conduct the defense of such
action or proceeding as efficiently as possible.
(B) If an indemnifying party is not so entitled to
assume the defense of such action or does not assume such
defense, after having received the notice referred to in
Section 4.1(c), the indemnifying party or parties will pay the
reasonable fees and expenses of counsel for the indemnified
party or parties as incurred.
(C) In such event, however, no indemnifying party
will be liable for any settlement effected without the written
consent of such indemnifying party, which consent may not be
unreasonably withheld or delayed.
(iv) If an indemnifying party is entitled to assume, and
assumes, the defense of such action or proceeding in accordance with
this Section 4(c), such indemnifying party shall not be liable for any
fees and expenses of counsel for the indemnified parties incurred
thereafter in connection with such action or proceeding.
-12-
<PAGE> 13
4.4 Contribution.
(i) (A) In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement
provided for in this Section 4 is for any reason held to be
unenforceable although applicable in accordance with its
terms, the Company and the selling Holders shall contribute to
the aggregate losses, liabilities, claims, damages and
expenses of the nature contemplated by such indemnity
agreement incurred by the Company and the selling Holders, in
such proportion as is appropriate to reflect the relative
fault of and benefits to the Company on the one hand and the
selling Holders on the other (in such proportions that the
selling Holders are severally, not jointly, responsible for
the balance), in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable
considerations.
(B) (I) The relative benefits to the indemnifying
party and indemnified parties shall be determined by
reference to, among other things, the total proceeds
received by the indemnifying party and indemnified
parties in connection with the offering to which such
losses, claims, damages, liabilities or expenses
relate.
(II) The relative fault of the indemnifying
party and indemnified parties shall be determined by
reference to, among other things, whether the action
in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged
omission to state a material fact, has been made by,
or relates to information supplied by, such
indemnifying party or the indemnified parties, and
the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent
such action.
(ii) (A) The parties hereto agree that it would not be just or
equitable if contribution pursuant to this Section 4.4(d) were
determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable
considerations referred to in Section 4.4(i).
(B) Notwithstanding the provisions of this Section
4.4, no selling Holder shall be required to contribute any
amount in excess of the amount by which the total price at
which the Registrable Securities of such selling Holder were
offered to the public exceeds the amount of any damages which
such selling Holder would otherwise have been required to pay
by reason of such untrue statement or omission.
-13-
<PAGE> 14
(iii) Notwithstanding the foregoing, no Person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
(iv) For purposes of this Section 4.4, each Person, if any,
who controls a Holder within the meaning of Section 15 of the
Securities Act and directors and officers of a Holder shall have the
same rights to contribution as such Holder, and each director of the
Company, each officer of the Company who signed the Registration
Statement and each Person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act shall have the same rights
to contribution as the Company.
V Filing of Exchange Act Reports; Rule 144 Sales
5.1 The Company covenants that it will file the reports required to be
filed by the Company under the Securities Act and the Exchange Act so as to
enable any Holder to sell Exchange Stock pursuant to Rule 144.
5.2 In connection with any sale, transfer or other disposition by any
Holder of any Exchange Stock pursuant to Rule 144, the Company shall cooperate
with such Holder to facilitate the timely preparation and delivery of
certificates representing Exchange Stock to be sold and not bearing any
Securities Act legend, and enable certificates for such Exchange Stock to be for
such number of shares and registered in such names as the selling Holders may
reasonably request at least two business days prior to any sale of Exchange
Stock.
VI Miscellaneous.
6.1 Amendments and Waivers. (i) The provisions of this Agreement,
including the provisions of this Section 6.1(i), may not be amended,
modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given without the written consent of
the Company and the Holders of a majority in amount of the outstanding
Registrable Securities; provided, however, that no amendment,
modification or supplement or waiver or consent to the departure with
respect to the provisions of Articles 2, 4 or 5 hereof shall be
effective as against any Holder unless consented to in writing by such
Holder.
(ii) Notice of any amendment, modification or supplement to
this Agreement adopted in accordance with this Section 6.1 shall be
provided by the Company to each Holder at least thirty (30) days prior
to the effective date of such amendment, modification or supplement.
6.2 Notices. (i) All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex,
-14-
<PAGE> 15
telecopier, or any courier guaranteeing overnight delivery, to the parties at
their respective addresses set forth opposite their signatures below or at such
other address as a party may indicate by written notice to the other party or
parties.
(ii) All such notices and communications shall be deemed to
have been duly given:
(A) at the time delivered by hand, if personally
delivered;
(B) three (3) business days after being deposited in
the mail, postage prepaid, if mailed;
(C) when answered back, if telexed;
(D) when receipt is acknowledged, if telecopied; or
(E) at the time delivered, if delivered by an air
courier guaranteeing overnight delivery.
6.3 Successors, Assigns and Transferees. (i) This Agreement shall inure
to the benefit of and be binding upon the successors, assigns and transferees of
each of the parties, including, without limitation and without the need for an
express assignment, subsequent Holders.
(ii) If any successor, assignee or transferee of any Holder
shall acquire Registrable Securities, in any manner, whether by
operation of law or otherwise, such Registrable Securities shall be
held subject to all of the terms of this Agreement, and by taking and
holding such Registrable Securities such Person shall be entitled to
receive the benefits hereof and shall be conclusively deemed to have
agreed to be bound by all of the terms and provisions hereof.
(iii) The term "successor, assignee or transferee of a Holder"
shall include any Person that acquires Registrable Securities by
operation of law, including upon the merger or consolidation,
liquidation or dissolution of a Holder.
6.4 Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
6.5 Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
-15-
<PAGE> 16
6.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF MARYLAND WITHOUT GIVING EFFECT TO THE
CONFLICTS OF LAW PROVISIONS THEREOF.
6.7 Specific Performance. The parties hereto acknowledge that there
would be no adequate remedy at law if any party fails to perform any of its
obligations hereunder, and accordingly agree that each party, in addition to any
other remedy to which it may be entitled at law or in equity, shall be entitled
to compel specific performance of the obligations of any other party under this
Agreement in accordance with the terms and conditions of this Agreement in any
court of the United States or any State thereof having jurisdiction.
6.8 Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
-16-
<PAGE> 17
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement, or caused this Agreement to be duly executed on its behalf, as of the
date first written above.
Address:
120 West 45th Street
New York, New York 10036-4003 TOWER REALTY TRUST, INC.
By:_____________________________________
Name:
Title:
120 West 45th Street
New York, New York 10036-4003 TOWER REALTY OPERATING
PARTNERSHIP, L.P.
By: Tower Realty Trust, Inc., its general
partner
By:_____________________________________
Name:
Title:
HOLDERS:
[Address:] ________________________________________
Signature
________________________________________
Name (Please Print or Type)
-17-
<PAGE> 1
EXHIBIT 10.4
FORM OF
LOCK-UP AGREEMENT
_____________, 1997
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
World Financial Center
North Tower, 26th Floor
New York, New York 10281-1326
Dear Sirs,
The undersigned understands that Merrill Lynch, Pierce, Fenner & Smith,
Incorporated ("Merrill Lynch") and certain other firms propose to enter into an
Underwriting Agreement (the "Underwriting Agreement") providing for the purchase
by Merrill Lynch and such other firms (the Underwriters") of shares (the
"Shares") of Common Stock, par value $0.01 per share (the "Common Stock"), of
Tower Realty Trust, Inc. (the "Company") and that the Underwriters propose to
reoffer the Shares to the public pursuant to a public offering (the "Offering").
Capitalized terms used but not otherwise defined in this letter agreement will
have the meaning set forth in the Company's Registration Statement on Form S-11
in connection with the registration under the Securities Act of 1933, as amended
(the "Act"), of Shares.
In consideration of the execution of the Underwriting Agreement by the
Underwriters, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the undersigned hereby irrevocably
agrees that without the prior written consent of Merrill Lynch, the undersigned
will not (and, except as may be disclosed in the Prospectus, will not announce
or disclose any intention to) directly or indirectly sell, offer to sell,
solicit an offer to buy, contract to sell, grant any option to purchase, or
otherwise transfer or dispose (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition at any time in
the future) of, any shares of Common Stock, or any securities convertible into
or exercisable or exchangeable for Common Stock, including any units of limited
partnership interest (the "OP Units") in Tower Realty Operating Partnership,
L.P., a Delaware limited partnership (the "Operating Partnership") beneficially
owned by the
<PAGE> 2
undersigned as of the date of the closing of the Company's initial public
offering, for a period of twenty-four (24) months after the later of (i) date of
the final Prospectus relating to the offering of the Shares to the public by the
Underwriters and (ii) the date the Offering is consummated and closed. Prior to
the expiration of such period, the undersigned will not publicly announce or
disclose any intention to do anything after the expiration of such period which
the undersigned is prohibited, as provided in the preceding sentence, from doing
during such period.
The undersigned agrees that the provisions of this agreement shall also
be binding upon the successors, assigns, heirs and personal representatives of
the undersigned.
In furtherance of the foregoing, the Company and
________________________, its Transfer Agent, are hereby authorized to decline
to make any transfer of securities if such transfer would constitute a violation
or breach of this letter agreement.
Very truly yours,
[INVESTOR]
By:____________________________
Name:
Title:
2--
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-11 of
our reports dated April 21, 1997, on our audit of the consolidated balance sheet
of Tower Realty Trust, Inc.; dated April 21, 1997, on our audits of the combined
financial statements and financial statement schedule of Tower Predecessor and
dated April 21, 1997, on our audits of the combined statements of revenues and
certain operating expenses of DRA Joint Ventures. We also consent to the
reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Dallas, Texas
August 5, 1997
2
<PAGE> 1
EXHIBIT 23.3
CONSENT
Landauer Associates, Inc. ("Landauer") hereby consents to the use of its
reports regarding the Metropolitan New York, Orlando, Phoenix, and Tucson
economies and office markets and the reference to Landauer and such reports
under the captions "Prospectus Summary," "Property Office Markets and Market
Economies," "The Properties -- Submarket and Property Information," and
"Experts" in the Registration Statement on Form S-11 of Tower Realty Trust, Inc.
LANDAUER ASSOCIATES, INC.
By: /s/ JOHN BRENGELMAN
------------------------------------
Name: John Brengelman
Title: Managing Director
Dated: August 4, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,092
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 4,675
<CURRENT-LIABILITIES> 0
<BONDS> 4,000
0
0
<COMMON> 1
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,675
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 DEC-31-1996
<CASH> 4,843 4,985
<SECURITIES> 0 0
<RECEIVABLES> 6,603 5,276
<ALLOWANCES> 2,500 2,500
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 170,303 169,619
<DEPRECIATION> 41,951 40,555
<TOTAL-ASSETS> 174,092 172,987
<CURRENT-LIABILITIES> 0 0
<BONDS> 200,097 202,892
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (61,945) (61,870)
<TOTAL-LIABILITY-AND-EQUITY> 174,092 172,987
<SALES> 0 0
<TOTAL-REVENUES> 7,700 28,734
<CGS> 0 0
<TOTAL-COSTS> 8,974 36,660
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,485 15,511
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,240) (7,465)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
CONSENT OF DIRECTOR NOMINEE
To Tower Realty Trust, Inc.:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement of
Tower Realty Trust, Inc. (the "Company") on Form S-11, and amendments thereto,
which indicate that I have accepted a nomination to become a director of the
Company subsequent to the closing of the Company's initial public offering.
/s/ ROBERT M. ADAMS
--------------------------------------
Robert M. Adams
Dated: August 4, 1997
<PAGE> 1
EXHIBIT 99.2
CONSENT OF DIRECTOR NOMINEE
To Tower Realty Trust, Inc.:
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as
amended, I hereby consent to the references in the Registration Statement of
Tower Realty Trust, Inc. (the "Company") on Form S-11, and amendments thereto,
which indicate that I have accepted a nomination to become a director of the
Company subsequent to the closing of the Company's initial public offering.
/s/ STEPHEN SIEGEL
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Stephen Siegel
Dated: August 4, 1997
