<PAGE> 1
Pursuant to Rule 424(b)(1)
Registration No. 333-33011
P R O S P E C T U S
12,015,000 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 21 office buildings (collectively, the "Properties") encompassing
approximately 3.4 million rentable square feet. 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. Of the
12,015,000 shares of Common Stock offered hereby, 9,712,000 shares are being
offered initially in the United States and Canada by the U.S. Underwriters and
2,303,000 shares are being offered initially outside the United States and
Canada by the International Managers. See "Underwriting." Upon completion of the
Offering, management and directors of the Company will beneficially own
approximately 9.0% of the equity in the Company.
Prior to the Offering, there has been no public market for the Common Stock.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Common Stock has been approved for listing on
the New York Stock Exchange, subject to official notice of issuance, 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 20 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 generally based on the value of the
Company as a going concern, and not 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 of the Company, including
the receipt by officers, directors and affiliates of the Company of equity
interests in the Company;
- conflicts of interest relating to the operation of the Company, including
conflicts of interest associated with the potential adverse tax
consequences to certain executive officers and directors of the Company of
sales and refinancings of certain Properties;
- 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, subject to an exception that
permits mutual funds and certain other entities to own or purchase up to
15% of any class of the Company's stock in appropriate circumstances;
- 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
- the possibility that the Company may not be able to refinance outstanding
indebtedness (initially expected to be approximately $113.7 million,
including its pro rata share of indebtedness of unconsolidated
investments) upon maturity, indebtedness might be refinanced on less
favorable terms, and 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................................... $26.00 $1.69 $24.31
- -----------------------------------------------------------------------------------------------------------
Total(3).................................... $312,390,000 $20,305,350 $292,084,650
===========================================================================================================
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(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $12.0
million.
(3) The Company has granted the U.S. Underwriters a 30-day option to purchase up
to 1,456,800 additional shares of Common Stock and has granted the
International Managers a 30-day option to purchase up to 345,450 additional
shares of Common Stock, solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $359,248,500, $23,351,153 and
$335,897,347, 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 orders in whole or in part. It is expected
that delivery of the shares of Common Stock offered hereby will be made in New
York, New York on or about October 16, 1997.
------------------------
MERRILL LYNCH & CO.
LEGG MASON WOOD WALKER
INCORPORATED
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
NATIONSBANC MONTGOMERY SECURITIES, INC.
------------------------
The date of this Prospectus is October 9, 1997.
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[LOGO]
[Color photograph of the Tower 45 office building]
Tower 45, Manhattan
------------------------
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> 3
For a summary property, operating and ownership data regarding the properties,
see the property tables contained under the caption "The Properties" herein.
[Color photograph of the 100 Wall Street office building]
100 Wall Street, Manhattan
[Color photograph of the 5750 Major Boulevard office building before
redevelopment]
[Color photograph of the 5750 Major Boulevard office building after
redevelopment.]*
5750 Major Boulevard, Orlando, Florida
*Artist's rendering of the property upon completion of the Company's
redevelopment program.
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[Color photograph of the 2800 North Central Avenue office building]
2800 North Central Avenue, Phoenix, Arizona
[Color photograph of the Century Plaza office building]
Century Plaza, Phoenix, Arizona
[Color photograph of the 5151 East Broadway office building]
Before redevelopment by the Company
[Color photograph of the 5151 East Broadway office building]
After redevelopment by the Company
5151 East Broadway, Tucson, Arizona
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY....................... 1
The Company............................ 1
Risk Factors........................... 2
Growth Strategies...................... 4
Market Information..................... 6
The Properties......................... 7
Formation and Structure of the
Company............................. 9
Formation Transactions.............. 9
Benefits to Related Parties......... 11
Conflicts of Interest............... 12
Structure of the Company............ 12
The Offering........................... 14
Distributions.......................... 14
Tax Status of the Company.............. 15
Summary Selected Financial
Information......................... 16
RISK FACTORS............................. 20
There is No Assurance that the Company
Has Paid Fair Market Value for the
Properties.......................... 20
Conflicts of Interest in the Formation
Transactions; Substantial Benefits
to Related Parties.................. 20
Conflicts of Interest in the Business
of the Company...................... 21
Leasing Services Provided to Other
Properties........................ 21
Possible Less Vigorous Enforcement
of Terms of Contribution and Other
Agreements by the Company......... 21
For a Period of Time, Sales of
Properties and Repayment of
Indebtedness May Have Different
Effects on Holders of OP Units
than on Stockholders.............. 21
Outside Interests of Officers and
Directors......................... 21
The Company's Performance and Value are
Subject to Risks Associated with the
Real Estate Industry................ 22
General Real Estate Industry Risks
Could Adversely Affect the
Company........................... 22
Tenant Defaults and Bankruptcy Could
Adversely Affect the Company's
Financial Condition............... 22
Increased Operating Expenses Could
Adversely Affect the Company's
Cash Flow......................... 22
The Failure to Renew or Relet Space
Under Expiring Leases Could
Adversely Affect the Company's
Cash Flow......................... 23
Loss of Major Tenants Could
Adversely Affect the Company's
Cash Flow......................... 23
Impact of Competition on Occupancy
Levels, Rent Charged, Acquisitions
and Management Services........... 23
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Liability for Environmental Matters
Could Adversely Affect the
Company's Financial Condition..... 23
The Cost of Complying with the
Americans with Disabilities Act
Could Adversely Affect the
Company's Cash Flow............... 24
Changes in Tax and Environmental
Laws Could Affect the Company's
Financial Condition............... 24
Uninsured Losses Could Adversely
Affect the Company's Cash Flow.... 25
Lack of Control Over Properties
Owned through Partnerships and
Joint Ventures Could Result in
Decisions Inconsistent with the
Company's Objectives.............. 25
Illiquidity of Real Estate
Investments Could Adversely Affect
the Company's Financial
Condition......................... 25
Acquisition, Redevelopment, and
Development Risks Could Adversely
Affect the Company................ 25
Managed Property Business and Non-REIT
Services............................ 26
Termination of Management and
Leasing Contracts................. 26
Adverse Consequences of Lack of
Control Over the Business of the
Management Company................ 26
Limits on Changes in Control........... 26
Stock Ownership Limit in Charter
Could Inhibit Acquisitions and
Changes in Control................ 26
Staggered Board Could Prevent
Acquisitions and Changes in
Control........................... 27
The Issuance of Additional Shares
Could Prevent Acquisitions and
Changes in Control................ 27
Limitations on Acquisition of and
Changes in Control Pursuant to
Maryland Law...................... 27
Failure to Qualify as a REIT Would
Cause the Company to be Taxed as a
Corporation......................... 28
The Company Will Be Taxed as a
Corporation if it Fails to Qualify
as a REIT......................... 28
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To Qualify As a REIT the Company
Will Need to Maintain a Certain
Level of Distributions............ 28
Other Tax Liabilities............... 29
The Company's Use of Debt to Finance
Acquisitions and Developments Could
Adversely Affect the Company........ 29
Rising Interest Rates Could
Adversely Affect the Company's
Cash Flow......................... 29
Debt Financing and Potential Adverse
Effects on Cash Flows and
Distributions..................... 29
The Inability to Obtain Permanent
Financing of Construction Loans
Could Result in a Loss of Income
and Asset Value of the Company.... 30
High Distribution Payout Ratio......... 30
Uncontrollable Market Factors Affecting
the Properties' Performance and
Value Could Produce Lower Returns... 30
Lack of Operating History and Risks of
Acquisitions Could Adversely Affect
the Company......................... 31
Changes in Policies, Such as the
Company's Debt Policy, Without
Stockholder Approval Could Adversely
Affect the Company.................. 31
The Company Relies on Key Personnel
Whose Continued Service is Not
Guaranteed.......................... 31
Control of Management.................. 32
Absence of Prior Public Market for
Common Stock and Market Conditions
Could Adversely Impact the Trading
Price of the Common Stock........... 32
Purchasers of Common Stock in the
Offering Will Experience Immediate
and Substantial Book Value
Dilution............................ 32
Possible Adverse Effect on Common Stock
Price of Shares Available for Future
Sale................................ 32
THE COMPANY.............................. 34
General................................ 34
Operations of the Company.............. 35
Concurrent Private Placements.......... 35
OPERATING AND GROWTH STRATEGIES.......... 36
Operating Strategies................... 36
Growth Strategies...................... 37
USE OF PROCEEDS.......................... 40
DISTRIBUTIONS............................ 41
CAPITALIZATION........................... 45
DILUTION................................. 46
SELECTED COMBINED FINANCIAL AND OPERATING
DATA................................... 47
PAGE
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................. 52
Results of Operations.................. 52
Pro Forma Operating Results............ 55
Recently Issued Accounting Standards... 56
Liquidity and Capital Resources........ 56
Cash Flows............................. 58
Funds from Operations and EBITDA....... 59
Inflation.............................. 60
PROPERTY OFFICE MARKETS AND MARKET
ECONOMIES.............................. 61
Manhattan Market and Economy........... 61
Metropolitan Orlando Market and
Economy............................. 65
Metropolitan Phoenix Market and
Economy............................. 68
Metropolitan Tucson Market and
Economy............................. 71
THE PROPERTIES........................... 75
General................................ 75
Properties............................. 75
Development Parcels.................... 77
Tenants................................ 77
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.................... 97
Land Parcel Options.................... 97
Air Rights and Ground Lease
Agreements.......................... 98
Depreciation of Significant
Properties.......................... 98
Real Estate Taxes on Significant
Properties.......................... 98
Occupancy, Effective Rent and Other
Data at Significant Properties...... 99
Excluded Properties.................... 99
Mortgage Indebtedness Remaining
Following the Offering.............. 99
Assumed Deferred Tax Liability......... 100
Line of Credit......................... 101
Insurance.............................. 101
Possible Environmental Liabilities..... 101
Competition............................ 102
Employees.............................. 102
Legal Proceedings...................... 102
MANAGEMENT............................... 103
Directors and Executive Officers....... 103
Managing Directors and Other Key
Employees........................... 105
Committees of the Board of Directors... 106
Compensation of Directors.............. 106
Board Observation Rights............... 106
Executive Compensation................. 107
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Employment Agreements.................. 108
Incentive Compensation................. 108
Stock Option and Restricted Stock
Plans............................... 109
Limitation of Liability and
Indemnification..................... 111
Indemnification Agreements............. 112
FORMATION AND STRUCTURE OF THE COMPANY... 112
Effects of the Formation
Transactions........................ 114
Determination and Valuation of
Ownership Interests................. 115
Certain Estimate of Value.............. 115
Benefits to Related Parties............ 115
Transfer of Properties................. 116
CERTAIN RELATIONSHIPS AND TRANSACTIONS... 117
Formation Transactions................. 117
Exchange Rights........................ 117
Registration Rights.................... 117
Employment Agreements; Award of
Options............................. 117
Excluded Property Management
Agreements.......................... 117
Executive Officer and Director
Distributions and Fees.............. 118
Miscellaneous.......................... 118
PRINCIPAL STOCKHOLDERS................... 119
DESCRIPTION OF CAPITAL STOCK............. 121
General................................ 121
Common Stock........................... 121
Preferred Stock........................ 122
Power to Issue Additional Shares of
Common Stock and Preferred Stock.... 122
Restrictions on Transfer............... 122
Transfer Agent and Registrar........... 125
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS....... 126
Number of Directors; Classification of
the Board of Directors.............. 126
Removal; Filling Vacancies............. 126
Business Combinations.................. 127
Control Share Acquisition Statute...... 127
Amendment to the Charter............... 128
Dissolution of the Company............. 128
Advance Notice of Director Nominations
and New Business.................... 128
Meetings of Stockholders............... 128
Operations............................. 128
Anti-Takeover Effect of Certain
Provisions of Maryland Law and of
the Charter and Bylaws.............. 129
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POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES............................. 129
Investment Policies.................... 129
Disposition Policies................... 130
Financing Policies..................... 130
Conflict of Interest Policies.......... 131
Policies with Respect to Other
Activities.......................... 132
Working Capital Reserves............... 132
SHARES AVAILABLE FOR FUTURE SALE......... 133
General................................ 133
Registration Rights.................... 134
PARTNERSHIP AGREEMENT.................... 135
Management............................. 135
Transferability of Interests........... 135
Capital Contribution................... 136
Exchange Rights........................ 136
Registration Rights.................... 137
Operations............................. 137
Distributions and Allocations.......... 137
Term................................... 138
Tax Matters............................ 138
FEDERAL INCOME TAX CONSIDERATIONS........ 138
Requirements for Qualification as a
REIT................................ 139
Failure to Qualify as a REIT........... 144
Taxation of the Company................ 145
Taxation of Stockholders............... 146
Statement of Stock Ownership........... 150
Tax Aspects of the Operating
Partnership......................... 150
Income Taxation of the Operating
Partnership and Its Partners........ 152
Other Tax Considerations............... 153
ERISA CONSIDERATIONS..................... 155
Employee Benefit Plans, Tax-Qualified
Retirement Plans, and IRAs.......... 155
Status of the Company and the Operating
Partnership (and the Subsidiary
Partnerships) under ERISA........... 156
UNDERWRITING............................. 158
EXPERTS.................................. 161
LEGAL MATTERS............................ 162
ADDITIONAL INFORMATION................... 162
GLOSSARY................................. 163
INDEX TO FINANCIAL STATEMENTS............ F-1
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<PAGE> 8
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 and
(ii) 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 a portfolio of 21 office
buildings (collectively, the "Properties") encompassing approximately 3.4
million rentable square feet. The Company will also own two parcels of land
which can support approximately 370,000 square feet of development and will hold
options to acquire two other parcels of land which can support approximately 1.8
million square feet of development. As of August 31, 1997, approximately 80% of
the Annualized Rent from the Company's portfolio was derived from Properties
located in central business district locations, including 54% 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 its turnaround strategy of acquiring office
properties at a significant discount to replacement cost that are attractively
priced 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 programs for underperforming
assets. The Company believes that the significant experience of its management
in property development, redevelopment, construction, management, and leasing
provides 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, vacancy rates in Manhattan have declined during the last
five years and rental rates for office properties in Manhattan have increased.
See "Property Office Markets and Market Economies." The Company believes that
demand for office space in Manhattan has increased recently because of
consistent new 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 Manhattan office space 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 new construction, the lead time required for
new construction typically exceeds three years, and new construction generally
is not economically feasible given current market rental rates.
1
<PAGE> 9
The Company believes that opportunities exist to acquire 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"), not taking
into account any tax subsidies that 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 in those markets. The Company believes these office markets generally
have significant rental 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,
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 June 30, 1997 from 16.8% to
7.2% in the Metropolitan Orlando office market and 25.1% to 8.3% 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 several institutional joint venture partners which will continue as
stockholders in the Company following the Offering; these joint venture partners
include affiliates of General Electric Capital Corp., DRA Advisors, Inc., and
The Carlyle Group ("Carlyle").
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 management and directors will, in the
aggregate, own approximately 9.0% of the Company's equity. See
"Management -- Directors and Executive Officers."
Concurrent with the Offering, and subject to certain conditions, the
Company is directly placing with (i) certain private investment funds and
separate accounts advised by Morgan Stanley Asset Management Inc. $20 million of
Common Stock and (ii) certain private investment funds sponsored by the Carlyle
Group $10 million of Common Stock, in each case, at the price per share sold in
the Offering (the "Concurrent Private Placements"). The Underwriters will not
receive a discount or commission on the sale of Common Stock in the Concurrent
Private Placements. See "The Company -- Concurrent Private Placements."
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 generally based on the
value of the Company as a going concern, and not 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,
including conflicts related to material benefits to officers, directors,
and other affiliates of the Company that will result in, among
2
<PAGE> 10
other benefits, receipt of equity interests in the Company with an aggregate
value of approximately $39.2 million based on the public offering price of
$26.00 per share (the "Offering Price");
- conflicts of interest relating to the operation of the Company, including
conflicts of interest associated with the potential adverse tax
consequences to certain executive officers and directors of the Company
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, subject to an exception that
permits mutual funds and certain other entities to own or purchase up to
15% of any class of the Company's stock in appropriate circumstances, 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;
- the possibility that the Company may not be able to refinance outstanding
indebtedness (initially expected to be approximately $113.7 million,
including 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;
- the lack of control over the Management Company, the Company's property
management and leasing business, 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;
- the Company's estimated initial distribution rate represents 92.2% of its
estimated Cash Available for Distribution, resulting in the risk that
actual Cash Available for Distribution will be insufficient to permit the
Company to maintain its proposed initial distribution rate;
- 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;
- 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 14 of the Properties), newly acquired
properties may have characteristics or deficiencies unknown to the
Company affecting value
3
<PAGE> 11
or revenue potential thereof, may fail to perform as expected or may be
difficult to integrate into the Company's existing management operations;
- 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 rentable square feet, of approximately 39% of the
Company's portfolio in the Metropolitan New York City office market, 38%
of the Company's portfolio in the Phoenix/Tucson office market, and 23%
of the Company's portfolio in the Orlando office market;
- the possibility of abandonment of office property development and
unexpected construction costs or delays, that newly developed or acquired
properties may fail to perform as expected, and the possible failure to
obtain, or experience of 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 $5.43 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 August 31, 1997, 48% of the
rentable square feet at the Properties included built-in contractual rate
increases over the remainder of the lease term. Between September 1, 1997
and August 31, 1998 the contractual base rents received by the Company
under such leases are expected to increase by an aggregate of $1.06
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")).
- Leasing of Vacant Space: The Company expects to realize additional cash
flow through the leasing or occupancy of approximately 257,000 rentable
square feet of vacant space at the Properties as of August 31, 1997
(approximately 7.6% 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,
property 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 attractively priced due to physical, leasing, and/or operational
deficiencies, and redeveloping those assets; (ii) property repositioning through
renovation and refurbishment programs for underperforming assets; and (iii)
exploring the development of office properties on the Company's owned and
optioned development land within the Phoenix/Tucson and Orlando markets, as well
4
<PAGE> 12
as the development of other office properties in these markets where such
development will result in a favorable risk-adjusted return.
Acquisition and Repositioning Strategies. The Company intends to initially
target the acquisition of office properties located in Manhattan that have
purchase prices of less than $100 million and that are attractively priced due
to physical, leasing or operational deficiencies. The Company believes that its
turnaround strategy will allow it to capitalize on Manhattan acquisition
opportunities that are not typically sought by many institutional buyers. In
addition, the Company expects to use its renovation and repositioning expertise
to acquire underperforming Manhattan office properties that have the potential
to be converted into fully leased Class A Manhattan office towers.
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
following the Offering, including the Company's proposed $200 million unsecured
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 (which ability
may not be possessed by competitors who are not structured like the Company or
who cannot otherwise exchange securities for property). 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.
An example which best illustrates the Company's repositioning strategy is
the acquisition of the 5151 East Broadway Property that the Company made in a
joint venture with the Quantum Fund in November 1994. The joint venture acquired
this Property 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 that included landscaping improvements to
the Company's outdoor plaza, lobby and elevator renovations, the installation of
updated mechanical equipment and targeted deferred maintenance at a cost of
approximately $2.5 million. The Company coupled their Property improvements with
a proactive leasing effort that included the widespread distribution of
marketing materials and listing sheets and targeted pre-leasing tenent
improvements which enabled prospective tenants to envision the cosmetic appeal
of the vacant space. The Company's repositioning program resulted in an increase
in Annualized Rent from approximately $1.7 million as of November 30, 1994 to
approximately $3.3 million as of August 31, 1997 (a 92% increase), and an
increase in Annualized Net Operating Income from $353,000 at acquisition to
approximately $2.0 million as of August 31, 1997, which generated an Adjusted
Investment Yield of 13.3% (calculated by dividing net operating income by the
Investment Cost). As of August 31, 1997, the 5151 East Broadway Property
accounted for approximately 4.4% of the Company's aggregate Annualized Rent and
7.3% of its total rentable square feet. 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.
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 40-story midtown
Manhattan Tower 45 Property).
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 which best illustrates this strategy includes the
Company's redevelopment of a 93,000 rentable square foot office building at 5750
Major Boulevard in
5
<PAGE> 13
Orlando, Florida. The Company acquired the Property in a joint venture with an
affiliate of General Electric Capital Corp. in October 1996 for a purchase price
of $3.8 million, or approximately $41 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 August 31, 1997). The Company expects to
implement this type of property repositioning strategy for the future
redevelopment of the Company's Madison Avenue Properties. See "The
Properties -- Submarket and Property Information -- Madison Avenue Property
Redevelopment Strategy."
Financing Strategy
The Company has obtained a commitment from Merrill Lynch Capital
Corporation for a $200 million unsecured 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 (including its pro rata share of
indebtedness of unconsolidated investments) of approximately $113.7 million or
20.7% 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 United States,
containing more rentable square feet than the next six largest United States
office markets combined. 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 18 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.
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.
6
<PAGE> 14
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 4.0% since 1992. Landauer reports that in
measuring non-agricultural employment gains since 1994, Metropolitan Phoenix
ranked third among the 100 largest metropolitan areas in the United States. In
addition, 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.
For additional information regarding the Company's markets, see "Property
Office Markets and Market Economies" and "The Properties -- Submarket and
Property Information."
THE PROPERTIES
Upon completion of the Offering, the Company will own interests in the 21
Properties, which contain 3.4 million rentable square feet. The Company will
also own two parcels of land which can support an aggregate of approximately
370,000 square feet of development and will have options to acquire two other
parcels of land which can support 1.8 million square feet of development.
Substantially all of the Properties are located in the Manhattan,
Phoenix/Tucson, and Orlando office markets and individually range from
approximately 10,300 to 459,000 rentable square feet. 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 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 August 31, 1997, approximately 80% of the
Annualized Rent from the Company's portfolio was derived from Properties located
in central business district locations, including approximately 54% from
Properties located in the Manhattan office market.
7
<PAGE> 15
The following table sets forth certain information, as of August 31, 1997,
with respect to the Properties:
<TABLE>
<CAPTION>
ANNUALIZED
NET
ANNUALIZED PERCENT EFFECTIVE
RENT PER OF RENT
LEASED PORTFOLIO PER LEASED
PERCENT YEAR BUILT/ RENTABLE PERCENT ANNUALIZED SQUARE ANNUALIZED SQUARE
MARKET/PROPERTY OWNED RENOVATED(1) SQUARE FEET LEASED RENT(2) FOOT RENT FOOT(3)
- --------------------------- ------- ------------ ----------- ------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
METROPOLITAN NEW YORK CITY
MARKETS
MANHATTAN MARKET
Tower 45............... 100% 1989 443,114 100.0% $ 20,890,000 $47.14 27.8% $31.48
286 Madison Avenue..... 100% 1918(4) 111,999 94.8 2,474,000 23.31 3.3 21.54
290 Madison Avenue..... 100% 1950(4) 38,512 100.0 1,057,000 27.44 1.4 24.97
292 Madison Avenue..... 100% 1920/86 186,901 98.9 5,212,000 28.18 6.9 25.60
100 Wall Street........ 100% 1969/94 458,848 88.7 11,222,000 27.57 14.9 28.12
LONG ISLAND MARKET
120 Mineola
Boulevard............ 100% 1984/92 100,810 91.2 2,458,000 26.74 3.3 21.04
--------- ----- ----------- ----- -----
Market
Subtotal/Weighted
Average............ 1,340,184 94.9% $ 43,313,000 $34.06 57.6% $27.77
--------- ----- ----------- ----- -----
METROPOLITAN ARIZONA
MARKETS
METROPOLITAN PHOENIX
MARKET
Corporate Center
Building 10010-30.... 100% 1976/86 188,614 100.0% $ 2,947,000 $15.62 3.9 $14.39
Corporate Center
Building 10040....... 100% 1976/86 23,155 100.0 380,000 16.43 0.5 15.09
Corporate Center
Building 10050....... 100% 1976/86 42,398 100.0 708,000 16.71 0.9 15.16
Corporate Center
Building 10210....... 100% 1976/86 45,100 100.0 706,000 15.65 0.9 14.50
Corporate Center
Building 10220....... 100% 1976/86 24,128 100.0 422,000 17.47 0.6 15.12
Corporate Center
Building 9630(5)..... 100% 1976/86 130,164 100.0 2,386,000 18.33 3.2 15.95
2800 North
Central(6)........... 10% 1987 357,923 91.0 5,291,000 16.24 7.0 15.50
Century Plaza.......... 100% 1974/90 219,769 84.2 2,408,000 13.02 3.2 12.86
--------- ----- ----------- ----- -----
METROPOLITAN TUCSON
MARKET
5151 E. Broadway....... 100% 1975/89/96 246,486 82.1% $ 3,269,000 $16.15 4.4 $13.64
--------- ----- ----------- ----- -----
Market
Subtotal/Weighted
Average............ 1,277,737 91.3% $ 18,517,000 $15.87 24.6 $14.56
--------- ----- ----------- ----- -----
METROPOLITAN ORLANDO MARKET
One Orlando Center..... 100% 1989 357,184 99.5% $ 8,154,000 $22.94 10.8% $21.57
5750 Major Boulevard... 100% 1973/97 92,828 21.0(7) 298,000 15.31 0.4 28.55
Maitland Forum......... 100% 1985/96 266,060 99.9 4,140,000 15.57 5.5 13.70
2601 Maitland Center
Parkway.............. 100% 1982 10,342 100.0 158,000 15.23 0.2 12.90
2603 Maitland Center
Parkway.............. 100% 1982 10,704 81.7 114,000 13.04 0.2 10.94
2605 Maitland Center
Parkway.............. 100% 1982 38,564 100.0 538,000 13.96 0.7 12.20
--------- ----- ----------- ----- -----
Market
Subtotal/Weighted
Average............ 775,682 90.0% $ 13,402,000 $19.19 17.8% $17.99
--------- ----- ----------- ----- -----
Consolidated Total/Weighted
Average.................. 3,393,603 92.4% $ 75,232,000 $23.98 100.0% $20.68
========= ===== =========== =====
</TABLE>
- ---------------
(1) Data do not include years in which tenant improvements were made to the
Properties.
(2) Annualized Rent represents the annualized monthly Base Rent in effect plus
estimated 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 August 31, 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. Annualized Rent represents actual payments attributable to leases
executed as of August 31, 1997 with adjustments for rent concessions as
reflected above and normal year-end adjustments. Normal year-end rental
payment adjustments for the Tower Predecessor in 1996 represented
approximately .9% of all rental payments received during that year. The
Company believes that Annualized Rent is helpful to investors as a measure
of the revenues the Company could expect to receive from its leases.
Annualized Rent should not be considered an alternative to Annualized Net
Effective Rent as an indication of the financial performance of a lease nor
is it indicative of the Company's ability to generate cash flow, including
its ability to make cash distributions.
(3) Annualized Net Effective Rent per Leased Square Foot represents the Base
Rent for the month of August 1997 under each lease executed as of August
31, 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
August 31, 1997, but was not yet occupied, had been included in that
percentage.
8
<PAGE> 16
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....................................... 3.6 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.................................................... 46.8 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 Company's Bylaws, the Company is authorized to
exercise this option only if (a) a majority of Independent Directors
approves 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 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.
(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
no cost. Pursuant to the option, the Company will acquire the right to
purchase this land for approximately $10.3 million from an unaffiliated
third party. Pursuant to the Company's Bylaws, the Company is authorized to
exercise this option only if the Independent Directors unanimously approve
the exercise thereof. The right to acquire the land expires on October 31,
1997, subject to one 30-day extension that requires 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 21 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 Placements, 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 12,015,000 shares of Common Stock in the Offering
and 769,230 shares of Common Stock to certain private investment funds
(for whom an affiliate of Morgan Stanley Asset Management Inc. ("MSAM")
acts as the general partner), separate accounts for which MSAM acts as an
investment advisor and an affiliate of MSAM (collectively, the "Morgan
Stanley Investors"), and 384,615 shares of Common Stock to certain
private investment funds sponsored by The Carlyle Group (the "Carlyle
Funds"). All the net proceeds to the Company from the Offering and the
Concurrent Private Placements 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 90.5%. The Company is the sole general partner of the
Operating
9
<PAGE> 17
Partnership and will own a 1% general partner interest in the Operating
Partnership and an approximate 89.5% 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 1,128,160 shares of restricted Common Stock,
1,583,640 OP Units, approximately $118.7 million in cash, the assumption
of approximately $244.6 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 1,509,490 OP Units (valued at approximately
$39.2 million based on the Offering Price); and
- The Company will acquire from persons other than the Primary
Contributors, directly or indirectly, debt, equity and fee interests
in the Properties (including an interest in the Maitland Forum ground
lease) in exchange for 1,128,160 shares of restricted Common Stock
(valued at approximately $29.3 million based on the Offering Price),
74,150 OP Units (valued at approximately $1.9 million based on the
Offering Price) and $118.7 million in cash.
- The Operating Partnership is expected to enter into a $107 million
seven-year term loan facility with Merrill Lynch Credit Corporation (the
"Term Loan") and will borrow approximately $54 million under such
facility at the closing of the Offering.
- The Operating Partnership will utilize $246.5 million of the net proceeds
of the Offering, the Concurrent Private Placements and the Term Loan to
repay 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 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 common stock and 5% of the voting
common 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 886,200 shares 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 of the Excluded Properties are controlled by certain Primary
Contributors and have non-cancellable management contracts (except upon a
sale of such property). 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.
10
<PAGE> 18
- The Operating Partnership will acquire, at no cost, an option held by
certain Primary Contributors that will provide the Operating Partnership
with the right to acquire from an unaffiliated third party for
approximately $10.3 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 (approximately $4.75
per buildable square foot) (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 Company will establish the three-year $200 million unsecured
revolving Line of Credit at or shortly after the closing of the Offering,
which will be used primarily to finance the acquisition of, and
investment in, office properties, to refinance existing indebtedness, and
for general working capital needs.
- The Company will pay to an affiliate of Carlyle $925,000 in consideration
of obtaining the consent to the transfer of an interest in the 2800 North
Central Avenue Property to the Company.
- 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."
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 M. Wisely (a nominee for director
of the Company), 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).
- The Primary Contributors will receive a total of 1,509,490 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
9.0% of the equity interests in the Company on a consolidated basis) will
have a total value of approximately $39.2 million based on the Offering
Price, compared to a deficiency in net tangible book value of the assets
contributed to the Operating Partnership by the Primary Contributors of
approximately $75.5 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 Merrill
Lynch, Pierce,
11
<PAGE> 19
Fenner & Smith Incorporated. 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.
- Messrs. Feldman and Cox will each serve as a director and officer of the
Company, Messrs. Adams and Wisely will serve as directors 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, options to purchase an aggregate
of 711,000 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."
CONFLICTS OF INTEREST
Following the completion of the Offering and the Formation Transactions,
conflicts of interest may arise with respect to certain transactions between the
holders of OP Units (including Lawrence H. Feldman and other executive officers
of the Company) and the stockholders of the Company. In particular, the sale of
any Properties or a reduction of indebtedness, could have adverse tax
consequences to holders of OP Units which would make such transactions less
desirable to such holders. The Company has adopted certain policies that are
designed to eliminate or minimize certain potential conflicts, including (i) 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 (defined as persons who are not officers or employees of
the Company, or an affiliate of the Company); (ii) 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; (iii) the Company's
Charter, with limited exceptions, requires that a majority of the Company's
Board of Directors be comprised of Independent Directors; and (iv) the Company's
Bylaws provide that any transaction in which the Company is purchasing, selling
leasing or mortgaging any real estate asset, or joint venture, or engaging in
any other transaction in which a director or officer of the Company or any
affiliate of the foregoing, has any direct or indirect interest, subject to
certain limited exceptions, must be approved by a majority of the Independent
Directors even if the Independent Directors constitute less than a quorum. See
"Policies with Respect to Certain Activities -- Conflict of Interest Policies"
and "Risk Factors -- Conflicts of Interest in the Business of the Company."
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 90.5% 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."
12
<PAGE> 20
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 depicting the ownership structure of Tower Realty
Operating Partnership, L.P. upon completion of the Offering and the formation
transactions: (i) Tower Realty Trust, Inc., 1% general partners interest and
89.5 limited partner interest; (ii) Primary Contributors, 9.0% limited partner
interest, and (iii) Continuing Investors, .5% limited partner interest.]
- ---------------
(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.
13
<PAGE> 21
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 Placements.
Common Stock offered by the
Company.................. 12,015,000 shares
U.S. Offering.............. 9,712,000 shares
International Offering..... 2,303,000 shares
Common Stock and OP Units
Outstanding after the
Offering and the
Concurrent Private
Placements............... 16,701,845 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."
NYSE Symbol................ TOW
- ---------------
(1) Includes (i) 1,583,640 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) 1,949,360 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 cancellation
of certain indebtedness, and (iii) 1,153,845 shares of Common Stock to be
issued in the Concurrent Private Placements. Excludes 975,000 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 $.3536 per
share, which represents a pro rata distribution based upon a full quarterly
distribution of $.4225 per share and an annual distribution of $1.69 per share
(or an annual distribution rate of approximately 6.5%, based upon the Offering
Price). See "Distributions."
The Company intends initially to distribute annually approximately 92.2% 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 August 31,
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
14
<PAGE> 22
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 stockholder's sale of the Common Stock), and thereafter as
taxable gain. The Company anticipates that approximately 45% (or $0.76 per
share) of the distributions intended to be paid by the Company for the
twelve-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 -- Requirements for Qualification
as a REIT -- 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 Considerations -- 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 Considerations -- Failure to Qualify as a REIT"
and "Risk Factors -- Failure to Qualify as a REIT Would Cause the Company to be
Taxed as a Corporation." 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.
15
<PAGE> 23
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 June 30, 1997 and for the six months ended
June 30, 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 six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the entire year ending
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
Associates Ltd. (the Maitland Forum ground lessor), 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 and
Properties Atlantic to be contributed to the Company, (ii) the completion of the
Offering, the Concurrent Private Placements, the issuance of convertible notes
by the Company to the Morgan Stanley Investors 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
initial closing of the Term Loan and the application of the net proceeds
therefrom as described under "Use of Proceeds," and (iii) the issuance of
886,200 shares 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 June 30, 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.
16
<PAGE> 24
THE COMPANY (PRO FORMA) AND THE TOWER PREDECESSOR (HISTORICAL)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 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........... $ 36,745 $ 13,521 $13,467 $ 72,939 $ 26,138 $ 25,202 $ 25,994 $ 23,496 $ 22,949
Management fees(1)...... 245 626 1,261 961 82 221 183
Construction, leasing
and other fees........ 519 474 543 1,703 1,335 1,041 320 604 737
--------- -------- ------- --------- -------- -------- -------- -------- --------
Total revenues.......... 37,264 14,240 14,636 74,642 28,734 27,204 26,396 24,321 23,869
--------- -------- ------- --------- -------- -------- -------- -------- --------
Expenses:
Property operating and
maintenance........... 9,282 2,703 2,781 18,613 5,481 5,332 5,278 5,938 5,316
Real estate taxes....... 5,324 2,331 2,360 11,011 4,722 4,571 3,971 4,409 4,920
General office and
administrative........ 1,747 1,746 1,767 3,363 3,494 3,497 2,512 2,591 2,658
Interest expense........ 4,020 7,028 7,172 8,040 15,511 15,150 12,751 12,756 14,390
Depreciation and
amortization.......... 6,845 3,494 3,384 13,642 6,853 6,897 7,415 7,982 6,775
Ground rent and air
rights expense........ 299 299 299 599 599 599 599 599 561
--------- -------- ------- --------- -------- -------- -------- -------- --------
Total expenses.......... 27,517 17,601 17,763 55,268 36,660 36,046 32,526 34,275 34,620
--------- -------- ------- --------- -------- -------- -------- -------- --------
Income (loss) from
operations.............. 9,747 (3,361) (3,127) 19,374 (7,926) (8,842) (6,130) (9,954) (10,751)
Equity in joint
ventures(1)............. 496 68 198 398 461 193 1
--------- -------- ------- --------- -------- -------- -------- -------- --------
Income (loss) before
minority interest and
extraordinary item...... 10,243 (3,293) (2,929) 19,772 (7,465) (8,649) (6,129) (9,954) (10,751)
Minority interest(2)...... 973 1,878
--------- -------- ------- --------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item...... 9,270 (3,293) (2,929) 17,894 (7,465) (8,649) (6,129) (9,954) (10,751)
Extraordinary item........ 6,475
--------- -------- ------- --------- -------- -------- -------- -------- --------
Net income (loss)......... $ 9,270 $ 3,182 $(2,929) $ 17,894 $ (7,465) $ (8,649) $ (6,129) $ (9,954) $(10,751)
========== ======== ======= ========== ======== ======== ======== ======== ========
Net income per share...... $ 0.61 -- -- $ 1.18 -- -- -- -- --
========== ==========
Weighted average number of
shares of common stock
outstanding............. 15,118 -- -- 15,118 -- -- -- -- --
Weighted average number of
shares of common stock
and OP Units
outstanding............. 16,702 -- -- 16,702 -- -- -- -- --
BALANCE SHEET DATA (at
period end):
Real estate investments
net of accumulated
depreciation............ $454,395 $127,577 -- -- $129,064 $128,138 $132,904 $137,662 $140,916
Total assets.............. 480,643 170,632 -- -- 172,987 173,889 184,174 188,742 193,363
Long-term debt............ 111,000 193,381 -- -- 202,892 199,962 202,454 204,853 177,145
Total liabilities......... 123,951 229,292 -- -- 234,857 230,977 235,343 236,211 231,110
Owners'/stockholders'
equity (deficit)........ 322,806 (58,660) -- -- (61,870) (57,088) (51,169) (47,469) (37,747)
OTHER DATA:
EBITDA (Company's pro
forma 90.5% share)(3)... $ 19,080 $ 14,069 $ 7,909 $ 37,433 $ 15,496 $ 13,695 $ 13,834 $ 10,268 $ 9,895
Funds from operations
(Company's pro forma
90.5% share)(4)......... 15,487 616 806 30,287 129 (1,449) 1,292 (1,972) (3,976)
Cash flow from operating
activities(5)........... 17,201 2,573 (693) 33,642 951 1,762 4,118 -- --
Cash flow from investing
activities(6)........... (834) (834) (1,329) (333,605) (6,787) (3,440) (3,137) -- --
Cash flow from financing
activities(7)........... (16,511) (2,398) 1,643 (21,608) 5,613 238 30 -- --
Number of properties (at
period end)............. 21 7 7 21 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."
17
<PAGE> 25
Equity in Joint Ventures includes the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
1997 1997 1996 1996
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
2800 North Central Property....................................... $ (39) $ (9) $ (12) $ (3)
DRA Joint Ventures................................................ -- 77 464
Management Company................................................ 535 -- 410
--- --- ---- ----
$ 496 $ 68 $ 398 $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 economic interest in 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 9.5% interest in the Operating Partnership that
will be owned by the Primary Contributors 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>
SIX MONTHS ENDED
JUNE 30, 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).................... $ 9,270 $ 3,182 $(2,929) $17,894 $(7,465) $(8,649) $(6,129) $(9,954) $(10,751)
Add:
Interest expense..................... 4,020 7,028 7,172 8,040 15,511 15,150 12,751 12,756 14,390
Real estate depreciation and
amortization....................... 6,845 3,494 3,384 13,642 6,853 6,897 7,415 7,982 6,775
Real estate depreciation and
amortization of unconsolidated
joint ventures..................... 25 415 351 52 741 303 6 -- --
Minority interest.................... 973 -- -- 1,878 -- -- -- -- --
Less:
Interest income...................... (50) (50) (69) (144) (144) (6) (209) (516) (519)
------- ------- ------- ------- ------- ------- ------- ------- -------
EBITDA............................... $21,083 $14,069 $ 7,909 $41,362 $15,496 $13,695 $13,834 $10,268 $ 9,895
======= ======= ======= ======= ======= ======= ======= ======= =======
Company's 90.5% share................ $19,080 $37,433
======= =======
</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.
The following is a reconciliation of net income to Funds from Operations.
18
<PAGE> 26
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 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).................... $ 9,270 $ 3,182 $(2,929) $17,894 $(7,465) $(8,649) $(6,129) $(9,954) $(10,751)
Add:
Real estate depreciation and
amortization....................... 6,845 3,494 3,384 13,642 6,853 6,897 7,415 7,982 6,775
Real estate depreciation and
amortization of unconsolidated
joint ventures..................... 25 415 351 52 741 303 6 -- --
Minority interest.................... 973 -- -- 1,878 -- -- -- -- --
Less:
Gain on extinguishment of debt....... -- (6,475) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ --------
Funds From Operations................ $17,113 $ 616 $ 806 $33,466 $ 129 $(1,449) $ 1,292 $(1,972) $ (3,976)
======= ======= ======= ======= ======= ======= ======= ====== ========
Funds From Operations
(Company's 90.5% share).............. $15,487 $30,287
======= =======
</TABLE>
(5) Pro forma cash flows from operating activities represents net income plus
minority interest, depreciation and amortization and amortization of loan
costs. There are no pro forma adjustments for changes in working capital
items.
(6) Pro forma cash flows from investing activities assumes that the transfer of
the Properties, certain development land and other assets of Tower Equities
to be contributed to the Company occurred on January 1, 1996.
(7) Pro forma cash flows from financing activities assumes that the completion
of the Offering, the Concurrent Private Placements, the issuance of the MSAM
Notes and the initial closing under the Term Loan had occurred on January 1,
1996. In addition, anticipated distributions per share of common stock and
OP Unit for the six months ended June 30, 1997 and the year ended December
31, 1996 have been deducted assuming that the Offering had occurred on
January 1, 1996.
19
<PAGE> 27
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.
THERE IS NO ASSURANCE THAT THE COMPANY HAS PAID FAIR MARKET VALUE FOR THE
PROPERTIES
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, which was generally based on the value of the
Company as a going concern, will not exceed the fair market value of the
Properties and other assets acquired by the Company in the Formation
Transactions. In addition, the value of the Company was not determined on a
property-by-property basis because, in the view of management, the appropriate
basis or valuing the Company is as an ongoing business enterprise, rather than a
collection of assets. The valuation of the Company also was not determined by a
valuation of its assets based on historical cost or fair market value, but
instead was 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; 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 M. Wisely (a nominee for director of the Company), 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, including Messrs. Feldman,
Cox, Kasman, Reimer, Friedberg and Stein who are promoters of the Company, 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
the following: (i) receipt of an aggregate of 1,509,490 OP Units including their
pro rata share of any OP Units that will be issued to certain Property
Partnerships (valued at approximately $39.2 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 711,000 shares
of Common Stock under the Company's option plans at the Offering Price, subject
to certain vesting requirements, which will have an aggregate purchase price of
approximately $18.5 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
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to Related Parties" and "Management -- Stock Option and Restricted Stock
Plans, -- Executive Compensation and -- Employment Agreements."
CONFLICTS OF INTEREST IN THE BUSINESS OF THE COMPANY
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 controlling stockholder and sole
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 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.
Possible Less Vigorous Enforcement of Terms of Contribution and Other
Agreements by the Company. 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 certain of
the Primary Contributors, including Messrs. Feldman, Cox and Kasman, to the
Company under a supplemental representations, warranties and indemnity agreement
relating to the Properties and the business to be owned by the Management
Company 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.
For a Period of Time, Sales of Properties and Repayment of Indebtedness May
Have Different Effects on Holders of OP Units than on Stockholders. Holders of
OP Units, including the Primary Contributors, may have unrealized taxable gain
associated with their interests in certain Properties contributed to the
Operating Partnership. Because holders of OP Units 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 of the Excluded Properties are
controlled by the Primary Contributors and have non-cancellable management
contracts with the Management Company (except upon the sale of the property).
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 officers or directors have a conflicting interest to that
of the Company to be approved by a majority of the Independent Directors, even
if the Independent Directors constitute less than a quorum. There can be no
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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."
THE COMPANY'S PERFORMANCE AND VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE
REAL ESTATE INDUSTRY
General Real Estate Industry Risks Could Adversely Affect the
Company. 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 Could Adversely Affect the Company's
Financial Condition. 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.
Increased Operating Expenses Could Adversely Affect the Company's Cash
Flow. 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.
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The Failure to Renew or Relet Space Under Expiring Leases Could Adversely
Affect the Company's Cash Flow. 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. In addition, the Company is subject to the risk that contractual
rent increases provided for in the Company's leases may not be realized due to
possible lease renegotiation. Leases relating to an aggregate of approximately
5.7% and 9.9% of the total rentable square feet in the Properties will expire in
the twelve-month periods ending August 31, 1998 and August 31, 1999,
respectively. Furthermore, because Tower Equities has managed 14 of the
Properties for less than two years (including the 100 Wall Street Property which
prior to the consummation of the Offering was not managed by the Company), 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."
Loss of Major Tenants Could Adversely Affect the Company's Cash Flow. As
of August 31, 1997, the Company's largest tenant, American Express Financial
Advisors Inc. and its affiliates ("American Express"), accounted for 5.52% of
the Company's total Annualized Rent and 8.07% of aggregate leased square feet.
The Company's 10 largest tenants at the Properties (based on rentable square
feet as of August 31, 1997) collectively accounted for approximately 28.9% of
the Company's total Annualized Rent and 27.5% of the Company's rentable square
feet, and have a weighted average remaining lease term of approximately five
years. In addition, as of August 31, 1997, the Veterans
Administration -- General Services Administration accounted for 2.04% of the
Company's total Annualized Rent and 3.20% of aggregate leased square feet under
five leases that, under federal law, may be unilaterally terminated or
renegotiated by the lessee under certain limited circumstances. 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, the cash flow to the Company would be decreased
and the Company's ability to make distributions to stockholders would be
adversely affected. See "The Properties -- Tenants."
Impact of Competition on Occupancy Levels, Rent Charged, Acquisitions and
Management Services. All of the Properties are located in highly developed areas
that include a large number of other office properties, including the five
Properties located in New York City, which is by far the largest office market
in the United States; eight Properties located in the Metropolitan Phoenix
office market; six Properties located in Metropolitan Orlando office market; one
Property located in the Long Island office market; and one Property located in
the Metropolitan Tucson office market. The number of office properties in such
locations, which may be newer, better located, or better capitalized than the
Company's Properties, 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. In addition, the Company may compete with other
property owners 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.
The Company believes its major competitors are local real estate companies in
its markets that specialize in the redevelopment and development of office
buildings and (i) in the New York City office market; SL Green Realty Corp.,
(ii) in the Metropolitan Orlando office market; Highwoods Properties, Inc., and
(iii) in the Metropolitan Phoenix office market; Prentiss Properties Trust, and
CarrAmerica Realty Corporation.
Liability for Environmental Matters Could Adversely Affect the Company's
Financial Condition. 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
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<PAGE> 31
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 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.
The Cost of Complying with the Americans with Disabilities Act Could
Adversely Affect the Company's Cash Flow. 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 Tax and Environmental Laws Could Affect the Company's Financial
Condition. 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
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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 Losses Could Adversely Affect the Company's Cash Flow. 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.
Lack of Control Over Properties Owned through Partnerships and Joint
Ventures Could Result in Decisions Inconsistent with the Company's
Objectives. 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 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.
Illiquidity of Real Estate Investments Could Adversely Affect the Company's
Financial Condition. 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 Could Adversely Affect
the Company. In the future, the Company expects to acquire additional office
properties. See "Operating and Growth Strategies --
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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.
MANAGED PROPERTY BUSINESS AND NON-REIT SERVICES
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 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
Stock Ownership Limit in Charter Could Inhibit Acquisitions and Changes in
Control. 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
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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,
subject to an exception that permits mutual funds and certain other entities to
own or purchase up to 15% of any class of the Company's stock in appropriate
circumstances (the "Look-Through 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 or the
Look-Through Ownership Limitation (as applicable). However, the Board may not
grant an exemption from the Ownership Limit or the Look-Through Ownership
Limitation to any proposed transferee whose ownership, direct or indirect, of
shares of capital stock of the Company in excess of the Ownership Limit or the
Look-Through Ownership Limitation (as applicable) would result in the
termination of the Company's status as a REIT. See "Description of Capital
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 or the Look-Through
Ownership Limitation (as applicable) 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 or the Look-Through Ownership
Limitation (as applicable) may be void under certain circumstances. The
foregoing restrictions on transferability and ownership may not be amended
without the approval of (i) the Board of Directors (including the unanimous vote
of the Independent Directors) and (ii) the affirmative vote of two-thirds of the
outstanding shares of stock of the Company entitled to vote generally in the
election of directors, voting together as a single class. 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."
Staggered Board Could Prevent Acquisitions and Changes in Control. 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."
The Issuance of Additional Shares Could Prevent Acquisitions and Changes in
Control. 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 and -- 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
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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, unless
exempted by the Charter or Bylaws, 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 for the Company to become subject to these provisions of the MGCL in
the future.
FAILURE TO QUALIFY AS A REIT WOULD CAUSE THE COMPANY TO BE TAXED AS A
CORPORATION
The Company Will Be Taxed As a Corporation if it Fails 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 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, this opinion will be based on
an analysis of the facts, including the proposed method of operation of the
Company, as they exist at the consummation of the Offering. 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 two-thirds of the outstanding shares of stock of the Company
entitled to vote generally in the election of directors, voting together as a
single class, to revoke the REIT election. See "Federal Income Tax
Considerations."
To Qualify As a REIT the Company Will Need to Maintain a Certain Level of
Distributions. 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
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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."
THE COMPANY'S USE OF DEBT TO FINANCE ACQUISITIONS AND DEVELOPMENTS COULD
ADVERSELY AFFECT THE COMPANY
Rising Interest Rates Could Adversely Affect the Company's Cash
Flow. 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 which expose the Company to the risk
that counterparties to such a transaction may not perform and cause the Company
to lose the anticipated benefits therefrom, which would have the adverse affects
associated with increases in market interest rates described above. See
"Management's 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 $113.7 million (including its pro rata share of
indebtedness of unconsolidated investments), with maturities ranging from 1998
to 2006. The Company has the right to prepay, commencing 40 days following the
Offering and prior to maturity, the $35.0 million of mortgage indebtedness that
will be collateralized by the Tower 45 Property. If the Company determines to
prepay the loan encumbering the Tower 45 Property prior to maturity, the Company
is positioned 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 on 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
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Distribution by the Company to its stockholders. See "-- Changes in Policies,
Such as the Company's Debt Policy, Without Stockholder Approval Could Adversely
Affect the Company."
In addition, the Company has obtained a commitment for the $200 million
unsecured 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 will mature three 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.
The Inability to Obtain Permanent Financing of Construction Loans Could
Result in a Loss of Income and Asset Value of the Company. 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.
HIGH DISTRIBUTION PAYOUT RATIO
The Company's estimated initial distribution rate represents 92.2% of the
Company's estimated Cash Available for Distribution resulting in the risk that
actual Cash Available for Distribution will be insufficient to permit the
Company to maintain its proposed initial distribution rate. 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.
UNCONTROLLABLE MARKET FACTORS AFFECTING THE PROPERTIES' PERFORMANCE AND VALUE
COULD PRODUCE LOWER RETURNS
Nine Properties (aggregating 38% of the Company's total rentable square
feet) of the Company's 21 Properties are located in Arizona, including eight
Properties (aggregating 30% of the Company's total rentable square feet) located
in the Metropolitan Phoenix office market, five Properties (aggregating 39% of
the Company's total rentable square feet) are located in the Manhattan office
market, and six Properties (aggregating 23% of the Company's total rentable
square feet) are located in the Metropolitan Orlando office market. In addition,
the Company initially intends to 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 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 Manhattan commercial properties). There can be no assurance as
to the continued growth of
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the economies in the Metropolitan Phoenix, or Metropolitan Orlando office
markets, or the future growth rate of the Company.
LACK OF OPERATING HISTORY AND RISKS OF ACQUISITIONS COULD ADVERSELY AFFECT THE
COMPANY
Fourteen of the Properties have been under the Company's management for two
years or less (including the 100 Wall Street Property which prior to the
consummation of the Offering was not managed by the Company). The most recently
acquired Properties may have characteristics or deficiencies unknown to the
Company affecting their value or revenue potential; and it is possible that the
operating performance of the most recently acquired Properties may decline under
the Company's management. In addition, the Company lacks certain historical net
effective rent and occupancy data for its 100 Wall Street and One Orlando Center
properties which may make it difficult for the Company to evaluate trends at
such properties, including future operating performance. 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, SUCH AS THE COMPANY'S DEBT POLICY, WITHOUT STOCKHOLDER
APPROVAL COULD ADVERSELY AFFECT THE COMPANY
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."
THE COMPANY RELIES ON KEY PERSONNEL WHOSE CONTINUED SERVICE IS NOT GUARANTEED
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; however, such employment agreements (including the
obligations of such persons to provide services to the Company and to not
compete with the Company under certain circumstances) may not be enforceable
under applicable state law, exposing the Company to the risk of loss of the
services of such persons, which could have an adverse effect on the operations
of the Company. See "Management -- Employment Agreements." Certain assets of the
Primary Contributors, including the Excluded Properties which consist of seven
retail shopping center properties containing and aggregate of 800,000 rentable
square feet, are not being contributed to the Company, and certain of the
executive officers of the Company, including Mr. Feldman, may devote a de
minimis portion of their management time towards the management of these
Excluded Properties; however, pursuant to each such executive officer's
employment agreement, such executive officers are required to devote
substantially all of their business time and attention to the day-to-day
operations of the Company. See "Management -- Employment Agreements" and "The
Properties -- Excluded Properties."
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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 management personnel of the Company as a group
will beneficially own approximately 9.0% of the total issued and outstanding
Common 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 seven 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; Substantial
Benefits to Related Parties."
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK AND MARKET CONDITIONS COULD
ADVERSELY IMPACT THE TRADING PRICE OF THE COMMON STOCK
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 Common Stock has been approved for listing on the New York Stock Exchange
(the "NYSE"), subject to official notice of issuance. 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. 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.
PURCHASERS OF COMMON STOCK IN THE OFFERING WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL BOOK VALUE 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 $5.43 per share in the net tangible book value of the Common Stock from the
Offering Price. See "Dilution."
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
1,583,640 OP Units, and the Company will issue 3,103,205 shares of restricted
Common Stock in connection
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with the Formation Transactions and the Concurrent Private Placements 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 Merrill Lynch, Pierce, Fenner & Smith Incorporated. The
purchasers of the shares of Common Stock in the Concurrent Private Placements
and the recipients of shares of Common Stock in the Formation Transactions 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 Merrill Lynch, Pierce, Fenner & Smith
Incorporated. 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, 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 975,000 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 21 Properties encompassing
approximately 3.4 million rentable square feet. The Company will also own two
parcels of land which can support an aggregate of approximately 370,000 square
feet of development and will have options to acquire two other parcels of land
which can support approximately 1.8 million square feet of development. See "The
Properties -- Development Parcels and -- Land Parcel Options." As of August 31,
1997, approximately 80% of the Annualized Rent from the Company's portfolio was
derived from Properties located in central business district locations,
including approximately 54% from Properties located in the Manhattan office
market. Substantially all of the Properties are located in 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 its turnaround strategy of acquiring office
properties at a significant discount to replacement cost that are attractively
priced 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 programs for underperforming
assets. The Company believes that the significant experience of its management
in property development, redevelopment, construction, management, and leasing
provides 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, vacancy rates in Manhattan have declined during the last
five years and rental rates for office properties in Manhattan have increased.
See "Property Office Markets and Market Economies." The Company believes that
demand for office space in Manhattan has increased recently because of
consistent 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 Manhattan office space 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 new construction, the lead time required for new
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 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 subsidies
that 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 rental 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, 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 June 30, 1997
from 16.8% to 7.2% in the Metropolitan Orlando office market and 25.1% to 8.3%
in the Metropolitan Phoenix office market.
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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 which will continue as
stockholders in the Company following the Offering; these joint venture partners
include affiliates of General Electric Capital Corp., DRA Advisors, Inc., and
Carlyle.
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 70 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, the Company's management and
directors will, in the aggregate, own approximately 9.0% 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 90.5% 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 89.5%
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 800,000 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 voting 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. Lawrence H. Feldman is the sole director of the Management Company
and owns 95% of the voting common stock thereof.
CONCURRENT PRIVATE PLACEMENTS
Concurrent with the closing of the Offering, (i) the Morgan Stanley
Investors advised by MSAM have agreed to purchase $20 million in Common Stock
and (ii) the Carlyle Funds have agreed to purchase
35
<PAGE> 43
$10 million in Common Stock, in each case, 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
Placements. The closings of the Concurrent Private Placements are 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 cancel
the outstanding balance of the MSAM Notes and issue to the Morgan Stanley
Investors approximately 886,200 shares of restricted Common Stock in complete
satisfaction of the MSAM Notes. The Company has granted to the Morgan Stanley
Investors and to the Carlyle Funds certain registration rights with respect to
sales of Common Stock received by the Morgan Stanley Investors and the Carlyle
Funds and any affiliates thereof in connection with the Concurrent Private
Placements 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 and the Carlyle Funds 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 the Representatives. 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. In addition, Esko I. Korhonen, a principal
of Carlyle Realty, L.P., an affiliate of Carlyle, will serve as a director of
the Company following the Offering. See "Underwriting," "Shares Available for
Future Sale" and "Management -- Directors and Executive Officers."
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 92.4% occupied as
of August 31, 1997.
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
36
<PAGE> 44
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, the
termination of above market service contracts and the evaluation of personnel
resources and payroll costs. 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 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 August 31, 1997, 48% of the
rentable square feet at the Properties included built-in contractual rate
increases over the remainder of the lease term. Between September 1, 1997
and August 31, 1998 the contractual base rents received by the Company
under such leases are expected to increase by an aggregate of $1.06
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). However, such contractual rent increases are subject to
renegotiation by tenants under certain circumstances. See "Risk
Factors -- The Company's Performance and Value are Subject to Risks
Associated with the Real Estate Industry -- The Failure to Renew or Relet
Space Under Expiring Leases Could Adversely Affect the Company's Cash
Flow."
- Leasing of Vacant Space: The Company expects to realize additional cash
flow through the leasing or occupancy of approximately 257,000 rentable
square feet of vacant space at the Properties as of August 31, 1997
(approximately 7.6% 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,
property 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 attractively priced due to physical, leasing, and/or operational
deficiencies, and redeveloping those assets; (ii) property repositioning through
renovation and refurbishment programs for underperforming assets; and (iii)
exploring the development of office properties on its owned and optioned
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 intends to initially target the
acquisition of office properties located in Manhattan that have purchase prices
of less than $100 million and that are attractively priced due to physical,
leasing or operational deficiencies. The Company believes that its turnaround
strategy will allow it to capitalize on Manhattan acquisition opportunities that
are not typically sought by many institutional buyers. In addition, the Company
expects to use its renovation and repositioning expertise to acquire
underperforming Manhattan office properties that have the potential to be
converted into fully leased Class A Manhattan office towers.
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
following the Offering, including the Company's proposed $200 million Line of
Credit; and (v) its ability to acquire
37
<PAGE> 45
properties in exchange for OP Units or Common Stock if the sellers so desire
(which ability may not be available to other prospective competitors who are not
structured like the Company or cannot otherwise exchange securities for
property). 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. 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.
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.
An example which best illustrates how the Company executes its turnaround
acquisition strategy is the purchase through a joint venture with an affiliate
of Carlyle 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 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
August 31, 1997). This tenant retention program included in-person interviews
with creditworthy tenants in order to gain insight into each tenant's business
objectives and space requirements. The Company leveraged this knowledge to
develop a plan to retain key tenants that would improve the perception of the
Property in the marketplace. This marketing plan also included providing
selected key tenants with tenant improvement allowances that exceeded customary
allowances by approximately $433,000. 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 tenant retention program
increased the Annualized Rent per leased square foot at the Property from
approximately $15.06 at the time of acquisition to $16.24 as of August 31, 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 August 31, 1997 was approximately
$3.1 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. As of August 31, 1997, the 2800 North Central Property accounted for
approximately 7.0% of the Company's aggregate Annualized Rent and 10.6% of the
Company's total rentable square feet.
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 deficiencies. 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, the installation of
updated mechanical equipment and building systems, such as new chillers, as well
as targeted cosmetic renovation. The Company's objective was to improve the
Properties in order to attract creditworthy tenants at increased rental rates.
An example which best illustrates the Company's repositioning strategy is
the acquisition of the 5151 East Broadway Property that the Company made in a
joint venture the Quantum Fund in November 1994. The joint venture acquired this
Property 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 that included landscaping improvements to the
Company's outdoor plaza, lobby, and elevator renovations, the installation of
updated mechanical and targeted deferred maintenance at a cost of approximately
$2.5 million. The Company coupled these Property improvements with a proactive
leasing effort that included the widespread distribution of marketing material
and listing sheets and targeted preliminary tenant improvements which enabled
prospective tenants to envision the cosmetic appeal of the vacant space, coupled
with an aggressive marketing and leasing effort. The
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<PAGE> 46
Company's repositioning program resulted in an increase in Annualized Rent from
approximately $1.7 million as of November 30, 1994 to approximately $3.3 million
as of August 31, 1997 (a 92% increase), and an increase in Annualized Net
Operating Income from $353,000 at acquisition to approximately $2.0 million as
of August 31, 1997, which generated an Adjusted Investment Yield of 13.3%
(calculated by dividing net operating income by the Investment Cost). As of
August 31, 1997, the 5151 East Broadway Property accounted for approximately
4.4% of the Company's aggregate Annualized Rent and 7.3% of its total rentable
square feet. 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.
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 40-story midtown
Manhattan Tower 45 Property). The Company currently does not intend to develop
or redevelop any properties outside of its primary markets and it is expected
that the Company's development activities will be limited by the terms of the
Line of Credit.
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 which best illustrates this strategy includes the
Company's redevelopment of a 93,000 rentable square foot office building at 5750
Major Boulevard in Orlando. The Company acquired the Property in a joint venture
with an affiliate of General Electric Capital Corp. in October 1996 for a
purchase price of $3.8 million, or approximately $41 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 August 31,
1997). As of August 31, 1997, the 5750 Major Boulevard Property accounted for
approximately 0.4% of the Company's aggregate Annualized Rent and 2.7% of the
Company's total rentable square feet. There can be no assurance however that the
Company will meet any of the foregoing expectations. The Company expects to
implement this type of property repositioning strategy for the future
redevelopment of the Company's Madison Avenue properties. See "The
Properties -- Submarket and Property Information -- Madison Avenue Property
Redevelopment Strategy."
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 $113.7 million or 20.7% of its Total
Market Capitalization (including its pro rata share of Joint Venture Debt). See
"The Properties -- Mortgage Indebtedness Remaining Following the Offering." The
Company has obtained a commitment from Merrill Lynch Capital Corporation for 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.
39
<PAGE> 47
USE OF PROCEEDS
The net cash proceeds to the Company from the Offering ($312.4 million) and
the Concurrent Private Placements ($30 million), after deducting the estimated
underwriting discount and estimated expenses of the Offering, are expected to be
approximately $310.0 million (approximately $353.3 million if the Underwriters'
over-allotment option is exercised in full). Such net cash proceeds will be
contributed to the Operating Partnership in exchange, in part, for the Company's
approximate 90.5% interest therein. The Operating Partnership will subsequently
use the proceeds received from the Company, the $54 million net cash proceeds
from the Term Loan borrowed concurrent with the Offering, and approximately
$12.3 million of proceeds received in exchange for the MSAM Notes as follows:
(i) approximately $246.5 million for repayment of certain indebtedness
(including associated prepayment penalties) relating to the Properties and the
Property Partnerships; (ii) approximately $118.7 million to acquire certain
equity, debt and fee interests in the Properties; (iii) approximately $2.4
million to pay for commitment fees and expenses relating to the Term Loan and
Line of Credit; (iv) approximately $3.4 million to pay transfer taxes and other
expenses associated with the acquisitions of the Properties; and (v) the
remaining approximately $5.3 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 over-allotment option to purchase 1,802,250 shares of
Common Stock is exercised in full, the Company expects to use the additional net
proceeds (which will be approximately $43.3 million) for general corporate
purposes.
Pending application of cash proceeds, 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 mortgages and other indebtedness to
be repaid upon completion of the Offering have a weighted average interest rate
of approximately 8.03% 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
AMOUNT TO PENALTIES INTEREST RATE AT MATURITY
PROPERTY BE REPAID(1) AND EXPENSES JUNE 30, 1997(2) DATE
- ---------------------------- -------------- -------------- ----------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Tower 45.................... $ 88,064 $1,250 7.44%(3) December 1998
Maitland Forum.............. 28,875 -- 8.90%(4) January 2001
Maitland West Properties.... 4,548 -- 9.15%(5) August 1998
120 Mineola Boulevard....... 11,260(6) 630(6) 8.70% May 1998
5750 Major Boulevard........ 4,651 -- 9.50% October 2001
One Orlando Center
5151 East Broadway
286, 290 and 292 Madison
Avenue Properties......... 107,231 -- 8.13% July 2002
-------- ------ ----
Total/Weighted
Average.............. $244,629 $1,880 8.03%
======== ====== ====
</TABLE>
- ---------------
(1) Represents the mortgage balances as of June 30, 1997 expected to be repaid
with the proceeds of the Offering. Exact repayment amounts may differ due to
amortization and additional fundings.
(2) Represents the weighted average rate as of June 30, 1997; for purposes of
these calculations for floating rate debt, as of June 30, 1997, LIBOR is
5.69% and GECC Commercial Paper is 5.65%.
(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 and
previously was paid by the Company.
40
<PAGE> 48
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 the Offering
and ending on December 31, 1997, is expected to be $.3536 per share, which
represents a pro rata distribution based on a full quarterly distribution of
$0.4225 per share. On an annualized basis, this would be $1.69 per share, or an
annual distribution rate of approximately 6.5% based on the Offering Price. The
Company does not intend to reduce the expected distribution per share if the
Underwriters' over-allotment 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 June 30,
1998, with certain adjustments based on the items described below. To estimate
Cash Available for Distribution for the twelve months ending August 31, 1998,
pro forma Funds from Operations for the twelve months ended June 30, 1997 was
adjusted (i) for certain known events and/or contractual commitments that either
occurred subsequent to June 30, 1997 or during the twelve months ended June 30,
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 deferred financing
fees, (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 45% (or $0.76 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 twelve months ended June 30, 1997, as adjusted for certain items
in the following table, would have been approximately $15.9 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
41
<PAGE> 49
distribution 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 as a result of the exercise of
the Underwriters' over-allotment 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 June 30, 1997 and the adjustments to pro
forma Funds from Operations for the twelve months ended June 30, 1997 in
estimating Cash Available for Distribution for the twelve months ending August
31, 1998:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS,
EXCEPT PER
SHARE DATA)
-----------
<S> <C>
Pro forma net income before minority interest of $1,878 for the year ended
December 31, 1996............................................................... $19,772
Plus: Pro forma real estate depreciation and amortization....................... 13,642
Pro forma real estate depreciation and amortization from unconsolidated
partnership............................................................... 52
-------
Pro forma Funds from Operations for the year ended December 31, 1996(1)........... 33,466
Less: Pro forma Funds from Operations for the six months ended June 30, 1996.... (15,889)
Plus: Pro forma Funds from Operations for the six months ended June 30, 1997.... 17,113
-------
Pro forma Funds from Operations for the twelve months ended June 30, 1997......... 34,690
Net increases in contractual rental income(2)................................ 6,814
Provision for lease expirations, assuming no renewals(3)..................... (4,423)
-------
Estimated pro forma Funds from Operations for the twelve months ending August 31,
1998............................................................................ 37,081
Net effect of straight-line rents(4)......................................... (2,934)
Pro forma amortization of deferred financing fees(5)......................... 176
-------
Estimated pro forma Cash Flows from Operating Activities for the twelve months
ending August 31, 1998.......................................................... 34,323
-------
Estimated annual provision for recurring tenant improvements and leasing
commissions(6).............................................................. (3,075)
Estimated recurring capital expenditures(7).................................. (459)
Scheduled debt principal payments(8)......................................... (182)
-------
Estimated Cash Available for Distribution for the twelve months ending August 31,
1998............................................................................ $30,607
=======
Company's share of estimated Cash Available for Distribution(9).............. $27,699
=======
Minority interest's share of estimated Cash Available for Distribution....... $ 2,908
=======
Estimated initial annual cash distributions to stockholders of the Company(10).... $25,550
Estimated initial annual distribution per share................................... $ 1.69
Payout ratio based on Estimated Cash Available for Distribution (11).............. 92.2%
</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
42
<PAGE> 50
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) Represents the net increases in contractual rental revenues from (i)
existing leases and renewals that were not in effect for the entire twelve
months ended August 31, 1997 ($4,282), and (ii) new leases and renewals
that went into effect between July 1, 1997 through August 31, 1997
($2,532). All calculations assume that no extension options were exercised.
(3) Represents the elimination of rental revenue from: (i) leases which expired
in the twelve months ended August 31, 1997 ($2,542) and (ii) leases which
will expire between September 1, 1997 and August 31, 1998 for that portion
of the twelve months ending August 31, 1998 that such leases are no longer
in effect ($1,881). This table assumes that leases which expire prior to
August 31, 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 twelve months
ending August 31, 1998 would equal approximately 88.9%, versus the actual
occupancy rate for the Properties of approximately 92.4% as of August 31,
1997. The Company's weighted average tenant retention rate for expiring
leases for the period January 1, 1994 through August 31, 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 fees 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 August
31, 1998 based on the weighted average TI and LC expenditures per square
foot for renewed and retenanted space at the Properties during 1994, 1995,
1996 and the six months ended June 30, 1997 multiplied by the average
annual square feet of leased space for
43
<PAGE> 51
which leases expire during the three-year period 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 rentable
square foot........................ $ 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)............................ 272,075
----------
2,756,120
Rate of Renewals (ii)................. x 70%
----------
Total cost of renewals................ $1,929,284
==========
Retenanted:
Recurring TI and LC per rentable
square foot........................ $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)................................ 272,075
----------
3,819,933
Rate of Retenanting (ii)................ x 30%
----------
Total cost of retenanting............. $1,145,980
----------
Total TI and LC cost.......... $3,075,264
==========
</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 the Company's portfolio matures, which is the amount used for purposes
of this calculation.
(8) Represents scheduled payments of mortgage loan principal on the debt
encumbering the Corporate Center Properties due during the twelve months
ending August 31, 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 90.5% aggregate partnership interest in the
Operating Partnership.
(10) Based on a total of 15,118,205 shares of Common Stock to be outstanding
after the consummation of the Offering, the Concurrent Private Placements
and the Formation Transactions multiplied by an anticipated distribution
per share of $1.69. The Company estimates that approximately 45% of the
estimated initial annual cash distributions with respect to the twelve
months ending August 31, 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 August 31, 1998. The payout
ratio based on the Company's share of estimated pro forma Funds from
Operations for the twelve months ending August 31, 1998 is 76.1%.
44
<PAGE> 52
CAPITALIZATION
The following table sets forth the combined historical capitalization of
the Company and Tower Predecessor and the pro forma capitalization of the
Company as of June 30, 1997, as adjusted to give effect to the Offering, the
Concurrent Private Placements, the issuance and subsequent cancellation of 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>
JUNE 30, 1997
------------------------
COMBINED
HISTORICAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Debt(1)............................................................... $200,660 $ 111,000
Minority interest in Operating Partnership............................ 33,886
Shareholders' equity:
Preferred Stock, par value $.01 per share, 50,000,000 shares
authorized; none issued and outstanding..........................
Common Stock, par value $.01 per share, 150,000,000 shares
authorized; 1,000 shares issued and outstanding historical, and
15,118,205 shares issued and outstanding, as adjusted(2)......... 1 151
Additional paid-in capital.......................................... 322,738
Owners' equity (deficit)............................................ (58,743) (83)
-------- --------
Total Owners'/Shareholders' equity (deficit)..................... (58,742) 322,806
-------- --------
Total Capitalization........................................ $141,918 $ 467,692
======== ========
</TABLE>
- ---------------
(1) See Note 6 of Notes to Combined Financial Statements of Tower Predecessor
for information relating to the indebtedness.
(2) Includes (i) 12,015,000 shares of Common Stock to be issued in the Offering,
(ii) 1,153,845 shares of Common Stock to be issued in the Concurrent Private
Placements, and (iii) 1,949,360 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 cancellation of the MSAM Notes. Excludes
(i) 1,583,640 shares of Common Stock that may be issued upon the exchange of
OP Units issued in connection with the Formation Transactions, (ii)
1,802,250 shares of Common Stock subject to the Underwriters' over-allotment
option, and (iii) 975,000 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."
45
<PAGE> 53
DILUTION
At June 30, 1997, the Company and the Tower Predecessor had a deficiency in
net tangible book value of approximately $79.2 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 Placements, (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 Placements, the MSAM
Notes and the Term Loan, and (v) the Formation Transactions, the pro forma net
tangible book value at June 30, 1997 would have been $343.6 million, or $20.57
per share of Common Stock. This amount represents an immediate increase in net
tangible book value of $70.60 per share to the Primary Contributors and
Continuing Investors and an immediate dilution in pro forma net tangible book
value of $5.43 per share of Common Stock to new investors. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share................... $26.00
Deficiency in net tangible book value per share prior
to the Offering and Concurrent Private
Placements(1)...................................... $(50.03)
Increase in net tangible book value per share
attributable to the Offering(2).................... $ 70.60
Pro forma net tangible book value after the Offering(3)... $20.57
------
Dilution in net tangible book value per share of Common
Stock to purchasers in the Offering(4).................. $ 5.43
======
</TABLE>
- ---------------
(1) Net tangible book value per share prior to the Offering and the Concurrent
Private Placements attributable to the Primary Contributors and Continuing
Investors is determined by dividing net tangible book value of the Company
(based on the June 30, 1997 net book value of the assets less intangible
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 Primary Contributors and 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 $343.6 million divided
by the total number of shares of Common Stock issued and outstanding after
the Offering (16,701,845 shares of Common Stock, including Common Stock
issuable upon exchange of OP Units to the Primary Contributors and
Continuing Investors), excluding the Common Stock that may be issuable upon
exercise of Common Stock options. There is no impact on dilution
attributable to the issuance of Common Stock in exchange for OP Units to be
issued to the Primary Contributors and 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 Placements and the Formation Transactions, the
number of shares of Common Stock to be sold by the Company in the Offering, the
Concurrent Private Placements 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 June 30, 1997 of the assets 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.... 12,015 72% $ 280,036 103% $ 26(1)
Concurrent Private Placements.... 1,154 7% $ 30,000 12% $ 26
Restricted Common Stock issued to
Continuing and New Investors... 1,949 12% 41,657 16% $ 21.37
OP Units issued to Primary
Contributors and Continuing
Investors...................... 1,584 9% $ (79,232)(2) (31)% $ (50.03)
-------- ------ -------- ------
Total.................. 16,702 100.00% $ 272,461 100.00%
======== ====== ======== ======
</TABLE>
- ---------------
(1) Before deducting the underwriting discount and other estimated expenses of
the Offering.
(2) Based on the June 30, 1997 net book value of the assets less deferred
charges to be contributed in connection with the Formation Transactions, net
of liabilities assumed.
46
<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 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 June 30, 1997 and for the six months ended
June 30, 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 six months ended June 30, 1997
are not necessarily indicative of the results to be expected for the entire year
ending 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
Associates, Ltd. (the Maitland Forum ground lessor), 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 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 and
Properties Atlantic to be contributed to the Company, (ii) the completion of the
Offering, the Concurrent Private Placements, the issuance of the MSAM Notes to
the Morgan Stanley Investors for the purpose of funding certain pre-Offering
transaction expenses and the acquisition of certain interests of third parties
in certain Properties, and the initial closing of the Term Loan and the
application of the net proceeds therefrom as described under "Use of Proceeds,"
and (iii) the issuance of 886,200 shares 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 June 30, 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.
47
<PAGE> 55
THE COMPANY (PRO FORMA) AND THE TOWER PREDECESSOR COMPANY (HISTORICAL)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 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.................. $ 36,745 $ 13,521 $13,467 $ 72,939 $ 26,138 $ 25,202 $ 25,994 $ 23,496 $ 22,949
Management fees................ 245 626 1,261 961 82 221 183
Construction, leasing and other
fees......................... 519 474 543 1,703 1,335 1,041 320 604 737
-------- -------- ------- ------- -------- -------- -------- -------- --------
Total revenues................. 37,264 14,240 14,636 74,642 28,734 27,204 26,396 24,321 23,869
-------- -------- ------- ------- -------- -------- -------- -------- --------
Expenses:
Property operating and
maintenance.................. 9,282 2,703 2,781 18,613 5,481 5,332 5,278 5,938 5,316
Real estate taxes.............. 5,324 2,331 2,360 11,011 4,722 4,571 3,971 4,409 4,920
General office and
administrative............... 1,747 1,746 1,767 3,363 3,494 3,497 2,512 2,591 2,658
Interest expense............... 4,020 7,028 7,172 8,040 15,511 15,150 12,751 12,756 14,390
Depreciation and
amortization................. 6,845 3,494 3,384 13,642 6,853 6,897 7,415 7,982 6,775
Ground rent and air rights
expense...................... 299 299 299 599 599 599 599 599 561
-------- -------- ------- ------- -------- -------- -------- -------- --------
Total expenses................. 27,517 17,601 17,763 55,268 36,660 36,046 32,526 34,275 34,620
-------- -------- ------- ------- -------- -------- -------- -------- --------
Income (loss) from operations.... 9,747 (3,361) (3,127) 19,374 (7,926) (8,842) (6,130) (9,954) (10,751)
Equity in joint ventures(1)...... 496 68 198 398 461 193 1
-------- -------- ------- ------- -------- -------- -------- -------- --------
Income (loss) before minority
interest....................... 10,243 (3,293) (2,929) 19,772 (7,465) (8,649) (6,129) (9,954) (10,751)
Minority interest (2)............ 973 1,878
-------- -------- ------- ------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item............. 9,270 (3,293) (2,929) 17,894 (7,465) (8,649) (6,129) (9,954) (10,751)
Extraordinary item............... 6,475
-------- -------- ------- ------- -------- -------- -------- -------- --------
Net income (loss)................ $ 9,270 $ 3,182 $(2,929) $ 17,894 $ (7,465) $ (8,649) $ (6,129) $ (9,954) $(10,751)
======== ======== ======= ======= ======== ======== ======== ======== ========
Net income per share............. $ 0.61 $ 1.18
======== =======
Weighted average number of shares
of common stock outstanding.... 15,118 15,118
Weighted average number of shares
of common stock and OP Units
outstanding.................... 16,702 16,702
BALANCE SHEET DATA (at period
end):
Real estate investments net of
accumulated depreciation....... $454,395 $127,577 -- -- $129,064 $128,138 $132,904 $137,662 $140,916
Total assets..................... 480,643 170,632 -- -- 172,987 173,889 184,174 188,742 193,363
Long-term debt................... 111,000 193,381 -- -- 202,892 199,962 202,454 204,853 177,145
Total liabilities................ 123,951 229,292 -- -- 234,857 230,977 235,343 236,211 231,110
Owners'/stockholders' equity
(deficit)...................... 322,806 (58,660) -- -- (61,870) (57,088) (51,169) (47,469) (37,747)
OTHER DATA:
EBITDA (Company's pro forma 90.5%
share)(3)...................... $ 19,080 $ 14,069 $ 7,909 $ 37,433 $ 15,496 $ 13,695 $ 13,834 $ 10,268 $ 9,895
Funds from operations (Company's
pro forma 90.5% share)(4)...... 15,487 616 806 30,287 129 (1,449) 1,292 (1,972) (3,976)
Cash flow from operating
activities(5).................. 17,201 2,573 (693) 33,642 951 1,762 4,118 -- --
Cash flow from investing
activities(6).................. (834) (834) (1,329) (333,605) (6,787) (3,440) (3,137) -- --
Cash flow from financing
activities(7).................. (16,511) (2,398) 1,643 (21,608) 5,613 238 30 -- --
Number of properties (at period
end)........................... 21 7 7 21 7 6 6 3 3
</TABLE>
48
<PAGE> 56
DRA JOINT VENTURES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 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.............................................. $ 14,503 $ 14,331 $ 29,010 $ 12,629 $ 207
Other income............................................... 83 98 288 224
--------- -------- --------- --------- --------
Total revenues............................................. 14,586 14,429 29,298 12,853 207
--------- -------- --------- --------- --------
Expenses
Property operating and maintenance......................... 4,371 4,585 8,592 4,373 101
Real estate taxes.......................................... 1,796 1,810 3,572 1,746 38
General office and administrative.......................... 40 169 282 164 31
Interest expense........................................... 5,692 4,816 10,176 3,814
Depreciation and amortization.............................. 2,307 1,949 4,118 1,684 31
--------- -------- --------- --------- --------
Total expenses............................................. 14,206 13,329 26,740 11,781 201
--------- -------- --------- --------- --------
Net income................................................... $ 380 $ 1,100 $ 2,558 $ 1,072 $ 6
======== ======= ======== ======== =======
BALANCE SHEET DATA (at period end):
Real estate investments net of accumulated depreciation...... $ 140,285 -- $ 140,759 $ 139,169 $ 10,503
Total assets................................................. 159,686 -- 160,008 149,928 11,001
Long-term debt............................................... 129,225 -- 126,517 119,288 --
Total liabilities............................................ 133,322 -- 130,473 124,716 768
Owners' equity (deficit)..................................... 26,364 -- 29,535 25,212 10,233
OTHER DATA:
EBITDA (8)................................................... $ 8,338 $ 7,820 $ 16,759 $ 6,532 $ 37
Funds from Operations (8).................................... 2,687 3,049 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>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------------- ----------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
1997 1997 1996 1996
--------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
2800 North Central Property............................ $ (39) $ (9) $ (12) $ (3)
DRA Joint Ventures..................................... -- 77 464
Management Company..................................... 535 -- 410
---- ---- ---- ----
$ 496 $ 68 $ 398 $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 economic interest in 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 9.5% interest in the Operating Partnership that
will be owned by the Primary Contributors 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.
49
<PAGE> 57
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 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)....................... $ 9,270 $ 3,182 $(2,929) $17,894 $(7,465) $(8,649) $(6,129) $(9,954) $(10,751)
Add:
Interest expense........................ 4,020 7,028 7,172 8,040 15,511 15,150 12,751 12,756 14,390
Real estate depreciation and
amortization.......................... 6,845 3,494 3,384 13,642 6,853 6,897 7,415 7,982 6,775
Real estate depreciation and
amortization of unconsolidated joint
ventures.............................. 25 415 351 52 741 303 6 -- --
Minority interest....................... 973 -- -- 1,878 -- -- -- -- --
Less:
Interest income......................... (50) (50) (69) (144) (144) (6) (209) (516) (519)
------- ------- ------- ------- ------- ------- ------- ------- --------
EBITDA.................................. $21,083 $14,069 $ 7,909 $41,362 $15,496 $13,695 $13,834 $10,268 $ 9,895
======= ======= ======= ======= ======= ======= ======= ======= ========
Company's 90.5% share................... $19,080 $37,433
======= =======
</TABLE>
(4) The White Paper on Funds from Operations approved by the Board of Governors
of 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.
The following is a reconciliation of net income to Funds from Operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 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)........................ $ 9,270 $3,182 $(2,929) $17,894 $(7,465) $(8,649) $(6,129) $(9,954) $(10,751)
Add:
Real estate depreciation and
amortization........................... 6,845 3,494 3,384 13,642 6,853 6,897 7,415 7,982 6,775
Real estate depreciation and amortization
of unconsolidated joint ventures....... 25 415 351 52 741 303 6 -- --
Minority interest........................ 973 -- -- 1,878 -- -- -- -- --
Less:
Gain on extinguishment of debt........... -- (6,475) -- -- -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- ------- ------
Funds from Operations.................... $17,113 $ 616 $ 806 $33,466 $ 129 $(1,449) $ 1,292 $(1,972) $ (3,976)
====== ======= ======= ======= ======= ======= ======= ======= ======
Funds from Operations
(Company's 90.5% share).................. $15,487 $30,287
====== =======
</TABLE>
(5) Pro forma cash flows from operating activities represents net income plus
minority interest, depreciation and amortization and amortization of loan
costs. There are no pro forma adjustments for changes in working capital
items.
(6) Pro forma cash flows from investing activities assumes that the transfer of
the Properties, certain development land and other assets of Tower Equities
to be contributed to the Company occurred on January 1, 1996.
(7) Pro forma cash flows from financing activities assumes that the completion
of the Offering, the Concurrent Private Placements, the issuance of the MSAM
Notes and the inidial closing under the Term Loan had occurred on January 1,
1996. In addition, anticipated
50
<PAGE> 58
distributions per share of Common Stock and OP Unit for the six months ended
June 30, 1997 and the year ended December 31, 1996 have been deducted
assuming that the Offering had occurred on January 1, 1996.
(8) EBITDA and Funds from Operations for the DRA Joint Ventures are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------- -----------------------------
1997 1996 1996 1995 1994
------ ------ ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EBITDA:
Net income.................................................... $ 380 $1,100 $ 2,558 $1,072 $ 6
Interest expense.............................................. 5,692 4,816 10,176 3,814 --
Real estate depreciation and amortization..................... 2,307 1,949 4,118 1,684 31
Interest income............................................... (41) (45) (93) (38) --
------ ------ ------- ------ ---
EBITDA.......................................................... $8,338 $7,820 $16,759 $6,532 $ 37
====== ====== ======= ====== ===
Funds from Operations:
Net income.................................................... 380 1,100 $ 2,558 $1,072 $ 6
Real estate depreciation and amortization..................... 2,307 1,949 4,118 1,684 31
------ ------ ------- ------ ---
Funds from Operations....................................... $2,687 $3,049 $ 6,676 $2,756 $ 37
====== ====== ======= ====== ===
</TABLE>
51
<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 June
30, 1997. The pro forma results of operations are 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
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 Six Months Ended June 30, 1997 to the Six Months Ended June
30, 1996
Total revenues for the six months ended June 30, 1997 decreased by $0.4
million, or 2.7%, to $14.2 million as compared to $14.6 million for six months
ended June 30, 1996. Rental income remained constant for the six months ended
June 30, 1997 and 1996 at $13.5 million.
Management fee income decreased $0.4 million to $0.2 million for the six
months ended June 30, 1997 as compared to $0.6 million for the six months ended
June 30, 1996 due to the fact that management fee income for the period from
April 1, 1997 through June 30, 1997 is recorded by the Management Company.
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 six months ended June 30, 1997 and 1996 at $0.5
million. See "--Management and Construction, Leasing and Other Fees."
Total expenses for the six months ended June 30, 1997 decreased by $0.1
million, or 0.9%, to $17.6 million as compared to $17.7 million for the six
months ended June 30, 1996. Expenses excluding interest and depreciation and
amortization remained relatively stable, decreasing slightly from $7.2 million
for the six months ended June 30, 1996 to $7.1 million for the six months ended
June 30, 1997. Expenses, excluding interest and depreciation and amortization,
as a percentage of total revenues, increased from 49.2% for the six months ended
June 30, 1996 to 49.7% for the six months ended June 30, 1997 due to increases
in real estate taxes. The increases in real estate taxes are primarily due to
the lower total revenue base, which is due to reduction in management fees
discussed above. Management believes that 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
revenues as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------
1997 1996
----- -----
<S> <C> <C>
Property operating and maintenance........................ 19.0% 19.0%
Real estate taxes......................................... 16.4% 16.1%
General office and administration......................... 12.2% 12.1%
Ground rent and air rights................................ 2.1% 2.0%
----- -----
49.7% 49.2%
===== =====
</TABLE>
52
<PAGE> 60
Interest expense decreased by $0.2 million, or 2%, to $7.0 million for the
six months ended June 30, 1997 as compared to $7.2 million for the six months
ended June 30, 1996 due to a decrease in interest rates associated with debt
related to one property.
Equity in joint ventures decreased slightly by $0.1 million to $0.1 million
for the six months ended June 30, 1997 as compared to $0.2 million for the six
months ended June 30, 1996 due primarily to higher interest expense due to
higher interest rates on the debt of the DRA Joint Venture properties, offset by
increased rental income of the DRA Joint Venture property.
Net loss decreased by $6.1 million, to net income of $3.2 million for the
six months ended June 30, 1997 as compared to net loss of $2.9 million primarily
due to extraordinary gain on extinguishment of debt for one of the properties.
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 $36.6 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. 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............................. 19.1% 19.6%
Real estate taxes.............................................. 16.4 16.8
General office and administration.............................. 12.2 12.9
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.
53
<PAGE> 61
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 $1.0 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 described above and (ii) expenses as a 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 revenues as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Property operating and maintenance............................. 19.6% 20.0%
Real estate taxes.............................................. 16.8 15.0
General office and administration.............................. 12.9 9.5
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 $200.0 million and $202.5 million,
respectively).
54
<PAGE> 62
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 and
income are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31,
------------------------- --------------------------
1997 1996 1996 1995 1994
---------- ---------- ------ ------ ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Management fees from Excluded Properties.... $ 342 $ 214 $ 514 $ 590 $ 76
Construction, leasing and other fees from
Excluded Properties....................... 234 194 419 835 320
Management fees from joint ventures......... 93 392 801 371 6
Construction, leasing and other fees from
joint ventures and other income........... 50 369 862 206 --
------ ------ ------ ------ ----
Total management fees and construction,
leasing and other fees.................... $ 719 $1,169 $2,596 $2,002 $402
====== ====== ====== ====== ====
</TABLE>
Beginning April 1, 1997, Tower Predecessor's third-party management and
other activities are conducted through the Management Company. The 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.
PRO FORMA OPERATING RESULTS
Six Months Ended June 30, 1997
For the six months ended June 30, 1997, pro forma net income would have
been $9.3 million compared to a historical net loss before extraordinary item
(gain on extinguishment of debt) of $3.3 million for the same period. The pro
forma operating results for the six months ended June 30, 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 the Century Plaza and 100 Wall Street Properties, 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 $0.2 million primarily results 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 remained consistent as compared to the combined Company
and Tower Predecessor. See "Formation and Structure of the Company -- Effects of
the Formation Transactions."
Interest expense decreased $3.2 million, or 44%, in the pro forma statement
of operations due to mortgage loans repaid concurrent with the Offering and
lower interest rates on the $89.0 million Term Loan (including $35.0 million
which has been assumed will be utilized to repay mortgage indebtedness relating
to the Tower 45 Property). The Term Loan is expected to 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 6.06% as of
October 9, 1997 was used for the calculation of the interest rate in the pro
forma results.
55
<PAGE> 63
Year Ended December 31, 1996
For the year ended December 31, 1996, pro forma net income would have been
$17.9 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 the Century Plaza and 100 Wall Street
Properties, 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 $.9 million primarily results from the Company's transfer of certain
management contracts and predecessor management companies and personnel to the
Management Company. General and administrative expenses decreased $0.1 million,
or 0.4%, 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 $7.5 million, or 48.2%, in the pro forma
statement of operations due to mortgage loans repaid concurrent with the
Offering and lower interest rates on the $89.0 million Term Loan (including
$35.0 million which has been assumed will be utilized to repay mortgage
indebtedness relating to the Tower 45 Property).
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 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 issued the MSAM Notes to fund
certain costs relating to the Offering and the formation of the Company. Upon
consummation of the Offering and Formation Transactions, (i) MSAM is expected to
convert the notes into approximately 886,200 shares of restricted Common Stock,
and to purchase an additional $20.0 million of shares of restricted Common Stock
in the Concurrent Private Placements and (ii) the Carlyle Funds are expected to
purchase $10 million of shares of restricted Common Stock in the Concurrent
Private Placements. Proceeds from these transactions and the Offering will be
used to repay and modify the terms of certain indebtedness, to acquire debt,
equity and fee interests in the Properties, reduce its total indebtedness to
approximately $113.7 million (including its pro rata share of Joint Venture
Debt), and establish working capital cash reserves of approximately $5.3
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
56
<PAGE> 64
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 Placements, 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 approximately $113.7 million
(including its pro rata share of Joint Venture Debt), which will initially be
collateralized by 10 of the Properties, with a weighted average interest rate of
7.14% (see footnote (4) to the mortgage indebtedness table below). There will be
a total of approximately $0.2 million of scheduled loan principal payments due
during the year ending December 31, 1998. The mortgage indebtedness will
represent approximately 20.7% of the Company's Total Market Capitalization.
Mortgage Indebtedness. Upon the consummation of the Offering, the Company
expects to have outstanding approximately $111.0 million of total consolidated
mortgage indebtedness, and approximately $2.7 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% 84 January 1, 2006 843
2800 North Central
Property(1)............. 2,658 9.41% 250 May 31, 1999(2) 2,658
Term Loan................. 89,000(3) 6.96%(4) 6,194(4) (4) 83,741
-------- ----- ---- -------
Total/Weighted
Average............ $113,658 7.14% 8,114 $105,168
======== ===== ==== =======
</TABLE>
- ---------------
(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 $54.0 million and will be secured by the One Orlando Center, 286
Madison Avenue, 290 Madison Avenue, and 292 Madison Avenue Properties.
Separately, $35.0 million of mortgage indebtedness, that will not be repaid
concurrent with the Offering, will be secured 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, at which time the Tower 45 Property will
secure the Term Loan and the three Madison Avenue Properties will become
unencumbered. See "Risk Factors -- The Company's Use of Debt to Finance
Acquisitions and Developments Could Adversely Affect the Company -- Debt
Financing and Potential Adverse Effect on Cash Flows and Distributions."
(4) The Term Loan is expected to 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 6.06% as of October 9, 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.
In addition, the Company has assumed a liability for deferred real estate
taxes of $12.9 million which accrued from 1988 through 1995 relating to the
Tower 45 Property. 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.
The Line of Credit. The Company has obtained a commitment for the $200
million Line of Credit, which will be used primarily to finance the acquisition
of, and investment in, office properties, to refinance
57
<PAGE> 65
existing indebtedness, and for general working capital needs. The Line of Credit
will be unsecured and will have a three year term which will commence upon or
shortly after the closing of the Offering. See "The Properties -- Line of
Credit."
Analysis of Liquidity and Capital Resources. Upon completion of the
Offering, the Concurrent Private Placements, and the Formation Transactions and
the application of the net proceeds therefrom, the Company will have reduced its
total indebtedness to approximately $113.7 million (including its pro rata share
of Joint Venture Debt).
The Company believes that the Offering, the Concurrent Private Placements,
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
$5.3 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 will be approximately
$3.1 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 $0.5 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 Six Months Ended June 30, 1997 to the Six Months Ended June
30, 1996
Tower Predecessor's cash and cash equivalents were $4.3 million and $4.8
million at June 30, 1997 and 1996, respectively. Cash and cash equivalents
decreased $0.7 million during the six months ended June 30, 1997 due to $2.5
million of cash flow provided by operating activities, $0.8 million of cash flow
used in investing activities and $2.4 million of cash flow used in financing
activities. The increase in cash from operating activities is primarily due to
increases in 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 decrease in
cash from operating activities is primarily due to decreases in receivables and
deferred charges which is partially offset by 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.
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<PAGE> 66
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 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.
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>
SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31,
30, -------------------------------------
---------------------- HISTORICAL
PRO FORMA HISTORICAL PRO FORMA -------------------------
1997 1997 1996 1996 1995 1994
--------- ---------- --------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Funds from Operations........... $15.5 $ 0.6 $30.3 $ 0.1 $(1.4) $ 1.3
EBITDA.......................... $19.1 $ 14.1 $37.4 $15.5 $13.7 $13.8
</TABLE>
Funds from Operations and EBITDA for the six months ended June 30, 1997
(pro forma) increased over Funds from Operations and EBITDA (historical) for the
same time period ended June 30, 1996 by $14.9 million and $5.0 million,
respectively. The increases are primarily attributable to the acquisition of the
DRA Joint Ventures and the Century Plaza and 100 Wall Street Properties 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 ended December 31, 1996 by $30.2 million and $21.9 million,
respectively. The increases are primarily attributable to the acquisition of the
DRA Joint Ventures and the Century Plaza and 100 Wall Street Properties 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
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<PAGE> 67
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 require the tenants
to pay most operating expenses, including real estate taxes and insurance, and
increases in common area maintenance expenditures, which partially offsets the
Company's exposure to increases in costs and operating expenses resulting from
inflation.
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<PAGE> 68
PROPERTY OFFICE MARKETS AND MARKET ECONOMIES
All market information not specifically attributed to the Company or an
identified governmental agency is based on information supplied by Landauer and
unless otherwise noted historical data are presented as of December 31 of the
specified year. The market data reported by Landauer were based on (i) a
compilation and analysis of measures of economic and real estate activity,
including data and information with respect to income, employment, office stock,
availability of vacant space, absorption and new construction, (ii) site visits
to certain markets and submarkets in which the Properties are located, (iii) an
analysis of various market and submarket characteristics, including with respect
to tenant mix, accessibility and major employers, and (iv) an analysis of
various reports published by industry experts with respect to the Company's
markets.
MANHATTAN MARKET AND ECONOMY
Manhattan Market Economy
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 United States,
containing more rentable square feet than the next six largest United States
office markets combined. 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 18 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.
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. This illustrates employment trends and service sector growth
in New York City.
HISTORICAL NON-AGRICULTURAL EMPLOYMENT AND SERVICES GROWTH
NEW YORK, NY
[GRAPH]
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NYC EMPLOYMENT NYC SERVICES
(FISCAL YEAR COVERED) GROWTH(%) GROWTH(%)
<S> <C> <C>
1992 -3 0.62
1993 -0.3 2.4
1994 1.0 2.6
1995 0.4 2.9
1996 1.2 4.1
</TABLE>
Source: United States Bureau of Labor Statistics
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<PAGE> 69
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
exceeded previous records for services employment gains in New York 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.
Landauer 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 11.2% to 9.2%. 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 9.2% to 7.4% and the overall direct
vacancy rate in this market declined from 11.5% to 8.1%.
HISTORICAL DIRECT VACANCY RATES
MIDTOWN MANHATTAN, NEW YORK
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) DIRECT VACANCY RATE (%)
<S> <C>
1992 15.50
1993 14.00
1994 12.90
1995 13.70
1996 11.50
1Q97 9.00
2Q97 8.10
</TABLE>
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<PAGE> 70
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, particularly
when taking into account such factors as the reduction in concessions to tenants
(such as free rent and tenant construction allowances).
NET ABSORPTION AND ASKING RENTAL RATES
MIDTOWN MANHATTAN, NEW YORK
[CHART]
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 1998, 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 one tenant. In the absence of tax
incentives, the Company believes that rents generally would have to increase
significantly to justify the cost of new construction.
Downtown Manhattan Market Overview
The Company believes that downtown Manhattan represents an attractive
investment opportunity. Specifically, the downtown Manhattan office market has
experienced three consecutive years of positive net absorption and declining
vacancy rates. In addition, the downtown market has certain competitive
advantages over the midtown Manhattan office market, including (i) rental rates
are significantly below rental rates in the
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<PAGE> 71
midtown Manhattan office market, and (ii) the lower Manhattan revitalization
plan, which has been in effect since October 1995, includes tax and other
incentives which have and are expected to continue to incentivize growth in the
downtown Manhattan office market. The plan includes incentives for both owners
and tenants, including temporary abatement on rent for new commercial leases,
lower energy costs, rezoning for residential development or conversion and
renovation deductions. The plan has led to an increase in residential
conversions, prompting restaurants, cafes, galleries, and other neighborhood
amenities. As a result, the Company believes that the lower Manhattan
revitalization program has enabled downtown Manhattan to reposition itself,
becoming more attractive to residential tenants. Therefore, the Company believes
that downtown Manhattan is becoming more conducive to office tenants as a
24-hour business environment.
Increasing Demand for Office Space
In the past four years the underlying fundamentals of supply and demand in
the downtown Manhattan office market have improved. The total amount of office
space available has decreased from 18.3 million square feet in 1993 to 15.6
million square feet at June 30, 1997, representing a 14.9% decline. According to
Landauer, during the same period the direct vacancy rate in the downtown
Manhattan office market decreased from 19% to 16% and there was net absorption
of 4.8 million square feet.
HISTORICAL DIRECT VACANCY RATES
DOWNTOWN MANHATTAN, NEW YORK
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) DIRECT VACANCY
<S> <C>
1991 17.80
1992 18.50
1993 19.00
1994 18.60
1995 18.90
1996 17.00
1Q97 17.00
2Q97 16.00
</TABLE>
Rental Rates
Rental rates in the downtown Manhattan office market have generally
decreased from 1993 to June 30, 1997. According to Landauer, asking rental rates
have decreased from $28.99 per leased square foot in 1992 to $25.73 at December
31, 1996. Notwithstanding the overall decline in asking rental rates, the
Company believes that the recent favorable supply/demand fundamentals in the
downtown Manhattan office market have had a stabilizing effect on asking rents,
which as of the end of the first six months of 1997, were $25.54 per square
foot.
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<PAGE> 72
NET ABSORPTION AND ASKING RENTAL RATES
DOWNTOWN MANHATTAN, NEW YORK
<TABLE>
<CAPTION>
NET ABSORPTION
MILLIONS OF SQ. FT. ASKING RENT ($/S.F.)
------------------- --------------------
<S> <C> <C>
1992 ..................... 4.2 28.99
1993 ..................... -0.1 28.75
1994 ..................... 0.8 27.35
1995 ..................... 0.2 25.96
1996 ..................... 3.1 25.73
1Q97 ..................... 0.2 25.52
2Q97 ..................... 0.5 25.54
</TABLE>
Supply of Office Space
The supply of office space decreased in the downtown Manhattan office
market from 18.3 million square feet at December 31, 1993 to 15.6 million square
feet at June 30, 1997. The Company expects the supply of office space in this
market to remain stable for the foreseeable future because there are relatively
few sites available for construction. In addition, the lead time required for
land assemblage and new construction typically exceeds three years and new
construction generally is not economically feasible at current market rental
rates. In the absence of any new tax incentives, the Company believes that
rental rates generally would have to increase at least 40% to justify the cost
of new construction.
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 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, 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%. 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.
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<PAGE> 73
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>
Landauer 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 34.9 years
in 1996, which is among the youngest among all metropolitan areas in Florida,
and almost 30.2% 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>
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. Employment in the
tourism-based service sector is 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 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. 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.
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<PAGE> 74
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 2.2% 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. 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 17.8% of the Company's portfolio is
located (based on Annualized 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 June 30, 1997, the direct vacancy rate in the market was 7.2%
with approximately 850,000 square feet under construction. This compares to a
1996 annual absorption of approximately 1.1 million square feet.
HISTORICAL DIRECT VACANCY RATES
ORLANDO, FL
<TABLE>
<CAPTION>
MEASUREMENT PERIOD EMPLOYMENT AND SERVICES GROWTH
(FISCAL YEAR COVERED) (%)
<S> <C>
1992 17.00
1993 12.50
1994 12.70
1995 10.30
1996 9.50
1Q97 10.20
2Q97 7.20
</TABLE>
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Rental Rates
Despite the substantial absorption of available office space and a
decreasing direct vacancy rate, asking rental rates in the Orlando office market
as a whole have varied from 1992 through June 30, 1997 as set forth in the chart
below. The Company believes that this variance is attributable to the fact that
average asking rents include rents relating to only vacant space in the market
and that vacancy rates for Class A office space in the market have fallen to an
extremely low level (6.0% at June 30, 1997). Average asking rental rates for
Class A Office Space in the Metropolitan Orlando office market have increased
from $17.48 per foot as of December 31, 1992 to $20.08 as of June 30, 1997.
NET ABSORPTION AND ASKING RENTAL RATES
ORLANDO, FL
<TABLE>
<CAPTION>
THOUSANDS
NET ABSORPTION ASKING RATES ($/S.F.)
------------------- --------------------
<S> <C> <C>
1992 ..................... 25 16
1993 ..................... 1100 15
1994 ..................... 189 15.5
1995 ..................... 189 16
1996 ..................... 1100 16.5
1Q97 ..................... 50 16
2Q97 ..................... 694 13.78
</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.
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. 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.
Landauer 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 4.0% since 1992. Landauer reports that in measuring
employment gains since 1994, the Phoenix Metropolitan Area ranked third among
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<PAGE> 76
the 100 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>
Landauer has forecast for the Phoenix metropolitan area a total increase in
non-agricultural employment for the period from 1996 to 2001 of approximately
14.0%, representing an average annual growth rate of approximately 2.7%.
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>
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. 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.
Landauer 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 Landauer the
services sector of the Phoenix economy increased by 33.7% from 1990 through
1996, representing an annual compounded growth rate of 5%. Landauer 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
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<PAGE> 77
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 20.3% of the Company's portfolio is
located (based on Annualized 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
further to 8.3% and the market had positive net absorption of approximately
86,000 square feet. These positive fundamentals in the Phoenix office market
resulted in an increase in average asking rents to $16.02 per square foot as of
June 30, 1997.
HISTORICAL DIRECT VACANCY RATES
PHOENIX, AZ
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) VACANCY RATE
<S> <C>
1992 25.1
1993 22
1994 17.3
1995 12.9
1996 9
1Q97 8.6
2Q97 8.3
</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 the 9.0 to 9.5 percent range during 1997 despite 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.
70
<PAGE> 78
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 $13.02 per square foot in 1993 to $15.40 per square
as of December 31, 1996. During the first six months of 1997, landlord average
asking rents increased further from $15.40 to $16.00, representing a 4.0%
increase during that period alone.
NET ABSORPTION AND ASKING RENTAL RATES
PHOENIX, ARIZONA
<TABLE>
<CAPTION>
Net Absorption Asking Rental Rates ($/s.f.)
<S> <C> <C>
"1992" 1188 13.2
"1993" 1658 13.02
"1994" 1681 13.6
"1995" 1074 14.53
"1996" 433 16
"1Q97" 420 16
"2Q97" 88 16
</TABLE>
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 1992, 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 38 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 MARKET AND 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.
71
<PAGE> 79
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 Landauer, 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 to Landauer, 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. Landauer 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
Landauer 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 Landauer, the government sector of
the economy has increased by approximately 15.7% 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 4.3% of the
Company's portfolio is located (based on Annualized 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.
72
<PAGE> 80
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 600,000 square feet. Since 1992, office space in the
Metropolitan Tucson 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 six months of 1997 which resulted in a further decrease
in the direct vacancy rate to approximately 8.2% and additional net absorption
of approximately 15,200 square feet.
HISTORICAL DIRECT VACANCY RATES
TUCSON, AZ
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) DIRECT VACANCY RATE
<S> <C>
1991 23.40
1992 16.90
1993 13.80
1994 11.50
1995 10.20
1996 9.00
1Q97 8.10
2Q97 8.15
</TABLE>
Rental Rates
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. As of June 30, 1997, average asking rental rates in this
market have remained relatively constant at approximately $17.85 per square
foot. Landauer projects that rents will continue to increase at healthy rates
through 1999 and then slowly plateau, reaching approximately $25.00 per square
foot in 2001. There can be no assurance such increases in rental rates will be
achieved.
73
<PAGE> 81
NET ABSORPTION AND ASKING RENTAL RATES
TUCSON, AZ
<TABLE>
<CAPTION>
Thousands
Net Absorption Asking Rental Rates ($/s.f.)
<S> <C> <C>
"1992" 85 13
"1993" 240 14
"1994" 141.6 13.5
"1995" 232.2 16
"1996" -8.7 18
1Q97 75 18
2Q97 15.16 17.85
</TABLE>
Supply of Office Space
From 1992 to June 30, 1997, only approximately 341,000 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%, Landauer estimates
that approximately 1.2 million square feet will be added to the market over the
next five years. Landauer 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.
74
<PAGE> 82
THE PROPERTIES
GENERAL
Upon completion of the Offering, the Company will own interests in the 21
Properties, which contain 3.4 million rentable square feet. Substantially all of
the Properties are located in nine submarkets in the Manhattan, Orlando, Phoenix
and Tucson office markets and individually range from 10,300 to 459,000 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 in which the Company owns a 10% interest (which
economic interest increases to up to 27.5% if certain performance criteria are
achieved). As of August 31, 1997, approximately 80% of the Annualized Rent from
the Company's portfolio was derived from Properties located in central business
district locations, including approximately 54% 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 will also own two parcels of land which can support
an aggregate of approximately 370,000 square feet of development and will have
options to acquire two other parcels of land which can support approximately 1.8
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 August 31, 1997, the Properties had a weighted average occupancy
rate of 92.4% and were leased to over 348 tenants. As of August 31, 1997, no
single tenant represented more than approximately 5.5% of the aggregate
Annualized Rent of the Company's portfolio and only 17 tenants individually
represented more than 1% of such Annualized Rent.
PROPERTIES
The following tables set forth certain information, as of August 31, 1997,
with respect to the Properties.
75
<PAGE> 83
<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
Manhattan Market
Tower 45................................................ 100% 1989 443,114 100.0% 33
286 Madison Avenue...................................... 100% 1918 (4) 111,999 94.8 39
290 Madison Avenue...................................... 100% 1950 (4) 38,512 100.0 4
292 Madison Avenue...................................... 100% 1920/86 186,901 98.9 19
100 Wall Street......................................... 100% 1969/94 458,848 88.7 17
Long Island Market
120 Mineola Boulevard................................... 100% 1984/92 100,810 91.2 15
--------- ----- ---
Market Subtotal/Weighted Average............................................... 1,340,184 94.9% 127
--------- ----- ---
ARIZONA MARKETS
Metropolitan Phoenix Market
Corporate Center Building 10010-30...................... 100% 1976/86 188,614 100.0% 2
Corporate Center Building 10040......................... 100% 1976/86 23,155 100.0 10
Corporate Center Building 10050......................... 100% 1976/86 42,398 100.0 10
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 91.0 37
Century Plaza........................................... 100% 1974/90 219,769 84.2 28
Metropolitan Tucson Market
5151 East Broadway...................................... 100% 1975/89/96 246,486 82.1% 45
--------- ----- ---
Market Subtotal/Weighted Average............................................... 1,277,737 91.3% 150
--------- ----- ---
METROPOLITAN ORLANDO MARKET
One Orlando Center...................................... 100% 1989 357,184 99.5% 34
5750 Major Boulevard.................................... 100% 1973/97 92,828 21.0(7) 13
Maitland Forum.......................................... 100% 1985/96 266,060 99.9 16
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............................................... 775,682 90.0% 71
--------- ----- ---
Consolidated Total/Weighted Average for all Properties................................ 3,393,603 92.4% 348
========= ===
<CAPTION>
PERCENTAGE OF ANNUALIZED ANNUALIZED NET
PORTFOLIO RENT EFFECTIVE RENT
ANNUALIZED ANNUALIZED PER LEASED PER LEASED
MARKET/PROPERTY RENT(2) RENT(2) SQUARE FOOT(2) SQUARE FOOT(3)
----------------------------------------------------------- ----------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
METROPOLITAN NEW YORK CITY MARKET
Manhattan Market
Tower 45................................................ $20,890,000 27.8% $47.14 $31.48
286 Madison Avenue...................................... 2,474,000 3.3 23.31 21.54
290 Madison Avenue...................................... 1,057,000 1.4 27.44 24.97
292 Madison Avenue...................................... 5,212,000 6.9 28.18 25.60
100 Wall Street......................................... 11,222,000 14.9 27.57 28.12
Long Island Market
120 Mineola Boulevard................................... 2,458,000 3.3 26.74 21.04
----------- ----- ------ ------
Market Subtotal/Weighted Average.................... $43,313,000 57.6% $34.06 $27.77
----------- ----- ------ ------
ARIZONA MARKETS
Metropolitan Phoenix Market
Corporate Center Building 10010-30...................... $ 2,947,000 3.9% $15.62 $14.39
Corporate Center Building 10040......................... 380,000 0.5 16.43 15.09
Corporate Center Building 10050......................... 708,000 0.9 16.71 15.16
Corporate Center Building 10210......................... 706,000 0.9 15.65 14.50
Corporate Center Building 10220......................... 422,000 0.6 17.47 15.12
Corporate Center Building 9630(5)....................... 2,386,000 3.2 18.33 15.95
2800 North Central(6)................................... 5,291,000 7.0 16.24 15.50
Century Plaza........................................... 2,408,000 3.2 13.02 12.86
Metropolitan Tucson Market
5151 East Broadway...................................... $ 3,269,000 4.4% $16.15 $13.64
----------- ----- ------ ------
Market Subtotal/Weighted Average.................... $18,517,000 24.6% $15.87 $14.56
----------- ----- ------ ------
METROPOLITAN ORLANDO MARKET
One Orlando Center...................................... $ 8,154,000 10.8% $22.94 $21.57
5750 Major Boulevard.................................... 298,000 0.4 15.31 28.55
Maitland Forum.......................................... 4,140,000 5.5 15.57 13.70
2601 Maitland Center Parkway............................ 158,000 0.2 15.23 12.90
2603 Maitland Center Parkway............................ 114,000 0.2 13.04 10.94
2605 Maitland Center Parkway............................ 538,000 0.7 13.96 12.20
----------- ----- ------ ------
Market Subtotal/Weighted Average.................... $13,402,000 17.8% $19.19 $17.99
----------- ----- ------ ------
Consolidated Total/Weighted Average for all Properties..... $75,232,000 100.0% $23.98 $20.68
=========== ===== ====== ======
</TABLE>
------------------
(1) Data do not include years in which tenant improvements were made to the
Properties.
(2) Annualized Rent represents the annualized monthly Base Rent in effect
plus estimated 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 August 31, 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. The Company believes that Annualized
Rent is helpful to investors as a measure of the revenues the Company
could expect to receive from its leases. Annualized Rent represents
actual payments attributable to leases executed as of August 31, 1997
with adjustments for rent concessions as reflected above and normal
year-end adjustments. Normal year-end rental payment adjustments for the
Tower Predecessor in 1996 represented approximately .9% of all rental
payments received during that year. Annualized Rent should not be
considered an alternative to Annualized Net Effective Rent as an
indication of the financial performance of a lease nor is it indicative
of the Company's ability to generate cash flow, including its ability to
make cash distributions.
(3) Annualized Net Effective Rent per Leased Square Foot represents the Base
Rent for the month of August 1997 under each lease executed as of August
31, 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
August 31, 1997, but was not yet occupied, had been included in that
percentage.
76
<PAGE> 84
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................................. 3.6 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................................. 43.2 optioned(4) 1,000,000
---- ---------
Total.............................................. 46.8 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 Company's Bylaws, the Company is authorized to exercise this
option only if (i)(a) a majority of Independent Directors approves 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 the property is
less than 50% preleased, the Board of Directors unanimously approves the
exercise of such option. See "-- Land Parcel Options and -- Development
Parcels."
(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 no
cost. Pursuant to the option, the Company will directly or indirectly
acquire the right to purchase this land for approximately $10.3 million from
an unaffiliated third party. Pursuant to the Company's Bylaws, the Company
is authorized to execute this option only if the Independent Directors
unanimously approve the exercise thereof. The right to acquire the land
expires on October 31, 1997, subject to one 30-day extension that requires
the payment of a $100,000 extension fee. See "The Properties -- Land Parcel
Options."
TENANTS
The Properties are leased to over 348 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 (which may not be representative of the
Company's entire tenant base), based on rentable square feet, as of August 31,
1997. The Company's largest tenant, American Express, accounted for 5.52% of the
Company's total Annualized Rent and 8.07% of aggregate leased square feet. In
addition, the Company's 10 largest tenants at the Properties (based on rentable
square feet as of August 31, 1997) collectively accounted for approximately
34.6% of the Company's total Annualized Rent and 29.8% 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 would be a material
adverse affect on the Company and the Company's ability to make distributions to
stockholders.
77
<PAGE> 85
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF AGGREGATE
REMAINING AGGREGATE AGGREGATE PORTFOLIO
NUMBER LEASE TERM RENTABLE LEASED ANNUALIZED ANNUALIZED
TENANT OF LEASES IN MONTHS SQUARE FEET SQUARE FEET RENT RENT
- --------------------------------------- --------- ---------- ----------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
American Express(1).................... 4 54 252,626 8.07% $ 4,154,000 5.52%
United States of America (by General
Services Administration)(2).......... 5 30 100,279 3.20 1,534,000 2.04
Credit Suisse.......................... 1 29 95,310 3.04 2,870,000 3.82
Waterhouse Securities, Inc............. 1 79 94,358 3.01 2,340,000 3.11
TBWA CHIAT/DAY, INC. .................. 1 86 70,791 2.26 2,122,000 2.82
First Union National Bank of Florida... 1 64 69,364 2.22 2,388,000 3.17
US West Communications, Inc.(3)........ 3 32 65,583 2.09 1,174,000 1.56
D.E. Shaw & Co., L.P. ................. 1 113 63,871 2.04 2,310,000 3.07
Swiss American Corporation............. 1 29 61,461 1.96 1,851,000 2.46
Honor Technologies, Inc. f/k/a
Southeast Switch, Inc. .............. 1 69 59,609 1.90 907,000 1.21
ITT Educational Services, Inc.(4)...... 3 65 58,469 1.87 925,000 1.23
State of Arizona(5).................... 4 40 58,240 1.86 758,000 1.01
The Equitable Life Assurance Society of
the United States.................... 3 42 56,815 1.81 1,683,000 2.24
United Healthcare Services, Inc.(6).... 2 54 56,649 1.81 984,000 1.31
Florida Power Corporation.............. 1 49 52,622 1.68 816,000 1.08
Brown, Raysman & Millstein............. 1 93 38,237 1.22 1,987,000 2.64
King & Spalding........................ 1 100 35,874 1.15 1,671,000 2.22
Southwest Catholic Health Network
Corporation d/b/a Mercy Care Plan.... 1 41 35,648 1.14 473,000 0.63
MCI Telecommunications Corporation..... 1 105 34,230 1.09 746,000 0.99
Bryan Cave............................. 1 89 31,954 1.02 669,000 .89
--
--- --------- ----- ----------- -----
Total/Weighted Average(7)...... 37 59 1,391,990 44.46% $ 32,364,000 43.02%
== ========= ===== =========== =====
</TABLE>
- ---------------
(1) The tenants under such leases are (i) American Express Financial Advisors
Inc., f/k/a IDS Financial Services Inc. (an aggregate of 19,797 rentable
square feet in the One Orlando Center and 5151 East Broadway Properties),
and (ii) American Express Travel Related Services Company, Inc. (an
aggregate of 232,829 rentable square feet under two separate leases in the
Corporate Center Properties).
(2) Under federal law, these leases may be terminated or renegotiated by the
lessee under certain circumstances. See "Risk Factors -- The Company's
Performance and Value are Subject to Risks Associated with the Real Estate
Industry -- Loss of Major Tenants Could Adversely Affect the Company's Cash
Flow."
(3) The tenants under such leases are (i) US West Communications, Inc. (an
aggregate of 61,614 rentable square feet in the 2800 North Central and
Corporate Center Properties) and (ii) US West NewVector Group, Inc. (3,968
rentable square feet in the 5151 East Broadway Property).
(4) The tenants under such leases are (i) ITT Educational Services, Inc. (34,422
rentable square feet in the Maitland Forum Property) and (ii) Hartford Fire
Insurance Company (an aggregate of 24,047 rentable square feet under two (2)
separate leases in the Corporate Center Properties).
(5) The tenants under such leases are (i) Department of Economic Security
(49,752 rentable square feet in the Century Plaza Property), (ii) State
Board of Directors for Community College of Arizona (4,706 rentable square
feet in the Century Plaza Property), and (iii) Arizona Veterans Service
Commission (3,782 rentable square feet in the Century Plaza Property).
(6) The tenants under such leases are (i) United HealthCare Services, Inc. f/k/a
CAC Properties, Inc. (39,240 rentable square feet in the One Orlando
Property) and (ii) UHC Management Company, Inc. (17,409 rentable square feet
in the Maitland Forum Properties).
(7) Weighted average calculation with respect to remaining lease term is based
on aggregate rentable square footage leased by each tenant.
78
<PAGE> 86
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 August
31, 1997:
<TABLE>
<CAPTION>
PERCENT OF PERCENTAGE OF
AGGREGATE AGGREGATE
PERCENT PORTFOLIO PORTFOLIO
SQUARE FEET NUMBER OF ALL TOTAL LEASED LEASED ANNUALIZED ANNUALIZED
UNDER LEASE OF LEASES LEASES SQUARE FEET SQUARE FEET RENT RENT
- --------------------------------------- --------- ------- ------------ ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
2,500 or less.......................... 135 38.79% 210,687 6.73% $ 4,245,300 5.64%
2,501-5,000............................ 61 17.53 254,676 8.13 5,646,168 7.50
5,001-7,500............................ 59 16.95 407,396 13.01 8,694,780 11.56
7,501-10,000........................... 19 5.46 176,177 5.63 4,911,564 6.53
10,001-20,000.......................... 44 12.64 697,744 22.28 17,115,036 22.75
20,001-40,000.......................... 18 5.17 492,346 15.72 13,276,344 17.65
40,001+................................ 12 3.45 892,093 28.49 21,342,900 28.37
--- ------ --------- ------ ----------- ------
Tota1(1)...................... 348 100.00% 3,131,119(2) 100.00% $ 75,232,092 100.00%
=== ====== ========= ====== =========== ======
</TABLE>
- ---------------
(1) Excludes 5,704 square feet (or .17% of total leased square feet) with
respect to four management offices occupied by the Company.
(2) Reconciliation of total rentable square footage is as follows:
<TABLE>
<CAPTION>
SQUARE FOOTAGE PERCENTAGE OF TOTAL
-------------- -------------------
<S> <C> <C>
Square footage occupied by tenants..................... 3,131,119 92.26%
Square footage used for management offices and building
use, and remeasurement adjustments................... 5,704 .17
Square footage vacant.................................. 256,780 7.57
--------- -----
Total net rentable square footage............ 3,393,603 100.0%
========= =====
</TABLE>
79
<PAGE> 87
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 August 31,1997, 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
SQUARE ANNUALIZED ANNUALIZED
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 ($000S) LEASES
- ----------------------------------- --------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1997............................... 25 62,292 1.99% $ 970 1.29%
1998............................... 48 198,782 6.34 4,193 5.57
1999............................... 56 371,732 11.85 7,430 9.88
2000............................... 42 322,546 10.28 8,400 11.17
2001............................... 46 420,684 13.41 8,679 11.54
2002............................... 52 690,179 22.00 14,763 19.62
2003............................... 15 227,921 7.27 4,156 5.52
2004............................... 20 202,369 6.45 7,458 9.91
2005............................... 21 313,527 10.00 10,956 14.56
2006............................... 8 148,807 4.74 3,218 4.28
2007............................... 6 128,166 4.09 3,813 5.07
2008............................... 1 3,250 0.10 142 0.19
2009............................... 2 16,310 0.52 397 0.53
2010............................... 6 24,554 0.78 658 0.88
--- --------- ----- ------- ------
Total.................... 348 3,131,119(1) 99.82%(1) $ 75,232 100.00%
=== ========= ===== ======= ======
</TABLE>
- ---------------
(1) Excludes an aggregate of 5,704 square feet (or .17% of total leased square
feet) with respect to four management offices occupied by the Company.
80
<PAGE> 88
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 August 31, 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. As of August 31, 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 0 37,439 11,858 63,572 50,684
Percentage of Total Leased Sq. Ft.............. -- 0.0% 8.4% 2.7% 14.3% 11.4%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 29,292 $1,793,160 $ 682,680 $2,475,300 $ 2,260,116
Percentage of Total Annualized Rent(1)......... -- 0.1% 8.6% 3.3% 11.8% 10.8%
Number of Leases Expiring...................... 0 0 7 1 3 7
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ -- $ -- $ 47.90 $ 57.57 $ 38.94 $ 44.59
Company Quoted Rental Rate Per Sq. Ft.(2)(3)... $ 38.00
286 MADISON AVENUE
Square Footage of Expiring Leases.............. 3,734 5,119 8,468 2,400 27,386 23,821
Percentage of Total Leased Sq. Ft.............. 3.5% 4.8% 8.0% 2.3% 25.8% 22.4%
Annualized Rent of Expiring Leases(1).......... $ 93,720 $ 137,868 $ 252,348 $ 48,972 $ 561,744 $ 550,956
Percentage of Total Annualized Rent(1)......... 3.8% 5.5% 10.2% 2.0% 22.7% 22.3%
Number of Leases Expiring...................... 2 3 3 3 10 8
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 25.10 $ 26.93 $ 29.80 $ 20.41 $ 20.51 $ 23.13
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 23.00
290 MADISON AVENUE
Square Footage of Expiring Leases.............. 0 15,966 0 5,322 0 5,322
Percentage of Total Leased Sq. Ft.............. -- 41.5% -- 13.8% -- 13.8%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 454,992 $ 0 $ 155,148 $ 0 $ 121,836
Percentage of Total Annualized Rent(1)......... -- 43.1% -- 14.7% -- 11.5%
Number of Leases Expiring...................... 0 1 0 1 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 28.50 -- $ 29.15 -- $ 22.89
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 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%
Annualized Rent of Expiring Leases(1).......... $ 228,036 $ 426,780 $ 0 $ 678,120 $ 400,968 $ 255,756
Percentage of Total Annualized Rent(1)......... 4.4% 8.2% -- 13.0% 7.7% 4.9%
Number of Leases Expiring...................... 0 3 0 4 2 2
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 22.55 $ 29.47 -- $ 27.57 $ 25.43 $ 18.94
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 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%
Annualized Rent of Expiring Leases(1).......... $ 222,888 $4,737,120 $ 5,554,476 $ 0 $3,135,348 $20,890,380
Percentage of Total Annualized Rent(1)......... 1.1% 22.7% 26.6% -- 15.0% 100%
Number of Leases Expiring...................... 1 5 5 0 4 33
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 32.99 $ 61.61 $ 51.33 -- $ 35.75 --
Company Quoted Rental Rate Per Sq. Ft.(2)(3)...
286 MADISON AVENUE
Square Footage of Expiring Leases.............. 10,116 9,366 13,149 0 2,600 106,159
Percentage of Total Leased Sq. Ft.............. 9.5% 8.8% 12.4% -- 2.4% 100%
Annualized Rent of Expiring Leases(1).......... $ 242,004 $ 220,620 $ 311,892 $ 0 $ 53,952 $ 2,474,076
Percentage of Total Annualized Rent(1)......... 9.8% 8.9% 12.6% -- 2.2% 100%
Number of Leases Expiring...................... 2 3 4 0 1 39
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 23.92 $ 23.56 $ 23.72 -- $ 20.75 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
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%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 324,840 $ 0 $ 0 $ 0 $ 1,056,816
Percentage of Total Annualized Rent(1)......... -- 30.7% -- -- -- 100%
Number of Leases Expiring...................... 0 1 0 0 0 4
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 27.29 -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
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%
Annualized Rent of Expiring Leases(1).......... $ 563,184 $ 220,872 $ 2,187,996 $ 0 $ 250,080 $ 5,211,792
Percentage of Total Annualized Rent(1)......... 10.8% 4.2% 42.0% -- 4.8% 100%
Number of Leases Expiring...................... 3 1 2 0 2 19
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 30.73 $ 21.84 $ 30.51 -- $ 39.65 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
</TABLE>
81
<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>
100 WALL STREET
Square Footage of Expiring Leases.............. 0 35,372 1,603 156,771 0 62,159
Percentage of Total Leased Sq. Ft.............. -- 8.7% 0.4% 38.5% -- 15.3%
Annualized Rent of Expiring Leases(1).......... $ 0 $1,116,240 $ 49,560 $4,721,172 $ 0 $ 1,546,896
Percentage of Total Annualized Rent(1)......... -- 9.9% 0.4% 42.1% -- 13.8%
Number of Leases Expiring...................... 0 2 1 2 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 31.56 $ 30.92 $ 30.12 $ 24.89
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 27.00
120 MINEOLA BOULEVARD
Square Footage of Expiring Leases.............. 0 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%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 152,388 $1,058,592 $ 120,384 $ 116,712 $ 96,900
Percentage of Total Annualized Rent(1)......... -- 6.2% 43.1% 4.9% 4.8% 3.9%
Number of Leases Expiring...................... 0 1 6 1 2 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 22.46 $ 30.29 $ 22.01 $ 26.52 $ 21.83
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 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%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 288,876 $ 0 $ 2,650,764
Percentage of Total Annualized Rent(1)......... -- -- -- 9.8% -- 90.0%
Number of Leases Expiring...................... 0 0 0 0 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- $ 19.17 -- $ 15.69
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 17.75
CORPORATE CENTER BUILDING 10040
Square Footage of Expiring Leases.............. 1,305 11,865 3,255 0 2,769 0
Percentage of Total Leased Sq. Ft. ............ 5.6% 51.2% 14.1% -- 12.0% --
Annualized Rent of Expiring Leases(1).......... $ 20,316 $ 209,712 $ 63,060 $ 0 $ 53,208 $ 0
Percentage of Total Annualized Rent(1)......... 5.3% 55.1% 16.6% -- 14.0% --
Number of Leases Expiring...................... 1 3 3 0 2 0
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 15.57 $ 17.67 $ 19.37 -- $ 19.22 --
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 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%
Annualized Rent of Expiring Leases(1).......... $ 51,576 $ 159,036 $ 235,572 $ 118,128 $ 94,893 $ 49,188
Percentage of Total Annualized Rent(1)......... 7.3% 22.4% 33.3% 16.7% 13.4% 6.9%
Number of Leases Expiring...................... 2 3 3 1 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 15.05 $ 15.86 $ 16.67 $ 17.85 $ 17.63 $ 17.50
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 17.75
<CAPTION>
100 WALL STREET
Square Footage of Expiring Leases.............. 0 7,041 50,122 77,601 16,442 407,111
Percentage of Total Leased Sq. Ft.............. -- 1.7% 12.3% 19.1% 4.0% 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 214,524 $ 1,350,840 $1,805,304 $ 417,756 $11,222,292
Percentage of Total Annualized Rent(1)......... -- 1.9% 12.1% 16.1% 3.7% 100%
Number of Leases Expiring...................... 0 2 4 3 2 17
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 30.47 $ 26.95 $ 23.26 $ 25.41 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
120 MINEOLA BOULEVARD
Square Footage of Expiring Leases.............. 15,943 12,086 7,819 0 0 91,894
Percentage of Total Leased Sq. Ft. ............ 17.3% 13.2% 8.5% -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 390,600 $ 325,056 $ 196,896 0 0 $ 2,457,528
Percentage of Total Annualized Rent(1)......... 15.9% 13.2% 8.0% -- -- 100%
Number of Leases Expiring...................... 1 1 2 0 0 15
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 24.50 $ 26.90 $ 25.18 -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
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%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 6,972 $ 2,946,612
Percentage of Total Annualized Rent(1)......... -- -- -- -- 0.2% 100%
Number of Leases Expiring...................... 0 0 0 0 1 2
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- $ 1.50 --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
CORPORATE CENTER BUILDING 10040
Square Footage of Expiring Leases.............. 0 2,404 0 0 0 21,598
Percentage of Total Leased Sq. Ft. ............ -- 10.4% -- -- -- 93.3%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 34,068 $ 0 $ 0 $ 0 $ 380,364
Percentage of Total Annualized Rent(1)......... -- 9.0% -- -- -- 100%
Number of Leases Expiring...................... 0 1 0 0 0 10
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 14.17 -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
CORPORATE CENTER BUILDING 10050
Square Footage of Expiring Leases.............. 0 0 0 0 0 42,398
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 708,396
Percentage of Total Annualized Rent(1)......... -- -- -- -- -- 100%
Number of Leases Expiring...................... 0 0 0 0 0 10
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
</TABLE>
82
<PAGE> 90
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1997 1998 1999 2000 2001 2002
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
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%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 290,148 $ 0 $ 294,396 $ 121,056
Percentage of Total Annualized Rent(1)......... -- -- 41.1% -- 41.7% 17.2%
Number of Leases Expiring...................... 0 0 1 0 2 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- $ 13.52 -- $ 17.50 $ 17.75
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 17.75
CORPORATE CENTER BUILDING 10220
Square Footage of Expiring Leases.............. 0 0 0 0 24,128 0
Percentage of Total Leased Sq. Ft.............. -- -- -- -- 100.0% --
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 421,536 $ 0
Percentage of Total Annualized Rent(1)......... -- -- -- -- 100% --
Number of Leases Expiring...................... 0 0 0 0 1 0
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- $ 17.47 --
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 17.75
CORPORATE CENTER BUILDING 9630(4)
Square Footage of Expiring Leases.............. 0 13,340 0 5,790 61,838 31,800
Percentage of Total Leased Sq. Ft.............. -- 10.2% -- 4.4% 47.5% 24.4%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 223,860 $ 0 $ 105,912 $1,051,356 $ 532,164
Percentage of Total Annualized Rent(1)......... -- 9.4% -- 4.4% 44.1% 22.3%
Number of Leases Expiring...................... 0 2 0 3 3 2
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 16.78 $ 18.29 $ 17.00 $ 16.73
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 17.75
2800 NORTH CENTRAL(5)
Square Footage of Expiring Leases.............. 9,850 26,267 72,105 0 65,034 63,859
Percentage of Total Leased Sq. Ft.............. 3.0% 8.1% 22.1% -- 20.0% 19.6%
Annualized Rent of Expiring Leases(1).......... $ 139,980 $ 386,400 $1,193,712 $ 0 $ 971,328 $ 1,100,376
Percentage of Total Annualized Rent(1)......... 2.6% 7.3% 22.6% -- 18.4% 20.8%
Number of Leases Expiring...................... 5 9 6 0 4 9
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 14.21 $ 14.71 $ 16.56 -- $ 14.94 $ 17.23
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 17.50
CENTURY PLAZA
Square Footage of Expiring Leases.............. 1,300 18,063 120,693 12,096 3,227 26,647
Percentage of Total Leased Sq. Ft.............. 0.7% 9.8% 65.2% 6.5% 1.7% 14.4%
Annualized Rent of Expiring Leases(1).......... $ 14,892 $ 242,148 $1,539,540 $ 149,400 $ 42,360 $ 378,240
Percentage of Total Annualized Rent(1)......... 0.6% 10.1% 63.9% 6.2% 1.8% 15.7%
Number of Leases Expiring...................... 1 7 10 6 1 2
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 11.46 $ 13.41 $ 12.76 $ 12.35 $ 13.13 $ 14.19
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 16.50
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 BEYOND TOTAL
- ----------------------------------------------- ---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
CORPORATE CENTER BUILDING 10210
Square Footage of Expiring Leases.............. 0 0 0 0 0 45,100
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 705,600
Percentage of Total Annualized Rent(1)......... -- -- -- -- -- 100%
Number of Leases Expiring...................... 0 0 0 0 0 4
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
CORPORATE CENTER BUILDING 10220
Square Footage of Expiring Leases.............. 0 0 0 0 0 24,128
Percentage of Total Leased Sq. Ft.............. -- -- -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 421,536
Percentage of Total Annualized Rent(1)......... -- -- -- -- -- 100%
Number of Leases Expiring...................... 0 0 0 0 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
CORPORATE CENTER BUILDING 9630(4)
Square Footage of Expiring Leases.............. 0 396 0 8,000 9,000 130,164
Percentage of Total Leased Sq. Ft.............. -- 0.3% -- 6.1% 6.9% 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 5,928 $ 0 $ 264,372 $ 202,368 $ 2,385,960
Percentage of Total Annualized Rent(1)......... -- 0.2% -- 11.1% 8.5% 100%
Number of Leases Expiring...................... 0 1 0 1 1 13
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 14.97 -- $ 33.05 $ 22.49 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
2800 NORTH CENTRAL(5)
Square Footage of Expiring Leases.............. 17,829 37,486 31,954 0 0 324,384
Percentage of Total Leased Sq. Ft.............. 5.5% 11.5% 9.8% -- -- 99.6%
Annualized Rent of Expiring Leases(1).......... $ 250,440 $ 580,056 $ 668,604 $ 0 $ 0 $ 5,290,896
Percentage of Total Annualized Rent(1)......... 4.7% 11.0% 12.6% -- -- 100%
Number of Leases Expiring...................... 1 2 1 0 0 37
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 14.05 $ 15.47 $ 20.92 -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
CENTURY PLAZA
Square Footage of Expiring Leases.............. 0 2,979 0 0 0 185,005
Percentage of Total Leased Sq. Ft.............. -- 1.6% -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 41,892 $ 0 $ 0 $ 0 $ 2,408,472
Percentage of Total Annualized Rent(1)......... -- 1.7% -- -- -- 100%
Number of Leases Expiring...................... 0 1 0 0 0 28
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 14.06 -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
</TABLE>
83
<PAGE> 91
<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 EAST BROADWAY
Square Footage of Expiring Leases.............. 5,209 17,443 11,689 25,831 33,162 59,407
Percentage of Total Leased Sq. Ft.............. 2.6% 8.6% 5.8% 12.8% 16.4% 29.4%
Annualized Rent of Expiring Leases(1).......... $ 40,980 $ 287,316 $ 197,004 $ 439,164 $ 561,840 $ 980,844
Percentage of Total Annualized Rent(1)......... 1.3% 8.8% 6.0% 13.4% 17.2% 30.0%
Number of Leases Expiring...................... 3 5 6 9 10 8
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 7.87 $ 16.47 $ 16.85 $ 17.00 $ 16.94 $ 16.51
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 16.50
ONE ORLANDO CENTER
Square Footage of Expiring Leases.............. 1,727 378 26,133 29,699 24,954 142,967
Percentage of Total Leased Sq. Ft. ............ 0.5% 0.1% 7.4% 8.4% 7.0% 40.2%
Annualized Rent of Expiring Leases(1).......... $ 41,076 $ 4,452 $ 492,780 $ 565,704 $ 503,316 $ 3,739,920
Percentage of Total Annualized Rent(1)......... 0.5% 0.1% 6.0% 6.9% 6.2% 45.9%
Number of Leases Expiring...................... 1 2 5 7 4 6
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 23.78 $ 11.78 $ 18.86 $ 19.05 $ 20.17 $ 26.16
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 21.00
5750 MAJOR BOULEVARD
Square Footage of Expiring Leases.............. 5,954 2,495 3,709 0 0 0
Percentage of Total Leased Sq. Ft. ............ 30.6% 12.8% 19.0% -- -- --
Annualized Rent of Expiring Leases(1).......... $ 83,748 $ 32,436 $ 54,036 0 0 0
Percentage of Total Annualized Rent(1)......... 28.1% 10.9% 18.1% -- -- --
Number of Leases Expiring...................... 9 2 1 0 0 0
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 14.07 $ 13.00 $ 14.57 -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 18.75
MAITLAND FORUM
Square Footage of Expiring Leases.............. 19,674 8,649 1,532 5,840 72,239 11,676
Percentage of Total Leased Sq. Ft. ............ 7.4% 3.3% 0.6% 2.2% 27.2% 4.4%
Annualized Rent of Expiring Leases(1).......... $ 255,768 $ 139,536 $ 24,516 $ 104,064 $1,129,716 $ 166,488
Percentage of Total Annualized Rent(1)......... 6.2% 3.4% 0.6% 2.5% 27.3% 4.0%
Number of Leases Expiring...................... 1 3 1 2 2 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 13.00 $ 16.13 $ 16.00 $ 17.82 $ 15.64 $ 14.26
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 17.00
2601 MAITLAND CENTER PARKWAY
Square Footage of Expiring Leases.............. 0 10,342 0 0 0 0
Percentage of Total Leased Sq. Ft. ............ -- 100.0% -- -- -- --
Annualized Rent of Expiring Leases(1).......... $ 0 $ 157,548 $ 0 $ 0 $ 0 $ 0
Percentage of Total Annualized Rent(1)......... -- 100.0% -- -- -- --
Number of Leases Expiring...................... 0 1 0 0 0 0
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 15.23 -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 15.50
<CAPTION>
5151 EAST BROADWAY
Square Footage of Expiring Leases.............. 30,118 0 0 18,577 0 201,436
Percentage of Total Leased Sq. Ft.............. 14.9% -- -- 9.2% -- 99.5%
Annualized Rent of Expiring Leases(1).......... $ 433,356 $ 0 $ 0 $ 328,548 $ 0 $ 3,269,052
Percentage of Total Annualized Rent(1)......... 13.2% -- -- 10.1% -- 100%
Number of Leases Expiring...................... 2 0 0 2 0 45
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 14.39 -- -- $ 17.69 -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
ONE ORLANDO CENTER
Square Footage of Expiring Leases.............. 1,842 31,708 30,400 25,541 38,271 353,620
Percentage of Total Leased Sq. Ft. ............ 0.5% 8.9% 8.6% 7.2% 10.8% 99.5%
Annualized Rent of Expiring Leases(1).......... $ 35,460 $ 752,604 $ 683,700 $ 519,828 $ 815,604 $ 8,154,444
Percentage of Total Annualized Rent(1)......... 0.4% 9.2% 8.4% 6.4% 10.0% 100%
Number of Leases Expiring...................... 1 2 2 1 3 34
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 19.25 $ 23.74 $ 22.49 $ 20.35 $ 21.31 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
5750 MAJOR BOULEVARD
Square Footage of Expiring Leases.............. 0 0 0 0 7,314 19,472
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- 37.6% 100.0%
Annualized Rent of Expiring Leases(1).......... 0 0 0 0 $ 127,992 $ 298,212
Percentage of Total Annualized Rent(1)......... -- -- -- -- 42.9% 100%
Number of Leases Expiring...................... 0 0 0 0 1 13
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- $ 17.50 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
MAITLAND FORUM
Square Footage of Expiring Leases.............. 126,992 0 150 19,088 0 265,840
Percentage of Total Leased Sq. Ft. ............ 47.8% -- 0.1% 7.2% -- 100%
Annualized Rent of Expiring Leases(1).......... $2,018,196 $ 0 $ 1,608 $ 299,880 $ 0 $ 4,139,772
Percentage of Total Annualized Rent(1)......... 48.8% -- 0.0% 7.2% -- 100%
Number of Leases Expiring...................... 4 0 1 1 -- 16
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 15.89 -- $ 10.72 $ 15.71 -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
2601 MAITLAND CENTER PARKWAY
Square Footage of Expiring Leases.............. 0 0 0 0 0 10,342
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 157,548
Percentage of Total Annualized Rent(1)......... -- -- -- -- -- 100%
Number of Leases Expiring...................... 0 0 0 0 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
</TABLE>
84
<PAGE> 92
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1997 1998 1999 2000 2001 2002
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
2603 MAITLAND PARKWAY
Square Footage of Expiring Leases.............. 0 0 8,743 0 0 0
Percentage of Total Leased Sq. Ft. ............ -- -- 100% -- -- --
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 113,976 $ 0 $ 0 $ 0
Percentage of Total Annualized Rent(1)......... -- -- 100% -- -- --
Number of Leases Expiring...................... 0 0 2 0 0 0
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- $ 13.04 -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 15.50
2605 MAITLAND PARKWAY
Square Footage of Expiring Leases.............. 0 2,185 5,827 15,184 0 15,368
Percentage of Total Leased Sq. Ft. ............ -- 5.7% 15.1% 39.4% -- 39.9%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 32,820 $ 71,952 $ 222,288 $ 0 $ 211,308
Percentage of Total Annualized Rent(1)......... -- 6.1% 13.4% 41.3% -- 39.2%
Number of Leases Expiring...................... -- 1 1 2 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 15.02 $ 12.35 $ 14.64 -- $ 13.75
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 15.50
PORTFOLIO TOTALS/WEIGHTED AVG.
Square Footage of Expiring Leases(6) .......... 62,292 198,782 371,732 322,546 420,684 690,179
Percentage of Total Leased Sq. Ft. ............ 2.0% 6.3% 11.9% 10.3% 13.4% 22.0%
Annualized Rent of Expiring Leases(1).......... $ 970,092 $4,192,824 $7,429,956 $8,400,012 $8,678,676 $14,762,808
Percentage of Total Annualized Rent(1)......... 1.29% 5.57% 9.88% 11.17% 11.54% 19.62%
Number of Leases Expiring...................... 25 48 56 42 46 52
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 15.57 $ 21.09 $ 19.99 $ 26.04 $ 20.63 $ 21.39
Weighted Average Company Quoted Rental Rate Per
Sq. Ft.(3) ................................... $ 22.51
<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.............. 0 0 0 0 0 8,743
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 113,976
Percentage of Total Annualized Rent(1)......... -- -- -- -- -- 100%
Number of Leases Expiring...................... 0 0 0 0 0 2
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
2605 MAITLAND PARKWAY
Square Footage of Expiring Leases.............. 0 0 0 0 0 38,564
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 538,368
Percentage of Total Annualized Rent(1)......... -- -- -- -- -- 100%
Number of Leases Expiring...................... 0 0 0 0 0 5
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
PORTFOLIO TOTALS/WEIGHTED AVG.
Square Footage of Expiring Leases(6) .......... 227,921 202,369 313,527 148,807 172,280 3,131,119
Percentage of Total Leased Sq. Ft. ............ 7.3% 6.5% 10.0% 4.7% 5.5% 99.8%(6)
Annualized Rent of Expiring Leases(1).......... $4,156,128 $7,457,580 $10,956,012 $3,217,932 $5,010,072 $75,232,092
Percentage of Total Annualized Rent(1)......... 5.52% 9.91% 14.56% 4.28% 6.66% 100%
Number of Leases Expiring...................... 15 20 21 8 15 348
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 18.23 $ 36.85 $ 34.94 $ 21.62 $ 29.08 --
Weighted Average Company Quoted Rental Rate Per
Sq. Ft.(3) ...................................
</TABLE>
- ---------------
(1) Represents Annualized Rent as of August 31, 1997.
(2) Represents the weighted average of high-rise space, mid-rise space and
low-rise space present in the Property.
(3) Represents average rental rates per square foot quoted by the Company at the
Property as of August 31, 1997.
(4) Includes data with respect to two free-standing restaurants adjacent to this
Property, which account for, in the aggregate, Annualized Rent of $466,000
pursuant to two leases which expire in 2006 ($264,000) and 2007 ($202,000).
(5) Data presented without proration on account of the Company's partial
ownership interest.
(6) Excludes an aggregate of 5,704 square feet (or .18% of total leased square
feet) with respect to four management offices occupied by the Company.
85
<PAGE> 93
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;
United Healthcare's expansion in One Orlando Center from 29,809 square feet to
39,240 square feet; and American Express has expanded in 10050 Corporate Center,
9630 Corporate Center and 10010-10030 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
1994 1995 1996 1997 JUNE 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....................................... 11,199 129,750 297,306 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 and 100 Wall Street
because these Properties 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 due to a 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 have been 74.81%. Accordingly, the Company believes a 70% retention
ratio is more representative of future results.
86
<PAGE> 94
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 and 100 Wall Street Properties which
are being acquired from unaffiliated third parties 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.
87
<PAGE> 95
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 and 100 Wall Street Properties which are being acquired from
unaffiliated third parties 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 at the Properties (other than the Century Plaza
and 100 Wall Street Properties which are being acquired from unaffiliated third
parties concurrently with the consummation of the Offering), which primarily
relate to major capital improvements such as lobby and elevator renovations, and
mechanical equipment improvements (e.g., new elevators and new chillers):
<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............................. -- -- $1.27 --
</TABLE>
- ---------------
(1) Excludes data with respect to the 2800 North Central Property 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, the per square foot amount
is computed by annualizing the capital expenditures amount to a pro forma
full year cost.
88
<PAGE> 96
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 AUGUST 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
TOTAL OF
PORTFOLIO PORTFOLIO
NUMBER OF RENTABLE RENTABLE ANNUALIZED ANNUALIZED
PROPERTIES SQUARE FEET SQUARE FEET RENT RENT
---------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Midtown Manhattan Market
Grand Central North Submarket...... 3 337,412 9.94% $ 8,742,684 11.62%
Times Square Submarket............. 1 443,114 13.06 20,890,380 27.77
Downtown Manhattan Market
Financial Submarket................ 1 458,848 13.52 11,222,292 14.92
Long Island Market
Central Nassau County Submarket.... 1 100,810 2.97 2,457,528 3.27
Metropolitan Orlando, Florida Market
Maitland Center Submarket.......... 4 325,670 9.60 4,949,664 6.58
Southwest Orlando Submarket........ 1 92,828 2.74 298,212 0.40
Downtown Orlando Submarket......... 1 357,184 10.53 8,154,444 10.84
Metropolitan Phoenix, Arizona Market
Northwest Phoenix Submarket........ 6 453,559 13.37 7,548,468 10.03
Uptown Phoenix Submarket........... 2 577,692 17.02 7,699,368 10.23
Metropolitan Tucson, Arizona Market
Tucson East Submarket.............. 1 246,486 7.26 3,269,052 4.35
--
--------- ----- ----------- -----
Total...................... 21 3,393,603 100.00% $75,232,092 100.00%
== ========= ===== =========== =====
</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 $30.60 per square foot in 1993. Since 1993 the average asking
rental rate for Class A space in this submarket has risen to $33.45 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 3,080 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 August 31, 1997, this
Property
89
<PAGE> 97
was 100% leased and the Annualized Rent was $47.14 per leased square foot as
compared to an average market rental rate, as of that date, of $38.00 per leased
square foot. Major tenants include D.E. Shaw & Co., L.P., a securities trading
and financial services company (63,871 rentable square feet), Equitable Life
Assurance Society of the United States (44,081 rentable square feet), NEC
Business Communications Systems (East), Inc., an international
telecommunications company (15,200 rentable square feet), U.S. Government,
General Services Agency (11,386 rentable square feet), King & Spalding, a
national law firm (35,574 rentable square feet), Shell Mining Company, a mining
and exploration company (11,858 rentable square feet), and Brown Raysman,
Milstein, Felder & Steiner LLP, a national law firm (38,237 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 10.3% 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 1993 and then moderately increasing to $36.19 per square foot in
1996; Class B average asking rents were $27.63 per square foot in 1992, $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 111,999 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. As
of August 31, 1997, this Property was 94.8% leased and the Annualized Rent was
$23.31 per leased square foot as compared to a market rental rate, as of that
date, 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 August 31,
1997 the building was 100% leased and the Annualized Rent was $27.44 per leased
square foot as compared to a market rental rate, as of that date, 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. As of
August 31, 1997, this Property was 98.9% leased and the Annualized Rent was
$28.18 per leased square foot as compared to a market rental rate, as of that
date, of $25.00 per leased
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square foot. The major tenant is TBWA CHIAT/DAY, INC., a national advertising
firm ("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 Annualized Rent of $26.52 per square foot as
of August 31, 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 the
Company intends to fund through working capital or finance through the Line of
Credit, and 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.
Downtown Manhattan Financial Submarket
The Financial submarket, consisting of the World Trade, Financial and
Insurance districts, contains approximately 97.3 million square feet of office
space and accounts for approximately 76% of the downtown Manhattan office
market's inventory. Approximately 61% of the office space in the Financial
submarket consists of Class A office space (approximately 59.8 million square
feet). According to Landauer, the current direct vacancy rate for Class A office
space in this submarket decreased from 16.4% in 1992 to 14.7% in 1996. The
availability rate for all classes of space in the Financial submarket declined
from 18.5% in 1992 to 17.0% in 1996, with 4.0 million square feet absorbed while
at the same time there were almost no additions to the inventory supply. The
positive impact of supply reductions on rent levels lagged behind absorption; in
1992 average asking rents for Class A space in this submarket were $34.22 before
falling during the mid-1990s to $29.72 per square foot in 1996. The average
asking rental rate for Class A space in this submarket is $29.38 per square foot
as of June 30, 1997. During the first six months of 1997, the Class A direct
vacancy rate in the Financial submarket decreased from 14.7% to 12.2% and there
was a positive net absorption of approximately 1.4 million square feet.
Description of Downtown Manhattan Financial Submarket Property
100 Wall Street (New York, New York)
100 Wall Street is a twenty-nine-story, 458,848 square foot Class A
building located in downtown Manhattan. The building was designed by Emory Roth
& Sons, P.C. and completed in 1969. In 1994 the
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building underwent an extensive modernization program and was the recipient of
the 1994 Builders Owners and Managers Association (BOMA) award for
modernization/restoration. As of August 31, 1997, this Property was 88.7% leased
and the Annualized Rent was $27.57 per leased square foot as compared to an
average market rental rate as of that date of $27.00 per leased square foot.
Major tenants include Credit Suisse, an international bank and financial
institution (95,310 rentable square feet), Waterhouse Securities, Inc., a
national securities firm (94,358 rentable square feet), Swiss American
Corporation, an international bank and financial institution (61,461 rentable
square feet), and MCI Telecommunications Corporation, an international
telecommunications company (34,250 rentable square feet).
Central Nassau County Submarket
The Central Nassau County Submarket contains approximately 1.9 million
square feet of space and accounts for 10.7% 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 six months of 1997, the vacancy rate in this submarket
decreased further to 9.7%, there was net absorption of 130,000 square feet and
average asking rental rates increased to $24.81 per square foot. There was no
new construction in this submarket during the first six months 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 1984. 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 1992 at a cost of
approximately $80,000. As of August 31, 1997, the building was 91.2% leased and
the Annualized Rent was $26.74 per leased square foot as compared to a market
rental rate, as of that date, of $23.00 per leased square foot. The major
tenants are Kraft Foods, Inc., an international manufacturer and distributor of
retail goods (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 Northwest Phoenix 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 six months of 1997, the vacancy rate in this submarket increased to 14.2%,
there was net absorption of 32,000 square feet and asking rents increased to
$14.00 per square foot. There are 108,000 square feet under construction in this
submarket during the first six months 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: 188,614 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
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9630: 113,164 square feet; and (vii) two restaurants: 17,000 square feet). The
Corporate Center Properties are 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 the Corporate Center Properties 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 August 31, 1997, the Corporate Center Properties were leased in
the following percentages: (i) Building 10010-30: 100% leased; (ii) Building
10040: 100.0% 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 Rent and the market rental rate for such period were
as follows: (i) Building 10010-30: $15.62 per leased square foot as compared to
a market rental rate, as of that date, of $17.75 per leased square foot; (ii)
Building 10040: $16.43 per leased square foot as compared to a market rental
rate, as of that date, of $17.75 per leased square foot; (iii) Building 10050:
$16.71 per leased square foot as compared to a market rental rate, as of that
date, of $17.75 per leased square foot; (iv) Building 10210: $15.65 per leased
square foot as compared to a market rental rate, as of that date, of $17.75 per
leased square foot; (v) Building 10220: $17.47 per leased square foot as
compared to a market rental rate, as of that date, of $17.75 per leased square
foot; and (vi) Building 9630: $18.33 per leased square foot as compared to a
market rental rate, as of that date, of $17.75 per leased square foot. The major
tenants at the Corporate Center Properties are as follows: (i) Building
10010-30: American Express which occupies an aggregate of 183,965 square feet;
(ii) Building 10040: Toyota Motor Credit Corporation, a national lending
institution, which occupies an aggregate of 10,384 square feet; (iii) Building
10050: American Express, Insurers Administrative Corporation, a national
insurance company, and Amica Mutual Insurance Company, a national insurance
company, which occupy an aggregate of 11,147, 8,796 and 5,663 square feet,
respectively; (iv) Building 10210: Insurers Administrative Corporation, a
national insurance company, Principal Mutual Life Insurance Company, a national
insurance company, and Gary A. Blake dba Farmers Insurance Exchange, a regional
insurance company, which occupy an aggregate of 21,454, 14,603 and 6,820 square
feet, respectively; (v) Building 10220: U.S. West Communications, Inc., an
international communications conglomerate, which occupies an aggregate of 24,128
square feet; and (vi) Building 9630: American Express, Hartford Fire Insurance
Company, a national insurance company, General Motors Acceptance Corporation dba
GMAC, a national lending institution, Employers Mutual Casualty Company, a
national insurance company, St. Paul Fire & Marine Insurance Company, a national
insurance company, and Crawford & Company, an consulting firm, which occupy an
aggregate of 37,717, 18,615, 23,625, 10,281, 7,271 and 6,068, respectively.
American Express occupies an aggregate of 232,829 square feet in the Corporate
Center Properties 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 Phoenix submarket contains approximately 10.3 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 Phoenix 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 six months of 1997, the vacancy rate in
this submarket decreased further to 11.6%, there was net absorption of 175,000
square feet and asking rents increased to $15.50 per square foot. There was no
new construction in this submarket during the first six months 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, acquired in May 1996. The building also
features an ancillary two-story 7,000 square foot pavilion offering retail space
which is
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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., an
international telecommunications company (22,459 rentable square feet), U.S.
West Communications, Inc., an international communications company (37,486
rentable square feet), Bryan Cave, McPheeters & McRoberts, a national law firm
(31,954 square feet), and Southwest Catholic Health Network, Inc. d/b/a
MercyCare, a regional not-for-profit healthcare organization (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 August
31, 1997, this Property was 91.0% leased and the Annualized Rent was $16.24 per
leased square foot as compared to a market rental rate, as of that date, of
$17.50 per leased square foot.
The 2800 North Central Property is owned in a joint venture with an
affiliate of 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 an affiliate 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 "Lack of Control Over Property Owned
Through Partnerships and Joint Ventures Could Result in Decisions Inconsistent
with the Company's Objectives." In addition, under the 2800 Partnership
Agreement, each of the Company and an affiliate of 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 a
15-story Class B office building located two and one-half miles west of downtown
Phoenix along the Central Avenue corridor. The building was built in 1974 and
contains 219,769 rentable square feet with parking for 600 vehicles. As of
August 31, 1997, this property was 84.2% leased and the Annualized Rent was
$13.02 per leased square foot as compared to a market rental rate as of such
date of $16.50 per leased square foot. The major tenants are Veterans
Administration -- GSA, a U.S. governmental agency (90,873 square feet) and
Arizona Department of Economic Security (58,240 square feet).
Tucson Eastside Submarket
The Tucson Eastside submarket contains approximately 3.5 million square
feet of office space and accounts for approximately 34% of the Metropolitan
Tucson office market's inventory. The direct vacancy rate in the Tucson Eastside
submarket decreased from 20.8% in 1992 to only 10.2% in 1996. This vacancy rate
has further declined to approximately 7.0% as of June 30, 1997. During the
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 Eastside submarket have increased from $13.50 in 1992 to
$17.58 as of June 30, 1997. According to Landauer, there is currently a low
supply of Class A space in the Tucson Eastside submarket which is expected to
remain among the most competitive submarkets in the Tucson office market.
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Description of Tucson Eastside Submarket Property
5151 East Broadway (Tucson, Arizona). 5151 East Broadway is the largest
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 246,486 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 August 31,
1997, this Property was 82.1% leased and the Annualized Rent was $16.15 per
leased square foot as compared to a market rental rate as of that date of $16.50
per leased square foot. The major tenants are The Winters Company, a regional
engineering firm (25,800 rentable square feet), U.S. Home Corporation, a
national home builder (15,358 rentable square feet), Dean Witter Reynolds, Inc.,
an international bank and financial institution (12,900 square feet), Allstate
Insurance Company, a national insurance company (12,524 square feet), Tucson
Realty & Trust Company, a local commercial real estate concern (7,801 rentable
square feet), and Equitable Life, an international insurance and financial
services company (6,730 rentable square feet).
Downtown Orlando Submarket
The Downtown Orlando submarket of the Orlando Metropolitan office market
contains 5.3 million square feet of space and accounts for approximately 25% of
the Orlando Metropolitan 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 six months of 1997, the vacancy
rate in this submarket decreased further to 7.9%, net absorption was
approximately 118,000 square feet and asking rents have increased to $20.35 per
square foot. There was no new construction in this submarket during the six
months 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 Property 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 357,184 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 August 31, 1997, this property was 99.5% leased
and the Annualized Rent was $22.94 per leased square foot as compared to a
market rental rate, as of that date, of $21.00 per leased square foot. The major
tenants at the Property are First Union Bank, a national bank (69,364 square
feet), American Express, an international financial institution (13,387 square
feet), United Healthcare Services, Inc., a national healthcare provider (39,240
square feet)and Hansen, Lind & Meyer, a national architectual and engineering
firm (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
six months of 1997, the vacancy rate in this submarket decreased considerably to
8.0%, while net absorption totaled
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approximately 155,500 square feet. Asking rental rates in the submarket
increased from $13.03 per square foot in 1992 to $14.48 per square foot at June
30, 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 the Company intends to fund with working capital or through borrowings
under the Line of Credit, and which is expected to be completed in January 1998.
The Company believes the capital improvement program will reposition this
Property into a Class A property, attracting higher quality tenants and
corresponding market rental rates. As of August 31, 1997, this Property was
21.0% leased and the Annualized Rent was $15.31 per leased square foot as
compared to a market rental rate, as of that date, of $18.75 per leased square
foot. The Property would be 74.5% leased if all space that was leased as of
August 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., a national
engineering and architectural firm, for 37,888 net rentable square feet, Apollo
Group Inc. a national educational services company for 18,944 net rentable
square feet, and Thruput Systems, Inc., a local computer software developer, for
7,314 net rentable square feet; and expects such tenants to occupy its leased
space during the remainder of 1997.
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 six
months of 1997, the vacancy rate in this submarket increased to 13.4%,
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 December 31, 1996 to $17.58 at June 30, 1997.
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 4, and is in close proximity to downtown
Orlando. The Maitland Forum Property was built in 1985 and contains 266,060
rentable square feet and includes 944 parking spaces. As of August 31, 1997 this
Property was 99.9% leased and the Annualized Rent was $15.57 per leased square
foot as compared to a market rental rate, as of that date, of $17.00 per leased
square foot. The major tenants at this Property are Honor Technologies, Inc., a
national banking services company (59,609 square feet), Florida Power
Corporation, a regional public utility (the utility company) (52,622 rentable
square feet), ITT Educational Services, Inc., a national educational services
company (34,422 rentable square feet), and Reliance Insurance Company, a
national 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 buildings share 249 parking spaces.
Maitland West I is also located within Maitland Center, Central Florida's
largest office complex, off Interstate 4, and is in close proximity to downtown
Orlando. As of August 31, 1997, the Maitland West Properties were leased in the
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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 Rent and the market rate as of that date were as
follows: (i) 2601 Maitland Center Parkway: $15.23 per leased square foot as
compared to a market rental rate, as of that date, 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, as of that date, of $15.50 per leased square
foot; and (iii) 2605 Maitland Center Parkway: $13.96 per leased square foot as
compared to a market rental rate, as of that date, 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, a local insurance company, which
occupies an aggregate of 10,342 square feet; (ii) 2603 Maitland Center Parkway:
CCL Consultants, Inc., a regional consulting practice, and Blazer Financial
Services, Inc., a national financial services company, which occupy an aggregate
of 5,693 and 3,050 square feet, respectively; and (iii) 2605 Maitland Center
Parkway: Health Plans of America, Inc., a regional health insurance company,
Community Care Network, Inc., a national health insurance company, FJW
Enterprises Inc., a regional restaurant chain, Systems One Services, Inc., a
national personnel services firm and General Electric Corporation, an
international financial services company, 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, which the Company intends to fund with working capital or through
project financing. 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, which
the Company intends to fund with working capital or through project financing.
There can be no assurance that such development will take place.
LAND PARCEL OPTIONS
Phoenix Land Parcel. The Company will acquire, at no cost, an option held
by certain Primary Contributors that will provide the Company with the right to
acquire from an unaffiliated third party for approximately $10.3 million,
approximately 43 acres of undeveloped land in Phoenix that can support 1.0
million square feet of development. The site is located adjacent to the Black
Canyon which is the only interstate freeway providing north access out of
Phoenix. This freeway, when fully completed, together with an adjoining
interstate, will form a complete loop around Phoenix. Site plans call for up to
1 million square feet of office space development. Within a 30-minute drive from
the site is the Deer Valley Airport (private planes) and the Sky Harbor
International Airport. As of September 30, 1997, the Primary Contributors had
paid approximately $200,000 in exchange for receipt of the option and the
Company had advanced approximately $450,000 for preliminary development work and
option extension fees relating to this land. The right to acquire the land
expires on October 31, 1997, subject to one 30-day extension that requires the
payment of a $100,000 extension fee. Pursuant to the Company's Bylaws, the
Company is authorized to exercise this option only if the Independent Directors
unanimously approve the exercise of such option even if the Independent
Directors constitute less than a quorum.
One Orlando Center Land Parcel. The Company holds a five-year option from
certain Primary Contributors to acquire certain additional properties and
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,
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<PAGE> 105
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
appraised value of the land as of May 9, 1997), which equates to approximately
$4.75 per buildable square foot. Pursuant to the Company's Bylaws, the Company
is authorized to exercise this option only if (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 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.
The exercise of these options by the Company is subject to a number of
contingencies, including the completion of due diligence, completion of the
Company's analysis of the development opportunity and the receipt of appropriate
Board approval and, therefore, are not deemed probable.
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 August 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 (which equates to a purchase price of approximately $13
million as of August 31, 1997).
120 Mineola Boulevard. The Company is the tenant under a lease for a
parking garage. The lease expires in October 2013, 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
The Tower 45, One Orlando Center and 100 Wall Street Properties
(collectively, the "Significant Properties") are deemed "significant" because
they each accounted for more than 10% of the Company's gross revenues for its
last fiscal year and the book value of such Significant Properties amounted to
10% or more of the Company's total assets for such period. For federal income
tax purposes, the basis, net of accumulated depreciation, in the Tower 45 and
One Orlando Center Properties aggregated approximately $133 million at June 30,
1997. Similar data for the 100 Wall Street Property is not available because the
Company did not own the Property during that period (and will not own it until
the closing of the Offering). The real property associated with those
Significant 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. The 1996 annual real estate taxes
paid on the 100 Wall Street Property were approximately $2.35 million. The New
York City real estate tax rate is $10.402 per each $100 of assessed value.
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OCCUPANCY, EFFECTIVE RENT AND OTHER DATA 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, NET 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) 68% 75% 99.1% 99.3% (1) (1) $19.50 $20.02 $19.95
100 Wall Street............ 82.2% 70.9% 80.1% 82.9% 95.5% (1) (1) (1) (1) (1)
</TABLE>
- ---------------
(1) Data not available because the Company did not own the Property during the
applicable period and the previous unaffiliated owners of such Properties have
advised the Company that such data is unavailable.
As of August 31, 1997: (i) one tenant occupied 10% or more of the rentable
square footage at the Tower 45 Property (D.E. Shaw & Co., L.P.); (ii) two
tenants each occupied 10% or more of the rentable square footage at the One
Orlando Center Property (First Union Bank and United Healthcare Services, Inc.);
and (iii) three tenants each occupied 10% or more of the rentable square feet at
the 100 Wall Street Property (Credit Suisse, Waterhouse Securities, Inc., and
Swiss American Corporation). The loss of one or more of these significant
tenants at one of these Properties could have a material adverse effect on the
financial performance of such Property. Further information with respect to
significant tenants at the Significant Properties and the markets in which they
are located is set forth under "-- Submarket and Property Information -- Times
Square Submarket and -- Description of Times Square Submarket Property (Tower
45), -- Downtown Orlando Submarket and -- Description of Downtown Orlando
Submarket Property (One Orlando Center), and -- Downtown Manhattan Financial
Submarket and -- Description of Downtown Manhattan Financial Submarket Property
(100 Wall Street)." See also "Risk Factors -- Impact of Competition on Occupancy
Levels, Rent Charged, Acquisitions and Management Services."
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, consist 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 of their business time and
attention 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 $113.7 million
(including its pro rata share of Joint Venture Debt), representing approximately
20.7% of the Company's Total Market Capitalization. Approximately $54.0 million
of the Mortgage Debt will consist 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
will consist of prior indebtedness of the Tower Predecessor including $35.0
million relating to the Tower 45 Property. The Company will have the right to
prepay, commencing 40 days following the Offering and prior to maturity, the
$35.0 million of mortgage indebtedness that will be collateralized by the Tower
45 Property following the consummation of the Offering. If the Company
determines to prepay the loan prior to maturity, the Company is positioned to
finance such prepayment by drawing upon the remaining $35.0 million of available
borrowing capacity 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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<PAGE> 107
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 84
One Orlando Center, 286, 290
and 292 Madison Avenue
Properties................. 54,000 (2) None (3) (4) 3,758
Tower 45(5).................. 35,000 LIBOR + None December 31, 1998 2,436
1.75%
2800 North Central(6)........ 2,658 9.41% None May 31, 1999(7) $ 250
----------- ---- ----------
Total/Weighted
Average........... $113,658 7.14% October 1, 2003(8) $ 8,114
=========== ==== ==========
</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 6.06% as of October 9, 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 $107
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. If the Term Loan is so used to prepay the
Tower 45 loan, the Tower 45 Property will secure the Term Loan and the three
Madison Avenue Properties will become unencumbered.
(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 $54.0 million Term
Loan 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.
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LINE OF CREDIT
Neither the Company's Bylaws nor its Charter will limit the amount of
indebtedness the Company may incur. To ensure the Company has sufficient
liquidity to conduct its operations, including to finance its acquisition of
additional office properties, to refinance existing indebtedness and for general
working capital requirements, the Company has obtained a commitment from Merrill
Lynch Capital Corporation for the $200 million Line of Credit. The Line of
Credit will be used primarily to finance the acquisition of, and investment in,
office properties, to refinance existing indebtedness, and for general working
capital needs. The Line of Credit will be unsecured and will have a three-year
term which will commence upon or shortly after the closing of the Offering.
While the Line of Credit permits borrowings up to $200 million, the Operating
Partnership's total outstanding indebtedness including aggregate advances under
the Line of Credit, is expected to be limited to 55% of the Total Value (as
defined below) during the first year of the term of the Line of Credit and 50%
of the Total Value thereafter. "Total Value" shall mean Cash Flow (as defined
below) capitalized at 9.5% plus (i) 100% of out-of-pocket costs for assets under
development (subject to a maximum of 10% of Total Value), and (ii) 100% of cash
and cash equivalents (excluding restricted deposits). "Cash Flow" shall mean the
sum of (a) Funds from Operations, (adjusted for non-recurring items and non-cash
revenue, including, without limitation, the effect of straight-lining the rents
pursuant to GAAP) and (b) interest expense. Outside of the Line of Credit, the
Company and the Operating Partnership may not incur secured indebtedness which
exceeds 40% of the Total Value during the first year of the term of the Line of
Credit and 35% thereafter. Recourse indebtedness of the Company and the
Operating Partnership, exclusive of the Line of Credit, shall not exceed 5% of
Total Value. Neither the Company nor the Operating Partnership shall make any
distributions in a quarter which, when added to all distributions made during
the immediately preceding three quarters exceeds 95% of Funds from Operations.
Borrowings under the Line of Credit are expected to bear interest at a variable
rate equal to (subject to certain exceptions): (x) LIBOR plus 125 basis points
if the Operating Partnership's total outstanding indebtedness is less than 30%
of Total Value; (y) LIBOR plus 137.5 basis points if the Operating Partnership's
total outstanding indebtedness is greater than or equal to 30% of Total Value
but less than 45% of Total Value; and (z) LIBOR plus 162.5 basis points if the
Operating Partnership's total outstanding indebtedness is greater than or equal
to 45% of Total Value but less than 55% of Total Value; in each case, calculated
based on interest periods of one, two, three or six months at the option of the
Operating Partnership. Economic conditions could result in higher interest
rates, which could increase debt service requirements on borrowings under the
Line of Credit and which could, in turn, reduce the amount of Cash Available for
Distribution. See "Risk Factors -- Changes in Policies, Such as the Company's
Debt Policy, without Stockholder Approval Could Adversely Affect the Company."
The Company will pay a loan fee of approximately $1.0 million upon the closing
of the Line of Credit. The closing of the Line of Credit is subject to the
satisfaction of customary conditions, including the negotiation and execution of
customary loan documents. Accordingly, there can be no assurance that the Line
of Credit will close on the terms set forth in its commitment with Merrill Lynch
Capital Corporation.
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 -- The Company's
Performance and Value are Subject to Risks Associated with the Real Estate
Industry -- Uninsured Losses Could Adversely Affect the Company's Cash Flow."
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
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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 -- The Company's Performance and Value are Subject to Risks Associated
with the Real Estate Industry -- Liability for Environmental Matters Could
Adversely Affect the Company's Financial Condition."
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 its
major competitors are local real estate companies in its markets that specialize
in the redevelopment and development of office buildings and (i) in the New York
City office market; SL Green Realty Corp., (ii) in the Metropolitan Orlando
office market; Highwoods Properties, Inc., and (iii) in the Metropolitan Phoenix
office market; Prentiss Properties Trust and CarrAmerica Realty Corporation. The
Company believes that the Offering, the Line of Credit and its access as a
public company to 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 70 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. Pursuant to the Charter, upon election of the director nominees, there
will be a majority of directors who are Independent Directors. Moreover, 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, Chief
Financial Officer and Treasurer
Eric S. Reimer...................... 38 Vice President -- Leasing
Reuben Friedberg.................... 71 Vice President -- Finance
Stephen B. Siegel................... 53 Director Nominee 2000
Esko I. Korhonen.................... 42 Director Nominee 1998(1)
Robert M. Adams..................... 56 Director Nominee 1998
Richard M. Wisely................... 52 Director Nominee 1998
Lester S. Garfinkel................. 43 Director 1999
</TABLE>
- ---------------
(1) Mr. Korhonen agreed to serve as a director of the Company at the same time
that Carlyle agreed to purchase $10.0 million in Common Stock pursuant to
the Concurrent Private Placements. The Company does not have any arrangement
to nominate or elect Mr. Korhonen as a director in the future.
The following is a biographical summary of each of the directors, director
nominees and executive officers of the Company:
LAWRENCE H. FELDMAN. Mr. Feldman serves as Chairman of the Board, Chief
Executive Officer and President of the Company. Since March 1990, Mr. Feldman
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, the Real Estate Board of New York and NAREIT. 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. Since December 1995, Mr. Cox 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 where his main responsibilities included supervising all of Tower
Equities's construction
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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 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, Chief
Financial Officer and Treasurer of the Company. Since February 1996, 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 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 Realty Fund, 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. Since 1987, 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. Since 1992, 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.
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 Wharton Business School's Real Estate Center and New York University's
Real Estate Council, and is a director of Liberty Property Trust.
ESKO I. KORHONEN. Mr. Korhonen is a principal of Carlyle Realty, L.P., an
affiliate of Carlyle, a Washington, D.C. based merchant banking firm, and since
April, 1995, he has been part of a group that is responsible for coordinating
the firm's real estate acquisitions. From 1991 to April, 1995, Mr. Korhonen was
Vice President of ING Real Estate, a subsidiary of the Netherlands based ING
Groep N.V., a financial services company ("ING"), where he directed acquisition
and asset management activities for ING's North American real estate portfolio.
From 1988 to 1991, Mr. Korhonen was a partner and regional manager at Richard
Ellis Inc., an investment advisory firm, where he acted as a principal-side
advisor to foreign and domestic institutional investors for the acquisition and
asset management of North American real estate. Mr. Korhonen began his real
estate career in 1983 as a developer with the Trammell Crow Company in Houston,
Texas. Mr. Korhonen graduated in 1977 with a B.A. from Colgate University and an
M.B.A. in 1983 from The J.L. Kellogg Graduate School of Business at Northwestern
University.
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
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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.
RICHARD M. WISELY. Mr. Wisely currently serves as Chairman of the Board
and Chief Executive Officer of LungCheck Inc., a highly specialized diagnostic
laboratory and lung cancer research facility that he co-founded in 1996. From
1990 until his retirement in August 1995, Mr. Wisely served as Sr. Vice
President and Chief Operating Officer of Rexall Sundown, Inc., a publicly-traded
vitamin and over-the-counter pharmaceutical manufacturer. Prior to joining
Rexall Sundown as the Sr. Vice President of Operations in 1985, Mr. Wisely had
spent 17 years with Dart Industries, principally with the former Rexall Drug
Company of St. Louis; his last position there was Vice President of Operations.
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. 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.
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. Since December 1995, 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 since 1987. 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 (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
served as Controller of Tower Equities since October 1995. 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.
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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.
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 initially 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
Placements, 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.
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EXECUTIVE COMPENSATION
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 the four other
most highly compensated executive officers of the Company (the "Named Executive
Officers"). Information for 1996 is not presented because the Company had no
operations during such period and the Named Executive Officers were employed by
other affiliated entities, as well as Tower Equities and certain members of the
Tower Predecessor.
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
Chairman of the Board, Chief Executive Officer and
President................................................. $175,000 201,000
Robert L. Cox
Executive Vice President, Chief Operating Officer......... $150,000 201,000
Joseph D. Kasman
Senior Vice President, Chief Financial Officer............ $150,000 110,000
Eric S. Reimer
Vice President -- Leasing................................. $150,000 68,000
Reuben Friedberg
Vice President -- Finance................................. $107,000 31,000
</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
875,000 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.
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL COMMON SHARE PRICE
UNDERLYING OPTIONS TO BE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE PRICE OPTION TERM(1)
TO BE EMPLOYEES IN PER COMMON ----------------------
NAME GRANTED(2) FISCAL YEAR SHARE(3) EXPIRATION DATE 5%(4) 10%(5)
- ---------------------- ---------- ---------------- -------------- ------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lawrence H. Feldman... 201,000 23.0% $26.00 (6) $3,286,350 $8,329,440
Robert L. Cox......... 201,000 23.0% $26.00 (6) $3,286,350 $8,329,440
Joseph D. Kasman...... 110,000 12.6% $26.00 (6) $1,798,500 $4,558,400
Eric S. Reimer........ 68,000 7.8% $26.00 (6) $1,111,800 $2,817,920
Reuben Friedberg...... 31,000 3.5% $26.00 (6) $ 506,850 $1,284,640
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission,
these amounts are the hypothetical gains or "option spreads" that would
exist for the respective options based on assumed rates of annual compound
share price appreciation of 5% and 10% from the date the options were
granted over the full option term. No gain to the optionee is possible
without an increase in the price of the Common Stock, which would benefit
all stockholders.
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(2) All options are granted at the fair market value of the shares of Common
Stock at the date of grant. Options granted are for a term of not more than
ten years from the date of grant and vest in three equal annual installments
(rounded to the nearest whole share of Common Stock) over three years.
(3) Based on the assumed Offering Price. The exercise price per share will be
equal to the Offering Price.
(4) An annual compound share price appreciation of 5% from the Offering price of
$26.00 per Common Share yields a price of $42.35 per Common Share.
(5) An annual compound share price appreciation of 10% from the Offering price
of $26.00 per Common Share yields a price of $67.44 per Common Share.
(6) The expiration date of the options is the ten year anniversary of the
closing of the Offering.
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 automatic one-year extensions, 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 in
the case of Mr. Cox, to automatic one-year extensions, 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, 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 each
case, payable within 30 days of each such officer's termination. In the case of
an officer's death or disability, salary is continued for a twelve-month period.
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. Pursuant to the employment agreements, such
options are subject to vesting, but will vest upon an officer's death or
disability or a change in control of the Company.
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, renovation 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 Period"), unless such termination was without cause or was made
by the officer with good reason. In the event of the termination of Messrs.
Feldman, Cox, or Kasman's employment by the Company without cause, or by the
officer for good reason, 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. See "Risk
Factors -- The Company Relies on Key Personnel Whose Continued Service is Not
Guaranteed."
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 Compen-
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sation 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.
Certain Federal Income Tax Consequences Relating to Options. In general, a
Participant will not recognize taxable income upon the grant or exercise of an
Incentive Stock Option ("ISO"). However, upon the exercise of an ISO, the excess
of the fair market value of the shares received on the date of exercise over the
exercise price of the shares will be treated as an adjustment to alternative
minimum taxable income. When a Participant disposes of shares acquired by
exercise of an ISO, the Participant's gain (the difference between the sale
proceeds and the price paid by the Participant for the shares) upon the
disposition will be taxed as capital gain, provided the Participant (i) does not
dispose of the shares within two years after the date of grant nor within one
year after the date of exercise, and (ii) exercises the option while an employee
of the Company or of an affiliate of the Company or within three months after
termination of employment for reasons other than death or disability. If the
first condition is not met, the Participant generally will realize ordinary
income in the year of the disqualifying disposition. If the second condition is
not met, the Participant generally will recognize ordinary income upon exercise
of the option.
In general, a Participant who receives a nonqualified stock option will
recognize no income at the time of the grant of the option. Upon exercise of a
nonqualified stock option, a Participant will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date of
exercise over the exercise price of the option. Special timing rules may apply
to a Participant who is subject to Section 16(a) of the Exchange Act.
The Company will be entitled to claim a federal income tax deduction on
account of the exercise of a nonqualified option. The amount of the deduction
will be equal to the ordinary income recognized by the Participant. The employer
will not be entitled to a federal income tax deduction on account of the grant
of any
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option or the exercise of an ISO. The employer may claim a federal income tax
deduction on account of certain disqualifying dispositions of Common Stock
acquired upon the exercise of an ISO.
Section 162(m) of the Code places a limitation of $1,000,000 on the amount
of compensation payable to each of the named executive officers that the Company
may deduct for federal income tax purposes. The limit does not apply to certain
performance-based compensation paid under a plan that meets the requirements of
the Code and regulations promulgated thereunder. While the 1997 Plan generally
complies with the requirements for performance-based compensation, stock awards
granted under the 1997 Plan will not satisfy those requirements.
Certain Federal Income Tax Consequences Relating to Options. In general, a
Participant will not recognize taxable income upon the grant or exercise of an
Incentive Stock Option ("ISO"). However, upon the exercise of an ISO, the excess
of the fair market value of the shares received on the date of exercise over the
exercise price of the shares will be treated as an adjustment to alternative
minimum taxable income. When a Participant disposes of shares acquired by
exercise of an ISO, the Participant's gain (the difference between the sale
proceeds and the price paid by the Participant for the shares) upon the
disposition will be taxed as capital gain, provided the Participant (i) does not
dispose of the shares within two years after the date of grant nor within one
year after the date of exercise, and (ii) exercises the option while an employee
of the Company or of an affiliate of the Company or within three months after
termination of employment for reasons other than death or disability. If the
first condition is not met, the Participant generally will realize ordinary
income in the year of the disqualifying disposition. If the second condition is
not met, the Participant generally will recognize ordinary income upon exercise
of the option.
In general, a Participant who receives a nonqualified stock option will
recognize no income at the time of the grant of the option. Upon exercise of a
nonqualified stock option, a Participant will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date of
exercise over the exercise price of the option. Special timing rules may apply
to a Participant who is subject to Section 16(a) of the Exchange Act.
The Company will be entitled to claim a federal income tax deduction on
account of the exercise of a nonqualified option. The amount of the deduction
will be equal to the ordinary income recognized by the Participant. The employer
will not be entitled to a federal income tax deduction on account of the grant
of any option or the exercise of an ISO. The employer may claim a federal income
tax deduction on account of certain disqualifying dispositions of Common Stock
acquired upon the exercise of an ISO.
Section 162(m) of the Code places a limitation of $1,000,000 on the amount
of compensation payable to each of the named executive officers that the Company
may deduct for federal income tax purposes. The limit does not apply to certain
performance-based compensation paid under a plan that meets the requirements of
the Code and regulations promulgated thereunder. While the 1997 Plan generally
complies with the requirements for performance-based compensation, stock awards
granted under the 1997 Plan will not satisfy those requirements.
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 the closing date of the Offering (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 commencement of the
term of office of such Non-Founding Director. 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
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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.
Certain Federal Income Tax Consequences Relating to Options. Generally, an
eligible director does not recognize any taxable income, and the Company is not
entitled to a deduction upon the grant of an option. Upon the exercise of an
option, the eligible director recognizes ordinary income equal to the excess of
the fair market value of the shares acquired over the option exercise price, if
any. Special rules may apply as a result of Section 16 of the Exchange Act. The
Company is generally entitled to a deduction equal to the compensation taxable
to the eligible director as ordinary income. Eligible directors may be subject
to backup withholding requirements for federal income tax.
Certain Federal Income Tax Consequences Relating to Options. Generally, an
eligible director does not recognize any taxable income, and the Company is not
entitled to a deduction upon the grant of an option. Upon the exercise of an
option, the eligible director recognizes ordinary income equal to the excess of
the fair market value of the shares acquired over the option exercise price, if
any. Special rules may apply as a result of Section 16 of the Exchange Act. The
Company is generally entitled to a deduction equal to the compensation taxable
to the eligible director as ordinary income. Eligible directors may be subject
to backup withholding requirements for federal income tax.
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
officer 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,
against any claim or liability to which he may become subject by reason of such
status. 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
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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 permits a corporation to advance reasonable expenses to a
director or officer upon the corporation's receipt of (a) a written affirmation
by the director or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by the corporation and (b) a written
undertaking by or on his behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met. 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 21 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 Placements, 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 12,015,000 shares of Common Stock in the Offering
and 1,153,845 shares of Common Stock in the Concurrent Private Placements
(769,230 to the Morgan Stanley Investors and 384,615 to the Carlyle
Funds). All the net proceeds to the Company from the Offering and the
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Concurrent Private Placements 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 90.5%. 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 89.5% 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 1,128,160 shares of restricted Common Stock,
1,583,640 OP Units, approximately $118.7 million in cash, and the
assumption of approximately $244.6 million in 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 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 1,509,490 OP Units (valued at
approximately $39.2 million based on the Offering Price); and
- The Company will acquire from persons other than the Primary
Contributors, directly or indirectly, debt, equity and fee interests
in the Properties (including an interest in the Maitland Forum ground
lease) in exchange for 1,128,160 shares of restricted Common Stock
(valued at approximately $29.3 million based on the Offering Price),
74,150 OP Units (valued at approximately $1.9 million based on the
Offering Price) and $118.7 million in cash.
- The Operating Partnership is expected to enter into the $107 million
seven-year Term Loan with Merrill Lynch Credit Corporation and will
borrow approximately $54 million under such facility at the closing of
the Offering.
- The Operating Partnership will utilize $246.5 million of the net proceeds
of the Offering, the Concurrent Private Placements and the Term Loan 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 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 common stock and 5% of the voting
common 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 886,200 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 of the
Excluded Properties are controlled by certain Primary Contributors and
have non-cancellable management contracts (except upon a sale of such
property). 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.
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- The Operating Partnership will acquire, at no cost, an option held by
certain Primary Contributors that will provide the Operating Partnership
with the right to acquire from an unaffiliated third party for
approximately $10.3 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. In addition, the Operating
Partnership will acquire from certain Primary Contributors for no
additional consideration an option to acquire for approximately $3.8
million (approximately $4.75 per buildable square foot) (75% of the
appraised value of the land as of May 9, 1997) the One Orlando Center
Land Parcel that can support approximately 800,000 square feet of
development. See "The Properties -- Land Parcel Options."
- The Company will establish the three-year $200 million unsecured
revolving Line of Credit at or shortly after the closing of the Offering,
which will be used primarily to finance the acquisition of, and
investment in, office properties, to refinance existing indebtedness, and
for general working capital needs.
- The Company will pay to an affiliate of Carlyle $925,000 in consideration
of obtaining the consent to the transfer of an interest in the 2800 North
Central Avenue Property to the Company.
- 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 90.5% 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 Placements, purchasers of Common Stock in
the Offering will hold approximately 71.9% of the equity of the Company, the
purchasers of Common Stock in the Concurrent Private Placements (the Morgan
Stanley Investors and the Carlyle Funds) will hold approximately 6.9% of the
equity of the Company, recipients of other restricted shares of Common Stock
will hold approximately 11.7% of the equity of the Company, the Primary
Contributors will directly or indirectly hold approximately 9.0% of the
consolidated equity of the Company, and the other Continuing Investors will
directly or indirectly hold approximately .5% 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; Substantial Benefits to Related Parties," "-- Benefits to Related
Parties," "Principal Stockholders," and "Partnership Agreement -- Exchange
Rights."
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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 approximately 6.5% 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 and Continuing Investors 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.
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 1,509,490 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 manage-
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ment and leasing businesses, in connection with the Formation
Transactions. These OP Units (representing approximately 9.0% of the
equity interests in the Company on a consolidated basis) will have a
total value of approximately $39.2 million based on the Offering Price,
compared to a deficiency in net tangible book value of the assets
contributed to the Operating Partnership by the Primary Contributors of
approximately $75.5 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 Merrill Lynch, Pierce, Fenner &
Smith Incorporated. 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.
- Messrs. Feldman and Cox will each serve as a director and officer of the
Company, Messrs. Adams and Wisely will serve as directors 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, options to purchase
an aggregate of 711,000 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. Certain of 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. In addition, the aggregate liability of those Primary
Contributors to the Company under the applicable supplemental representations,
warranties and indemnity agreement relating to the Properties is limited to the
initial value of the OP Units received by them in the Formation Transactions
(approximately $36.9 million). These representations and warranties will survive
the closing of the Offering for a period of one year. See "Risk
Factors -- Conflicts of Interest in the Business of the Company -- Possible Less
Vigorous Enforcement of Terms of Contribution and Other Agreements by the
Company."
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
FORMATION TRANSACTIONS
The terms of the acquisition of interests in the Properties and in Tower
Equities and Properties Atlantic 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 received from
the Company consulting fees of approximately $132,000 for the year ended
December 31, 1996 and fees of approximately $66,000 through March 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; Substantial
Benefits to Related Parties," "Formation and Structure of the
Company -- Benefits to Related Parties" and "Partnership Agreement -- Exchange
Rights."
REGISTRATION RIGHTS
For a description of certain registration rights held by the Primary
Contributors, the Morgan Stanley Investors, and the Carlyle Funds, 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 201,000, 201,000 and 110,000 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 of the Excluded Properties are controlled by certain Primary
Contributors and have non-cancellable management contracts (except upon the sale
of such property). 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."
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EXECUTIVE OFFICER AND DIRECTOR DISTRIBUTIONS AND FEES
The executive officers and directors of the Company 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 $24,044,800 of restricted Common Stock and $23,120,000 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................................ 881,025 5.8% 5.3%
Robert L. Cox...................................... 106,723 * *
Joseph D. Kasman................................... 109,421 * *
Eric S. Reimer..................................... 78,722 * *
Reuben Friedberg................................... 30,119 * *
Lester S. Garfinkel(4)............................. -- -- --
Robert M. Adams(5)................................. 53,993 * *
Stephen B. Siegel(6)............................... -- -- --
Richard M. Wisely(7)............................... 38,000 * *
Esko I. Korhonen(8)(9)............................. 384,615 2.5 2.3
DRA Opportunity Fund(10)........................... 465,400 3.1 2.8
Office Invest Sub LLC(11).......................... 459,400 3.0 2.8
Morgan Stanley Asset Management Inc.(12)........... 1,655,430 10.9 9.9
All executive officers, directors and director
nominees as a group (10 persons)................. 1,682,618 11.1% 10.1%
</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 15,118,205 shares of Common Stock outstanding immediately following
the Offering and the Concurrent Private Placements. 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 16,701,845 shares of Common Stock and OP Units
outstanding immediately following the Offering (15,118,205 shares of Common
Stock and 1,583,640 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 Insignia/Edward S. Gordon Co., 200
Park Avenue, 19th Floor, New York, New York 10166.
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(7) The business address of Mr. Wisely is LungCheck, Inc., 8255 East Raintree
Drive, Scottsdale, Arizona, 85260-2515.
(8) The business address of Mr. Korhonen is The Carlyle Group, 1001
Pennsylvania Avenue N.W., Suite 220 South, Washington, D.C. 20004-2505.
(9) Includes 384,615 shares of Common Stock to be purchased by the Carlyle
Funds in the Concurrent Private Placements, which may be deemed
beneficially to be owned by Mr. Korhonen as he is a principal of Carlyle
Realty, L.P., an affiliate of Carlyle.
(10) The business address of DRA Opportunity Fund is 1180 Avenue of the
Americas, New York, New York 10036.
(11) The business address of Office Invest Sub LLC is c/o DRA Advisors, Inc.,
1180 Avenue of the Americas, New York, New York 10036.
(12) 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 beneficially to own the shares of Common Stock
beneficially owned by the Morgan Stanley 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. MSAM disclaims
beneficial ownership of such shares of Common Stock.
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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 150,000,000
shares of Common Stock, par value $0.01 per share, and 50,000,000 shares of
preferred stock, $0.01 par value per share (the "Preferred Stock"). Upon
completion of the Offering, 15,118,205 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 provides
that, except as specifically provided otherwise in the Charter, any action
requiring a greater number of affirmative votes of stockholders shall be
effective and valid if approved by the affirmative vote of all of the votes
entitled to be cast on the matter. The Charter provides that the provisions on
restrictions on transfers will not be amended, altered, changed or repealed
without the approval of the Board of Directors (including the affirmative vote
of all Independent Directors) and the holders of not less than two-thirds of the
outstanding shares of stock of the Company entitled to vote generally in the
election of directors, voting together as a single class. Moreover, no amendment
to the Charter may be made unless the same is approved by the Board of Directors
in accordance with Section 2-604 of the MGCL and the Charter is thereafter
approved by the affirmative vote of the holders of two-thirds of the outstanding
shares of Capital Stock of the Company entitled to vote on such amendment,
voting together as a single class, and the affirmative vote of the holders of
two-thirds of the outstanding shares of each class entitled to vote thereon as a
class (except to amend any provision of the Charter relating to the
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authority of the Company to issue shares of its Capital Stock, only a majority,
rather than two-thirds, is needed).
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 from time to time into one or more classes or
series, as authorized by the Board of Directors. Prior to issuance of shares of
each series, the Board is required by the MGCL and the Charter of the Company to
set, subject to the provisions of the Charter regarding the restrictions on
transfer of stock, the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each such series. Thus,
the Board could authorize the issuance of shares of Preferred Stock with terms
and conditions which could have the effect of delaying, deferring or preventing
a 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") (subject to the Look-Through Ownership Limitation
applicable to certain stockholders, as described below). Certain types of
entities, such as pension trusts qualifying under section 401(a) of the Code,
mutual funds qualifying as regulated investment companies under section 851 of
the Code, and corporations, will be looked through for purposes of the "closely
held" test in section 856(h) of the Code. Subject to certain limited exceptions,
the Charter will allow such an entity under the Look-Through Ownership
Limitation to own up to 15.0% of the shares of any class or series of the
Company's stock, provided that such ownership does not cause any
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individual beneficial owner of such entity to exceed the Ownership Limitation or
otherwise result in a violation of the tests described in clauses (ii), (iii)
and (iv) of the second sentence of the succeeding paragraph.
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 or the Look-Through Ownership Limitation, if
applicable, (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 real property of the Company, 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 Limitation (or the Look-Through Ownership
Limitation, if applicable). 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 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. In
addition, the Board of Directors may give a Look-Through Entity an exception to
the Look-Through Ownership Limit if the Look-Through Entity satisfies the Board
of Directors that such share ownership will not adversely affect the Company's
ability to qualify as a REIT.
If, notwithstanding the restrictions described above, and subject to
certain exceptions described herein, any purported transfer of Common Stock that
would (i) result in any person owning, directly or indirectly, shares of Common
Stock in excess of the Ownership Limitation (or the Look-Through Ownership
Limitation, if applicable), (ii) result in the shares of Common Stock being
owned by fewer than 100 persons (determined without reference to any rules of
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, such shares
will be designated as "Shares-in-Trust" and will be transferred automatically to
a trust (a "Trust"), effective on the business day before the purported transfer
of such shares of Common Stock. The record holder of the shares of Common Stock
that are designated as Shares-in-Trust (the "Prohibited Owner") will be required
to submit such number of shares of Common 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
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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 irreversible 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 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
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(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 or the
Look-Through Ownership Limit, as applicable.
The Ownership Limitation (or the Look-Through Ownership Limitation, as
applicable) generally will not apply to the acquisition of shares of capital
stock by an underwriter that participates in a public offering of such shares.
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 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. Any individual so
elected as director will hold office until the next annual meeting of
stockholders and until his successor is elected and qualifies.
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 only upon the recommendation of
the Board of Directors in accordance with Section 2-604 of the MGCL and the
approval of the stockholders. In addition to any other vote of the stockholders
that is required by applicable law, the affirmative vote of two-thirds of the
outstanding shares of the capital stock of the Company entitled to vote on such
amendment, voting together as a single class, and the affirmative vote of
two-thirds of the outstanding shares of each class entitled to vote thereon as a
class, is required to amend any provision of the Charter (except to amend any
provision of the Charter relating to the authority of the Company to issue
shares of its capital stock, only a majority rather than two-thirds is
required).
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 two-thirds of all of the
votes entitled to be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual
meeting of stockholders, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by stockholders may be
made only (i) pursuant to the Company's notice of the meeting; (ii) by 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 25% of all votes entitled to be cast at the meeting.
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.
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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. 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").
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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 or other entities engaged in real
estate activities. In addition, the Company may, but does not presently intend
to, invest in securities of other issuers, including for the purpose of
exercising control over such entities. See "-- Policies with Respect to Other
Activities."
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 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 20.7% (19.1% if
the Underwriters' over-allotment 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.
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.
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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, Such as
the Company's Debt Policy, Without Stockholder Approval Could Adversely Affect
the Company" 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 or an affiliate of the Company). 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 of each
class 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 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 a director or officer 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 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
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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 Placements, 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 15,118,205 shares of Common Stock issued and outstanding
(16,920,455 shares if the Underwriters' over-allotment option is exercised in
full). In addition, (i) 1,583,640 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
1,949,360 shares of Common Stock issued in the Formation Transactions, the
1,153,845 shares of Common Stock issued in the Concurrent Private Placements and
the 1,583,640 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 executive 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 acquired at the time of the
Offering 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 and the Carlyle Funds, 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 and Restricted Stock Plans
and -- Compensation of Directors." The Company intends to issue options to
purchase approximately 975,000 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 twelve-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
Placements 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
agreements 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 and Continuing Investors, 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) alter the rights of a partner to receive certain distributions
or allocations.
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
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856(i) of the Code; or (iii) the transfer occurs in connection with a
transaction which includes a merger, 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 Placements, in partial
consideration of which it will receive an approximate 1.0% general partner
interest and an approximate 89.5% 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
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Partnership may not satisfy a Limited Partner's Exchange Right if and to the
extent that the delivery of 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 approximately 1,583,640. 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 Placements 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
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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 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. The Taxpayer Relief Act
of 1997 (the "1997 Act") was enacted on August 5, 1997. The 1997 Act contains
many provisions which generally make it easier to operate and to continue to
qualify as a REIT for taxable years beginning after the date of enactment
(which, for the Company, would be applicable commencing with its taxable year
beginning January 1, 1998). 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.
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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 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. Battle Fowler LLP ("Counsel") has acted as special tax
counsel to the Company in connection with the election to be taxed as a REIT.
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 Battle Fowler LLP, the Company, commencing with
the taxable year ending December 31, 1997, will be organized in conformity with
the requirements for qualification as a REIT, and its proposed method of
operation will enable it to meet the requirements for qualification and taxation
as a REIT under the Code, 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
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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 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. Pursuant to the 1997 Act,
for the Company's taxable years commencing on and after January 1, 1998, if the
Company complies with regulatory rules pursuant to which it is required to send
annual letters to certain of its shareholders requesting information regarding
the actual ownership of its stock, but does not know, or exercising reasonable
diligence would not have known, whether it failed to meet the requirement that
it not be closely held, the Company will be treated as having met the "five or
fewer" requirement. If the Company were to fail to comply with these regulatory
rules for any year, it would be subject to a $25,000 penalty. If the Company's
failure to comply was due to intentional disregard of the requirements, the
penalty is increased to $50,000. However, if the Company's failure to comply was
due to reasonable cause and not willful neglect, no penalty would be imposed.
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 is
owned by the REIT. For the Company's 1997 taxable year, all of such stock must
be owned by the Company from the commencement of such corporation's existence.
For taxable years of the Company beginning on and after January 1, 1998, the
Company must own all of the stock of such subsidiary but not from the
commencement of such subsidiary'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
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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. It should be noted that for its
1998 taxable year and all taxable years thereafter, the third test noted above
is no longer applicable.
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"). For the Company's taxable year which begins on January
1, 1998 and for all taxable years thereafter, only partners who own 25% or more
of the capital or profits interest in a partnership are included in the
determination of whether a tenant is 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
geographic area in which the property is located (i.e., services which are not
considered rendered to the occupant of the property). In addition, for its 1998
taxable year and thereafter, the Company is permitted to receive up to 1% of the
gross income from each Property from the provision of non-customary services and
still treat all other amounts received from such Property as "rents from real
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 common 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
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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. For the Company's taxable year, which
begins on January 1, 1998, and for all taxable years thereafter, income from
hedging transactions which is qualifying income for the 95% gross income test
also includes payments to the Company under an option, futures contract, forward
rate agreement, or any similar financial instrument. Furthermore, for the
Company's 1997 taxable year 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.
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 for its 1997 taxable year, 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.
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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 non-voting 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 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 (plus, for the
Company's 1998 taxable year and thereafter, income from cancellation of
indebtedness, original issue discount, and coupon interest) 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
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taxable income," it will be subject to tax thereon at regular corporate tax
rates. For the Company's taxable year beginning on January 1, 1998 and for all
taxable years thereafter, undistributed capital gains may be so designated by
the Company and are includable in the income of the holders of shares of Common
Stock. Such holders are treated as having paid the capital gains tax imposed on
the Company on the designated amounts included in their income as long-term
capital gains. Such stockholders would get an increase in their basis for income
recognized and a decrease in their basis for taxes paid by the Company. In
addition, 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 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
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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 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
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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. 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 characterized as ordinary income or as capital gain, are not eligible
for the 70% dividends received deduction for corporations.
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
gain from the sale or exchange of a capital asset held for more than one year 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 without regard to the
period for which a holder has held his shares in the Company. It is not clear
under the 1997 Act whether, for a U.S. stockholder who is an individual or an
estate or trust, such amounts will be taxable at the rate applicable to mid-term
capital gain (i.e., gains from the sale of capital assets held for more than one
year but not more than 18 months) or at the rate applicable to long-term capital
gains (i.e., gains from the sale of capital assets held for more than 18
months). This uncertainty may be clarified by future legislation or regulations.
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.
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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
"Federal Income Tax Considerations -- 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. 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
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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 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
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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.
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
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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 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;
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(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 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.
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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 (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
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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 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
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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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<PAGE> 164
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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UNDERWRITING
Subject to the terms and conditions in the United States purchase agreement
(the "U.S. Purchase Agreement") between the Company and each of the underwriters
named below (the "U.S. Underwriters"), and concurrently with the sale of the
2,303,000 shares of Common Stock to the International Managers (as defined
below), the Company has agreed to sell to each of the U.S. Underwriters, for
whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, Legg Mason Wood Walker,
Incorporated, Morgan Stanley & Co. Incorporated, Prudential Securities
Incorporated, Smith Barney Inc. and NationsBanc Montgomery Securities, Inc., are
acting as representatives (the "U.S. Representatives"), and each of the U.S.
Underwriters has severally agreed to purchase from the Company, the respective
number of shares of Common Stock set forth below opposite their respective
names:
<TABLE>
<CAPTION>
NUMBER
OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................................. 1,068,670
Legg Mason Wood Walker, Incorporated.................................................... 1,068,666
Morgan Stanley & Co. Incorporated....................................................... 1,068,666
Prudential Securities Incorporated...................................................... 1,068,666
Smith Barney Inc. ...................................................................... 1,068,666
NationsBanc Montgomery Securities, Inc. ................................................ 1,068,666
BT Alex. Brown Incorporated............................................................. 150,000
SBC Warburg Dillon Read Inc. ........................................................... 150,000
Donaldson, Lufkin & Jenrette Securities Corporation..................................... 150,000
A.G. Edwards & Sons, Inc. .............................................................. 150,000
Goldman, Sachs & Co. ................................................................... 150,000
Lazard Freres & Co. LLC................................................................. 150,000
Lehman Brothers Inc. ................................................................... 150,000
PaineWebber Incorporated................................................................ 150,000
Advest, Inc. ........................................................................... 70,000
J.C. Bradford & Co. .................................................................... 70,000
Cowen & Company......................................................................... 70,000
EVEREN Securities, Inc. ................................................................ 70,000
Ferris, Baker Watts, Incorporated....................................................... 70,000
First of Michigan Corporation........................................................... 70,000
Friedman, Billings, Ramsey & Co., Inc. ................................................. 70,000
Furman Selz LLC......................................................................... 70,000
Gruntal & Co., L.L.C. .................................................................. 70,000
Interstate/Johnson Lane Corporation..................................................... 70,000
Janney Montgomery Scott Inc. ........................................................... 70,000
Jefferies & Company, Inc. .............................................................. 70,000
Edward D. Jones & Co., L.P. ............................................................ 70,000
McDonald & Company Securities, Inc. .................................................... 70,000
Mesirow Financial, Inc. ................................................................ 70,000
Morgan Keegan & Company, Inc. .......................................................... 70,000
Nesbitt Burns Securities Inc. .......................................................... 70,000
Ormes Capital Markets, Inc. ............................................................ 70,000
Piper Jaffray Inc. ..................................................................... 70,000
Principal Financial Securities, Inc. ................................................... 70,000
Rauscher Pierce Refsnes, Inc. .......................................................... 70,000
Raymond James & Associates, Inc. ....................................................... 70,000
The Robinson-Humphrey Company, Inc. .................................................... 70,000
Roney & Co., LLC........................................................................ 70,000
Sands Brothers & Co., Ltd. ............................................................. 70,000
Stifel, Nicolaus & Company, Incorporated................................................ 70,000
Sutro & Co. Incorporated................................................................ 70,000
Tucker Anthony Incorporated............................................................. 70,000
Utendahl Capital Partners, L.P. ........................................................ 70,000
Wheat, First Securities, Inc. .......................................................... 70,000
---------
Total......................................................................... 9,712,000
=========
</TABLE>
The Company has also entered into a purchase agreement (the "International
Purchase Agreement" and, together with the U.S. Purchase Agreement, the
"Purchase Agreements") with certain underwriters outside the United States and
Canada (the "International Managers" and, together with the U.S. Underwriters,
the "Underwriters") for whom Merrill Lynch International, Legg Mason Wood
Walker, Incorporated, Morgan Stanley & Co. International Limited,
Prudential-Bache Securities (U.K.) Inc., Smith Barney Inc. and NationsBanc
Montgomery Securities, Inc. are acting as lead managers. Subject to the terms
and conditions set forth in the International Purchase Agreement and
concurrently with the sale of 9,712,000 shares of Common Stock to the U.S.
Underwriters pursuant to the U.S. Purchase Agreement, the Company has agreed
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to sell to the International Managers, and the International Managers have
severally agreed to purchase from the Company, an aggregate of 2,303,000 shares
of Common Stock. The initial public offering price per share and the total
underwriting discount per share are identical under the U.S. Purchase Agreement
and the International Purchase Agreement.
In each Purchase Agreement, the several U.S. Underwriters and the several
International Managers have agreed, respectively, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all of the shares
of Common Stock being sold pursuant to such Purchase Agreement if any of such
shares of Common Stock are purchased. Under certain circumstances, the
commitments of non-defaulting U.S. Underwriters or International Managers (as
the case may be) may be increased. The sale of Common Stock pursuant to the U.S.
Purchase Agreement and the International Purchase Agreement are conditioned upon
each other.
The U.S. Representatives have advised the Company that the U.S.
Underwriters propose initially to offer the shares of Common Stock 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 $1.02 per share. The U.S. Underwriters may allow, and such dealers may
re-allow, a discount not in excess of $.10 per share on sales to certain other
dealers. After the date of this Prospectus, the initial public offering price,
concession and discount may be changed. The Company has been informed that the
U.S. Underwriters and the International Managers have entered into an agreement
(the "Intersyndicate Agreement") providing for the coordination of their
activities. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of the Intersyndicate Agreement, the International Managers and any dealer to
whom they sell shares of Common Stock will not offer to sell or sell shares of
Common Stock to persons who are United States persons or Canadian persons or to
persons they believe intend to resell to persons who are United States persons
or Canadian persons, and the U.S. Underwriters and any dealer to whom they sell
Common Stock will not offer to sell or sell shares of Common Stock to persons
who are non-United States and non-Canadian persons or to persons they believe
intend to resell to non-United States and non-Canadian persons, except in each
case for transactions pursuant to the Intersyndicate Agreement.
The Company has granted the U.S. Underwriters an option exercisable for 30
days after the date hereof to purchase up to 1,456,800 additional shares of
Common Stock to cover over-allotments, if any, at the initial public offering
price, less the underwriting discount set forth on the cover page of this
Prospectus. If the U.S. Underwriters exercise this option, each U.S. Underwriter
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the foregoing table bears to such U.S.
Underwriter's initial amount reflected in the foregoing table. The Company has
also granted an option to the International Managers, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 345,450
additional shares of Common Stock to cover over-allotments, if any, on terms
similar to those granted to the U.S. Underwriters.
At the request of the Company, the U.S. Underwriters have reserved up to
575,000 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 U.S. Underwriters to the
general public on the same terms as the other shares offered by this Prospectus.
In the Purchase Agreements, the Company and the Operating Partnership have
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 and the
Operating Partnership have 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.
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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, the Morgan Stanley Investors and the Carlyle Funds 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 two years for the Primary Contributors and one year for
the other Continuing Investors, the Morgan Stanley Investors and the Carlyle
Funds 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 was determined through
negotiations between the Company and the U.S. Representatives. Among the factors
considered in such negotiations, in addition to prevailing market conditions,
were dividend yields and financial characteristics of publicly traded REITs that
the Company and the U.S. Representatives believe to be comparable to the
Company, the expected results of operations of the Company (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 Stock 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 Stock. As an
exception to these rules, the U.S. Representatives and the International
Managers are permitted to engage in certain transactions that stabilize the
price of the Common Stock. Such transactions may consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives and the International Managers, respectively, may reduce that
short position by purchasing Common Stock in the open market. The U.S.
Representatives and the International Managers, respectively, may also elect to
reduce any short position by exercising all or part of the over-allotment option
described above.
The U.S. Representatives and the International Managers, may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the U.S. Representatives or the International Managers purchase Common Stock
in the open market to reduce the Underwriters' short position or to stabilize
the price of the Common Stock, 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 otherwise 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 U.S.
Representatives or the International Managers 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 (i) an advisory fee equal to
.50% of the gross proceeds of the Offering (including any exercise of the
Underwriters' over-allotment option) plus $1,487,500 for
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advisory services rendered in connection with the evaluation, analysis and
structuring of the Offering and (ii) a $600,000 acquisition advisory fee for
services rendered in connection with the evaluation, analysis and structuring of
the acquisition of the 100 Wall Street Property.
Merrill Lynch Capital Corporation, an affiliate of Merrill Lynch, has
committed to be the syndication agent for the Line of Credit and Merrill Lynch
Credit Corporation, an affiliate of Merrill Lynch, has committed to provide to
the Company the Term Loan. In connection with the closing of these loans, the
Company shall pay Merrill Lynch fees of approximately $2.1 million.
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 Morgan Stanley Investors, advised by MSAM, an affiliate of Morgan
Stanley & Co. Incorporated, have agreed to purchase 769,230 shares of Common
Stock in the Concurrent Private Placements. The Underwriters will not receive a
discount or commission on the sale of Common Stock in the Concurrent Private
Placements. The closing of the Concurrent Private Placements is subject to the
closing of the Offering and the satisfaction of other customary conditions.
Upon consummation of the Offering, the Company will repay the outstanding
balance of and the accrued interest on the MSAM Notes by issuing to the Morgan
Stanley Investors 886,200 shares of restricted Common Stock in complete
satisfaction of the MSAM Notes. The Company has granted to the Morgan Stanley
Investors certain registration rights with respect to sale of Common Stock
received by the Morgan Stanley Investors or any affiliates in connection with
the Concurrent Private Placements and the cancellation of the MSAM Notes,
including the right to include such shares in a shelf registration statement the
Company has agreed to file within fifteen days after the expiration of the
one-year period following completion of the Offering. 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 time of the
Offering.
The Common Stock has been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "TOW." In order to meet one of the
requirements for listing the Common Stock on the NYSE, the Underwriters have
undertaken to sell lots of 100 or more shares of Common Stock to a minimum of
2,000 beneficial holders.
EXPERTS
The consolidated balance sheet of the Company as of June 30, 1997 and the
related consolidated statement of operations, shareholder's equity and cash
flows for the period from March 27, 1997 through June 30, 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, 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 and the statements of revenues and certain operating expenses for 100
Wall Street for the year ended December 31, 1996, 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.
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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. Battle Fowler LLP will rely on Ballard
Spahr Andrews & Ingersoll as to certain matters of Maryland law. Certain legal
matters will be passed upon for the Underwriters by Hogan & Hartson L.L.P.
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.
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<PAGE> 170
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
August 31, 1997 of a Property divided by the Investment Cost.
"American Express" means American Express Financial Advisors, Inc. and its
affiliates.
"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 August 31, 1997" means the net
operating income of the Property for the period month August 31, 1997,
annualized.
"Annualized Rent" means the annualized monthly Base Rent in effect plus
estimated 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 August 31, 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.
"Appraised Property" means the Maitland Forum Property.
"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.
"Carlyle" means The Carlyle Group, a Washington, D.C. based merchant
banking firm.
"Carlyle Funds" means the private investment funds sponsored by Carlyle
that have agreed to purchase shares of Common Stock in the Concurrent Private
Placements.
"Cash Available for Distribution" means Funds From Operations adjusted for
certain non-cash items, less reserves for capital expenditures.
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<PAGE> 171
"Cash Flow" means the sum of (a) Funds from Operations (adjusted for
non-recurring items and non-cash revenue, including, without limitation, the
effect of straight-lining the rents pursuant to GAAP) and (b) interest expense.
"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.
"Closing Price" means 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 for, if the shares of Common Stock are not listed or admitted to
trading on any 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.
"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.
"Concurrent Private Placements" means the private placement by the Company
of $20 million of Common Stock to the Morgan Stanley Investors and $10 million
to the Carlyle Funds 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 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.
"DRA" means DRA Realty Advisors.
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<PAGE> 172
"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.
"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 Exchange Rights 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 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 in the United
States.
"General Partner" means the sole general partner of the Operating
Partnership.
"ICIP" means The Industrial Commercial Incentive Program, a program
established to provide incentives to developers and redevelopers of property in
New York City.
"Independent Director" means a director of the Company who is not an
officer or employee of the Company or the Operating Partnership or an affiliate
of the Company or the Operating Partnership.
"Interested Stockholder" means a stockholder holding 10% or more of the
voting securities in a Maryland corporation, such as the Company.
"International Managers" means the underwriters outside of the United
States and Canada named in this Prospectus for whom Merrill Lynch International;
Legg Mason Wood Walker, Incorporated; Morgan Stanley & Co. International
Limited; Prudential-Bache Securities (U.K.) Inc., Smith Barney Inc. and
NationsBanc Montgomery Securities, Inc. are acting as lead managers.
"International Offering" means the public offering of the Common Stock of
the Company outside the United States and Canada.
"International Purchase Agreement" means the purchase agreement between the
Company and the International Managers.
"Intersyndicate Agreement" means the agreement between the U.S.
Underwriters and the International Managers providing for the coordination of
their activities.
"Investment Cost" means as of August 31, 1997 the aggregate investment
cost of a Property, including the applicable purchase price amount, closing
costs, tenant improvements, leasing commissions and capital
165
<PAGE> 173
expenditures less any applicable depreciation and amortization of tenant
improvements, leasing commissions and capital expenditures.
"IRA" means individual retirement account.
"IRS" means the United States 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 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.
"LIBOR" means the London Interbank Offering Rate.
"Limited Partners" means the limited partners of the Operating
Partnership.
"Line of Credit" means the $200 million unsecured line of credit for which
the Company has obtained a commitment.
"Lock-up Period" means the one- or two-year period (as applicable)
commencing from the date of this Prospectus.
"Look-Through Ownership Limitation" means the ownership of as much as up to
15.0% of any class of the Company's stock by mutual funds and certain other
entities.
"Management Company" means Tower Equities Management, Inc., a Delaware
corporation.
"Market Price" means the average of the Closing Price for the five
consecutive Trading Days ending on such date.
"Merrill Lynch" means Merrill Lynch & Co., Inc.
"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 shares of Common
Stock in the Concurrent Private Placements.
"MSAM" means Morgan Stanley Asset Management Inc.
"MSAM Notes" means the convertible notes of the Company held by the Morgan
Stanley Investors in the aggregate principal amount of approximately $12.3
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.
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<PAGE> 174
"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
$26.00 per share.
"One Orlando Land Parcel" means the approximately 3.8 acres of undeveloped
land in Orlando, Florida that the Company holds an option to purchase.
"Operating Partnership" means Tower Realty 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%, or up to 15%
in the case of certain stockholders, 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 DOL 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 M. Wisely (a nominee for director
of the Company), 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), 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.
"Properties" means the 21 office buildings referred to herein in which the
Company has an interest.
"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.
"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.
"Restricted Shares" means the 1,949,360 shares of Common Stock received by
MSAM and certain Continuing Investors in the Formation Transactions, the
1,153,845 shares of Common Stock issued in the
167
<PAGE> 175
Concurrent Private Placements, and the 1,583,640 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 $107 million loan facility that the Company expects
to enter into concurrent with the consummation of the Offering and for which it
has obtained a commitment.
"Total Market Capitalization" means the Company's total equity market
capitalization plus its consolidated indebtedness and pro rata share of
indebtedness of unconsolidated investments.
"Total Value" means Cash Flow capitalized at 9.5% plus (i) 100% of
out-of-pocket costs for assets under development (subject to a maximum of 10% of
Total Value), and (ii) 100% of cash and cash equivalents (excluding restricted
deposits).
"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.
"Tower Predecessor" means 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 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.
"Trading Day" means 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.
"Transaction" means any transaction resulting in a change of control of
the Operating Partnership 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.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"UBTI" means unrelated business taxable income.
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<PAGE> 176
"Underwriters" means the U.S. Underwriters and the International Managers.
"U.S. Offering" means the public offering of the Common Stock of the
Company in the United States and Canada.
"U.S. Purchase Agreement" means the purchase agreement between the Company
and the U.S. Underwriters.
"U.S. Representatives" means Merrill Lynch, Pierce, Fenner & Smith,
Incorporated; Legg Mason Wood Walker, Incorporated; Morgan Stanley & Co.
Incorporated; Prudential Securities Incorporated, Smith Barney Inc. and
NationsBanc Montgomery Securities, Inc.
"U.S. Underwriters" means the Underwriters for the United States and
Canada named in the prospectus for whom the U.S. Representatives are acting as
representatives.
169
<PAGE> 177
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Tower Realty Trust, Inc.
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1997 (unaudited)...... F-2
Pro Forma Condensed Consolidated Statement of Operations for the six months ended
June 30, 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-18
Consolidated Balance Sheet as of June 30, 1997...................................... F-19
Consolidated Statement of Operations for the period from March 27, 1997 (date of
inception) through June 30, 1997................................................. F-20
Consolidated Statement of Shareholder's Equity for the period from March 27, 1997
(date of inception) through June 30, 1997........................................ F-21
Consolidated Statement of Cash Flows for the period from March 27, 1997 (date of
inception) through June 30, 1997................................................. F-22
Notes to Consolidated Financial Statements.......................................... F-23
Tower Predecessor
Report of Independent Accountants................................................... F-29
Combined Balance Sheets as of December 31, 1996 and 1995 and (unaudited) as of June
30, 1997......................................................................... F-30
Combined Statements of Operations for each of the three years in the period ended
December 31, 1996 and (unaudited) for the six months ended June 30, 1997 and
1996............................................................................. F-31
Combined Statements of Owners' Deficit for each of the three years in the period
ended December 31, 1996 and (unaudited) for the six months ended June 30, 1997... F-32
Combined Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 and (unaudited) for the six months ended June 30, 1997 and
1996............................................................................. F-33
Notes to Combined Financial Statements.............................................. F-34
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 1996...... F-44
DRA Joint Ventures
Report of Independent Accountants................................................... F-46
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 six months ended June 30, 1997
and 1996......................................................................... F-47
Notes to Combined Statements of Revenues and Certain Operating Expenses............. F-48
100 Wall Street
Report of Independent Accountants................................................... F-51
Statements of Revenues and Certain Operating Expenses for the year ended December
31, 1996 and (unaudited) for the six months ended June 30, 1997 and 1996......... F-52
Notes to Statements of Revenues and Certain Operating Expenses...................... F-53
</TABLE>
F-1
<PAGE> 178
TOWER REALTY TRUST, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
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 Placements, the MSAM Notes
and Term Loan and the application of the net proceeds therefrom had occurred on
June 30, 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 June 30, 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 PLACEMENTS ADJUSTMENTS
HISTORICAL HISTORICAL (A) (B) (C) PRO FORMA
---------- ----------- ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Real estate, net........................ $ 127,577 $ 326,818 $454,395
Deferred charges, net................... $7,640 12,041 $ (7,640) $ 1,094 13,135
Receivables, net........................ 3,436 (936) 2,500
Unbilled rent receivable................ 14,580 (14,580)
Escrowed funds.......................... 421 (421)
Cash and cash equivalents............... 4 4,326 (400,755) 317,676 84,084 5,335
Investments in joint ventures........... 60 4,745 2,098 (4,745) 2,158
Other assets............................ 3,506 3,120 (3,506) 3,120
---------- ----------- ----------- -------------- ----------- ---------
Total assets.................... $7,704 $ 170,632 $ (68,719) $310,036 $ 60,990 $480,643
======== ========= ========= ============ ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Debt on real estate..................... $7,279 $ 193,381 $ (149,015) $ 59,355 $111,000
Accounts payable and other
liabilities........................... 1,689 25,537 (14,275) 12,951
Amounts due to (from) affiliates........ (1,182) 10,374 (9,192)
---------- ----------- ----------- ----------- ---------
Total liabilities............... 7,786 229,292 (149,015) 35,888 123,951
---------- ----------- ----------- ----------- ---------
Minority interest in Operating
Partnership........................... 8,580 25,306 33,886
----------- ----------- ---------
Shareholders' equity:
Preferred shares, 50,000,000 shares
authorized, none issued and
outstanding.........................
Common shares, $.01 par value,
150,000,000 shares authorized; 1,000
shares issued and outstanding
(historical) and 15,118,205 shares
issued and outstanding (pro
forma).............................. 1 10 $ 132 8 151
Additional paid-in capital............ 29,318 309,904 (16,484) 322,738
Owners' equity (deficit).............. (83) (58,660) 42,388 16,272 (83)
---------- ----------- ----------- -------------- ----------- ---------
Total shareholders' equity
(deficit)..................... (82) (58,660) 71,716 310,036 (204) 322,806
---------- ----------- ----------- -------------- ----------- ---------
Total liabilities and
shareholders' equity
(deficit)..................... $7,704 $ 170,632 $ (68,719) $310,036 $ 60,990 $480,643
======== ========= ========= ============ ========== ========
</TABLE>
The accompanying notes are an integral part of this pro forma condensed
consolidated balance sheet.
F-2
<PAGE> 179
TOWER REALTY TRUST, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 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
Placements, 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>
SIX MONTHS ENDED JUNE 30, 1997
PRO FORMA ADJUSTMENTS
-------------------------
THE ACQUISITION OTHER
COMPANY PREDECESSOR PROPERTIES ADJUSTMENTS
HISTORICAL HISTORICAL (A) (B) PRO FORMA
---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income..................... $13,521 $21,316 $ 1,908 $36,745
Management fees................... 245 (245)
Construction, leasing, and other
fees........................... 33 474 1,316 (1,304) 519
---- ------- ------- ------- -------
Total revenues............ 33 14,240 22,632 359 37,264
---- ------- ------- ------- -------
Expenses:
Property operating and
maintenance.................... 2,703 6,579 9,282
Real estate taxes................. 2,331 3,043 (50) 5,324
General office and
administration................. 1,746 701 (700) 1,747
Interest expense.................. 176 7,028 (3,184) 4,020
Depreciation and amortization..... 3,494 3,351 6,845
Ground rent and air rights
expense........................ 299 299
---- ------- ------- ------- -------
Total expenses............ 176 17,601 10,323 (583) 27,517
Equity in income (loss) of joint
ventures....................... 60 68 368 496
---- ------- ------- ------- -------
Income (loss) before minority
interest.......................... (83) (3,293) 12,309 1,310 10,243
Minority interest in Operating
Partnership....................... 973 973
---- ------- ------- ------- -------
Net income (loss)................... $(83) $(3,293) $12,309 $ 337 $ 9,270
==== ======= ======= ======= =======
Net income per share................ $ 0.61
=======
Weighted average number of common
shares outstanding................ 15,118
=======
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidated statements of operations.
F-3
<PAGE> 180
TOWER REALTY TRUST, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 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 $42,731 $ 3,608 $72,939
Management fees..................... 1,261 (1,261)
Construction, leasing, and other
fees............................. 1,335 2 2,374 (2,008) 1,703
------- ---- ------- ------- -------
Total revenues.............. 28,734 464 45,105 339 74,642
------- ---- ------- ------- -------
Expenses:
Property operating and
maintenance...................... 5,481 193 12,939 18,613
Real estate taxes................... 4,722 79 6,310 (100) 11,011
General office and administration... 3,494 47 1,552 (1,730) 3,363
Interest expense.................... 15,511 (7,471) 8,040
Depreciation and amortization....... 6,853 6,789 13,642
Ground rent and air rights
expense.......................... 599 599
------- ---- ------- ------- -------
Total expenses.............. 36,660 319 20,801 (2,512) 55,268
Equity in income (loss) of joint
ventures......................... 461 (63) 398
------- ---- ------- ------- -------
Income (loss) before minority
interest............................ (7,465) 145 24,304 2,788 19,772
Minority interest in Operating
Partnership......................... 1,878 1,878
------- ---- ------- ------- -------
Net income (loss)..................... $(7,465) $145 $24,304 $ 910 $17,894
======= ==== ======= ======= =======
Net income per share.................. $ 1.18
=======
Weighted average number of common
shares outstanding.................. 15,118
=======
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidated statements of operations.
F-4
<PAGE> 181
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 -- JUNE 30, 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
$194.6 million in cash (including repayment of indebtedness), 72,942 OP
Units (approximate value of $1.9 million based on a value of $26.00 per
OP Unit) and 203,360 shares of restricted Common Stock (approximate value
of $5.3 million based on a value of $26 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 2800 North Central. The
acquisitions of certain partnership interests in 2800 North Central,
excluding Lawrence Feldman's interest, for approximately $.9 million in
cash and 45,131 OP Units (approximate value of $1.2 million based on a
value of $26.00 per OP Unit) is accounted for utilizing the purchase
method of accounting. The acquisition of Larry Feldman's interest in 2800
North Central is accounted for at historical cost. In total, the pro
forma consolidated balance sheet includes an approximate 10% ownership
interest in 2800 North Central.
- Acquisition of partnership interests in the entities comprising the DRA
Joint Ventures, including acquisitions of the 5151 East Broadway and
Corporate Center Land Parcels. The acquisitions of all partnership
interests in the DRA Joint Ventures, excluding Lawrence H. Feldman's
interest, for approximately $28.0 million in cash plus assumption of
$22.0 million of indebtedness and assumption of and repayment of
indebtedness aggregating approximately $107.2 million, 85,923 OP Units
(approximate value of $2.2 million based on a value of $26.00 per OP
Unit) and 924,800 shares of restricted Common Stock (approximate value
$24.0 million based on a value of $26.00 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 $11.7 million in cash and 6,000
OP Units (approximate value of $.2 million based on a value of $26.00 per
common share) 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 $3.1 million based on
a value of $26.00 per OP Unit) is accounted for utilizing the purchase
method of accounting.
- Acquisition of 100 Wall Street. The acquisition of 100 Wall Street from
an unrelated third party for approximately $58.0 million in cash, plus
$1.2 million of transfer taxes and other costs, is accounted for
utilizing the purchase method of accounting.
F-5
<PAGE> 182
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 interest in 2800
North Central), DRA Joint Ventures, Century Plaza, Properties Atlantic and 100
Wall Street are as follows:
<TABLE>
<CAPTION>
DRA 100
TOWER JOINT CENTURY PROPERTIES WALL
PREDECESSOR VENTURES PLAZA ATLANTIC STREET TOTAL
----------- --------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Real estate..................... $ 72,228 $ 183,494 $ 11,857 $ 59,239 $ 326,818
Cash and cash equivalents....... (194,600)(a) (135,215)(b) (11,701) (59,239) (400,755)
Investment in joint ventures.... 2,098 2,098
Prepaid expenses and other
assets........................ $3,120 3,120
--------- --------- -------- ------ -------- ---------
$ (120,274) $ 48,279 $ 156 $3,120 $ $ (68,719)
========= ========= ======== ====== ======== =========
Debt............................ $ (171,015)(c) $ 22,000 (149,015)
Minority interest in Operating
Partnership................... 3,070 2,234 $ 156 $3,120 8,580
Common shares................... 2 9 11
Additional paid in capital...... 5,281 24,036 29,317
Owners' equity.................. 42,388 42,388
--------- --------- -------- ------ -------- ---------
$ (120,274) $ 48,279 $ 156 $3,120 $ $ (68,719)
========= ========= ======== ====== ======== =========
</TABLE>
- ---------------
(a) The following details the use of cash and cash equivalents in the Tower
Predecessor transaction:
<TABLE>
<CAPTION>
TOWER
PREDECESSOR
--------
<S> <C>
Repayment of indebtedness:
Tower 45..................................................... $123,064(1)
Maitland Forum............................................... 28,875
Maitland West................................................ 4,548
120 Mineola Boulevard........................................ 11,260
5750 Major Boulevard......................................... 3,268(2)
--------
171,015
Cash payments:
Tower 45..................................................... 10,746
Maitland Forum and Maitland West............................. 3,697
120 Mineola Boulevard........................................ 275
5750 Major Boulevard......................................... 4,469
2800 North Central........................................... 925
Transfer taxes and other expenses............................ 3,473
--------
$194,600
========
</TABLE>
- ---------------
(1) 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
($35.0 million), and will then be repaid with proceeds from the Term
Loan. The Term Loan amount in pro forma adjustment C(6) reflects the
repayment of this Tower 45 debt.
F-6
<PAGE> 183
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(2) Indebtedness relating to 5750 Major Boulevard at June 30, 1997 is $3.3
million. At the date of the Offering it is expected that the
indebtedness will increase to $4.7 million to fund construction
expenditures of $1.4 million expected to be incurred.
(b) The use of cash and cash equivalents in the DRA Joint Ventures transaction
of $135.2 million is comprised of (i) payments of $107.2 million for the
partners in the DRA Joint Ventures to repay indebtedness associated with the
properties, and (ii) payments of $28.0 million to DRA and other parties.
(c) Historical debt on real estate for Tower Predecessor at June 30, 1997 is
$193.4 million. The debt on real estate has been reduced by $22.4 million to
reflect anticipated reduction from debt restructurings.
The following table reconciles the aforementioned adjustments to cash to
the $246.5 million for repayment of certain indebtedness described in the
section captioned "Use of Proceeds" within this Registration Statement:
<TABLE>
<S> <C>
Tower Predecesor -- footnote 1A(a) $171,015
DRA Joint Ventures -- footnote 1A(b) 107,225
5750 Major Boulevard -- footnote 1A(a)(2) 1,383
Other -- prepayment penalties 1,880
Less:
Tower 45 debt -- footnote 1A(a)(1) (35,000)
--------
Total cash for repayment of indebtedness as per Use of Proceeds $246,503
========
</TABLE>
The following table reconciles the aforementioned adjustments to cash to
the $118.7 million to acquire certain equity, debt and fee interests in the
properties described in the section captioned "Use of Proceeds" in this
Registration Statement:
<TABLE>
<S> <C>
Tower 45 -- footnote 1A(a) $ 10,746
Maitland Forum and West -- footnote 1A(a) 3,697
120 Mineola Boulevard -- footnote 1A(a) 275
5750 Major Boulevard -- footnote 1A(a) 4,469
2800 North Central -- footnote 1A(a) 925
100 Wall Street 59,239
Century Plaza 11,701
DRA -- footnote 1A(b) 27,990
Other (300)
--------
Total cash to acquire certain equity, debt and fee interests in
the properties as per Use of Proceeds $118,742
========
</TABLE>
The other historical assets and liabilities of Tower Predecessor, DRA Joint
Ventures, Century Plaza, 100 Wall Street 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 of
approximately $2.5 million for a portion of this liability which is expected to
be recovered from tenants. This deferred real estate tax 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.
F-7
<PAGE> 184
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
B. THE OFFERING AND CONCURRENT PRIVATE PLACEMENTS
Reflects the initial capitalization of the Company and the issuance of
13,168,845 shares of Common Stock in connection with the Offering (12,015,000
shares) and Concurrent Private Placements (1,153,845 shares) at an assumed
initial public offering price of $26.00 per share. The estimated costs of the
Offering include $20.3 million of underwriters' discount and $12.0 million of
other offering costs (of which $7.6 million has been recorded as a deferred
charge on the Company's historical balance sheet at June 30, 1997), which have
been reflected as a reduction to additional paid-in capital (there is no
underwriters' discount for the shares sold in the Concurrent Private
Placements). The resulting net proceeds of the Offering and Concurrent Private
Placements total approximately $310.0 million.
The following details the shares of Common Stock and OP Units issued in
connection with the Offering, Concurrent Private Placements, the MSAM Notes and
related Formation Transactions:
<TABLE>
<CAPTION>
TRANSACTION COMMON SHARES OP UNITS
---------------------------------------------------------- ------------- ---------
<S> <C> <C>
Tower Predecessor 203,360 72,942
2800 North Central 45,131
DRA Joint Ventures 924,800 85,923
Properties Atlantic 120,000
Century Plaza 6,000
Offering 12,015,000
Concurrent Private Placements 1,153,845
Conversion of MSAM Notes 821,200
OP Units issued to Primary Contributors related to Tower
Predecessor, 2800 North Central and DRA Joint Ventures
transactions 1,253,644
------------- ---------
15,118,205 1,583,640
============ ========
</TABLE>
F-8
<PAGE> 185
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
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
INVEST- DEBT
PRO UNBILLED CASH MENTS IN ON
FORMA ADJUST- DEFERRED RENT ESCROWED AND CASH JOINT OTHER REAL
MENT CHARGES RECEIVABLES RECEIVABLE FUNDS EQUIVALENTS VENTURES ASSETS ESTATE
- ---------------------------- --------- ---------- ----------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C(1) Adjustment to deferred
charges................ $ 1,094 $ (2,431) $ (1,100)
C(2) Elimination of other
assets and liabilities
of Tower Predecessor
and intercompany
receivables............ $ (936) $(421) (4,326) (2,406)
C(3) Elimination of unbilled
rent receivable of
Tower Predecessor...... $ (14,580)
C(4) Elimination of invest-
ment in DRA Joint Ven-
tures.................. $ (4,745)
C(5) Conversion of MSAM
Notes debt............. 3,721 $ (7,279)
C(6) Debt activity.......... 89,000 66,634
C(7) Prepayment penalties... (1,880)
C(8) Allocation to minority
interest in Operating
Partnership............
C(9) Reclass historical
Tower Predecessor
owners' equity to
additional paid-in
capital................
------ ------- -------- ------ ------- ------- ------- -------
$ 1,094 $ (936) $ (14,580) $(421) $ 84,084 $ (4,745) $ (3,506) $ 59,355
====== ======= ======== ====== ======= ======= ======= =======
<CAPTION>
MINORITY
ACCOUNTS INTEREST
PAYABLE AMOUNTS IN
PRO AND DUE TO OPERATING ADDITIONAL OWNERS'
FORMA ADJUST- OTHER (FROM) PARTNER- COMMON PAID-IN EQUITY
MENT LIABILITIES AFFILIATES SHIP STOCK CAPITAL (DEFICIT)
- ---------------------------- ------------ ---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
C(1) Adjustment to deferred
charges................ $ (2,437)
C(2) Elimination of other
assets and liabilities
of Tower Predecessor
and intercompany
receivables............ $ (14,275) $ (9,192) 15,378
C(3) Elimination of unbilled
rent receivable of
Tower Predecessor...... (14,580)
C(4) Elimination of invest-
ment in DRA Joint Ven-
tures.................. (4,745)
C(5) Conversion of MSAM
Notes debt............. $ 8 $ 10,992
C(6) Debt activity.......... 22,366
C(7) Prepayment penalties... (1,880)
C(8) Allocation to minority
interest in Operating
Partnership............ $ 25,306 (25,306)
C(9) Reclass historical
Tower Predecessor
owners' equity to
additional paid-in
capital................ (2,170) 2,170
-- -- --
-------- ------- ------- -------- -------
$ (14,275) $ (9,192) $ 25,306 $ 8 $ (16,484) $ 16,272
======== ======= ======= ====== ======== =======
</TABLE>
The following pro forma adjustments represent other aspects of the Offering
and related Formation Transactions.
(1) Represents the write-off to owners' equity of historical Tower
Predecessor's previously capitalized deferred financing costs on mortgage
loans ($1.3 million) and organizational costs ($1.1 million). Also includes
the capitalization of $2.4 million of deferred financing fees to be
incurred on the Term Loan and Line of Credit.
(2) 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 tax 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. Also
represents the elimination of $1.2 million of the Company's amounts due
from affiliates.
(3) Represents the elimination of unbilled rent receivable of the
Tower Predecessor due to the acquisition of the Properties on June 30,
1997.
(4) 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.
(5) Represents the issuance and conversion of certain debt held by
certain investment funds advised by MSAM (the "MSAM Notes") assumed to be
incurred of $11.0 million to 821,200 shares of restricted Common Stock
(approximate value of $21.4 million based on a value of $26.00 per
restricted Common
F-9
<PAGE> 186
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Stock). Other MSAM notes totalling $1.3 million were previously assumed, in
the acquisition of partnership interests in the Tower Predecessor, to be
converted to 65,000 shares of restricted Common Stock (approximate value of
$1.7 million based on a value of $26.00 per share of restricted Common
Stock). See pro forma adjustment 1A. Also represents the redemption of
1,000 shares from the initial incorporation of the Company. The pro forma
adjustment is to increase cash by $3.7 million since this amount will be
borrowed under the MSAM Notes subsequent to June 30, 1997.
(6) Represents the new borrowings under the Term Loan of $89.0 million
partially offset by debt forgiveness of $22.4 million.
Pro forma debt outstanding at June 30, 1997 is as follows:
<TABLE>
<S> <C>
Corporate Center.................................................. $ 22,000
Term Loan......................................................... 89,000
---------
$111,000
=========
</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 then be repaid with proceeds from the Term Loan. The
above Term Loan amount of $107.0 million reflects the repayment of this
Tower 45 debt.
(7) Represents prepayment penalties on Tower Predecessor debt of $1.9
million.
(8) Represents the equity attributable to OP Units owned. The Company
is the sole general partner of the Operating Partnership and will own
approximately 90.5% of the Operating Partnership. Total OP Units
outstanding will be 1,583,640 which will represent an approximate 9.5%
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.
The holders of the OP Units will have the right to cause the Operating
Partnership to exchange the 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.
(9) Reclassifies remaining historical Tower Predecessor owners' equity
to additional paid-in capital.
2. PRO FORMA ADJUSTMENTS TO THE STATEMENT OF OPERATIONS -- JUNE 30, 1997
A. ACQUISITION PROPERTIES
The statements of operations information for the six months ended June 30,
1997 reflects the historical operations of the DRA Joint Ventures, Century
Plaza, Properties Atlantic and 100 Wall Street as follows:
<TABLE>
<CAPTION>
DRA JOINT CENTURY PROPERTIES 100 WALL
VENTURES PLAZA ATLANTIC STREET TOTAL
--------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Rental income....................... $14,503 $ 1,207 $5,606 $21,316
Other income........................ 83 25 $890 318 1,316
------- ------ ---- ------ -------
Total revenues............ 14,586 1,232 890 5,924 22,632
------- ------ ---- ------ -------
Property operating and
maintenance....................... 3,959 665 1,955 6,579
Real estate taxes................... 1,796 55 1,192 3,043
Other expenses...................... 452 81 71 97 701
------- ------ ---- ------ -------
Total expenses............ 6,207 801 71 3,244 10,323
------- ------ ---- ------ -------
Revenues in excess of certain
operating expenses................ $ 8,379 $ 431 $819 $2,680 $12,309
======= ====== ==== ====== =======
</TABLE>
F-10
<PAGE> 187
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 SIX MONTHS ENDED JUNE 30, 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.............. $1,908
2B(2) Elimination of
property management
and other fees...... $(245) $ (1,304) $ (727) $ 475
2B(3) Real estate
taxes............... $(50)
2B(4) General office and
administration...... 27
2B(5) Interest
expense............. $ (2,927)
2B(6) Amortization of
deferred financing
fees................ (257)
2B(7) Depreciation
expense............. $3,351
2B(8) Consolidation of DRA
Joint Ventures...... (68)
2B(9) Equity investment in
2800 North
Central............. (39)
2B(10) Minority interest in
Operating
Partnership.........
------ ----- ------- ---- ----- ------ ------ ----
Total............... $1,908 $(245) $ (1,304) $(50) $ (700) $ (3,184) $3,351 $ 368
====== ===== ======= ==== ===== ====== ====== ====
<CAPTION>
MINORITY
INTEREST IN
PRO FORMA OPERATING
ADJUSTMENT PARTNERSHIP
- ---------- -----------
<C> <S> <C>
2B(1) Straight line rental
income..............
2B(2) Elimination of
property management
and other fees......
2B(3) Real estate
taxes...............
2B(4) General office and
administration......
2B(5) Interest
expense.............
2B(6) Amortization of
deferred financing
fees................
2B(7) Depreciation
expense.............
2B(8) Consolidation of DRA
Joint Ventures......
2B(9) Equity investment in
2800 North
Central.............
2B(10) Minority interest in
Operating
Partnership......... $ 973
-------
Total............... $ 973
=======
</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 historical management fees ($245) and
construction, leasing and other fees ($1,304) and property management fee
expense ($727) related to the DRA Joint Ventures, Century Plaza and 100 Wall
Street for the six months ended June 30, 1997 and the Tower Predecessor for the
three months ended June 30, 1997. The Management Company was formed as a 95%
owned equity investment of the Company on March 27, 1997. As a result of the
Company's prospective ownership and management of these properties, these
historical amounts will no longer be changed. The Management Company will only
include amounts related to the Excluded Properties and third party management
contracts.
F-11
<PAGE> 188
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
As a result of this pro forma adjustment, the pro forma statement of
operations of the Management Company for the six months ended June 30, 1997 is
as follows (represents revenues and expenses from the Excluded Properties and
third party management contracts):
<TABLE>
<S> <C>
Management fees.............................................................. $ 342
Construction, leasing and other fees......................................... 234
Properties Atlantic third party representation fees.......................... 890
General office and administrative............................................ (600)
-----
Income before income taxes.............................................. 866
Income taxes............................................................ (303)
-----
Net income.............................................................. $ 563
=====
95% equity in earnings of the Management Company recorded by the Company..... $ 535
Management Company earnings included in the Company's historical statement of
operations for the six months ended June 30, 1997.......................... (60)
-----
Pro forma adjustment......................................................... $ 475
=====
</TABLE>
(3) 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).
(4) Reflects a net increase of $27 in general office and administrative
expense which is a result of estimated additional costs of operating as a public
company partially by certain expenses (such as separate partnership accounting
fees and reductions in salaries of certain officers) that are no longer
required.
(5) 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% $ 793
Corporate Center..................................... 1,000 8.37% 42
Term Loan(a)......................................... 89,000 6.96% 3,097
-------- -------
Total...................................... $ 111,000
========
Pro forma annual interest expense.................... 3,932
Historical interest expense, excluding amortization
of deferred financing fees, in previous columns
(also see (6) below)............................... (6,859)
-------
Reduction to interest expense (also see (6)
below)................................... $ (2,927)
=======
</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 will then
be repaid with proceeds from the Term Loan. The above Term Loan amount of $89.0
million reflects the repayment of this Tower 45 debt. The interest rate is based
on the seven-year U.S. Treasury Note rate (6.06% at October 9, 1997) plus 90
basis points.
F-12
<PAGE> 189
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) Reflects the net decrease in the amortization of deferred financing
fees ($257) as a result of a reduction of the amortization expense associated
with historical deferred financing fees to be written off concurrent with the
Offering ($345) partially offset by the amortization of $1.2 million of deferred
financing fees associated with the Term Loan ($88) amortized over the seven year
term.
(7) Reflects the net increase in depreciation and amortization as a result
of the acquisition of Tower Predecessor, DRA Joint Ventures, Century Plaza,
Properties Atlantic and 100 Wall Street 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 SIX 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............. $ 72,228 $ 14,446 $ 57,782 40 years $ 722
DRA Joint Ventures............ 183,494 55,048 128,446 40 years 1,606
Century Plaza................. 11,857 2,371 9,486 40 years 119
Properties Atlantic........... $3,120 5 years 312
100 Wall Street............... 59,239 11,848 47,391 40 years 592
-------- ------ ------- -------- ------
Net increase in assets and
depreciation and
amortization expense........ $326,818 $3,120 $ 83,713 $ 243,105 $3,351
======== ====== ======= ======== ======
</TABLE>
(8) Reflects the elimination of the equity in earnings from the investment
in the DRA Joint Ventures from Tower Predecessor's historical statement of
operations ($68).
(9) Reflects the decrease of the equity in earnings from the investment in
2800 North Central to reflect the purchase of additional partnership interests,
10% of net loss or ($39).
(10) Reflects net income attributable to the minority interest of the
Operating Partnership. The Company is the sole general partner and will own
approximately 90.5% of the Operating Partnership.
(11) Historical debt on real estate for the Tower Predecessor has been
reduced by $23.7 million to reflect anticipated reduction from debt
restructurings. Also, prepayment penalties of approximately $1.9 million will be
paid on the Tower Predecessor debt on real estate. This extraordinary gain on
extinguishment of debt has not been included in the pro forma statements of
operations due to their nonrecurring nature.
F-13
<PAGE> 190
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 statements of operations information for the year ended December 31,
1996 reflect the historical operations of the DRA Joint Ventures, Century Plaza,
Properties Atlantic and 100 Wall Street as follows:
<TABLE>
<CAPTION>
DRA JOINT CENTURY PROPERTIES 100 WALL
VENTURES PLAZA ATLANTIC STREET TOTAL
--------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Rental income.................. $29,010 $ 2,404 $ 11,317 $42,731
Other income................... 288 194 $931 961 2,374
------- ------ ---- ------- -------
Total revenues....... 29,298 2,598 931 12,278 45,105
------- ------ ---- ------- -------
Property operating and
maintenance.................. 7,791 997 4,151 12,939
Real estate taxes.............. 3,572 214 2,524 6,310
Other expenses................. 1,083 174 152 143 1,552
------- ------ ---- ------- -------
Total expenses....... 12,446 1,385 152 6,818 20,801
------- ------ ---- ------- -------
Revenues in excess of certain
operating expenses........... $16,852 $ 1,213 $779 $ 5,460 $24,304
======= ====== ==== ======= =======
</TABLE>
F-14
<PAGE> 191
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>
EQUITY IN
INCOME MINORITY
CONSTRUCTION, GENERAL DEPRECIATION (LOSS) INTEREST IN
PRO FORMA RENTAL MANAGEMENT LEASING AND REAL OFFICE AND INTEREST AND OF JOINT OPERATING
ADJUSTMENT INCOME FEES OTHER FEES ESTATE TAXES ADMINISTRATION EXPENSE AMORTIZATION VENTURES PARTNERSHIP
- ---------------- ------ ---------- ------------- ------------ -------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3C(1) Straight
line
rental
revenue... $3,608
3C(2) Elimination
of
property
management
and
other
fees... $ (1,261) $(2,008) $ (2,443) $ 410
3C(3) Real
estate
taxes... $ (100)
3C(4) General
office
and
administration... 713
3C(5) Interest
expense... $ (7,143)
3C(6) Amortization
of deferred
financing
fees... (328)
3C(7) Depreciation
expense... $6,789
3C(8) Consolidation
of DRA Joint
Ventures... (461)
3C(9) Equity
investment
in 2800
North
Central... (12)
3C(10) Minority
interest
in
Operating
Partnership... $ 1,878
------ ------- ------- ------- ------- ------- ------ ----- ------
T $3,608 $ (1,261) $(2,008) $ (100) $ (1,730) $ (7,471) $6,789 $ (63) $ 1,878
====== ======= ======= ======= ======= ======= ====== ===== ======
</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 management fees ($1,261) and construction,
leasing and other fees ($2,008) and property management fee expense ($2,443)
related to the DRA Joint Ventures, Century Plaza, 5750 Major Boulevard and 100
Wall Street for the year ended December 31, 1996. As a result of the Company's
prospective ownership and management of these properties these historical
amounts will no longer be charged. The Management Company will only include
amounts related to the Excluded Properties and third party management contracts.
As a result of this pro forma adjustment, the pro forma statement of operations
of the Management Company for the year ended December 31, 1996 is as follows
(represents revenues and expenses from the Excluded Properties and third party
management contracts):
<TABLE>
<S> <C>
Management fees.................................................... $ 514
Construction, leasing and other fees............................... 419
Properties Atlantic third party representation fees................ 931
General office and administrative.................................. (1,200)
------
Income before income taxes.................................... 664
Income taxes.................................................. (232)
------
Net income.................................................... $ 432
======
95% equity in earnings of the Management Company recorded by the
Company.......................................................... $ 410
======
</TABLE>
F-15
<PAGE> 192
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) 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).
(4) Reflects a net increase of $713 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 expenses (such as separate
partnership accounting fees and reductions in salaries of certain officers) that
are no longer required.
(5) 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)................................ 89,000 6.96% 6,194
-------- --------
Total............................. $ 111,000
========
Pro forma annual interest expense........... 7,864
Historical interest expense, excluding
amortization of deferred financing fees,
in previous columns (also see (6)
below).................................... (15,007)
--------
Reduction to interest expense
(also see (6) below)............ $ (7,143)
========
</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 will then
be repaid with proceeds from the Term Loan. The above Term Loan amount of $89.0
million reflects the repayment of this Tower 45 debt. The interest rate is based
on the 7 year U.S. Treasury Note rate (6.06% at October 9, 1997) plus 90 basis
points.
(6) Reflects the net decrease in the amortization of deferred financing
fees ($328) as a result of reduction of the amortization expense associated with
historical deferred financing fees to be written off concurrent with the
Offering ($504) partially offset by the amortization of $1.2 million of deferred
financing fees associated with the Term Loan ($176) amortized over the seven
year term.
F-16
<PAGE> 193
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) Reflects the net increase in depreciation and amortization as a result
of the acquisition of Tower Predecessor, DRA Joint Ventures, Century Plaza,
Properties Atlantic and 100 Wall Street 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.......... $ 72,228 $ 14,446 $ 57,782 40 years $1,444
DRA Joint Ventures......... 183,494 55,048 128,446 40 years 3,212
Century Plaza.............. 11,857 2,371 9,486 40 years 238
Properties Atlantic........ $3,120 5 years 624
100 Wall Street............ 59,239 11,848 47,391 40 years 1,184
Additional depreciation
expense for 5750 Major
Boulevard due to
acquisition in 1996...... 87
-------- ------ ------- -------- ------
Net increase in assets and
depreciation and
amortization expense..... $326,818 $3,120 $ 83,713 $ 243,105 $6,789
======== ====== ======= ======== ======
</TABLE>
(8) Reflects the elimination of the equity in earnings from the investment
in the DRA Joint Ventures from Tower Predecessor's historical statement of
operations ($461).
(9) Reflects the decrease of the equity in earnings from the investment in
2800 North Central to reflect the purchase of additional partnership interests,
10% of net loss or ($12).
(10) Reflects net income attributable to the minority interest of the
Operating Partnership. The Company is the sole general partner and will own
approximately 90.5% of the Operating Partnership.
(11) Historical debt on real estate for the Tower Predecessor has been
reduced by $23.7 million to reflect anticipated reduction from debt
restructuring. Also, prepayment penalties of approximately $1.9 million will be
paid on the Tower Predecessor debt on real estate. This extraordinary gain on
extinguishment of debt has not be included in the pro forma statements of
operations due to their nonrecurring nature.
F-17
<PAGE> 194
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 June 30, 1997 and the related consolidated statements
of operations, shareholder's equity and cash flows for the period from March 27,
1997 (date of inception) to June 30, 1997. These financial statements are the
responsibility of the management of Tower Realty Trust, Inc. Our responsibility
is to express an opinion on these financial statements 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
presents fairly, in all material respects, the financial position of Tower
Realty Trust, Inc. as of June 30, 1997, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
September 15, 1997
F-18
<PAGE> 195
TOWER REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<S> <C>
Cash............................................................................... $ 4
Amounts due from affiliates........................................................ 1,182
Investment in Tower Equities Management, Inc. ..................................... 60
Deferred charges................................................................... 7,640
-----
$ 8,886
=====
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable and accrued expenses.............................................. $ 1,689
Debt............................................................................... 7,279
-----
8,968
Commitments and contingencies (Notes 4 and 5)
Shareholder's equity (deficit):
Preferred shares, 50,000,000 shares authorized, none issued and outstanding........
Common shares, $.01 par value, 150,000,000 shares authorized; 1,000 shares issued
and outstanding.................................................................. 1
Accumulated deficit................................................................ (83)
-----
$ 8,886
=====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 196
TOWER REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 27, 1997 (DATE OF INCEPTION) THROUGH JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Revenues:
Interest income..................................................................... $ 33
----
Total revenues.............................................................. 33
----
Expenses
Interest expense.................................................................... 176
----
Total expenses.............................................................. 176
----
Equity in income of Tower Equities Management, Inc. .................................. 60
----
Net loss.................................................................... $(83)
====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 197
TOWER REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE PERIOD FROM MARCH 27, 1997 (DATE OF INCEPTION) THROUGH JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF ACCUMULATED
COMMON SHARES COMMON SHARES DEFICIT
------------- ------------- -----------
<S> <C> <C> <C>
Balance at March 27, 1997......................... -- -- --
Issuance of common shares....................... 1,000 $ 1
Net loss........................................ $ (83)
--
----- ----
Balance at June 30, 1997.......................... 1,000 $ 1 $ (83)
===== == ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 198
TOWER REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 27, 1997 (DATE OF INCEPTION) THROUGH JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flow from operating activities:
Net loss......................................................................... $ (83)
Adjustments to reconcile net loss to net cash provided by operating activities:
Equity in income of Tower Equities Management, Inc............................ (60)
Change in accounts payable and accrued expenses............................... 1,689
-------
Net cash flow provided by operating activities........................... 1,546
-------
Cash flow from investing activities:
Increase in deferred charges..................................................... (7,640)
Increase in due from affiliates.................................................. (1,182)
-------
Net cash flow used in investing activities............................... (8,822)
-------
Cash flow from financing activities:
Proceeds from issuance of debt................................................... 7,279
Proceeds from issuance of common stock........................................... 1
-------
Net cash flow provided by investing activities........................... 7,280
-------
Net increase in cash and cash equivalents.......................................... 4
Cash, beginning of year............................................................
-------
Cash, end of year.................................................................. $ 4
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 199
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 89.5% 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.
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. At June
30, 1997, the balance on the notes has been increased to approximately $7.3
million. The notes bear interest at a rate of 15% per annum and are payable
quarterly, in arrears. Subsequent to June 30, 1997, the Company issued an
additional $5.0 million of notes. All interests contributed in the previously
described transactions were recorded at zero as the historical carry-over basis
of these interests were negative. Under the Partnership agreements, these
partners are not required to fund any partners' deficit balances to the
Operating Partnership.
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.
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.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-23
<PAGE> 200
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 has filed 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 Placements"). All the net proceeds to the
Company from the Offering and the Concurrent Private Placements will be
contributed either directly or indirectly to the Operating Partnership in
exchange for a sole 1% general partnership interest and an 89.5% 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
21 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 has entered into a $107.0 million seven year term
facility with Merrill Lynch Credit Corporation (the "Term Loan") and will borrow
approximately $54 million under such facility at the closing of the Offering.
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.
F-24
<PAGE> 201
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LINE OF CREDIT
The Company has obtained a commitment for a $200 million Line of Credit.
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.
4. INVESTMENT IN TOWER EQUITIES MANAGEMENT, INC.:
The Company records its investment in Tower Equities Management, Inc.
("TEMI") using the equity method of accounting and, therefore, reports its share
of income and expenses based on its 95% ownership interest in TEMI. Presented
below in condensed financial information of TEMI:
TOWER EQUITIES MANAGEMENT, INC.
BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash.................................................................. $136
Accounts receivable................................................... 297
Equipment............................................................. 113
----
Total assets................................................ $546
====
LIABILITIES AND OWNERS' EQUITY
Accounts payable and accrued expenses................................. $247
Due to affiliates..................................................... 237
Owners' equity........................................................ 62
----
Total liabilities and owners' equity........................ $546
====
</TABLE>
F-25
<PAGE> 202
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOWER EQUITIES MANAGEMENT, INC.
STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION (MARCH 27, 1997) THROUGH JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenues:
Management fees................................................... $1,002
Construction, leasing and other fees.............................. 186
------
Total revenues............................................ $1,188
------
Expenses:
General office and administration................................. 1,083
Depreciation and amortization..................................... 9
Total expenses................................................. 1,092
------
Income before taxes............................................ 96
Income tax expense.................................................. 34
------
Net income..................................................... $ 62
======
</TABLE>
5. STOCK INCENTIVE PLANS:
Prior to the Offering, the Board of Directors will 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 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. 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, 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. 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
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
F-26
<PAGE> 203
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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").
6. 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,
subject, in certain circumstances, to automatic one year extensions, 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, in
the case of Mr. Cox, to automatic one-year extensions, 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 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 each
case, payable within 30 days of each such officer's termination. In the case of
an officer's death or disability, salary is continued for a twelve-month period.
In addition, such employment agreements will provide for the grant of the
options and the stock awards previously described above. Pursuant to the
employment agreements, such options are subject to vesting, but will vest upon
an officer's death or disability or a change of control of the Company.
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).
F-27
<PAGE> 204
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-28
<PAGE> 205
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
presents 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-29
<PAGE> 206
TOWER PREDECESSOR
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
JUNE 30, 1997 -------- --------
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate.............................................. $ 170,865 $169,619 $163,879
Less: accumulated depreciation......................... (43,288) (40,555) (35,741)
--------- --------- ---------
Real estate, net......................................... 127,577 129,064 128,138
Deferred charges, net.................................... 12,041 11,636 12,543
Receivables, net of allowance for doubtful accounts of 3,436 2,776 3,121
approximately $2.5 million for all periods.............
Unbilled rent receivable................................. 14,580 15,242 16,447
Escrowed funds........................................... 421 413 297
Cash and cash equivalents................................ 4,326 4,985 5,208
Investments in joint ventures............................ 4,745 5,316 4,538
Other assets............................................. 3,506 3,555 3,597
--------- --------- ---------
Total assets................................... $ 170,632 $172,987 $173,889
========= ========= =========
LIABILITIES AND OWNERS' DEFICIT
Real estate debt......................................... $ 193,381 $202,892 $199,962
Deferred real estate taxes............................... 12,951 12,951 12,951
Accounts payable and other liabilities................... 12,586 12,867 11,600
Amounts due to affiliates................................ 10,374 6,147 6,464
--------- --------- ---------
Total liabilities.............................. 229,292 234,857 230,977
Commitments and contingencies (Note 12)
Owners' deficit.......................................... (58,660) (61,870) (57,088)
--------- --------- ---------
Total liabilities and owners' deficit.......... $ 170,632 $172,987 $173,889
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-30
<PAGE> 207
TOWER PREDECESSOR
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- -------------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income...................... $13,521 $13,467 $26,138 $25,202 $25,994
Management fees.................... 245 626 1,261 961 82
Construction, leasing, and other
fees............................ 474 543 1,335 1,041 320
------- ------- -------- -------- --------
Total revenues............. 14,240 14,636 28,734 27,204 26,396
------- ------- -------- -------- --------
Expenses:
Property operating and
maintenance..................... 2,703 2,781 5,481 5,332 5,278
Real estate taxes.................. 2,331 2,360 4,722 4,571 3,971
General office and
administration.................. 1,746 1,767 3,494 3,497 2,512
Interest expense................... 7,028 7,172 15,511 15,150 12,751
Depreciation and amortization...... 3,494 3,384 6,853 6,897 7,415
Ground rent and air rights
expense......................... 299 299 599 599 599
------- ------- -------- -------- --------
Total expenses............. 17,601 17,763 36,660 36,046 32,526
------- ------- -------- -------- --------
Equity in income of joint ventures... 68 198 461 193 1
------- ------- -------- -------- --------
Net loss before
extraordinary gain on
early extinguishment of
debt..................... (3,293) (2,929) (7,465) (8,649) (6,129)
Extraordinary gain on early
extinguishment of debt............. 6,475
------- ------- -------- -------- --------
Net income (loss).......... $ 3,182 $(2,929) $(7,465) $(8,649) $(6,129)
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-31
<PAGE> 208
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 income (unaudited).......................................................... 3,182
Contributions, net (unaudited).................................................. 28
-------
Balance at June 30, 1997 (unaudited).............................................. $(58,660)
=======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-32
<PAGE> 209
TOWER PREDECESSOR
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss).......................... $ 3,182 $(2,929) $(7,465) $(8,649) $(6,129)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization........... 3,494 3,384 6,853 6,897 7,415
Amortization of deferred financing
costs................................. 345 252 504 575 574
Equity in income of joint ventures, net
of distributions...................... (5) (461) (193) (34)
Gain on disposal of assets.............. (39) (30) (81)
Extraordinary gain on early
extinguishment of debt................ (6,475)
Change in:
Deferred charges...................... (1,352) (765) (867) (373) 1,085
Receivables........................... (660) 352 345 2,673 (2,471)
Unbilled rent receivable.............. 662 239 1,205 3,084 2,437
Escrowed funds........................ (8) (462) (116) 268 69
Other assets.......................... 49 88 42 (616) (278)
Deferred real estate taxes............ 366 1,074
Accounts payable and other
liabilities........................ (281) (595) 1,267 90 (1,548)
Amounts due to affiliates............. 3,617 (252) (317) (2,330) 2,005
------- ------- ------- ------- -------
Net cash flow provided by (used in)
operating activities............. 2,573 (693) 951 1,762 4,118
------- ------- ------- ------- -------
Cash flow from investing activities:
Improvements to real estate................ (1,405) (1,329) (2,659) (967) (1,602)
Acquisitions of real estate................ (3,850)
Distribution from (contribution to) joint
ventures................................ 571 (317) (2,503) (1,808)
Proceeds from disposal of assets........... 39 30 273
------- ------- ------- ------- -------
Net cash flow used in investing
activities....................... (834) (1,329) (6,787) (3,440) (3,137)
------- ------- ------- ------- -------
Cash flow from financing activities:
Partners' contributions, net............... 28 1,239 2,683 2,730 2,429
Proceeds from real estate debt............. 2,186 1,657 7,039 424 780
Repayment of real estate debt.............. (4,612) (1,253) (4,109) (2,916) (3,179)
------- ------- ------- ------- -------
Net cash flow (used in) provided by
financing activities............. (2,398) 1,643 5,613 238 30
------- ------- ------- ------- -------
Net (decrease) increase in cash and cash
equivalents................................ (659) (379) (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...... $ 4,326 $ 4,829 $ 4,985 $ 5,208 $ 6,648
======= ======= ======= ======= =======
Supplemental cash flow information:
Cash paid for interest..................... $ 6,725 $ 6,373 $15,007 $14,575 $12,177
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-33
<PAGE> 210
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 89.5% 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 concurrent private placements (the "Concurrent Private
Placements"). The proceeds from the Offering and the Concurrent Private
Placements are expected to be used to purchase a
F-34
<PAGE> 211
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
sole 1% general partnership interest and 89.5% 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-35
<PAGE> 212
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 June 30, 1997 and for the six
months ended June 30, 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 six months ended June 30, 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,
JUNE 30, ---------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Land.............................................. $ 25,662 $ 25,662 $ 25,280
Buildings and improvements........................ 145,084 143,838 138,441
Furniture, fixtures and equipment................. 119 119 158
-------- -------- --------
Total................................... 170,865 169,619 163,879
Less: Accumulated depreciation.................... (43,288) (40,555) (35,741)
-------- -------- --------
$ 127,577 $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 six months ended June 30, 1997 and 1996 (unaudited)
was approximately $2.9 million and $2.8 million, respectively.
F-36
<PAGE> 213
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. DEFERRED CHARGES
Deferred charges consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Deferred financing costs........................... $ 2,248 $ 1,049 $ 2,214
Deferred leasing costs............................. 17,047 17,018 16,500
Deferred brokerage commissions..................... 7,971 7,330 7,132
-------- -------- --------
27,266 25,397 25,846
Less: Accumulated amortization................ (15,225) (13,761) (13,303)
-------- -------- --------
$12,041 $ 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.
F-37
<PAGE> 214
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Presented below is condensed combined financial information of the DRA
Joint Ventures:
DRA JOINT VENTURES
Combined Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate, net of accumulated depreciation.............. $ 140,285 $140,759 $139,169
Other assets.............................................. 19,401 19,249 10,759
-------- -------- --------
Total assets.................................... $ 159,686 $160,008 $149,928
======== ======== ========
LIABILITIES AND OWNERS' EQUITY
Debt on real estate....................................... $ 129,225 $126,517 $119,288
Accounts payable and other liabilities.................... 4,097 3,956 5,428
-------- -------- --------
Total liabilities............................... 133,322 130,473 124,716
Owners' equity............................................ 26,364 29,535 25,212
-------- -------- --------
Total liabilities and owners' equity............ $ 159,686 $160,008 $149,928
======== ======== ========
</TABLE>
DRA JOINT VENTURES
Combined Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- ----------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income......................... $14,503 $14,331 $29,010 $12,629 $207
Management fees and other............. 83 98 288 224
------ ------ ------- ------- ----
Total revenues................ 14,586 14,429 29,298 12,853 207
------ ------ ------- ------- ----
Expenses:
Property operating expenses, real
estate taxes and management fees... 6,207 6,564 12,446 6,283 170
Interest expense...................... 5,692 4,816 10,176 3,814
Depreciation and amortization......... 2,307 1,949 4,118 1,684 31
------ ------ ------- ------- ----
Total expenses................ 14,206 13,329 26,740 11,781 201
------ ------ ------- ------- ----
Net income.................... $ 380 $ 1,100 $ 2,558 $ 1,072 $ 6
====== ====== ======= ======= ====
</TABLE>
F-38
<PAGE> 215
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
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate, net of accumulated depreciation........................ $31,151 $ 30,638
Other assets........................................................ 2,448 2,244
------- -------
Total assets.............................................. $33,599 $ 32,882
======= =======
LIABILITIES AND OWNERS' EQUITY
Debt on real estate................................................. $26,489 $ 25,021
Accounts payable and other liabilities.............................. 925 1,285
------- -------
Total liabilities......................................... 27,414 26,306
Owners' equity...................................................... 6,185 6,576
------- -------
Total liabilities and owners' equity...................... $33,599 $ 32,882
======= =======
</TABLE>
2800 NORTH CENTRAL PROPERTY
Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
PERIOD FROM
SIX-MONTHS MAY 1996
ENDED THROUGH
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Rental income..................................................... $2,779 $3,615
Management fees and other......................................... 9 48
------ ------
Total revenues............................................ 2,788 3,663
------ ------
Expenses:
Property operating expenses, real estate taxes and management
fees........................................................... 1,360 1,687
Interest expense.................................................. 1,265 1,581
Depreciation and amortization..................................... 554 519
------ ------
Total expenses............................................ 3,179 3,787
------ ------
Net loss.................................................. $ (391) $ (124)
====== ======
</TABLE>
F-39
<PAGE> 216
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,
JUNE 30, ---------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Tower 45.................................................. $ 145,430 $147,616 $151,109
120 Mineola Boulevard..................................... 11,260 18,892 18,892
Maitland Forum............................................ 28,875 29,409 27,013
Maitland Center Parkway (3 properties).................... 4,548 4,437 2,948
5750 Major Boulevard...................................... 3,268 2,538
-------- -------- --------
$ 193,381 $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,
plus an additional rate ranging from 3.25% to 4.50% (8.76% to 9.51% at December
31, 1996 and 8.69% to 9.50% (unaudited) at June 30, 1997). 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 30-day LIBOR (5.50% and 5.69% (unaudited) on December 31, 1996 and
June 30, 1997, respectively), plus an additional rate ranging from 1.75% to
2.50%. 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>
During the six months ended June 30, 1997, the debt on 120 Mineola
Boulevard was extinguished with proceeds from another lender of $11,260. Gain on
the early extinguishment of debt totalled $6,475.
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-40
<PAGE> 217
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The geographic concentration of the future minimum lease payments to be
received as of December 31, 1996 is 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,
JUNE 30, -------------------
1997 1996 1995
----------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued interest............................................ $ 5,981 $ 6,022 $ 5,455
Accounts payable............................................ 3,151 3,336 4,161
Advance rent and deposits................................... 2,331 2,322 1,801
Deferred income............................................. 1,123 1,187 183
------- ------- -------
$12,586 $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 six
months ended June 30, 1997 and 1996, fees and costs derived from these
agreements totalled $0.2 million (unaudited) and $0.8 million (unaudited),
respectively.
Amounts due to affiliates at June 30, 1997 and 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-41
<PAGE> 218
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 six
months ended June 30, 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-42
<PAGE> 219
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-43
<PAGE> 220
SCHEDULE III
TOWER PREDECESSOR
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST COSTS
--------------------- CAPITALIZED
BUILDING AND SUBSEQUENT TO
PROPERTY NAME(1) LOCATION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITIONS
- ------------------------------ ---------------- ------------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Maitland Center Parkway....... Maitland, FL $ 4,437 $ 218 $ 2,400 $ 556
120 Mineola Boulevard......... Long Island, NY 18,892 3,216 16,885 390
Maitland Forum................ Maitland, FL 29,409 3,817 10,415 7,862
Tower 45...................... New York, NY 147,616 18,029 71,886 30,095
5750 Major Boulevard.......... Orlando, FL 2,538 382 3,468 --
-------- ------- ------- -------
$202,892 $25,662 $105,054 $38,903
======== ======= ======= =======
<CAPTION>
GROSS AMOUNT CARRIED
AT CLOSE OF PERIOD
-----------------------------------
LAND AND BUILDING AND ACCUMULATED DATE OF DATE DEPRECIABLE
PROPERTY NAME(1) IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED LIVES (YEARS)
- ------------------------------ ------------ ------------ -------- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maitland Center Parkway....... $ 218 $ 2,956 3,174 355 -- 1992 (2)
120 Mineola Boulevard......... 3,216 17,275 20,491 4,701 -- 1988 (2)
Maitland Forum................ 3,817 18,277 22,094 7,666 1984 -- (2)
Tower 45...................... 18,029 101,981 120,010 27,814 1989 -- (2)
5750 Major Boulevard.......... 382 3,468 3,850 19 -- 1996 (2)
------- -------- -------- -------
$ 25,662 $143,957 $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-44
<PAGE> 221
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-45
<PAGE> 222
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 DRA Joint Ventures' revenues
and expenses.
In our opinion, the combined statements of revenues and certain operating
expenses referred to above present 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-46
<PAGE> 223
DRA JOINT VENTURES
COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED YEAR ENDED NOVEMBER 21,
JUNE 30, DECEMBER 31, 1994 THROUGH
--------------------------- ------------------- DECEMBER 31,
1997 1996 1996 1995 1994
----------- ----------- ------- ------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income................... $13,994 $13,561 $27,592 11,672 $193
Unbilled rental income.......... 509 770 1,418 957 14
Other income.................... 83 98 288 224
------ ------ ------- ------- ----
Total revenues.......... 14,586 14,429 29,298 12,853 207
------ ------ ------- ------- ----
Certain operating expenses:
Property operating and
maintenance.................. 3,959 4,190 7,791 4,003 95
Real estate taxes............... 1,796 1,810 3,572 1,746 38
General office and
administration............... 40 169 282 164 31
Management fees................. 412 395 801 370 6
------ ------ ------- ------- ----
Total certain operating
expenses.............. 6,207 6,564 12,446 6,283 170
------ ------ ------- ------- ----
Revenues in excess of
certain operating
expenses.............. $ 8,379 $ 7,865 $16,852 $ 6,570 $ 37
====== ====== ======= ======= ====
</TABLE>
The accompanying notes are an integral part of these combined
statements of revenues and certain operating expenses.
F-47
<PAGE> 224
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 89.5%
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 concurrent private placements (the "Concurrent Private
Placements"). The proceeds from the Offering and the Concurrent Private
Placements will be used to purchase a sole 1% general partnership interest and
89.5% 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-48
<PAGE> 225
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 six months ended June 30, 1997, One Orlando Center and Corporate Center
comprise 30.0% and 26.5% 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 six months ended June
30, 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-49
<PAGE> 226
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 six
months ended June 30, 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 six months ended June
30, 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
six months ended June 30, 1997 and 1996, fees paid under these agreements
totalled $0.5 million (unaudited) and $0.6 million (unaudited), respectively.
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.
4. REAL ESTATE
The following is real estate and accumulated depreciation information for
DRA Joint Ventures as of December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
INITIAL COST COSTS
--------------------- CAPITALIZED
BUILDING AND SUBSEQUENT TO
PROPERTY NAME(1) LOCATION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITIONS
- ---------------------------- ------------- ------------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
286 Madison Avenue.......... New York, NY $ 7,909 $ 1,204 $ 5,693 $ 1,078
290 Madison Avenue.......... New York, NY 4,184 736 3,465 100
292 Madison Avenue.......... New York, NY 18,400 3,297 15,593 427
5151 East Broadway.......... Tucson, AZ 15,089 2,020 8,080 5,398
Corporate Center Building... Phoenix, AZ 22,000 8,510 25,531 992
One Orlando Center.......... Orlando, FL 58,935 6,100 54,900 2,991
-------- ------- ------- -------
$126,517 $21,867 $113,262 $10,986
======== ======= ======= =======
<CAPTION>
GROSS AMOUNT CARRIED
AT CLOSE OF PERIOD
-----------------------------------
LAND AND BUILDING AND ACCUMULATED DATE OF DATE DEPRECIABLE
PROPERTY NAME(1) IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED LIVES (YEARS)
- ---------------------------- ------------ ------------ -------- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
286 Madison Avenue.......... $ 1,205 $ 6,770 $ 7,975 $ 316 -- 1995 (2)
290 Madison Avenue.......... 736 3,565 4,301 128 -- 1995 (2)
292 Madison Avenue.......... 3,301 16,016 19,317 584 -- 1995 (2)
5151 East Broadway.......... 2,040 13,458 15,498 887 -- 1994 (2)
Corporate Center Building... 8,510 26,523 35,033 969 -- 1995 (2)
One Orlando Center.......... 6,115 57,876 63,991 2,472 -- 1995 (2)
------- -------- -------- -------
$ 21,907 $124,208 $146,115 $ 5,356
======= ======== ======== =======
</TABLE>
- ---------------
Notes:
(1) Includes properties held by DRA Properties. For Corporate Center Building (6
properties), information is unavailable on an individual property basis.
(2) Buildings and improvements depreciated over 40 years.
F-50
<PAGE> 227
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Tower Realty Trust, Inc.
We have audited the accompanying statement of revenues and certain
operating expenses of 100 Wall Street for the year ended December 31, 1996. This
historical statement of revenues and certain operating expenses is the
responsibility of the management of 100 Wall Street. Our responsibility is to
express an opinion on this statement of revenues and certain operating expenses
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 historical statement of revenues and
certain operating expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the 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 statement
of revenues and certain operating expenses. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenues and certain operating expenses was
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 is not
intended to be a complete presentation of 100 Wall Street's revenues and
expenses.
In our opinion, the statement of revenues and certain operating expenses
referred to above presents fairly, in all material respects, the revenues and
certain operating expenses of 100 Wall Street, as described in Note 1, for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
September 15, 1997
F-51
<PAGE> 228
100 WALL STREET
STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED
--------------------------- DECEMBER 31,
1997 1996 1996
----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rental income......................................... $ 5,606 $ 5,102 $ 11,317
Other income.......................................... 318 610 961
------ ------ -------
Total revenues................................ 5,924 5,712 12,278
------ ------ -------
Certain operating expenses:
Property operating and maintenance.................... 1,955 1,951 4,151
Real estate taxes..................................... 1,192 1,387 2,524
Other expenses........................................ 97 48 143
------ ------ -------
Total certain operating expenses.............. 3,244 3,386 6,818
------ ------ -------
Revenues in excess of certain operating
expenses.................................... $ 2,680 $ 2,326 $ 5,460
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these
statements of revenues and certain operating expenses.
F-52
<PAGE> 229
100 WALL STREET
NOTES TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
The accompanying statements of revenues and certain operating expenses of
100 Wall Street have been presented on a historical cost basis 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
89.5% limited partnership interest in the Operating Partnership concurrent with
the Company's initial public offering. In management's opinion, these statements
of revenues and certain operating expenses include the revenues and expenses
associated with the operations of the property intended to be sold to the
Company.
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 concurrent private placements (the "Concurrent Private
Placements"). The proceeds from the Offering and the Concurrent Private
Placements will be used to purchase a sole 1% general partnership interest and
89.5% limited partnership interest in the Operating Partnership which will hold
the operating assets and liabilities of the Company.
The accompanying historical statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission and are
not representative of the actual operations of the property for the periods
presented. The statements exclude certain expenses such as interest,
depreciation and amortization and other costs not directly related to the future
operations of the property that may not be comparable to the expenses expected
to be incurred in the proposed future operations of the property.
REVENUE RECOGNITION
100 Wall Street, as a lessor, has retained substantially all of the risks
and benefits of ownership of the rental properties and accounts for its lease as
operating leases. Space is leased to tenants under leases ranging from 1 to 16
years. Rental income is recognized over the terms of the leases as it is earned.
FUTURE RENTAL REVENUE
The future minimum lease payments to be received by 100 Wall Street as of
December 31, 1996 under noncancelable operating leases, which expire on various
dates through September 2066, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
------------------------------------------------ ------------
<S> <C>
1997....................................... $ 10,672,038
1998....................................... 11,445,587
1999....................................... 10,409,691
2000....................................... 6,171,497
2001....................................... 5,957,006
Thereafter................................. 27,698,050
-----------
$ 72,353,869
===========
</TABLE>
There were two major tenants which together represented approximately 51%
and 50% of 100 Wall Street total revenue income for the year ended December 31,
1996 and the six months ended June 30, 1997, respectively.
F-53
<PAGE> 230
100 WALL STREET
NOTES TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES -- (CONTINUED)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of 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. Actual results could
differ from those estimates.
UNAUDITED INTERIM STATEMENTS
The revenues in excess of certain operating expenses for the six months
ended June 30, 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 statements have been included. The revenues in excess
of certain operating expenses for the six months ended June 30, 1997 are not
necessarily indicative of the 100 Wall Street future operations for the full
year ending December 31, 1997.
F-54
<PAGE> 231
[Color photograph of the One Orlando Center office building]
One Orlando Center, Orlando, Florida
[Color photograph of the 292 Madison Avenue office building]
292 Madison Avenue, Manhattan
[LOGO]
[Color photograph of the 286 Madison Avenue office building]
286 Madison Avenue, Manhattan
For a summary property, operating and ownership data regarding the properties,
see the property tables contained under the caption "The Properties" herein.
<PAGE> 232
======================================================
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.......................... 20
The Company........................... 34
Operating and Growth Strategies....... 36
Use of Proceeds....................... 40
Distributions......................... 41
Capitalization........................ 45
Dilution.............................. 46
Selected Combined Financial and
Operating Data...................... 47
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 52
Property Office Markets and Market
Economies........................... 61
The Properties........................ 75
Management............................ 103
Formation and Structure of the
Company............................. 112
Certain Relationships and
Transactions........................ 117
Principal Stockholders................ 119
Description of Capital Stock.......... 121
Certain Provisions of Maryland Law and
of the Company's Charter and
Bylaws.............................. 126
Policies with Respect to Certain
Activities.......................... 129
Shares Available for Future Sale...... 133
Partnership Agreement................. 135
Federal Income Tax Considerations..... 138
ERISA Considerations.................. 155
Underwriting.......................... 158
Experts............................... 161
Legal Matters......................... 162
Additional Information................ 162
Glossary.............................. 163
Index to Financial Statements......... F-1
</TABLE>
UNTIL NOVEMBER 4, 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.
======================================================
======================================================
12,015,000 SHARES
TOWER REALTY
TRUST, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
LEGG MASON WOOD WALKER
INCORPORATED
MORGAN STANLEY DEAN WITTER
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
NATIONSBANC MONTGOMERY
SECURITIES, INC.
OCTOBER 9, 1997
======================================================
<PAGE> 233
Pursuant to Rule 424(b)(1)
Registration No. 333-33011
P R O S P E C T U S
12,015,000 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 21 office buildings (collectively, the "Properties") encompassing
approximately 3.4 million rentable square feet. 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. Of the
12,015,000 shares of Common Stock offered hereby, 2,303,000 shares of Common
Stock are being offered initially outside the United States and Canada by the
International Managers and 9,712,000 shares of Common Stock are being offered
initially in the United States and Canada by the U.S. Underwriters. See
"Underwriting." Upon completion of the Offering, management and directors of the
Company will beneficially own approximately 9.0% of the equity in the Company.
Prior to the Offering, there has been no public market for the Common Stock.
See "Underwriting" for a discussion of the factors considered in determining the
initial public offering price. The Common Stock has been approved for listing on
the New York Stock Exchange, subject to official notice of issuance, 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 20 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 generally based on the value of the
Company as a going concern, and not 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 of the Company, including
the receipt by officers, directors and affiliates of the Company of equity
interests in the Company;
- conflicts of interest relating to the operation of the Company, including
conflicts of interest associated with the potential adverse tax
consequences to certain executive officers and directors of the Company of
sales and refinancings of certain Properties;
- 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, subject to an exception that
permits mutual funds and certain other entities to own or purchase up to
15% of any class of the Company's stock in appropriate circumstances;
- 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
- the possibility that the Company may not be able to refinance outstanding
indebtedness (initially expected to be approximately $113.7 million,
including its pro rata share of indebtedness of unconsolidated investments)
upon maturity, indebtedness might be refinanced on less favorable terms,
and 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.
<TABLE>
<CAPTION>
===========================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................... $26.00 $1.69 $24.31
- -----------------------------------------------------------------------------------------------------------
Total(3).................................... $312,390,000 $20,305,350 $292,084,650
===========================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $12.0
million.
(3) The Company has granted the International Managers a 30-day option to
purchase up to 345,450 additional shares of Common Stock and has granted to
the U.S. Underwriters a 30-day option to purchase up to 1,456,800 additional
shares of Common Stock, solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $359,248,500, $23,351,153 and
$335,897,347, 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 orders in whole or in part. It is expected
that delivery of the shares of Common Stock offered hereby will be made in New
York, New York on or about October 16, 1997.
------------------------
MERRILL LYNCH INTERNATIONAL
LEGG MASON WOOD WALKER
INCORPORATED
MORGAN STANLEY DEAN WITTER
PRUDENTIAL-BACHE SECURITIES
SMITH BARNEY INC.
NATIONSBANC MONTGOMERY SECURITIES, INC.
------------------------
The date of this Prospectus is October 9, 1997.
<PAGE> 234
[LOGO]
[Color photograph of the Tower 45 office building]
Tower 45, Manhattan
------------------------
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> 235
For a summary property, operating and ownership data regarding the properties,
see the property tables contained under the caption "The Properties" herein.
[Color photograph of the 100 Wall Street office building]
100 Wall Street, Manhattan
[Color photograph of the 5750 Major Boulevard office building before
redevelopment]
[Color photograph of the 5750 Major Boulevard office building after
redevelopment.]*
5750 Major Boulevard, Orlando, Florida
*Artist's rendering of the property upon completion of the Company's
redevelopment program.
<PAGE> 236
[Color photograph of the 2800 North Central Avenue office building]
2800 North Central Avenue, Phoenix, Arizona
[Color photograph of the Century Plaza office building]
Century Plaza, Phoenix, Arizona
[Color photograph of the 5151 East Broadway office building]
Before redevelopment by the Company
[Color photograph of the 5151 East Broadway office building]
After redevelopment by the Company
5151 East Broadway, Tucson, Arizona
<PAGE> 237
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY....................... 1
The Company............................ 1
Risk Factors........................... 2
Growth Strategies...................... 4
Market Information..................... 6
The Properties......................... 7
Formation and Structure of the
Company............................. 9
Formation Transactions.............. 9
Benefits to Related Parties......... 11
Conflicts of Interest............... 12
Structure of the Company............ 12
The Offering........................... 14
Distributions.......................... 14
Tax Status of the Company.............. 15
Summary Selected Financial
Information......................... 16
RISK FACTORS............................. 20
There is No Assurance that the Company
Has Paid Fair Market Value for the
Properties.......................... 20
Conflicts of Interest in the Formation
Transactions; Substantial Benefits
to Related Parties.................. 20
Conflicts of Interest in the Business
of the Company...................... 21
Leasing Services Provided to Other
Properties........................ 21
Possible Less Vigorous Enforcement
of Terms of Contribution and Other
Agreements by the Company......... 21
For a Period of Time, Sales of
Properties and Repayment of
Indebtedness May Have Different
Effects on Holders of OP Units
than on Stockholders.............. 21
Outside Interests of Officers and
Directors......................... 21
The Company's Performance and Value are
Subject to Risks Associated with the
Real Estate Industry................ 22
General Real Estate Industry Risks
Could Adversely Affect the
Company........................... 22
Tenant Defaults and Bankruptcy Could
Adversely Affect the Company's
Financial Condition............... 22
Increased Operating Expenses Could
Adversely Affect the Company's
Cash Flow......................... 22
The Failure to Renew or Relet Space
Under Expiring Leases Could
Adversely Affect the Company's
Cash Flow......................... 23
Loss of Major Tenants Could
Adversely Affect the Company's
Cash Flow......................... 23
Impact of Competition on Occupancy
Levels, Rent Charged, Acquisitions
and Management Services........... 23
<CAPTION>
PAGE
----
<S> <C>
Liability for Environmental Matters
Could Adversely Affect the
Company's Financial Condition..... 23
The Cost of Complying with the
Americans with Disabilities Act
Could Adversely Affect the
Company's Cash Flow............... 24
Changes in Tax and Environmental
Laws Could Affect the Company's
Financial Condition............... 24
Uninsured Losses Could Adversely
Affect the Company's Cash Flow.... 25
Lack of Control Over Properties
Owned through Partnerships and
Joint Ventures Could Result in
Decisions Inconsistent with the
Company's Objectives.............. 25
Illiquidity of Real Estate
Investments Could Adversely Affect
the Company's Financial
Condition......................... 25
Acquisition, Redevelopment, and
Development Risks Could Adversely
Affect the Company................ 25
Managed Property Business and Non-REIT
Services............................ 26
Termination of Management and
Leasing Contracts................. 26
Adverse Consequences of Lack of
Control Over the Business of the
Management Company................ 26
Limits on Changes in Control........... 26
Stock Ownership Limit in Charter
Could Inhibit Acquisitions and
Changes in Control................ 26
Staggered Board Could Prevent
Acquisitions and Changes in
Control........................... 27
The Issuance of Additional Shares
Could Prevent Acquisitions and
Changes in Control................ 27
Limitations on Acquisition of and
Changes in Control Pursuant to
Maryland Law...................... 27
Failure to Qualify as a REIT Would
Cause the Company to be Taxed as a
Corporation......................... 28
The Company Will Be Taxed as a
Corporation if it Fails to Qualify
as a REIT......................... 28
</TABLE>
i
<PAGE> 238
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
To Qualify As a REIT the Company
Will Need to Maintain a Certain
Level of Distributions............ 28
Other Tax Liabilities............... 29
The Company's Use of Debt to Finance
Acquisitions and Developments Could
Adversely Affect the Company........ 29
Rising Interest Rates Could
Adversely Affect the Company's
Cash Flow......................... 29
Debt Financing and Potential Adverse
Effects on Cash Flows and
Distributions..................... 29
The Inability to Obtain Permanent
Financing of Construction Loans
Could Result in a Loss of Income
and Asset Value of the Company.... 30
High Distribution Payout Ratio......... 30
Uncontrollable Market Factors Affecting
the Properties' Performance and
Value Could Produce Lower Returns... 30
Lack of Operating History and Risks of
Acquisitions Could Adversely Affect
the Company......................... 31
Changes in Policies, Such as the
Company's Debt Policy, Without
Stockholder Approval Could Adversely
Affect the Company.................. 31
The Company Relies on Key Personnel
Whose Continued Service is Not
Guaranteed.......................... 31
Control of Management.................. 32
Absence of Prior Public Market for
Common Stock and Market Conditions
Could Adversely Impact the Trading
Price of the Common Stock........... 32
Purchasers of Common Stock in the
Offering Will Experience Immediate
and Substantial Book Value
Dilution............................ 32
Possible Adverse Effect on Common Stock
Price of Shares Available for Future
Sale................................ 32
THE COMPANY.............................. 34
General................................ 34
Operations of the Company.............. 35
Concurrent Private Placements.......... 35
OPERATING AND GROWTH STRATEGIES.......... 36
Operating Strategies................... 36
Growth Strategies...................... 37
USE OF PROCEEDS.......................... 40
DISTRIBUTIONS............................ 41
CAPITALIZATION........................... 45
DILUTION................................. 46
SELECTED COMBINED FINANCIAL AND OPERATING
DATA................................... 47
PAGE
----
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................. 52
Results of Operations.................. 52
Pro Forma Operating Results............ 55
Recently Issued Accounting Standards... 56
Liquidity and Capital Resources........ 56
Cash Flows............................. 58
Funds from Operations and EBITDA....... 59
Inflation.............................. 60
PROPERTY OFFICE MARKETS AND MARKET
ECONOMIES.............................. 61
Manhattan Market and Economy........... 61
Metropolitan Orlando Market and
Economy............................. 65
Metropolitan Phoenix Market and
Economy............................. 68
Metropolitan Tucson Market and
Economy............................. 71
THE PROPERTIES........................... 75
General................................ 75
Properties............................. 75
Development Parcels.................... 77
Tenants................................ 77
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.................... 97
Land Parcel Options.................... 97
Air Rights and Ground Lease
Agreements.......................... 98
Depreciation of Significant
Properties.......................... 98
Real Estate Taxes on Significant
Properties.......................... 98
Occupancy, Effective Rent and Other
Data at Significant Properties...... 99
Excluded Properties.................... 99
Mortgage Indebtedness Remaining
Following the Offering.............. 99
Assumed Deferred Tax Liability......... 100
Line of Credit......................... 101
Insurance.............................. 101
Possible Environmental Liabilities..... 101
Competition............................ 102
Employees.............................. 102
Legal Proceedings...................... 102
MANAGEMENT............................... 103
Directors and Executive Officers....... 103
Managing Directors and Other Key
Employees........................... 105
Committees of the Board of Directors... 106
Compensation of Directors.............. 106
Board Observation Rights............... 106
Executive Compensation................. 107
</TABLE>
ii
<PAGE> 239
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Employment Agreements.................. 108
Incentive Compensation................. 108
Stock Option and Restricted Stock
Plans............................... 109
Limitation of Liability and
Indemnification..................... 111
Indemnification Agreements............. 112
FORMATION AND STRUCTURE OF THE COMPANY... 112
Effects of the Formation
Transactions........................ 114
Determination and Valuation of
Ownership Interests................. 115
Certain Estimate of Value.............. 115
Benefits to Related Parties............ 115
Transfer of Properties................. 116
CERTAIN RELATIONSHIPS AND TRANSACTIONS... 117
Formation Transactions................. 117
Exchange Rights........................ 117
Registration Rights.................... 117
Employment Agreements; Award of
Options............................. 117
Excluded Property Management
Agreements.......................... 117
Executive Officer and Director
Distributions and Fees.............. 118
Miscellaneous.......................... 118
PRINCIPAL STOCKHOLDERS................... 119
DESCRIPTION OF CAPITAL STOCK............. 121
General................................ 121
Common Stock........................... 121
Preferred Stock........................ 122
Power to Issue Additional Shares of
Common Stock and Preferred Stock.... 122
Restrictions on Transfer............... 122
Transfer Agent and Registrar........... 125
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S CHARTER AND BYLAWS....... 126
Number of Directors; Classification of
the Board of Directors.............. 126
Removal; Filling Vacancies............. 126
Business Combinations.................. 127
Control Share Acquisition Statute...... 127
Amendment to the Charter............... 128
Dissolution of the Company............. 128
Advance Notice of Director Nominations
and New Business.................... 128
Meetings of Stockholders............... 128
Operations............................. 128
Anti-Takeover Effect of Certain
Provisions of Maryland Law and of
the Charter and Bylaws.............. 129
PAGE
----
POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES............................. 129
Investment Policies.................... 129
Disposition Policies................... 130
Financing Policies..................... 130
Conflict of Interest Policies.......... 131
Policies with Respect to Other
Activities.......................... 132
Working Capital Reserves............... 132
SHARES AVAILABLE FOR FUTURE SALE......... 133
General................................ 133
Registration Rights.................... 134
PARTNERSHIP AGREEMENT.................... 135
Management............................. 135
Transferability of Interests........... 135
Capital Contribution................... 136
Exchange Rights........................ 136
Registration Rights.................... 137
Operations............................. 137
Distributions and Allocations.......... 137
Term................................... 138
Tax Matters............................ 138
FEDERAL INCOME TAX CONSIDERATIONS........ 138
Requirements for Qualification as a
REIT................................ 139
Failure to Qualify as a REIT........... 144
Taxation of the Company................ 145
Taxation of Stockholders............... 146
Statement of Stock Ownership........... 150
Tax Aspects of the Operating
Partnership......................... 150
Income Taxation of the Operating
Partnership and Its Partners........ 152
Other Tax Considerations............... 153
ERISA CONSIDERATIONS..................... 155
Employee Benefit Plans, Tax-Qualified
Retirement Plans, and IRAs.......... 155
Status of the Company and the Operating
Partnership (and the Subsidiary
Partnerships) under ERISA........... 156
UNDERWRITING............................. 158
EXPERTS.................................. 161
LEGAL MATTERS............................ 162
ADDITIONAL INFORMATION................... 162
GLOSSARY................................. 163
INDEX TO FINANCIAL STATEMENTS............ F-1
</TABLE>
iii
<PAGE> 240
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 and
(ii) 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 a portfolio of 21 office
buildings (collectively, the "Properties") encompassing approximately 3.4
million rentable square feet. The Company will also own two parcels of land
which can support approximately 370,000 square feet of development and will hold
options to acquire two other parcels of land which can support approximately 1.8
million square feet of development. As of August 31, 1997, approximately 80% of
the Annualized Rent from the Company's portfolio was derived from Properties
located in central business district locations, including 54% 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 its turnaround strategy of acquiring office
properties at a significant discount to replacement cost that are attractively
priced 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 programs for underperforming
assets. The Company believes that the significant experience of its management
in property development, redevelopment, construction, management, and leasing
provides 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, vacancy rates in Manhattan have declined during the last
five years and rental rates for office properties in Manhattan have increased.
See "Property Office Markets and Market Economies." The Company believes that
demand for office space in Manhattan has increased recently because of
consistent new 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 Manhattan office space 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 new construction, the lead time required for
new construction typically exceeds three years, and new construction generally
is not economically feasible given current market rental rates.
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<PAGE> 241
The Company believes that opportunities exist to acquire 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"), not taking
into account any tax subsidies that 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 in those markets. The Company believes these office markets generally
have significant rental 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,
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 June 30, 1997 from 16.8% to
7.2% in the Metropolitan Orlando office market and 25.1% to 8.3% 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 several institutional joint venture partners which will continue as
stockholders in the Company following the Offering; these joint venture partners
include affiliates of General Electric Capital Corp., DRA Advisors, Inc., and
The Carlyle Group ("Carlyle").
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 management and directors will, in the
aggregate, own approximately 9.0% of the Company's equity. See
"Management -- Directors and Executive Officers."
Concurrent with the Offering, and subject to certain conditions, the
Company is directly placing with (i) certain private investment funds and
separate accounts advised by Morgan Stanley Asset Management Inc. $20 million of
Common Stock and (ii) certain private investment funds sponsored by the Carlyle
Group $10 million of Common Stock, in each case, at the price per share sold in
the Offering (the "Concurrent Private Placements"). The Underwriters will not
receive a discount or commission on the sale of Common Stock in the Concurrent
Private Placements. See "The Company -- Concurrent Private Placements."
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 generally based on the
value of the Company as a going concern, and not 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,
including conflicts related to material benefits to officers, directors,
and other affiliates of the Company that will result in, among
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<PAGE> 242
other benefits, receipt of equity interests in the Company with an aggregate
value of approximately $39.2 million based on the public offering price of
$26.00 per share (the "Offering Price");
- conflicts of interest relating to the operation of the Company, including
conflicts of interest associated with the potential adverse tax
consequences to certain executive officers and directors of the Company
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, subject to an exception that
permits mutual funds and certain other entities to own or purchase up to
15% of any class of the Company's stock in appropriate circumstances, 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;
- the possibility that the Company may not be able to refinance outstanding
indebtedness (initially expected to be approximately $113.7 million,
including 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;
- the lack of control over the Management Company, the Company's property
management and leasing business, 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;
- the Company's estimated initial distribution rate represents 92.2% of its
estimated Cash Available for Distribution, resulting in the risk that
actual Cash Available for Distribution will be insufficient to permit the
Company to maintain its proposed initial distribution rate;
- 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;
- 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 14 of the Properties), newly acquired
properties may have characteristics or deficiencies unknown to the
Company affecting value
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<PAGE> 243
or revenue potential thereof, may fail to perform as expected or may be
difficult to integrate into the Company's existing management operations;
- 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 rentable square feet, of approximately 39% of the
Company's portfolio in the Metropolitan New York City office market, 38%
of the Company's portfolio in the Phoenix/Tucson office market, and 23%
of the Company's portfolio in the Orlando office market;
- the possibility of abandonment of office property development and
unexpected construction costs or delays, that newly developed or acquired
properties may fail to perform as expected, and the possible failure to
obtain, or experience of 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 $5.43 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 August 31, 1997, 48% of the
rentable square feet at the Properties included built-in contractual rate
increases over the remainder of the lease term. Between September 1, 1997
and August 31, 1998 the contractual base rents received by the Company
under such leases are expected to increase by an aggregate of $1.06
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")).
- Leasing of Vacant Space: The Company expects to realize additional cash
flow through the leasing or occupancy of approximately 257,000 rentable
square feet of vacant space at the Properties as of August 31, 1997
(approximately 7.6% 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,
property 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 attractively priced due to physical, leasing, and/or operational
deficiencies, and redeveloping those assets; (ii) property repositioning through
renovation and refurbishment programs for underperforming assets; and (iii)
exploring the development of office properties on the Company's owned and
optioned development land within the Phoenix/Tucson and Orlando markets, as well
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<PAGE> 244
as the development of other office properties in these markets where such
development will result in a favorable risk-adjusted return.
Acquisition and Repositioning Strategies. The Company intends to initially
target the acquisition of office properties located in Manhattan that have
purchase prices of less than $100 million and that are attractively priced due
to physical, leasing or operational deficiencies. The Company believes that its
turnaround strategy will allow it to capitalize on Manhattan acquisition
opportunities that are not typically sought by many institutional buyers. In
addition, the Company expects to use its renovation and repositioning expertise
to acquire underperforming Manhattan office properties that have the potential
to be converted into fully leased Class A Manhattan office towers.
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
following the Offering, including the Company's proposed $200 million unsecured
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 (which ability
may not be possessed by competitors who are not structured like the Company or
who cannot otherwise exchange securities for property). 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.
An example which best illustrates the Company's repositioning strategy is
the acquisition of the 5151 East Broadway Property that the Company made in a
joint venture with the Quantum Fund in November 1994. The joint venture acquired
this Property 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 that included landscaping improvements to
the Company's outdoor plaza, lobby and elevator renovations, the installation of
updated mechanical equipment and targeted deferred maintenance at a cost of
approximately $2.5 million. The Company coupled their Property improvements with
a proactive leasing effort that included the widespread distribution of
marketing materials and listing sheets and targeted pre-leasing tenent
improvements which enabled prospective tenants to envision the cosmetic appeal
of the vacant space. The Company's repositioning program resulted in an increase
in Annualized Rent from approximately $1.7 million as of November 30, 1994 to
approximately $3.3 million as of August 31, 1997 (a 92% increase), and an
increase in Annualized Net Operating Income from $353,000 at acquisition to
approximately $2.0 million as of August 31, 1997, which generated an Adjusted
Investment Yield of 13.3% (calculated by dividing net operating income by the
Investment Cost). As of August 31, 1997, the 5151 East Broadway Property
accounted for approximately 4.4% of the Company's aggregate Annualized Rent and
7.3% of its total rentable square feet. 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.
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 40-story midtown
Manhattan Tower 45 Property).
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 which best illustrates this strategy includes the
Company's redevelopment of a 93,000 rentable square foot office building at 5750
Major Boulevard in
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<PAGE> 245
Orlando, Florida. The Company acquired the Property in a joint venture with an
affiliate of General Electric Capital Corp. in October 1996 for a purchase price
of $3.8 million, or approximately $41 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 August 31, 1997). The Company expects to
implement this type of property repositioning strategy for the future
redevelopment of the Company's Madison Avenue Properties. See "The
Properties -- Submarket and Property Information -- Madison Avenue Property
Redevelopment Strategy."
Financing Strategy
The Company has obtained a commitment from Merrill Lynch Capital
Corporation for a $200 million unsecured 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 (including its pro rata share of
indebtedness of unconsolidated investments) of approximately $113.7 million or
20.7% 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 United States,
containing more rentable square feet than the next six largest United States
office markets combined. 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 18 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.
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.
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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 4.0% since 1992. Landauer reports that in
measuring non-agricultural employment gains since 1994, Metropolitan Phoenix
ranked third among the 100 largest metropolitan areas in the United States. In
addition, 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.
For additional information regarding the Company's markets, see "Property
Office Markets and Market Economies" and "The Properties -- Submarket and
Property Information."
THE PROPERTIES
Upon completion of the Offering, the Company will own interests in the 21
Properties, which contain 3.4 million rentable square feet. The Company will
also own two parcels of land which can support an aggregate of approximately
370,000 square feet of development and will have options to acquire two other
parcels of land which can support 1.8 million square feet of development.
Substantially all of the Properties are located in the Manhattan,
Phoenix/Tucson, and Orlando office markets and individually range from
approximately 10,300 to 459,000 rentable square feet. 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 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 August 31, 1997, approximately 80% of the
Annualized Rent from the Company's portfolio was derived from Properties located
in central business district locations, including approximately 54% from
Properties located in the Manhattan office market.
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<PAGE> 247
The following table sets forth certain information, as of August 31, 1997,
with respect to the Properties:
<TABLE>
<CAPTION>
ANNUALIZED
NET
ANNUALIZED PERCENT EFFECTIVE
RENT PER OF RENT
LEASED PORTFOLIO PER LEASED
PERCENT YEAR BUILT/ RENTABLE PERCENT ANNUALIZED SQUARE ANNUALIZED SQUARE
MARKET/PROPERTY OWNED RENOVATED(1) SQUARE FEET LEASED RENT(2) FOOT RENT FOOT(3)
- --------------------------- ------- ------------ ----------- ------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
METROPOLITAN NEW YORK CITY
MARKETS
MANHATTAN MARKET
Tower 45............... 100% 1989 443,114 100.0% $ 20,890,000 $47.14 27.8% $31.48
286 Madison Avenue..... 100% 1918(4) 111,999 94.8 2,474,000 23.31 3.3 21.54
290 Madison Avenue..... 100% 1950(4) 38,512 100.0 1,057,000 27.44 1.4 24.97
292 Madison Avenue..... 100% 1920/86 186,901 98.9 5,212,000 28.18 6.9 25.60
100 Wall Street........ 100% 1969/94 458,848 88.7 11,222,000 27.57 14.9 28.12
LONG ISLAND MARKET
120 Mineola
Boulevard............ 100% 1984/92 100,810 91.2 2,458,000 26.74 3.3 21.04
--------- ----- ----------- ----- -----
Market
Subtotal/Weighted
Average............ 1,340,184 94.9% $ 43,313,000 $34.06 57.6% $27.77
--------- ----- ----------- ----- -----
METROPOLITAN ARIZONA
MARKETS
METROPOLITAN PHOENIX
MARKET
Corporate Center
Building 10010-30.... 100% 1976/86 188,614 100.0% $ 2,947,000 $15.62 3.9 $14.39
Corporate Center
Building 10040....... 100% 1976/86 23,155 100.0 380,000 16.43 0.5 15.09
Corporate Center
Building 10050....... 100% 1976/86 42,398 100.0 708,000 16.71 0.9 15.16
Corporate Center
Building 10210....... 100% 1976/86 45,100 100.0 706,000 15.65 0.9 14.50
Corporate Center
Building 10220....... 100% 1976/86 24,128 100.0 422,000 17.47 0.6 15.12
Corporate Center
Building 9630(5)..... 100% 1976/86 130,164 100.0 2,386,000 18.33 3.2 15.95
2800 North
Central(6)........... 10% 1987 357,923 91.0 5,291,000 16.24 7.0 15.50
Century Plaza.......... 100% 1974/90 219,769 84.2 2,408,000 13.02 3.2 12.86
--------- ----- ----------- ----- -----
METROPOLITAN TUCSON
MARKET
5151 E. Broadway....... 100% 1975/89/96 246,486 82.1% $ 3,269,000 $16.15 4.4 $13.64
--------- ----- ----------- ----- -----
Market
Subtotal/Weighted
Average............ 1,277,737 91.3% $ 18,517,000 $15.87 24.6 $14.56
--------- ----- ----------- ----- -----
METROPOLITAN ORLANDO MARKET
One Orlando Center..... 100% 1989 357,184 99.5% $ 8,154,000 $22.94 10.8% $21.57
5750 Major Boulevard... 100% 1973/97 92,828 21.0(7) 298,000 15.31 0.4 28.55
Maitland Forum......... 100% 1985/96 266,060 99.9 4,140,000 15.57 5.5 13.70
2601 Maitland Center
Parkway.............. 100% 1982 10,342 100.0 158,000 15.23 0.2 12.90
2603 Maitland Center
Parkway.............. 100% 1982 10,704 81.7 114,000 13.04 0.2 10.94
2605 Maitland Center
Parkway.............. 100% 1982 38,564 100.0 538,000 13.96 0.7 12.20
--------- ----- ----------- ----- -----
Market
Subtotal/Weighted
Average............ 775,682 90.0% $ 13,402,000 $19.19 17.8% $17.99
--------- ----- ----------- ----- -----
Consolidated Total/Weighted
Average.................. 3,393,603 92.4% $ 75,232,000 $23.98 100.0% $20.68
========= ===== =========== =====
</TABLE>
- ---------------
(1) Data do not include years in which tenant improvements were made to the
Properties.
(2) Annualized Rent represents the annualized monthly Base Rent in effect plus
estimated 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 August 31, 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. Annualized Rent represents actual payments attributable to leases
executed as of August 31, 1997 with adjustments for rent concessions as
reflected above and normal year-end adjustments. Normal year-end rental
payment adjustments for the Tower Predecessor in 1996 represented
approximately .9% of all rental payments received during that year. The
Company believes that Annualized Rent is helpful to investors as a measure
of the revenues the Company could expect to receive from its leases.
Annualized Rent should not be considered an alternative to Annualized Net
Effective Rent as an indication of the financial performance of a lease nor
is it indicative of the Company's ability to generate cash flow, including
its ability to make cash distributions.
(3) Annualized Net Effective Rent per Leased Square Foot represents the Base
Rent for the month of August 1997 under each lease executed as of August
31, 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
August 31, 1997, but was not yet occupied, had been included in that
percentage.
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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....................................... 3.6 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.................................................... 46.8 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 Company's Bylaws, the Company is authorized to
exercise this option only if (a) a majority of Independent Directors
approves 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 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.
(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
no cost. Pursuant to the option, the Company will acquire the right to
purchase this land for approximately $10.3 million from an unaffiliated
third party. Pursuant to the Company's Bylaws, the Company is authorized to
exercise this option only if the Independent Directors unanimously approve
the exercise thereof. The right to acquire the land expires on October 31,
1997, subject to one 30-day extension that requires 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 21 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 Placements, 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 12,015,000 shares of Common Stock in the Offering
and 769,230 shares of Common Stock to certain private investment funds
(for whom an affiliate of Morgan Stanley Asset Management Inc. ("MSAM")
acts as the general partner), separate accounts for which MSAM acts as an
investment advisor and an affiliate of MSAM (collectively, the "Morgan
Stanley Investors"), and 384,615 shares of Common Stock to certain
private investment funds sponsored by The Carlyle Group (the "Carlyle
Funds"). All the net proceeds to the Company from the Offering and the
Concurrent Private Placements 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 90.5%. The Company is the sole general partner of the
Operating
9
<PAGE> 249
Partnership and will own a 1% general partner interest in the Operating
Partnership and an approximate 89.5% 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 1,128,160 shares of restricted Common Stock,
1,583,640 OP Units, approximately $118.7 million in cash, the assumption
of approximately $244.6 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 1,509,490 OP Units (valued at approximately
$39.2 million based on the Offering Price); and
- The Company will acquire from persons other than the Primary
Contributors, directly or indirectly, debt, equity and fee interests
in the Properties (including an interest in the Maitland Forum ground
lease) in exchange for 1,128,160 shares of restricted Common Stock
(valued at approximately $29.3 million based on the Offering Price),
74,150 OP Units (valued at approximately $1.9 million based on the
Offering Price) and $118.7 million in cash.
- The Operating Partnership is expected to enter into a $107 million
seven-year term loan facility with Merrill Lynch Credit Corporation (the
"Term Loan") and will borrow approximately $54 million under such
facility at the closing of the Offering.
- The Operating Partnership will utilize $246.5 million of the net proceeds
of the Offering, the Concurrent Private Placements and the Term Loan to
repay 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 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 common stock and 5% of the voting
common 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 886,200 shares 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 of the Excluded Properties are controlled by certain Primary
Contributors and have non-cancellable management contracts (except upon a
sale of such property). 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.
10
<PAGE> 250
- The Operating Partnership will acquire, at no cost, an option held by
certain Primary Contributors that will provide the Operating Partnership
with the right to acquire from an unaffiliated third party for
approximately $10.3 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 (approximately $4.75
per buildable square foot) (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 Company will establish the three-year $200 million unsecured
revolving Line of Credit at or shortly after the closing of the Offering,
which will be used primarily to finance the acquisition of, and
investment in, office properties, to refinance existing indebtedness, and
for general working capital needs.
- The Company will pay to an affiliate of Carlyle $925,000 in consideration
of obtaining the consent to the transfer of an interest in the 2800 North
Central Avenue Property to the Company.
- 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."
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 M. Wisely (a nominee for director
of the Company), 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).
- The Primary Contributors will receive a total of 1,509,490 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
9.0% of the equity interests in the Company on a consolidated basis) will
have a total value of approximately $39.2 million based on the Offering
Price, compared to a deficiency in net tangible book value of the assets
contributed to the Operating Partnership by the Primary Contributors of
approximately $75.5 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 Merrill
Lynch, Pierce,
11
<PAGE> 251
Fenner & Smith Incorporated. 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.
- Messrs. Feldman and Cox will each serve as a director and officer of the
Company, Messrs. Adams and Wisely will serve as directors 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, options to purchase an aggregate
of 711,000 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."
CONFLICTS OF INTEREST
Following the completion of the Offering and the Formation Transactions,
conflicts of interest may arise with respect to certain transactions between the
holders of OP Units (including Lawrence H. Feldman and other executive officers
of the Company) and the stockholders of the Company. In particular, the sale of
any Properties or a reduction of indebtedness, could have adverse tax
consequences to holders of OP Units which would make such transactions less
desirable to such holders. The Company has adopted certain policies that are
designed to eliminate or minimize certain potential conflicts, including (i) 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 (defined as persons who are not officers or employees of
the Company, or an affiliate of the Company); (ii) 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; (iii) the Company's
Charter, with limited exceptions, requires that a majority of the Company's
Board of Directors be comprised of Independent Directors; and (iv) the Company's
Bylaws provide that any transaction in which the Company is purchasing, selling
leasing or mortgaging any real estate asset, or joint venture, or engaging in
any other transaction in which a director or officer of the Company or any
affiliate of the foregoing, has any direct or indirect interest, subject to
certain limited exceptions, must be approved by a majority of the Independent
Directors even if the Independent Directors constitute less than a quorum. See
"Policies with Respect to Certain Activities -- Conflict of Interest Policies"
and "Risk Factors -- Conflicts of Interest in the Business of the Company."
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 90.5% 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."
12
<PAGE> 252
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 depicting the ownership structure of Tower Realty
Operating Partnership, L.P. upon completion of the Offering and the formation
transactions: (i) Tower Realty Trust, Inc., 1% general partners interest and
89.5 limited partner interest; (ii) Primary Contributors, 9.0% limited partner
interest, and (iii) Continuing Investors, .5% limited partner interest.]
- ---------------
(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.
13
<PAGE> 253
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 Placements.
Common Stock offered by the
Company.................. 12,015,000 shares
U.S. Offering.............. 9,712,000 shares
International Offering..... 2,303,000 shares
Common Stock and OP Units
Outstanding after the
Offering and the
Concurrent Private
Placements............... 16,701,845 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."
NYSE Symbol................ TOW
- ---------------
(1) Includes (i) 1,583,640 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) 1,949,360 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 cancellation
of certain indebtedness, and (iii) 1,153,845 shares of Common Stock to be
issued in the Concurrent Private Placements. Excludes 975,000 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 $.3536 per
share, which represents a pro rata distribution based upon a full quarterly
distribution of $.4225 per share and an annual distribution of $1.69 per share
(or an annual distribution rate of approximately 6.5%, based upon the Offering
Price). See "Distributions."
The Company intends initially to distribute annually approximately 92.2% 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 August 31,
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
14
<PAGE> 254
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 stockholder's sale of the Common Stock), and thereafter as
taxable gain. The Company anticipates that approximately 45% (or $0.76 per
share) of the distributions intended to be paid by the Company for the
twelve-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 -- Requirements for Qualification
as a REIT -- 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 Considerations -- 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 Considerations -- Failure to Qualify as a REIT"
and "Risk Factors -- Failure to Qualify as a REIT Would Cause the Company to be
Taxed as a Corporation." 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.
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<PAGE> 255
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 June 30, 1997 and for the six months ended
June 30, 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 six months ended June 30, 1997 are not
necessarily indicative of the results to be expected for the entire year ending
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
Associates Ltd. (the Maitland Forum ground lessor), 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 and
Properties Atlantic to be contributed to the Company, (ii) the completion of the
Offering, the Concurrent Private Placements, the issuance of convertible notes
by the Company to the Morgan Stanley Investors 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
initial closing of the Term Loan and the application of the net proceeds
therefrom as described under "Use of Proceeds," and (iii) the issuance of
886,200 shares 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 June 30, 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.
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<PAGE> 256
THE COMPANY (PRO FORMA) AND THE TOWER PREDECESSOR (HISTORICAL)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 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........... $ 36,745 $ 13,521 $13,467 $ 72,939 $ 26,138 $ 25,202 $ 25,994 $ 23,496 $ 22,949
Management fees(1)...... 245 626 1,261 961 82 221 183
Construction, leasing
and other fees........ 519 474 543 1,703 1,335 1,041 320 604 737
--------- -------- ------- --------- -------- -------- -------- -------- --------
Total revenues.......... 37,264 14,240 14,636 74,642 28,734 27,204 26,396 24,321 23,869
--------- -------- ------- --------- -------- -------- -------- -------- --------
Expenses:
Property operating and
maintenance........... 9,282 2,703 2,781 18,613 5,481 5,332 5,278 5,938 5,316
Real estate taxes....... 5,324 2,331 2,360 11,011 4,722 4,571 3,971 4,409 4,920
General office and
administrative........ 1,747 1,746 1,767 3,363 3,494 3,497 2,512 2,591 2,658
Interest expense........ 4,020 7,028 7,172 8,040 15,511 15,150 12,751 12,756 14,390
Depreciation and
amortization.......... 6,845 3,494 3,384 13,642 6,853 6,897 7,415 7,982 6,775
Ground rent and air
rights expense........ 299 299 299 599 599 599 599 599 561
--------- -------- ------- --------- -------- -------- -------- -------- --------
Total expenses.......... 27,517 17,601 17,763 55,268 36,660 36,046 32,526 34,275 34,620
--------- -------- ------- --------- -------- -------- -------- -------- --------
Income (loss) from
operations.............. 9,747 (3,361) (3,127) 19,374 (7,926) (8,842) (6,130) (9,954) (10,751)
Equity in joint
ventures(1)............. 496 68 198 398 461 193 1
--------- -------- ------- --------- -------- -------- -------- -------- --------
Income (loss) before
minority interest and
extraordinary item...... 10,243 (3,293) (2,929) 19,772 (7,465) (8,649) (6,129) (9,954) (10,751)
Minority interest(2)...... 973 1,878
--------- -------- ------- --------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item...... 9,270 (3,293) (2,929) 17,894 (7,465) (8,649) (6,129) (9,954) (10,751)
Extraordinary item........ 6,475
--------- -------- ------- --------- -------- -------- -------- -------- --------
Net income (loss)......... $ 9,270 $ 3,182 $(2,929) $ 17,894 $ (7,465) $ (8,649) $ (6,129) $ (9,954) $(10,751)
========== ======== ======= ========== ======== ======== ======== ======== ========
Net income per share...... $ 0.61 -- -- $ 1.18 -- -- -- -- --
========== ==========
Weighted average number of
shares of common stock
outstanding............. 15,118 -- -- 15,118 -- -- -- -- --
Weighted average number of
shares of common stock
and OP Units
outstanding............. 16,702 -- -- 16,702 -- -- -- -- --
BALANCE SHEET DATA (at
period end):
Real estate investments
net of accumulated
depreciation............ $454,395 $127,577 -- -- $129,064 $128,138 $132,904 $137,662 $140,916
Total assets.............. 480,643 170,632 -- -- 172,987 173,889 184,174 188,742 193,363
Long-term debt............ 111,000 193,381 -- -- 202,892 199,962 202,454 204,853 177,145
Total liabilities......... 123,951 229,292 -- -- 234,857 230,977 235,343 236,211 231,110
Owners'/stockholders'
equity (deficit)........ 322,806 (58,660) -- -- (61,870) (57,088) (51,169) (47,469) (37,747)
OTHER DATA:
EBITDA (Company's pro
forma 90.5% share)(3)... $ 19,080 $ 14,069 $ 7,909 $ 37,433 $ 15,496 $ 13,695 $ 13,834 $ 10,268 $ 9,895
Funds from operations
(Company's pro forma
90.5% share)(4)......... 15,487 616 806 30,287 129 (1,449) 1,292 (1,972) (3,976)
Cash flow from operating
activities(5)........... 17,201 2,573 (693) 33,642 951 1,762 4,118 -- --
Cash flow from investing
activities(6)........... (834) (834) (1,329) (333,605) (6,787) (3,440) (3,137) -- --
Cash flow from financing
activities(7)........... (16,511) (2,398) 1,643 (21,608) 5,613 238 30 -- --
Number of properties (at
period end)............. 21 7 7 21 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."
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<PAGE> 257
Equity in Joint Ventures includes the following:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------------ ------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
1997 1997 1996 1996
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
2800 North Central Property....................................... $ (39) $ (9) $ (12) $ (3)
DRA Joint Ventures................................................ -- 77 464
Management Company................................................ 535 -- 410
--- --- ---- ----
$ 496 $ 68 $ 398 $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 economic interest in 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 9.5% interest in the Operating Partnership that
will be owned by the Primary Contributors 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>
SIX MONTHS ENDED
JUNE 30, 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).................... $ 9,270 $ 3,182 $(2,929) $17,894 $(7,465) $(8,649) $(6,129) $(9,954) $(10,751)
Add:
Interest expense..................... 4,020 7,028 7,172 8,040 15,511 15,150 12,751 12,756 14,390
Real estate depreciation and
amortization....................... 6,845 3,494 3,384 13,642 6,853 6,897 7,415 7,982 6,775
Real estate depreciation and
amortization of unconsolidated
joint ventures..................... 25 415 351 52 741 303 6 -- --
Minority interest.................... 973 -- -- 1,878 -- -- -- -- --
Less:
Interest income...................... (50) (50) (69) (144) (144) (6) (209) (516) (519)
------- ------- ------- ------- ------- ------- ------- ------- -------
EBITDA............................... $21,083 $14,069 $ 7,909 $41,362 $15,496 $13,695 $13,834 $10,268 $ 9,895
======= ======= ======= ======= ======= ======= ======= ======= =======
Company's 90.5% share................ $19,080 $37,433
======= =======
</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.
The following is a reconciliation of net income to Funds from Operations.
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<PAGE> 258
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 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).................... $ 9,270 $ 3,182 $(2,929) $17,894 $(7,465) $(8,649) $(6,129) $(9,954) $(10,751)
Add:
Real estate depreciation and
amortization....................... 6,845 3,494 3,384 13,642 6,853 6,897 7,415 7,982 6,775
Real estate depreciation and
amortization of unconsolidated
joint ventures..................... 25 415 351 52 741 303 6 -- --
Minority interest.................... 973 -- -- 1,878 -- -- -- -- --
Less:
Gain on extinguishment of debt....... -- (6,475) -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ --------
Funds From Operations................ $17,113 $ 616 $ 806 $33,466 $ 129 $(1,449) $ 1,292 $(1,972) $ (3,976)
======= ======= ======= ======= ======= ======= ======= ====== ========
Funds From Operations
(Company's 90.5% share).............. $15,487 $30,287
======= =======
</TABLE>
(5) Pro forma cash flows from operating activities represents net income plus
minority interest, depreciation and amortization and amortization of loan
costs. There are no pro forma adjustments for changes in working capital
items.
(6) Pro forma cash flows from investing activities assumes that the transfer of
the Properties, certain development land and other assets of Tower Equities
to be contributed to the Company occurred on January 1, 1996.
(7) Pro forma cash flows from financing activities assumes that the completion
of the Offering, the Concurrent Private Placements, the issuance of the MSAM
Notes and the initial closing under the Term Loan had occurred on January 1,
1996. In addition, anticipated distributions per share of common stock and
OP Unit for the six months ended June 30, 1997 and the year ended December
31, 1996 have been deducted assuming that the Offering had occurred on
January 1, 1996.
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<PAGE> 259
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.
THERE IS NO ASSURANCE THAT THE COMPANY HAS PAID FAIR MARKET VALUE FOR THE
PROPERTIES
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, which was generally based on the value of the
Company as a going concern, will not exceed the fair market value of the
Properties and other assets acquired by the Company in the Formation
Transactions. In addition, the value of the Company was not determined on a
property-by-property basis because, in the view of management, the appropriate
basis or valuing the Company is as an ongoing business enterprise, rather than a
collection of assets. The valuation of the Company also was not determined by a
valuation of its assets based on historical cost or fair market value, but
instead was 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; 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 M. Wisely (a nominee for director of the Company), 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, including Messrs. Feldman,
Cox, Kasman, Reimer, Friedberg and Stein who are promoters of the Company, 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
the following: (i) receipt of an aggregate of 1,509,490 OP Units including their
pro rata share of any OP Units that will be issued to certain Property
Partnerships (valued at approximately $39.2 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 711,000 shares
of Common Stock under the Company's option plans at the Offering Price, subject
to certain vesting requirements, which will have an aggregate purchase price of
approximately $18.5 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
20
<PAGE> 260
to Related Parties" and "Management -- Stock Option and Restricted Stock
Plans, -- Executive Compensation and -- Employment Agreements."
CONFLICTS OF INTEREST IN THE BUSINESS OF THE COMPANY
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 controlling stockholder and sole
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 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.
Possible Less Vigorous Enforcement of Terms of Contribution and Other
Agreements by the Company. 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 certain of
the Primary Contributors, including Messrs. Feldman, Cox and Kasman, to the
Company under a supplemental representations, warranties and indemnity agreement
relating to the Properties and the business to be owned by the Management
Company 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.
For a Period of Time, Sales of Properties and Repayment of Indebtedness May
Have Different Effects on Holders of OP Units than on Stockholders. Holders of
OP Units, including the Primary Contributors, may have unrealized taxable gain
associated with their interests in certain Properties contributed to the
Operating Partnership. Because holders of OP Units 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 of the Excluded Properties are
controlled by the Primary Contributors and have non-cancellable management
contracts with the Management Company (except upon the sale of the property).
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 officers or directors have a conflicting interest to that
of the Company to be approved by a majority of the Independent Directors, even
if the Independent Directors constitute less than a quorum. There can be no
21
<PAGE> 261
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."
THE COMPANY'S PERFORMANCE AND VALUE ARE SUBJECT TO RISKS ASSOCIATED WITH THE
REAL ESTATE INDUSTRY
General Real Estate Industry Risks Could Adversely Affect the
Company. 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 Could Adversely Affect the Company's
Financial Condition. 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.
Increased Operating Expenses Could Adversely Affect the Company's Cash
Flow. 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.
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<PAGE> 262
The Failure to Renew or Relet Space Under Expiring Leases Could Adversely
Affect the Company's Cash Flow. 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. In addition, the Company is subject to the risk that contractual
rent increases provided for in the Company's leases may not be realized due to
possible lease renegotiation. Leases relating to an aggregate of approximately
5.7% and 9.9% of the total rentable square feet in the Properties will expire in
the twelve-month periods ending August 31, 1998 and August 31, 1999,
respectively. Furthermore, because Tower Equities has managed 14 of the
Properties for less than two years (including the 100 Wall Street Property which
prior to the consummation of the Offering was not managed by the Company), 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."
Loss of Major Tenants Could Adversely Affect the Company's Cash Flow. As
of August 31, 1997, the Company's largest tenant, American Express Financial
Advisors Inc. and its affiliates ("American Express"), accounted for 5.52% of
the Company's total Annualized Rent and 8.07% of aggregate leased square feet.
The Company's 10 largest tenants at the Properties (based on rentable square
feet as of August 31, 1997) collectively accounted for approximately 28.9% of
the Company's total Annualized Rent and 27.5% of the Company's rentable square
feet, and have a weighted average remaining lease term of approximately five
years. In addition, as of August 31, 1997, the Veterans
Administration -- General Services Administration accounted for 2.04% of the
Company's total Annualized Rent and 3.20% of aggregate leased square feet under
five leases that, under federal law, may be unilaterally terminated or
renegotiated by the lessee under certain limited circumstances. 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, the cash flow to the Company would be decreased
and the Company's ability to make distributions to stockholders would be
adversely affected. See "The Properties -- Tenants."
Impact of Competition on Occupancy Levels, Rent Charged, Acquisitions and
Management Services. All of the Properties are located in highly developed areas
that include a large number of other office properties, including the five
Properties located in New York City, which is by far the largest office market
in the United States; eight Properties located in the Metropolitan Phoenix
office market; six Properties located in Metropolitan Orlando office market; one
Property located in the Long Island office market; and one Property located in
the Metropolitan Tucson office market. The number of office properties in such
locations, which may be newer, better located, or better capitalized than the
Company's Properties, 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. In addition, the Company may compete with other
property owners 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.
The Company believes its major competitors are local real estate companies in
its markets that specialize in the redevelopment and development of office
buildings and (i) in the New York City office market; SL Green Realty Corp.,
(ii) in the Metropolitan Orlando office market; Highwoods Properties, Inc., and
(iii) in the Metropolitan Phoenix office market; Prentiss Properties Trust, and
CarrAmerica Realty Corporation.
Liability for Environmental Matters Could Adversely Affect the Company's
Financial Condition. 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
23
<PAGE> 263
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 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.
The Cost of Complying with the Americans with Disabilities Act Could
Adversely Affect the Company's Cash Flow. 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 Tax and Environmental Laws Could Affect the Company's Financial
Condition. 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
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<PAGE> 264
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 Losses Could Adversely Affect the Company's Cash Flow. 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.
Lack of Control Over Properties Owned through Partnerships and Joint
Ventures Could Result in Decisions Inconsistent with the Company's
Objectives. 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 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.
Illiquidity of Real Estate Investments Could Adversely Affect the Company's
Financial Condition. 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 Could Adversely Affect
the Company. In the future, the Company expects to acquire additional office
properties. See "Operating and Growth Strategies --
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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.
MANAGED PROPERTY BUSINESS AND NON-REIT SERVICES
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 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
Stock Ownership Limit in Charter Could Inhibit Acquisitions and Changes in
Control. 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
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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,
subject to an exception that permits mutual funds and certain other entities to
own or purchase up to 15% of any class of the Company's stock in appropriate
circumstances (the "Look-Through 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 or the
Look-Through Ownership Limitation (as applicable). However, the Board may not
grant an exemption from the Ownership Limit or the Look-Through Ownership
Limitation to any proposed transferee whose ownership, direct or indirect, of
shares of capital stock of the Company in excess of the Ownership Limit or the
Look-Through Ownership Limitation (as applicable) would result in the
termination of the Company's status as a REIT. See "Description of Capital
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 or the Look-Through
Ownership Limitation (as applicable) 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 or the Look-Through Ownership
Limitation (as applicable) may be void under certain circumstances. The
foregoing restrictions on transferability and ownership may not be amended
without the approval of (i) the Board of Directors (including the unanimous vote
of the Independent Directors) and (ii) the affirmative vote of two-thirds of the
outstanding shares of stock of the Company entitled to vote generally in the
election of directors, voting together as a single class. 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."
Staggered Board Could Prevent Acquisitions and Changes in Control. 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."
The Issuance of Additional Shares Could Prevent Acquisitions and Changes in
Control. 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 and -- 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
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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, unless
exempted by the Charter or Bylaws, 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 for the Company to become subject to these provisions of the MGCL in
the future.
FAILURE TO QUALIFY AS A REIT WOULD CAUSE THE COMPANY TO BE TAXED AS A
CORPORATION
The Company Will Be Taxed As a Corporation if it Fails 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 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, this opinion will be based on
an analysis of the facts, including the proposed method of operation of the
Company, as they exist at the consummation of the Offering. 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 two-thirds of the outstanding shares of stock of the Company
entitled to vote generally in the election of directors, voting together as a
single class, to revoke the REIT election. See "Federal Income Tax
Considerations."
To Qualify As a REIT the Company Will Need to Maintain a Certain Level of
Distributions. 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
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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."
THE COMPANY'S USE OF DEBT TO FINANCE ACQUISITIONS AND DEVELOPMENTS COULD
ADVERSELY AFFECT THE COMPANY
Rising Interest Rates Could Adversely Affect the Company's Cash
Flow. 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 which expose the Company to the risk
that counterparties to such a transaction may not perform and cause the Company
to lose the anticipated benefits therefrom, which would have the adverse affects
associated with increases in market interest rates described above. See
"Management's 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 $113.7 million (including its pro rata share of
indebtedness of unconsolidated investments), with maturities ranging from 1998
to 2006. The Company has the right to prepay, commencing 40 days following the
Offering and prior to maturity, the $35.0 million of mortgage indebtedness that
will be collateralized by the Tower 45 Property. If the Company determines to
prepay the loan encumbering the Tower 45 Property prior to maturity, the Company
is positioned 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 on 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
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Distribution by the Company to its stockholders. See "-- Changes in Policies,
Such as the Company's Debt Policy, Without Stockholder Approval Could Adversely
Affect the Company."
In addition, the Company has obtained a commitment for the $200 million
unsecured 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 will mature three 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.
The Inability to Obtain Permanent Financing of Construction Loans Could
Result in a Loss of Income and Asset Value of the Company. 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.
HIGH DISTRIBUTION PAYOUT RATIO
The Company's estimated initial distribution rate represents 92.2% of the
Company's estimated Cash Available for Distribution resulting in the risk that
actual Cash Available for Distribution will be insufficient to permit the
Company to maintain its proposed initial distribution rate. 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.
UNCONTROLLABLE MARKET FACTORS AFFECTING THE PROPERTIES' PERFORMANCE AND VALUE
COULD PRODUCE LOWER RETURNS
Nine Properties (aggregating 38% of the Company's total rentable square
feet) of the Company's 21 Properties are located in Arizona, including eight
Properties (aggregating 30% of the Company's total rentable square feet) located
in the Metropolitan Phoenix office market, five Properties (aggregating 39% of
the Company's total rentable square feet) are located in the Manhattan office
market, and six Properties (aggregating 23% of the Company's total rentable
square feet) are located in the Metropolitan Orlando office market. In addition,
the Company initially intends to 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 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 Manhattan commercial properties). There can be no assurance as
to the continued growth of
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the economies in the Metropolitan Phoenix, or Metropolitan Orlando office
markets, or the future growth rate of the Company.
LACK OF OPERATING HISTORY AND RISKS OF ACQUISITIONS COULD ADVERSELY AFFECT THE
COMPANY
Fourteen of the Properties have been under the Company's management for two
years or less (including the 100 Wall Street Property which prior to the
consummation of the Offering was not managed by the Company). The most recently
acquired Properties may have characteristics or deficiencies unknown to the
Company affecting their value or revenue potential; and it is possible that the
operating performance of the most recently acquired Properties may decline under
the Company's management. In addition, the Company lacks certain historical net
effective rent and occupancy data for its 100 Wall Street and One Orlando Center
properties which may make it difficult for the Company to evaluate trends at
such properties, including future operating performance. 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, SUCH AS THE COMPANY'S DEBT POLICY, WITHOUT STOCKHOLDER
APPROVAL COULD ADVERSELY AFFECT THE COMPANY
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."
THE COMPANY RELIES ON KEY PERSONNEL WHOSE CONTINUED SERVICE IS NOT GUARANTEED
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; however, such employment agreements (including the
obligations of such persons to provide services to the Company and to not
compete with the Company under certain circumstances) may not be enforceable
under applicable state law, exposing the Company to the risk of loss of the
services of such persons, which could have an adverse effect on the operations
of the Company. See "Management -- Employment Agreements." Certain assets of the
Primary Contributors, including the Excluded Properties which consist of seven
retail shopping center properties containing and aggregate of 800,000 rentable
square feet, are not being contributed to the Company, and certain of the
executive officers of the Company, including Mr. Feldman, may devote a de
minimis portion of their management time towards the management of these
Excluded Properties; however, pursuant to each such executive officer's
employment agreement, such executive officers are required to devote
substantially all of their business time and attention to the day-to-day
operations of the Company. See "Management -- Employment Agreements" and "The
Properties -- Excluded Properties."
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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 management personnel of the Company as a group
will beneficially own approximately 9.0% of the total issued and outstanding
Common 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 seven 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; Substantial
Benefits to Related Parties."
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON STOCK AND MARKET CONDITIONS COULD
ADVERSELY IMPACT THE TRADING PRICE OF THE COMMON STOCK
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 Common Stock has been approved for listing on the New York Stock Exchange
(the "NYSE"), subject to official notice of issuance. 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. 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.
PURCHASERS OF COMMON STOCK IN THE OFFERING WILL EXPERIENCE IMMEDIATE AND
SUBSTANTIAL BOOK VALUE 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 $5.43 per share in the net tangible book value of the Common Stock from the
Offering Price. See "Dilution."
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
1,583,640 OP Units, and the Company will issue 3,103,205 shares of restricted
Common Stock in connection
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with the Formation Transactions and the Concurrent Private Placements 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 Merrill Lynch, Pierce, Fenner & Smith Incorporated. The
purchasers of the shares of Common Stock in the Concurrent Private Placements
and the recipients of shares of Common Stock in the Formation Transactions 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 Merrill Lynch, Pierce, Fenner & Smith
Incorporated. 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, 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 975,000 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 21 Properties encompassing
approximately 3.4 million rentable square feet. The Company will also own two
parcels of land which can support an aggregate of approximately 370,000 square
feet of development and will have options to acquire two other parcels of land
which can support approximately 1.8 million square feet of development. See "The
Properties -- Development Parcels and -- Land Parcel Options." As of August 31,
1997, approximately 80% of the Annualized Rent from the Company's portfolio was
derived from Properties located in central business district locations,
including approximately 54% from Properties located in the Manhattan office
market. Substantially all of the Properties are located in 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 its turnaround strategy of acquiring office
properties at a significant discount to replacement cost that are attractively
priced 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 programs for underperforming
assets. The Company believes that the significant experience of its management
in property development, redevelopment, construction, management, and leasing
provides 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, vacancy rates in Manhattan have declined during the last
five years and rental rates for office properties in Manhattan have increased.
See "Property Office Markets and Market Economies." The Company believes that
demand for office space in Manhattan has increased recently because of
consistent 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 Manhattan office space 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 new construction, the lead time required for new
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 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 subsidies
that 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 rental 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, 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 June 30, 1997
from 16.8% to 7.2% in the Metropolitan Orlando office market and 25.1% to 8.3%
in the Metropolitan Phoenix office market.
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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 which will continue as
stockholders in the Company following the Offering; these joint venture partners
include affiliates of General Electric Capital Corp., DRA Advisors, Inc., and
Carlyle.
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 70 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, the Company's management and
directors will, in the aggregate, own approximately 9.0% 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 90.5% 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 89.5%
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 800,000 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 voting 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. Lawrence H. Feldman is the sole director of the Management Company
and owns 95% of the voting common stock thereof.
CONCURRENT PRIVATE PLACEMENTS
Concurrent with the closing of the Offering, (i) the Morgan Stanley
Investors advised by MSAM have agreed to purchase $20 million in Common Stock
and (ii) the Carlyle Funds have agreed to purchase
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<PAGE> 275
$10 million in Common Stock, in each case, 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
Placements. The closings of the Concurrent Private Placements are 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 cancel
the outstanding balance of the MSAM Notes and issue to the Morgan Stanley
Investors approximately 886,200 shares of restricted Common Stock in complete
satisfaction of the MSAM Notes. The Company has granted to the Morgan Stanley
Investors and to the Carlyle Funds certain registration rights with respect to
sales of Common Stock received by the Morgan Stanley Investors and the Carlyle
Funds and any affiliates thereof in connection with the Concurrent Private
Placements 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 and the Carlyle Funds 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 the Representatives. 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. In addition, Esko I. Korhonen, a principal
of Carlyle Realty, L.P., an affiliate of Carlyle, will serve as a director of
the Company following the Offering. See "Underwriting," "Shares Available for
Future Sale" and "Management -- Directors and Executive Officers."
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 92.4% occupied as
of August 31, 1997.
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
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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, the
termination of above market service contracts and the evaluation of personnel
resources and payroll costs. 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 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 August 31, 1997, 48% of the
rentable square feet at the Properties included built-in contractual rate
increases over the remainder of the lease term. Between September 1, 1997
and August 31, 1998 the contractual base rents received by the Company
under such leases are expected to increase by an aggregate of $1.06
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). However, such contractual rent increases are subject to
renegotiation by tenants under certain circumstances. See "Risk
Factors -- The Company's Performance and Value are Subject to Risks
Associated with the Real Estate Industry -- The Failure to Renew or Relet
Space Under Expiring Leases Could Adversely Affect the Company's Cash
Flow."
- Leasing of Vacant Space: The Company expects to realize additional cash
flow through the leasing or occupancy of approximately 257,000 rentable
square feet of vacant space at the Properties as of August 31, 1997
(approximately 7.6% 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,
property 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 attractively priced due to physical, leasing, and/or operational
deficiencies, and redeveloping those assets; (ii) property repositioning through
renovation and refurbishment programs for underperforming assets; and (iii)
exploring the development of office properties on its owned and optioned
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 intends to initially target the
acquisition of office properties located in Manhattan that have purchase prices
of less than $100 million and that are attractively priced due to physical,
leasing or operational deficiencies. The Company believes that its turnaround
strategy will allow it to capitalize on Manhattan acquisition opportunities that
are not typically sought by many institutional buyers. In addition, the Company
expects to use its renovation and repositioning expertise to acquire
underperforming Manhattan office properties that have the potential to be
converted into fully leased Class A Manhattan office towers.
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
following the Offering, including the Company's proposed $200 million Line of
Credit; and (v) its ability to acquire
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properties in exchange for OP Units or Common Stock if the sellers so desire
(which ability may not be available to other prospective competitors who are not
structured like the Company or cannot otherwise exchange securities for
property). 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. 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.
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.
An example which best illustrates how the Company executes its turnaround
acquisition strategy is the purchase through a joint venture with an affiliate
of Carlyle 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 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
August 31, 1997). This tenant retention program included in-person interviews
with creditworthy tenants in order to gain insight into each tenant's business
objectives and space requirements. The Company leveraged this knowledge to
develop a plan to retain key tenants that would improve the perception of the
Property in the marketplace. This marketing plan also included providing
selected key tenants with tenant improvement allowances that exceeded customary
allowances by approximately $433,000. 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 tenant retention program
increased the Annualized Rent per leased square foot at the Property from
approximately $15.06 at the time of acquisition to $16.24 as of August 31, 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 August 31, 1997 was approximately
$3.1 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. As of August 31, 1997, the 2800 North Central Property accounted for
approximately 7.0% of the Company's aggregate Annualized Rent and 10.6% of the
Company's total rentable square feet.
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 deficiencies. 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, the installation of
updated mechanical equipment and building systems, such as new chillers, as well
as targeted cosmetic renovation. The Company's objective was to improve the
Properties in order to attract creditworthy tenants at increased rental rates.
An example which best illustrates the Company's repositioning strategy is
the acquisition of the 5151 East Broadway Property that the Company made in a
joint venture the Quantum Fund in November 1994. The joint venture acquired this
Property 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 that included landscaping improvements to the
Company's outdoor plaza, lobby, and elevator renovations, the installation of
updated mechanical and targeted deferred maintenance at a cost of approximately
$2.5 million. The Company coupled these Property improvements with a proactive
leasing effort that included the widespread distribution of marketing material
and listing sheets and targeted preliminary tenant improvements which enabled
prospective tenants to envision the cosmetic appeal of the vacant space, coupled
with an aggressive marketing and leasing effort. The
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Company's repositioning program resulted in an increase in Annualized Rent from
approximately $1.7 million as of November 30, 1994 to approximately $3.3 million
as of August 31, 1997 (a 92% increase), and an increase in Annualized Net
Operating Income from $353,000 at acquisition to approximately $2.0 million as
of August 31, 1997, which generated an Adjusted Investment Yield of 13.3%
(calculated by dividing net operating income by the Investment Cost). As of
August 31, 1997, the 5151 East Broadway Property accounted for approximately
4.4% of the Company's aggregate Annualized Rent and 7.3% of its total rentable
square feet. 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.
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 40-story midtown
Manhattan Tower 45 Property). The Company currently does not intend to develop
or redevelop any properties outside of its primary markets and it is expected
that the Company's development activities will be limited by the terms of the
Line of Credit.
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 which best illustrates this strategy includes the
Company's redevelopment of a 93,000 rentable square foot office building at 5750
Major Boulevard in Orlando. The Company acquired the Property in a joint venture
with an affiliate of General Electric Capital Corp. in October 1996 for a
purchase price of $3.8 million, or approximately $41 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 August 31,
1997). As of August 31, 1997, the 5750 Major Boulevard Property accounted for
approximately 0.4% of the Company's aggregate Annualized Rent and 2.7% of the
Company's total rentable square feet. There can be no assurance however that the
Company will meet any of the foregoing expectations. The Company expects to
implement this type of property repositioning strategy for the future
redevelopment of the Company's Madison Avenue properties. See "The
Properties -- Submarket and Property Information -- Madison Avenue Property
Redevelopment Strategy."
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 $113.7 million or 20.7% of its Total
Market Capitalization (including its pro rata share of Joint Venture Debt). See
"The Properties -- Mortgage Indebtedness Remaining Following the Offering." The
Company has obtained a commitment from Merrill Lynch Capital Corporation for 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.
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USE OF PROCEEDS
The net cash proceeds to the Company from the Offering ($312.4 million) and
the Concurrent Private Placements ($30 million), after deducting the estimated
underwriting discount and estimated expenses of the Offering, are expected to be
approximately $310.0 million (approximately $353.3 million if the Underwriters'
over-allotment option is exercised in full). Such net cash proceeds will be
contributed to the Operating Partnership in exchange, in part, for the Company's
approximate 90.5% interest therein. The Operating Partnership will subsequently
use the proceeds received from the Company, the $54 million net cash proceeds
from the Term Loan borrowed concurrent with the Offering, and approximately
$12.3 million of proceeds received in exchange for the MSAM Notes as follows:
(i) approximately $246.5 million for repayment of certain indebtedness
(including associated prepayment penalties) relating to the Properties and the
Property Partnerships; (ii) approximately $118.7 million to acquire certain
equity, debt and fee interests in the Properties; (iii) approximately $2.4
million to pay for commitment fees and expenses relating to the Term Loan and
Line of Credit; (iv) approximately $3.4 million to pay transfer taxes and other
expenses associated with the acquisitions of the Properties; and (v) the
remaining approximately $5.3 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 over-allotment option to purchase 1,802,250 shares of
Common Stock is exercised in full, the Company expects to use the additional net
proceeds (which will be approximately $43.3 million) for general corporate
purposes.
Pending application of cash proceeds, 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 mortgages and other indebtedness to
be repaid upon completion of the Offering have a weighted average interest rate
of approximately 8.03% 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
AMOUNT TO PENALTIES INTEREST RATE AT MATURITY
PROPERTY BE REPAID(1) AND EXPENSES JUNE 30, 1997(2) DATE
- ---------------------------- -------------- -------------- ----------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Tower 45.................... $ 88,064 $1,250 7.44%(3) December 1998
Maitland Forum.............. 28,875 -- 8.90%(4) January 2001
Maitland West Properties.... 4,548 -- 9.15%(5) August 1998
120 Mineola Boulevard....... 11,260(6) 630(6) 8.70% May 1998
5750 Major Boulevard........ 4,651 -- 9.50% October 2001
One Orlando Center
5151 East Broadway
286, 290 and 292 Madison
Avenue Properties......... 107,231 -- 8.13% July 2002
-------- ------ ----
Total/Weighted
Average.............. $244,629 $1,880 8.03%
======== ====== ====
</TABLE>
- ---------------
(1) Represents the mortgage balances as of June 30, 1997 expected to be repaid
with the proceeds of the Offering. Exact repayment amounts may differ due to
amortization and additional fundings.
(2) Represents the weighted average rate as of June 30, 1997; for purposes of
these calculations for floating rate debt, as of June 30, 1997, LIBOR is
5.69% and GECC Commercial Paper is 5.65%.
(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 and
previously was paid by the Company.
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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 the Offering
and ending on December 31, 1997, is expected to be $.3536 per share, which
represents a pro rata distribution based on a full quarterly distribution of
$0.4225 per share. On an annualized basis, this would be $1.69 per share, or an
annual distribution rate of approximately 6.5% based on the Offering Price. The
Company does not intend to reduce the expected distribution per share if the
Underwriters' over-allotment 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 June 30,
1998, with certain adjustments based on the items described below. To estimate
Cash Available for Distribution for the twelve months ending August 31, 1998,
pro forma Funds from Operations for the twelve months ended June 30, 1997 was
adjusted (i) for certain known events and/or contractual commitments that either
occurred subsequent to June 30, 1997 or during the twelve months ended June 30,
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 deferred financing
fees, (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 45% (or $0.76 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 twelve months ended June 30, 1997, as adjusted for certain items
in the following table, would have been approximately $15.9 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
41
<PAGE> 281
distribution 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 as a result of the exercise of
the Underwriters' over-allotment 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 June 30, 1997 and the adjustments to pro
forma Funds from Operations for the twelve months ended June 30, 1997 in
estimating Cash Available for Distribution for the twelve months ending August
31, 1998:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS,
EXCEPT PER
SHARE DATA)
-----------
<S> <C>
Pro forma net income before minority interest of $1,878 for the year ended
December 31, 1996............................................................... $19,772
Plus: Pro forma real estate depreciation and amortization....................... 13,642
Pro forma real estate depreciation and amortization from unconsolidated
partnership............................................................... 52
-------
Pro forma Funds from Operations for the year ended December 31, 1996(1)........... 33,466
Less: Pro forma Funds from Operations for the six months ended June 30, 1996.... (15,889)
Plus: Pro forma Funds from Operations for the six months ended June 30, 1997.... 17,113
-------
Pro forma Funds from Operations for the twelve months ended June 30, 1997......... 34,690
Net increases in contractual rental income(2)................................ 6,814
Provision for lease expirations, assuming no renewals(3)..................... (4,423)
-------
Estimated pro forma Funds from Operations for the twelve months ending August 31,
1998............................................................................ 37,081
Net effect of straight-line rents(4)......................................... (2,934)
Pro forma amortization of deferred financing fees(5)......................... 176
-------
Estimated pro forma Cash Flows from Operating Activities for the twelve months
ending August 31, 1998.......................................................... 34,323
-------
Estimated annual provision for recurring tenant improvements and leasing
commissions(6).............................................................. (3,075)
Estimated recurring capital expenditures(7).................................. (459)
Scheduled debt principal payments(8)......................................... (182)
-------
Estimated Cash Available for Distribution for the twelve months ending August 31,
1998............................................................................ $30,607
=======
Company's share of estimated Cash Available for Distribution(9).............. $27,699
=======
Minority interest's share of estimated Cash Available for Distribution....... $ 2,908
=======
Estimated initial annual cash distributions to stockholders of the Company(10).... $25,550
Estimated initial annual distribution per share................................... $ 1.69
Payout ratio based on Estimated Cash Available for Distribution (11).............. 92.2%
</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
42
<PAGE> 282
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) Represents the net increases in contractual rental revenues from (i)
existing leases and renewals that were not in effect for the entire twelve
months ended August 31, 1997 ($4,282), and (ii) new leases and renewals
that went into effect between July 1, 1997 through August 31, 1997
($2,532). All calculations assume that no extension options were exercised.
(3) Represents the elimination of rental revenue from: (i) leases which expired
in the twelve months ended August 31, 1997 ($2,542) and (ii) leases which
will expire between September 1, 1997 and August 31, 1998 for that portion
of the twelve months ending August 31, 1998 that such leases are no longer
in effect ($1,881). This table assumes that leases which expire prior to
August 31, 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 twelve months
ending August 31, 1998 would equal approximately 88.9%, versus the actual
occupancy rate for the Properties of approximately 92.4% as of August 31,
1997. The Company's weighted average tenant retention rate for expiring
leases for the period January 1, 1994 through August 31, 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 fees 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 August
31, 1998 based on the weighted average TI and LC expenditures per square
foot for renewed and retenanted space at the Properties during 1994, 1995,
1996 and the six months ended June 30, 1997 multiplied by the average
annual square feet of leased space for
43
<PAGE> 283
which leases expire during the three-year period 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 rentable
square foot........................ $ 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)............................ 272,075
----------
2,756,120
Rate of Renewals (ii)................. x 70%
----------
Total cost of renewals................ $1,929,284
==========
Retenanted:
Recurring TI and LC per rentable
square foot........................ $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)................................ 272,075
----------
3,819,933
Rate of Retenanting (ii)................ x 30%
----------
Total cost of retenanting............. $1,145,980
----------
Total TI and LC cost.......... $3,075,264
==========
</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 the Company's portfolio matures, which is the amount used for purposes
of this calculation.
(8) Represents scheduled payments of mortgage loan principal on the debt
encumbering the Corporate Center Properties due during the twelve months
ending August 31, 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 90.5% aggregate partnership interest in the
Operating Partnership.
(10) Based on a total of 15,118,205 shares of Common Stock to be outstanding
after the consummation of the Offering, the Concurrent Private Placements
and the Formation Transactions multiplied by an anticipated distribution
per share of $1.69. The Company estimates that approximately 45% of the
estimated initial annual cash distributions with respect to the twelve
months ending August 31, 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 August 31, 1998. The payout
ratio based on the Company's share of estimated pro forma Funds from
Operations for the twelve months ending August 31, 1998 is 76.1%.
44
<PAGE> 284
CAPITALIZATION
The following table sets forth the combined historical capitalization of
the Company and Tower Predecessor and the pro forma capitalization of the
Company as of June 30, 1997, as adjusted to give effect to the Offering, the
Concurrent Private Placements, the issuance and subsequent cancellation of 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>
JUNE 30, 1997
------------------------
COMBINED
HISTORICAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Debt(1)............................................................... $200,660 $ 111,000
Minority interest in Operating Partnership............................ 33,886
Shareholders' equity:
Preferred Stock, par value $.01 per share, 50,000,000 shares
authorized; none issued and outstanding..........................
Common Stock, par value $.01 per share, 150,000,000 shares
authorized; 1,000 shares issued and outstanding historical, and
15,118,205 shares issued and outstanding, as adjusted(2)......... 1 151
Additional paid-in capital.......................................... 322,738
Owners' equity (deficit)............................................ (58,743) (83)
-------- --------
Total Owners'/Shareholders' equity (deficit)..................... (58,742) 322,806
-------- --------
Total Capitalization........................................ $141,918 $ 467,692
======== ========
</TABLE>
- ---------------
(1) See Note 6 of Notes to Combined Financial Statements of Tower Predecessor
for information relating to the indebtedness.
(2) Includes (i) 12,015,000 shares of Common Stock to be issued in the Offering,
(ii) 1,153,845 shares of Common Stock to be issued in the Concurrent Private
Placements, and (iii) 1,949,360 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 cancellation of the MSAM Notes. Excludes
(i) 1,583,640 shares of Common Stock that may be issued upon the exchange of
OP Units issued in connection with the Formation Transactions, (ii)
1,802,250 shares of Common Stock subject to the Underwriters' over-allotment
option, and (iii) 975,000 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."
45
<PAGE> 285
DILUTION
At June 30, 1997, the Company and the Tower Predecessor had a deficiency in
net tangible book value of approximately $79.2 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 Placements, (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 Placements, the MSAM
Notes and the Term Loan, and (v) the Formation Transactions, the pro forma net
tangible book value at June 30, 1997 would have been $343.6 million, or $20.57
per share of Common Stock. This amount represents an immediate increase in net
tangible book value of $70.60 per share to the Primary Contributors and
Continuing Investors and an immediate dilution in pro forma net tangible book
value of $5.43 per share of Common Stock to new investors. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share................... $26.00
Deficiency in net tangible book value per share prior
to the Offering and Concurrent Private
Placements(1)...................................... $(50.03)
Increase in net tangible book value per share
attributable to the Offering(2).................... $ 70.60
Pro forma net tangible book value after the Offering(3)... $20.57
------
Dilution in net tangible book value per share of Common
Stock to purchasers in the Offering(4).................. $ 5.43
======
</TABLE>
- ---------------
(1) Net tangible book value per share prior to the Offering and the Concurrent
Private Placements attributable to the Primary Contributors and Continuing
Investors is determined by dividing net tangible book value of the Company
(based on the June 30, 1997 net book value of the assets less intangible
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 Primary Contributors and 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 $343.6 million divided
by the total number of shares of Common Stock issued and outstanding after
the Offering (16,701,845 shares of Common Stock, including Common Stock
issuable upon exchange of OP Units to the Primary Contributors and
Continuing Investors), excluding the Common Stock that may be issuable upon
exercise of Common Stock options. There is no impact on dilution
attributable to the issuance of Common Stock in exchange for OP Units to be
issued to the Primary Contributors and 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 Placements and the Formation Transactions, the
number of shares of Common Stock to be sold by the Company in the Offering, the
Concurrent Private Placements 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 June 30, 1997 of the assets 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.... 12,015 72% $ 280,036 103% $ 26(1)
Concurrent Private Placements.... 1,154 7% $ 30,000 12% $ 26
Restricted Common Stock issued to
Continuing and New Investors... 1,949 12% 41,657 16% $ 21.37
OP Units issued to Primary
Contributors and Continuing
Investors...................... 1,584 9% $ (79,232)(2) (31)% $ (50.03)
-------- ------ -------- ------
Total.................. 16,702 100.00% $ 272,461 100.00%
======== ====== ======== ======
</TABLE>
- ---------------
(1) Before deducting the underwriting discount and other estimated expenses of
the Offering.
(2) Based on the June 30, 1997 net book value of the assets less deferred
charges to be contributed in connection with the Formation Transactions, net
of liabilities assumed.
46
<PAGE> 286
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 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 June 30, 1997 and for the six months ended
June 30, 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 six months ended June 30, 1997
are not necessarily indicative of the results to be expected for the entire year
ending 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
Associates, Ltd. (the Maitland Forum ground lessor), 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 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 and
Properties Atlantic to be contributed to the Company, (ii) the completion of the
Offering, the Concurrent Private Placements, the issuance of the MSAM Notes to
the Morgan Stanley Investors for the purpose of funding certain pre-Offering
transaction expenses and the acquisition of certain interests of third parties
in certain Properties, and the initial closing of the Term Loan and the
application of the net proceeds therefrom as described under "Use of Proceeds,"
and (iii) the issuance of 886,200 shares 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 June 30, 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.
47
<PAGE> 287
THE COMPANY (PRO FORMA) AND THE TOWER PREDECESSOR COMPANY (HISTORICAL)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 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.................. $ 36,745 $ 13,521 $13,467 $ 72,939 $ 26,138 $ 25,202 $ 25,994 $ 23,496 $ 22,949
Management fees................ 245 626 1,261 961 82 221 183
Construction, leasing and other
fees......................... 519 474 543 1,703 1,335 1,041 320 604 737
-------- -------- ------- ------- -------- -------- -------- -------- --------
Total revenues................. 37,264 14,240 14,636 74,642 28,734 27,204 26,396 24,321 23,869
-------- -------- ------- ------- -------- -------- -------- -------- --------
Expenses:
Property operating and
maintenance.................. 9,282 2,703 2,781 18,613 5,481 5,332 5,278 5,938 5,316
Real estate taxes.............. 5,324 2,331 2,360 11,011 4,722 4,571 3,971 4,409 4,920
General office and
administrative............... 1,747 1,746 1,767 3,363 3,494 3,497 2,512 2,591 2,658
Interest expense............... 4,020 7,028 7,172 8,040 15,511 15,150 12,751 12,756 14,390
Depreciation and
amortization................. 6,845 3,494 3,384 13,642 6,853 6,897 7,415 7,982 6,775
Ground rent and air rights
expense...................... 299 299 299 599 599 599 599 599 561
-------- -------- ------- ------- -------- -------- -------- -------- --------
Total expenses................. 27,517 17,601 17,763 55,268 36,660 36,046 32,526 34,275 34,620
-------- -------- ------- ------- -------- -------- -------- -------- --------
Income (loss) from operations.... 9,747 (3,361) (3,127) 19,374 (7,926) (8,842) (6,130) (9,954) (10,751)
Equity in joint ventures(1)...... 496 68 198 398 461 193 1
-------- -------- ------- ------- -------- -------- -------- -------- --------
Income (loss) before minority
interest....................... 10,243 (3,293) (2,929) 19,772 (7,465) (8,649) (6,129) (9,954) (10,751)
Minority interest (2)............ 973 1,878
-------- -------- ------- ------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item............. 9,270 (3,293) (2,929) 17,894 (7,465) (8,649) (6,129) (9,954) (10,751)
Extraordinary item............... 6,475
-------- -------- ------- ------- -------- -------- -------- -------- --------
Net income (loss)................ $ 9,270 $ 3,182 $(2,929) $ 17,894 $ (7,465) $ (8,649) $ (6,129) $ (9,954) $(10,751)
======== ======== ======= ======= ======== ======== ======== ======== ========
Net income per share............. $ 0.61 $ 1.18
======== =======
Weighted average number of shares
of common stock outstanding.... 15,118 15,118
Weighted average number of shares
of common stock and OP Units
outstanding.................... 16,702 16,702
BALANCE SHEET DATA (at period
end):
Real estate investments net of
accumulated depreciation....... $454,395 $127,577 -- -- $129,064 $128,138 $132,904 $137,662 $140,916
Total assets..................... 480,643 170,632 -- -- 172,987 173,889 184,174 188,742 193,363
Long-term debt................... 111,000 193,381 -- -- 202,892 199,962 202,454 204,853 177,145
Total liabilities................ 123,951 229,292 -- -- 234,857 230,977 235,343 236,211 231,110
Owners'/stockholders' equity
(deficit)...................... 322,806 (58,660) -- -- (61,870) (57,088) (51,169) (47,469) (37,747)
OTHER DATA:
EBITDA (Company's pro forma 90.5%
share)(3)...................... $ 19,080 $ 14,069 $ 7,909 $ 37,433 $ 15,496 $ 13,695 $ 13,834 $ 10,268 $ 9,895
Funds from operations (Company's
pro forma 90.5% share)(4)...... 15,487 616 806 30,287 129 (1,449) 1,292 (1,972) (3,976)
Cash flow from operating
activities(5).................. 17,201 2,573 (693) 33,642 951 1,762 4,118 -- --
Cash flow from investing
activities(6).................. (834) (834) (1,329) (333,605) (6,787) (3,440) (3,137) -- --
Cash flow from financing
activities(7).................. (16,511) (2,398) 1,643 (21,608) 5,613 238 30 -- --
Number of properties (at period
end)........................... 21 7 7 21 7 6 6 3 3
</TABLE>
48
<PAGE> 288
DRA JOINT VENTURES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 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.............................................. $ 14,503 $ 14,331 $ 29,010 $ 12,629 $ 207
Other income............................................... 83 98 288 224
--------- -------- --------- --------- --------
Total revenues............................................. 14,586 14,429 29,298 12,853 207
--------- -------- --------- --------- --------
Expenses
Property operating and maintenance......................... 4,371 4,585 8,592 4,373 101
Real estate taxes.......................................... 1,796 1,810 3,572 1,746 38
General office and administrative.......................... 40 169 282 164 31
Interest expense........................................... 5,692 4,816 10,176 3,814
Depreciation and amortization.............................. 2,307 1,949 4,118 1,684 31
--------- -------- --------- --------- --------
Total expenses............................................. 14,206 13,329 26,740 11,781 201
--------- -------- --------- --------- --------
Net income................................................... $ 380 $ 1,100 $ 2,558 $ 1,072 $ 6
======== ======= ======== ======== =======
BALANCE SHEET DATA (at period end):
Real estate investments net of accumulated depreciation...... $ 140,285 -- $ 140,759 $ 139,169 $ 10,503
Total assets................................................. 159,686 -- 160,008 149,928 11,001
Long-term debt............................................... 129,225 -- 126,517 119,288 --
Total liabilities............................................ 133,322 -- 130,473 124,716 768
Owners' equity (deficit)..................................... 26,364 -- 29,535 25,212 10,233
OTHER DATA:
EBITDA (8)................................................... $ 8,338 $ 7,820 $ 16,759 $ 6,532 $ 37
Funds from Operations (8).................................... 2,687 3,049 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>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------------- ----------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
1997 1997 1996 1996
--------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
2800 North Central Property............................ $ (39) $ (9) $ (12) $ (3)
DRA Joint Ventures..................................... -- 77 464
Management Company..................................... 535 -- 410
---- ---- ---- ----
$ 496 $ 68 $ 398 $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 economic interest in 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 9.5% interest in the Operating Partnership that
will be owned by the Primary Contributors 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.
49
<PAGE> 289
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 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)....................... $ 9,270 $ 3,182 $(2,929) $17,894 $(7,465) $(8,649) $(6,129) $(9,954) $(10,751)
Add:
Interest expense........................ 4,020 7,028 7,172 8,040 15,511 15,150 12,751 12,756 14,390
Real estate depreciation and
amortization.......................... 6,845 3,494 3,384 13,642 6,853 6,897 7,415 7,982 6,775
Real estate depreciation and
amortization of unconsolidated joint
ventures.............................. 25 415 351 52 741 303 6 -- --
Minority interest....................... 973 -- -- 1,878 -- -- -- -- --
Less:
Interest income......................... (50) (50) (69) (144) (144) (6) (209) (516) (519)
------- ------- ------- ------- ------- ------- ------- ------- --------
EBITDA.................................. $21,083 $14,069 $ 7,909 $41,362 $15,496 $13,695 $13,834 $10,268 $ 9,895
======= ======= ======= ======= ======= ======= ======= ======= ========
Company's 90.5% share................... $19,080 $37,433
======= =======
</TABLE>
(4) The White Paper on Funds from Operations approved by the Board of Governors
of 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.
The following is a reconciliation of net income to Funds from Operations.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 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)........................ $ 9,270 $3,182 $(2,929) $17,894 $(7,465) $(8,649) $(6,129) $(9,954) $(10,751)
Add:
Real estate depreciation and
amortization........................... 6,845 3,494 3,384 13,642 6,853 6,897 7,415 7,982 6,775
Real estate depreciation and amortization
of unconsolidated joint ventures....... 25 415 351 52 741 303 6 -- --
Minority interest........................ 973 -- -- 1,878 -- -- -- -- --
Less:
Gain on extinguishment of debt........... -- (6,475) -- -- -- -- -- -- --
------ ------- ------- ------- ------- ------- ------- ------- ------
Funds from Operations.................... $17,113 $ 616 $ 806 $33,466 $ 129 $(1,449) $ 1,292 $(1,972) $ (3,976)
====== ======= ======= ======= ======= ======= ======= ======= ======
Funds from Operations
(Company's 90.5% share).................. $15,487 $30,287
====== =======
</TABLE>
(5) Pro forma cash flows from operating activities represents net income plus
minority interest, depreciation and amortization and amortization of loan
costs. There are no pro forma adjustments for changes in working capital
items.
(6) Pro forma cash flows from investing activities assumes that the transfer of
the Properties, certain development land and other assets of Tower Equities
to be contributed to the Company occurred on January 1, 1996.
(7) Pro forma cash flows from financing activities assumes that the completion
of the Offering, the Concurrent Private Placements, the issuance of the MSAM
Notes and the inidial closing under the Term Loan had occurred on January 1,
1996. In addition, anticipated
50
<PAGE> 290
distributions per share of Common Stock and OP Unit for the six months ended
June 30, 1997 and the year ended December 31, 1996 have been deducted
assuming that the Offering had occurred on January 1, 1996.
(8) EBITDA and Funds from Operations for the DRA Joint Ventures are as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------- -----------------------------
1997 1996 1996 1995 1994
------ ------ ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
EBITDA:
Net income.................................................... $ 380 $1,100 $ 2,558 $1,072 $ 6
Interest expense.............................................. 5,692 4,816 10,176 3,814 --
Real estate depreciation and amortization..................... 2,307 1,949 4,118 1,684 31
Interest income............................................... (41) (45) (93) (38) --
------ ------ ------- ------ ---
EBITDA.......................................................... $8,338 $7,820 $16,759 $6,532 $ 37
====== ====== ======= ====== ===
Funds from Operations:
Net income.................................................... 380 1,100 $ 2,558 $1,072 $ 6
Real estate depreciation and amortization..................... 2,307 1,949 4,118 1,684 31
------ ------ ------- ------ ---
Funds from Operations....................................... $2,687 $3,049 $ 6,676 $2,756 $ 37
====== ====== ======= ====== ===
</TABLE>
51
<PAGE> 291
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 June
30, 1997. The pro forma results of operations are 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
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 Six Months Ended June 30, 1997 to the Six Months Ended June
30, 1996
Total revenues for the six months ended June 30, 1997 decreased by $0.4
million, or 2.7%, to $14.2 million as compared to $14.6 million for six months
ended June 30, 1996. Rental income remained constant for the six months ended
June 30, 1997 and 1996 at $13.5 million.
Management fee income decreased $0.4 million to $0.2 million for the six
months ended June 30, 1997 as compared to $0.6 million for the six months ended
June 30, 1996 due to the fact that management fee income for the period from
April 1, 1997 through June 30, 1997 is recorded by the Management Company.
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 six months ended June 30, 1997 and 1996 at $0.5
million. See "--Management and Construction, Leasing and Other Fees."
Total expenses for the six months ended June 30, 1997 decreased by $0.1
million, or 0.9%, to $17.6 million as compared to $17.7 million for the six
months ended June 30, 1996. Expenses excluding interest and depreciation and
amortization remained relatively stable, decreasing slightly from $7.2 million
for the six months ended June 30, 1996 to $7.1 million for the six months ended
June 30, 1997. Expenses, excluding interest and depreciation and amortization,
as a percentage of total revenues, increased from 49.2% for the six months ended
June 30, 1996 to 49.7% for the six months ended June 30, 1997 due to increases
in real estate taxes. The increases in real estate taxes are primarily due to
the lower total revenue base, which is due to reduction in management fees
discussed above. Management believes that 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
revenues as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------
1997 1996
----- -----
<S> <C> <C>
Property operating and maintenance........................ 19.0% 19.0%
Real estate taxes......................................... 16.4% 16.1%
General office and administration......................... 12.2% 12.1%
Ground rent and air rights................................ 2.1% 2.0%
----- -----
49.7% 49.2%
===== =====
</TABLE>
52
<PAGE> 292
Interest expense decreased by $0.2 million, or 2%, to $7.0 million for the
six months ended June 30, 1997 as compared to $7.2 million for the six months
ended June 30, 1996 due to a decrease in interest rates associated with debt
related to one property.
Equity in joint ventures decreased slightly by $0.1 million to $0.1 million
for the six months ended June 30, 1997 as compared to $0.2 million for the six
months ended June 30, 1996 due primarily to higher interest expense due to
higher interest rates on the debt of the DRA Joint Venture properties, offset by
increased rental income of the DRA Joint Venture property.
Net loss decreased by $6.1 million, to net income of $3.2 million for the
six months ended June 30, 1997 as compared to net loss of $2.9 million primarily
due to extraordinary gain on extinguishment of debt for one of the properties.
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 $36.6 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. 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............................. 19.1% 19.6%
Real estate taxes.............................................. 16.4 16.8
General office and administration.............................. 12.2 12.9
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.
53
<PAGE> 293
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 $1.0 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 described above and (ii) expenses as a 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 revenues as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Property operating and maintenance............................. 19.6% 20.0%
Real estate taxes.............................................. 16.8 15.0
General office and administration.............................. 12.9 9.5
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 $200.0 million and $202.5 million,
respectively).
54
<PAGE> 294
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 and
income are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31,
------------------------- --------------------------
1997 1996 1996 1995 1994
---------- ---------- ------ ------ ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Management fees from Excluded Properties.... $ 342 $ 214 $ 514 $ 590 $ 76
Construction, leasing and other fees from
Excluded Properties....................... 234 194 419 835 320
Management fees from joint ventures......... 93 392 801 371 6
Construction, leasing and other fees from
joint ventures and other income........... 50 369 862 206 --
------ ------ ------ ------ ----
Total management fees and construction,
leasing and other fees.................... $ 719 $1,169 $2,596 $2,002 $402
====== ====== ====== ====== ====
</TABLE>
Beginning April 1, 1997, Tower Predecessor's third-party management and
other activities are conducted through the Management Company. The 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.
PRO FORMA OPERATING RESULTS
Six Months Ended June 30, 1997
For the six months ended June 30, 1997, pro forma net income would have
been $9.3 million compared to a historical net loss before extraordinary item
(gain on extinguishment of debt) of $3.3 million for the same period. The pro
forma operating results for the six months ended June 30, 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 the Century Plaza and 100 Wall Street Properties, 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 $0.2 million primarily results 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 remained consistent as compared to the combined Company
and Tower Predecessor. See "Formation and Structure of the Company -- Effects of
the Formation Transactions."
Interest expense decreased $3.2 million, or 44%, in the pro forma statement
of operations due to mortgage loans repaid concurrent with the Offering and
lower interest rates on the $89.0 million Term Loan (including $35.0 million
which has been assumed will be utilized to repay mortgage indebtedness relating
to the Tower 45 Property). The Term Loan is expected to 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 6.06% as of
October 9, 1997 was used for the calculation of the interest rate in the pro
forma results.
55
<PAGE> 295
Year Ended December 31, 1996
For the year ended December 31, 1996, pro forma net income would have been
$17.9 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 the Century Plaza and 100 Wall Street
Properties, 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 $.9 million primarily results from the Company's transfer of certain
management contracts and predecessor management companies and personnel to the
Management Company. General and administrative expenses decreased $0.1 million,
or 0.4%, 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 $7.5 million, or 48.2%, in the pro forma
statement of operations due to mortgage loans repaid concurrent with the
Offering and lower interest rates on the $89.0 million Term Loan (including
$35.0 million which has been assumed will be utilized to repay mortgage
indebtedness relating to the Tower 45 Property).
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 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 issued the MSAM Notes to fund
certain costs relating to the Offering and the formation of the Company. Upon
consummation of the Offering and Formation Transactions, (i) MSAM is expected to
convert the notes into approximately 886,200 shares of restricted Common Stock,
and to purchase an additional $20.0 million of shares of restricted Common Stock
in the Concurrent Private Placements and (ii) the Carlyle Funds are expected to
purchase $10 million of shares of restricted Common Stock in the Concurrent
Private Placements. Proceeds from these transactions and the Offering will be
used to repay and modify the terms of certain indebtedness, to acquire debt,
equity and fee interests in the Properties, reduce its total indebtedness to
approximately $113.7 million (including its pro rata share of Joint Venture
Debt), and establish working capital cash reserves of approximately $5.3
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
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<PAGE> 296
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 Placements, 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 approximately $113.7 million
(including its pro rata share of Joint Venture Debt), which will initially be
collateralized by 10 of the Properties, with a weighted average interest rate of
7.14% (see footnote (4) to the mortgage indebtedness table below). There will be
a total of approximately $0.2 million of scheduled loan principal payments due
during the year ending December 31, 1998. The mortgage indebtedness will
represent approximately 20.7% of the Company's Total Market Capitalization.
Mortgage Indebtedness. Upon the consummation of the Offering, the Company
expects to have outstanding approximately $111.0 million of total consolidated
mortgage indebtedness, and approximately $2.7 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% 84 January 1, 2006 843
2800 North Central
Property(1)............. 2,658 9.41% 250 May 31, 1999(2) 2,658
Term Loan................. 89,000(3) 6.96%(4) 6,194(4) (4) 83,741
-------- ----- ---- -------
Total/Weighted
Average............ $113,658 7.14% 8,114 $105,168
======== ===== ==== =======
</TABLE>
- ---------------
(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 $54.0 million and will be secured by the One Orlando Center, 286
Madison Avenue, 290 Madison Avenue, and 292 Madison Avenue Properties.
Separately, $35.0 million of mortgage indebtedness, that will not be repaid
concurrent with the Offering, will be secured 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, at which time the Tower 45 Property will
secure the Term Loan and the three Madison Avenue Properties will become
unencumbered. See "Risk Factors -- The Company's Use of Debt to Finance
Acquisitions and Developments Could Adversely Affect the Company -- Debt
Financing and Potential Adverse Effect on Cash Flows and Distributions."
(4) The Term Loan is expected to 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 6.06% as of October 9, 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.
In addition, the Company has assumed a liability for deferred real estate
taxes of $12.9 million which accrued from 1988 through 1995 relating to the
Tower 45 Property. 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.
The Line of Credit. The Company has obtained a commitment for the $200
million Line of Credit, which will be used primarily to finance the acquisition
of, and investment in, office properties, to refinance
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<PAGE> 297
existing indebtedness, and for general working capital needs. The Line of Credit
will be unsecured and will have a three year term which will commence upon or
shortly after the closing of the Offering. See "The Properties -- Line of
Credit."
Analysis of Liquidity and Capital Resources. Upon completion of the
Offering, the Concurrent Private Placements, and the Formation Transactions and
the application of the net proceeds therefrom, the Company will have reduced its
total indebtedness to approximately $113.7 million (including its pro rata share
of Joint Venture Debt).
The Company believes that the Offering, the Concurrent Private Placements,
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
$5.3 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 will be approximately
$3.1 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 $0.5 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 Six Months Ended June 30, 1997 to the Six Months Ended June
30, 1996
Tower Predecessor's cash and cash equivalents were $4.3 million and $4.8
million at June 30, 1997 and 1996, respectively. Cash and cash equivalents
decreased $0.7 million during the six months ended June 30, 1997 due to $2.5
million of cash flow provided by operating activities, $0.8 million of cash flow
used in investing activities and $2.4 million of cash flow used in financing
activities. The increase in cash from operating activities is primarily due to
increases in 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 decrease in
cash from operating activities is primarily due to decreases in receivables and
deferred charges which is partially offset by 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.
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<PAGE> 298
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 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.
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>
SIX MONTHS ENDED JUNE YEAR ENDED DECEMBER 31,
30, -------------------------------------
---------------------- HISTORICAL
PRO FORMA HISTORICAL PRO FORMA -------------------------
1997 1997 1996 1996 1995 1994
--------- ---------- --------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Funds from Operations........... $15.5 $ 0.6 $30.3 $ 0.1 $(1.4) $ 1.3
EBITDA.......................... $19.1 $ 14.1 $37.4 $15.5 $13.7 $13.8
</TABLE>
Funds from Operations and EBITDA for the six months ended June 30, 1997
(pro forma) increased over Funds from Operations and EBITDA (historical) for the
same time period ended June 30, 1996 by $14.9 million and $5.0 million,
respectively. The increases are primarily attributable to the acquisition of the
DRA Joint Ventures and the Century Plaza and 100 Wall Street Properties 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 ended December 31, 1996 by $30.2 million and $21.9 million,
respectively. The increases are primarily attributable to the acquisition of the
DRA Joint Ventures and the Century Plaza and 100 Wall Street Properties 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
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<PAGE> 299
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 require the tenants
to pay most operating expenses, including real estate taxes and insurance, and
increases in common area maintenance expenditures, which partially offsets the
Company's exposure to increases in costs and operating expenses resulting from
inflation.
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<PAGE> 300
PROPERTY OFFICE MARKETS AND MARKET ECONOMIES
All market information not specifically attributed to the Company or an
identified governmental agency is based on information supplied by Landauer and
unless otherwise noted historical data are presented as of December 31 of the
specified year. The market data reported by Landauer were based on (i) a
compilation and analysis of measures of economic and real estate activity,
including data and information with respect to income, employment, office stock,
availability of vacant space, absorption and new construction, (ii) site visits
to certain markets and submarkets in which the Properties are located, (iii) an
analysis of various market and submarket characteristics, including with respect
to tenant mix, accessibility and major employers, and (iv) an analysis of
various reports published by industry experts with respect to the Company's
markets.
MANHATTAN MARKET AND ECONOMY
Manhattan Market Economy
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 United States,
containing more rentable square feet than the next six largest United States
office markets combined. 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 18 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.
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. This illustrates employment trends and service sector growth
in New York City.
HISTORICAL NON-AGRICULTURAL EMPLOYMENT AND SERVICES GROWTH
NEW YORK, NY
[GRAPH]
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NYC EMPLOYMENT NYC SERVICES
(FISCAL YEAR COVERED) GROWTH(%) GROWTH(%)
<S> <C> <C>
1992 -3 0.62
1993 -0.3 2.4
1994 1.0 2.6
1995 0.4 2.9
1996 1.2 4.1
</TABLE>
Source: United States Bureau of Labor Statistics
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<PAGE> 301
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
exceeded previous records for services employment gains in New York 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.
Landauer 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 11.2% to 9.2%. 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 9.2% to 7.4% and the overall direct
vacancy rate in this market declined from 11.5% to 8.1%.
HISTORICAL DIRECT VACANCY RATES
MIDTOWN MANHATTAN, NEW YORK
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) DIRECT VACANCY RATE (%)
<S> <C>
1992 15.50
1993 14.00
1994 12.90
1995 13.70
1996 11.50
1Q97 9.00
2Q97 8.10
</TABLE>
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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, particularly
when taking into account such factors as the reduction in concessions to tenants
(such as free rent and tenant construction allowances).
NET ABSORPTION AND ASKING RENTAL RATES
MIDTOWN MANHATTAN, NEW YORK
[CHART]
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 1998, 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 one tenant. In the absence of tax
incentives, the Company believes that rents generally would have to increase
significantly to justify the cost of new construction.
Downtown Manhattan Market Overview
The Company believes that downtown Manhattan represents an attractive
investment opportunity. Specifically, the downtown Manhattan office market has
experienced three consecutive years of positive net absorption and declining
vacancy rates. In addition, the downtown market has certain competitive
advantages over the midtown Manhattan office market, including (i) rental rates
are significantly below rental rates in the
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<PAGE> 303
midtown Manhattan office market, and (ii) the lower Manhattan revitalization
plan, which has been in effect since October 1995, includes tax and other
incentives which have and are expected to continue to incentivize growth in the
downtown Manhattan office market. The plan includes incentives for both owners
and tenants, including temporary abatement on rent for new commercial leases,
lower energy costs, rezoning for residential development or conversion and
renovation deductions. The plan has led to an increase in residential
conversions, prompting restaurants, cafes, galleries, and other neighborhood
amenities. As a result, the Company believes that the lower Manhattan
revitalization program has enabled downtown Manhattan to reposition itself,
becoming more attractive to residential tenants. Therefore, the Company believes
that downtown Manhattan is becoming more conducive to office tenants as a
24-hour business environment.
Increasing Demand for Office Space
In the past four years the underlying fundamentals of supply and demand in
the downtown Manhattan office market have improved. The total amount of office
space available has decreased from 18.3 million square feet in 1993 to 15.6
million square feet at June 30, 1997, representing a 14.9% decline. According to
Landauer, during the same period the direct vacancy rate in the downtown
Manhattan office market decreased from 19% to 16% and there was net absorption
of 4.8 million square feet.
HISTORICAL DIRECT VACANCY RATES
DOWNTOWN MANHATTAN, NEW YORK
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) DIRECT VACANCY
<S> <C>
1991 17.80
1992 18.50
1993 19.00
1994 18.60
1995 18.90
1996 17.00
1Q97 17.00
2Q97 16.00
</TABLE>
Rental Rates
Rental rates in the downtown Manhattan office market have generally
decreased from 1993 to June 30, 1997. According to Landauer, asking rental rates
have decreased from $28.99 per leased square foot in 1992 to $25.73 at December
31, 1996. Notwithstanding the overall decline in asking rental rates, the
Company believes that the recent favorable supply/demand fundamentals in the
downtown Manhattan office market have had a stabilizing effect on asking rents,
which as of the end of the first six months of 1997, were $25.54 per square
foot.
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<PAGE> 304
NET ABSORPTION AND ASKING RENTAL RATES
DOWNTOWN MANHATTAN, NEW YORK
<TABLE>
<CAPTION>
NET ABSORPTION
MILLIONS OF SQ. FT. ASKING RENT ($/S.F.)
------------------- --------------------
<S> <C> <C>
1992 ..................... 4.2 28.99
1993 ..................... -0.1 28.75
1994 ..................... 0.8 27.35
1995 ..................... 0.2 25.96
1996 ..................... 3.1 25.73
1Q97 ..................... 0.2 25.52
2Q97 ..................... 0.5 25.54
</TABLE>
Supply of Office Space
The supply of office space decreased in the downtown Manhattan office
market from 18.3 million square feet at December 31, 1993 to 15.6 million square
feet at June 30, 1997. The Company expects the supply of office space in this
market to remain stable for the foreseeable future because there are relatively
few sites available for construction. In addition, the lead time required for
land assemblage and new construction typically exceeds three years and new
construction generally is not economically feasible at current market rental
rates. In the absence of any new tax incentives, the Company believes that
rental rates generally would have to increase at least 40% to justify the cost
of new construction.
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 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, 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%. 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.
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<PAGE> 305
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>
Landauer 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 34.9 years
in 1996, which is among the youngest among all metropolitan areas in Florida,
and almost 30.2% 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>
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. Employment in the
tourism-based service sector is 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 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. 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.
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<PAGE> 306
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 2.2% 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. 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 17.8% of the Company's portfolio is
located (based on Annualized 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 June 30, 1997, the direct vacancy rate in the market was 7.2%
with approximately 850,000 square feet under construction. This compares to a
1996 annual absorption of approximately 1.1 million square feet.
HISTORICAL DIRECT VACANCY RATES
ORLANDO, FL
<TABLE>
<CAPTION>
MEASUREMENT PERIOD EMPLOYMENT AND SERVICES GROWTH
(FISCAL YEAR COVERED) (%)
<S> <C>
1992 17.00
1993 12.50
1994 12.70
1995 10.30
1996 9.50
1Q97 10.20
2Q97 7.20
</TABLE>
67
<PAGE> 307
Rental Rates
Despite the substantial absorption of available office space and a
decreasing direct vacancy rate, asking rental rates in the Orlando office market
as a whole have varied from 1992 through June 30, 1997 as set forth in the chart
below. The Company believes that this variance is attributable to the fact that
average asking rents include rents relating to only vacant space in the market
and that vacancy rates for Class A office space in the market have fallen to an
extremely low level (6.0% at June 30, 1997). Average asking rental rates for
Class A Office Space in the Metropolitan Orlando office market have increased
from $17.48 per foot as of December 31, 1992 to $20.08 as of June 30, 1997.
NET ABSORPTION AND ASKING RENTAL RATES
ORLANDO, FL
<TABLE>
<CAPTION>
THOUSANDS
NET ABSORPTION ASKING RATES ($/S.F.)
------------------- --------------------
<S> <C> <C>
1992 ..................... 25 16
1993 ..................... 1100 15
1994 ..................... 189 15.5
1995 ..................... 189 16
1996 ..................... 1100 16.5
1Q97 ..................... 50 16
2Q97 ..................... 694 13.78
</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.
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. 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.
Landauer 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 4.0% since 1992. Landauer reports that in measuring
employment gains since 1994, the Phoenix Metropolitan Area ranked third among
68
<PAGE> 308
the 100 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>
Landauer has forecast for the Phoenix metropolitan area a total increase in
non-agricultural employment for the period from 1996 to 2001 of approximately
14.0%, representing an average annual growth rate of approximately 2.7%.
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>
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. 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.
Landauer 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 Landauer the
services sector of the Phoenix economy increased by 33.7% from 1990 through
1996, representing an annual compounded growth rate of 5%. Landauer 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
69
<PAGE> 309
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 20.3% of the Company's portfolio is
located (based on Annualized 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
further to 8.3% and the market had positive net absorption of approximately
86,000 square feet. These positive fundamentals in the Phoenix office market
resulted in an increase in average asking rents to $16.02 per square foot as of
June 30, 1997.
HISTORICAL DIRECT VACANCY RATES
PHOENIX, AZ
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) VACANCY RATE
<S> <C>
1992 25.1
1993 22
1994 17.3
1995 12.9
1996 9
1Q97 8.6
2Q97 8.3
</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 the 9.0 to 9.5 percent range during 1997 despite 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.
70
<PAGE> 310
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 $13.02 per square foot in 1993 to $15.40 per square
as of December 31, 1996. During the first six months of 1997, landlord average
asking rents increased further from $15.40 to $16.00, representing a 4.0%
increase during that period alone.
NET ABSORPTION AND ASKING RENTAL RATES
PHOENIX, ARIZONA
<TABLE>
<CAPTION>
Net Absorption Asking Rental Rates ($/s.f.)
<S> <C> <C>
"1992" 1188 13.2
"1993" 1658 13.02
"1994" 1681 13.6
"1995" 1074 14.53
"1996" 433 16
"1Q97" 420 16
"2Q97" 88 16
</TABLE>
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 1992, 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 38 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 MARKET AND 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.
71
<PAGE> 311
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 Landauer, 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 to Landauer, 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. Landauer 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
Landauer 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 Landauer, the government sector of
the economy has increased by approximately 15.7% 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 4.3% of the
Company's portfolio is located (based on Annualized 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.
72
<PAGE> 312
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 600,000 square feet. Since 1992, office space in the
Metropolitan Tucson 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 six months of 1997 which resulted in a further decrease
in the direct vacancy rate to approximately 8.2% and additional net absorption
of approximately 15,200 square feet.
HISTORICAL DIRECT VACANCY RATES
TUCSON, AZ
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) DIRECT VACANCY RATE
<S> <C>
1991 23.40
1992 16.90
1993 13.80
1994 11.50
1995 10.20
1996 9.00
1Q97 8.10
2Q97 8.15
</TABLE>
Rental Rates
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. As of June 30, 1997, average asking rental rates in this
market have remained relatively constant at approximately $17.85 per square
foot. Landauer projects that rents will continue to increase at healthy rates
through 1999 and then slowly plateau, reaching approximately $25.00 per square
foot in 2001. There can be no assurance such increases in rental rates will be
achieved.
73
<PAGE> 313
NET ABSORPTION AND ASKING RENTAL RATES
TUCSON, AZ
<TABLE>
<CAPTION>
Thousands
Net Absorption Asking Rental Rates ($/s.f.)
<S> <C> <C>
"1992" 85 13
"1993" 240 14
"1994" 141.6 13.5
"1995" 232.2 16
"1996" -8.7 18
1Q97 75 18
2Q97 15.16 17.85
</TABLE>
Supply of Office Space
From 1992 to June 30, 1997, only approximately 341,000 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%, Landauer estimates
that approximately 1.2 million square feet will be added to the market over the
next five years. Landauer 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.
74
<PAGE> 314
THE PROPERTIES
GENERAL
Upon completion of the Offering, the Company will own interests in the 21
Properties, which contain 3.4 million rentable square feet. Substantially all of
the Properties are located in nine submarkets in the Manhattan, Orlando, Phoenix
and Tucson office markets and individually range from 10,300 to 459,000 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 in which the Company owns a 10% interest (which
economic interest increases to up to 27.5% if certain performance criteria are
achieved). As of August 31, 1997, approximately 80% of the Annualized Rent from
the Company's portfolio was derived from Properties located in central business
district locations, including approximately 54% 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 will also own two parcels of land which can support
an aggregate of approximately 370,000 square feet of development and will have
options to acquire two other parcels of land which can support approximately 1.8
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 August 31, 1997, the Properties had a weighted average occupancy
rate of 92.4% and were leased to over 348 tenants. As of August 31, 1997, no
single tenant represented more than approximately 5.5% of the aggregate
Annualized Rent of the Company's portfolio and only 17 tenants individually
represented more than 1% of such Annualized Rent.
PROPERTIES
The following tables set forth certain information, as of August 31, 1997,
with respect to the Properties.
75
<PAGE> 315
<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
Manhattan Market
Tower 45................................................ 100% 1989 443,114 100.0% 33
286 Madison Avenue...................................... 100% 1918 (4) 111,999 94.8 39
290 Madison Avenue...................................... 100% 1950 (4) 38,512 100.0 4
292 Madison Avenue...................................... 100% 1920/86 186,901 98.9 19
100 Wall Street......................................... 100% 1969/94 458,848 88.7 17
Long Island Market
120 Mineola Boulevard................................... 100% 1984/92 100,810 91.2 15
--------- ----- ---
Market Subtotal/Weighted Average............................................... 1,340,184 94.9% 127
--------- ----- ---
ARIZONA MARKETS
Metropolitan Phoenix Market
Corporate Center Building 10010-30...................... 100% 1976/86 188,614 100.0% 2
Corporate Center Building 10040......................... 100% 1976/86 23,155 100.0 10
Corporate Center Building 10050......................... 100% 1976/86 42,398 100.0 10
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 91.0 37
Century Plaza........................................... 100% 1974/90 219,769 84.2 28
Metropolitan Tucson Market
5151 East Broadway...................................... 100% 1975/89/96 246,486 82.1% 45
--------- ----- ---
Market Subtotal/Weighted Average............................................... 1,277,737 91.3% 150
--------- ----- ---
METROPOLITAN ORLANDO MARKET
One Orlando Center...................................... 100% 1989 357,184 99.5% 34
5750 Major Boulevard.................................... 100% 1973/97 92,828 21.0(7) 13
Maitland Forum.......................................... 100% 1985/96 266,060 99.9 16
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............................................... 775,682 90.0% 71
--------- ----- ---
Consolidated Total/Weighted Average for all Properties................................ 3,393,603 92.4% 348
========= ===
<CAPTION>
PERCENTAGE OF ANNUALIZED ANNUALIZED NET
PORTFOLIO RENT EFFECTIVE RENT
ANNUALIZED ANNUALIZED PER LEASED PER LEASED
MARKET/PROPERTY RENT(2) RENT(2) SQUARE FOOT(2) SQUARE FOOT(3)
----------------------------------------------------------- ----------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
METROPOLITAN NEW YORK CITY MARKET
Manhattan Market
Tower 45................................................ $20,890,000 27.8% $47.14 $31.48
286 Madison Avenue...................................... 2,474,000 3.3 23.31 21.54
290 Madison Avenue...................................... 1,057,000 1.4 27.44 24.97
292 Madison Avenue...................................... 5,212,000 6.9 28.18 25.60
100 Wall Street......................................... 11,222,000 14.9 27.57 28.12
Long Island Market
120 Mineola Boulevard................................... 2,458,000 3.3 26.74 21.04
----------- ----- ------ ------
Market Subtotal/Weighted Average.................... $43,313,000 57.6% $34.06 $27.77
----------- ----- ------ ------
ARIZONA MARKETS
Metropolitan Phoenix Market
Corporate Center Building 10010-30...................... $ 2,947,000 3.9% $15.62 $14.39
Corporate Center Building 10040......................... 380,000 0.5 16.43 15.09
Corporate Center Building 10050......................... 708,000 0.9 16.71 15.16
Corporate Center Building 10210......................... 706,000 0.9 15.65 14.50
Corporate Center Building 10220......................... 422,000 0.6 17.47 15.12
Corporate Center Building 9630(5)....................... 2,386,000 3.2 18.33 15.95
2800 North Central(6)................................... 5,291,000 7.0 16.24 15.50
Century Plaza........................................... 2,408,000 3.2 13.02 12.86
Metropolitan Tucson Market
5151 East Broadway...................................... $ 3,269,000 4.4% $16.15 $13.64
----------- ----- ------ ------
Market Subtotal/Weighted Average.................... $18,517,000 24.6% $15.87 $14.56
----------- ----- ------ ------
METROPOLITAN ORLANDO MARKET
One Orlando Center...................................... $ 8,154,000 10.8% $22.94 $21.57
5750 Major Boulevard.................................... 298,000 0.4 15.31 28.55
Maitland Forum.......................................... 4,140,000 5.5 15.57 13.70
2601 Maitland Center Parkway............................ 158,000 0.2 15.23 12.90
2603 Maitland Center Parkway............................ 114,000 0.2 13.04 10.94
2605 Maitland Center Parkway............................ 538,000 0.7 13.96 12.20
----------- ----- ------ ------
Market Subtotal/Weighted Average.................... $13,402,000 17.8% $19.19 $17.99
----------- ----- ------ ------
Consolidated Total/Weighted Average for all Properties..... $75,232,000 100.0% $23.98 $20.68
=========== ===== ====== ======
</TABLE>
------------------
(1) Data do not include years in which tenant improvements were made to the
Properties.
(2) Annualized Rent represents the annualized monthly Base Rent in effect
plus estimated 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 August 31, 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. The Company believes that Annualized
Rent is helpful to investors as a measure of the revenues the Company
could expect to receive from its leases. Annualized Rent represents
actual payments attributable to leases executed as of August 31, 1997
with adjustments for rent concessions as reflected above and normal
year-end adjustments. Normal year-end rental payment adjustments for the
Tower Predecessor in 1996 represented approximately .9% of all rental
payments received during that year. Annualized Rent should not be
considered an alternative to Annualized Net Effective Rent as an
indication of the financial performance of a lease nor is it indicative
of the Company's ability to generate cash flow, including its ability to
make cash distributions.
(3) Annualized Net Effective Rent per Leased Square Foot represents the Base
Rent for the month of August 1997 under each lease executed as of August
31, 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
August 31, 1997, but was not yet occupied, had been included in that
percentage.
76
<PAGE> 316
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................................. 3.6 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................................. 43.2 optioned(4) 1,000,000
---- ---------
Total.............................................. 46.8 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 Company's Bylaws, the Company is authorized to exercise this
option only if (i)(a) a majority of Independent Directors approves 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 the property is
less than 50% preleased, the Board of Directors unanimously approves the
exercise of such option. See "-- Land Parcel Options and -- Development
Parcels."
(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 no
cost. Pursuant to the option, the Company will directly or indirectly
acquire the right to purchase this land for approximately $10.3 million from
an unaffiliated third party. Pursuant to the Company's Bylaws, the Company
is authorized to execute this option only if the Independent Directors
unanimously approve the exercise thereof. The right to acquire the land
expires on October 31, 1997, subject to one 30-day extension that requires
the payment of a $100,000 extension fee. See "The Properties -- Land Parcel
Options."
TENANTS
The Properties are leased to over 348 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 (which may not be representative of the
Company's entire tenant base), based on rentable square feet, as of August 31,
1997. The Company's largest tenant, American Express, accounted for 5.52% of the
Company's total Annualized Rent and 8.07% of aggregate leased square feet. In
addition, the Company's 10 largest tenants at the Properties (based on rentable
square feet as of August 31, 1997) collectively accounted for approximately
34.6% of the Company's total Annualized Rent and 29.8% 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 would be a material
adverse affect on the Company and the Company's ability to make distributions to
stockholders.
77
<PAGE> 317
<TABLE>
<CAPTION>
PERCENTAGE OF
PERCENTAGE OF AGGREGATE
REMAINING AGGREGATE AGGREGATE PORTFOLIO
NUMBER LEASE TERM RENTABLE LEASED ANNUALIZED ANNUALIZED
TENANT OF LEASES IN MONTHS SQUARE FEET SQUARE FEET RENT RENT
- --------------------------------------- --------- ---------- ----------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
American Express(1).................... 4 54 252,626 8.07% $ 4,154,000 5.52%
United States of America (by General
Services Administration)(2).......... 5 30 100,279 3.20 1,534,000 2.04
Credit Suisse.......................... 1 29 95,310 3.04 2,870,000 3.82
Waterhouse Securities, Inc............. 1 79 94,358 3.01 2,340,000 3.11
TBWA CHIAT/DAY, INC. .................. 1 86 70,791 2.26 2,122,000 2.82
First Union National Bank of Florida... 1 64 69,364 2.22 2,388,000 3.17
US West Communications, Inc.(3)........ 3 32 65,583 2.09 1,174,000 1.56
D.E. Shaw & Co., L.P. ................. 1 113 63,871 2.04 2,310,000 3.07
Swiss American Corporation............. 1 29 61,461 1.96 1,851,000 2.46
Honor Technologies, Inc. f/k/a
Southeast Switch, Inc. .............. 1 69 59,609 1.90 907,000 1.21
ITT Educational Services, Inc.(4)...... 3 65 58,469 1.87 925,000 1.23
State of Arizona(5).................... 4 40 58,240 1.86 758,000 1.01
The Equitable Life Assurance Society of
the United States.................... 3 42 56,815 1.81 1,683,000 2.24
United Healthcare Services, Inc.(6).... 2 54 56,649 1.81 984,000 1.31
Florida Power Corporation.............. 1 49 52,622 1.68 816,000 1.08
Brown, Raysman & Millstein............. 1 93 38,237 1.22 1,987,000 2.64
King & Spalding........................ 1 100 35,874 1.15 1,671,000 2.22
Southwest Catholic Health Network
Corporation d/b/a Mercy Care Plan.... 1 41 35,648 1.14 473,000 0.63
MCI Telecommunications Corporation..... 1 105 34,230 1.09 746,000 0.99
Bryan Cave............................. 1 89 31,954 1.02 669,000 .89
--
--- --------- ----- ----------- -----
Total/Weighted Average(7)...... 37 59 1,391,990 44.46% $ 32,364,000 43.02%
== ========= ===== =========== =====
</TABLE>
- ---------------
(1) The tenants under such leases are (i) American Express Financial Advisors
Inc., f/k/a IDS Financial Services Inc. (an aggregate of 19,797 rentable
square feet in the One Orlando Center and 5151 East Broadway Properties),
and (ii) American Express Travel Related Services Company, Inc. (an
aggregate of 232,829 rentable square feet under two separate leases in the
Corporate Center Properties).
(2) Under federal law, these leases may be terminated or renegotiated by the
lessee under certain circumstances. See "Risk Factors -- The Company's
Performance and Value are Subject to Risks Associated with the Real Estate
Industry -- Loss of Major Tenants Could Adversely Affect the Company's Cash
Flow."
(3) The tenants under such leases are (i) US West Communications, Inc. (an
aggregate of 61,614 rentable square feet in the 2800 North Central and
Corporate Center Properties) and (ii) US West NewVector Group, Inc. (3,968
rentable square feet in the 5151 East Broadway Property).
(4) The tenants under such leases are (i) ITT Educational Services, Inc. (34,422
rentable square feet in the Maitland Forum Property) and (ii) Hartford Fire
Insurance Company (an aggregate of 24,047 rentable square feet under two (2)
separate leases in the Corporate Center Properties).
(5) The tenants under such leases are (i) Department of Economic Security
(49,752 rentable square feet in the Century Plaza Property), (ii) State
Board of Directors for Community College of Arizona (4,706 rentable square
feet in the Century Plaza Property), and (iii) Arizona Veterans Service
Commission (3,782 rentable square feet in the Century Plaza Property).
(6) The tenants under such leases are (i) United HealthCare Services, Inc. f/k/a
CAC Properties, Inc. (39,240 rentable square feet in the One Orlando
Property) and (ii) UHC Management Company, Inc. (17,409 rentable square feet
in the Maitland Forum Properties).
(7) Weighted average calculation with respect to remaining lease term is based
on aggregate rentable square footage leased by each tenant.
78
<PAGE> 318
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 August
31, 1997:
<TABLE>
<CAPTION>
PERCENT OF PERCENTAGE OF
AGGREGATE AGGREGATE
PERCENT PORTFOLIO PORTFOLIO
SQUARE FEET NUMBER OF ALL TOTAL LEASED LEASED ANNUALIZED ANNUALIZED
UNDER LEASE OF LEASES LEASES SQUARE FEET SQUARE FEET RENT RENT
- --------------------------------------- --------- ------- ------------ ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
2,500 or less.......................... 135 38.79% 210,687 6.73% $ 4,245,300 5.64%
2,501-5,000............................ 61 17.53 254,676 8.13 5,646,168 7.50
5,001-7,500............................ 59 16.95 407,396 13.01 8,694,780 11.56
7,501-10,000........................... 19 5.46 176,177 5.63 4,911,564 6.53
10,001-20,000.......................... 44 12.64 697,744 22.28 17,115,036 22.75
20,001-40,000.......................... 18 5.17 492,346 15.72 13,276,344 17.65
40,001+................................ 12 3.45 892,093 28.49 21,342,900 28.37
--- ------ --------- ------ ----------- ------
Tota1(1)...................... 348 100.00% 3,131,119(2) 100.00% $ 75,232,092 100.00%
=== ====== ========= ====== =========== ======
</TABLE>
- ---------------
(1) Excludes 5,704 square feet (or .17% of total leased square feet) with
respect to four management offices occupied by the Company.
(2) Reconciliation of total rentable square footage is as follows:
<TABLE>
<CAPTION>
SQUARE FOOTAGE PERCENTAGE OF TOTAL
-------------- -------------------
<S> <C> <C>
Square footage occupied by tenants..................... 3,131,119 92.26%
Square footage used for management offices and building
use, and remeasurement adjustments................... 5,704 .17
Square footage vacant.................................. 256,780 7.57
--------- -----
Total net rentable square footage............ 3,393,603 100.0%
========= =====
</TABLE>
79
<PAGE> 319
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 August 31,1997, 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
SQUARE ANNUALIZED ANNUALIZED
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 ($000S) LEASES
- ----------------------------------- --------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
1997............................... 25 62,292 1.99% $ 970 1.29%
1998............................... 48 198,782 6.34 4,193 5.57
1999............................... 56 371,732 11.85 7,430 9.88
2000............................... 42 322,546 10.28 8,400 11.17
2001............................... 46 420,684 13.41 8,679 11.54
2002............................... 52 690,179 22.00 14,763 19.62
2003............................... 15 227,921 7.27 4,156 5.52
2004............................... 20 202,369 6.45 7,458 9.91
2005............................... 21 313,527 10.00 10,956 14.56
2006............................... 8 148,807 4.74 3,218 4.28
2007............................... 6 128,166 4.09 3,813 5.07
2008............................... 1 3,250 0.10 142 0.19
2009............................... 2 16,310 0.52 397 0.53
2010............................... 6 24,554 0.78 658 0.88
--- --------- ----- ------- ------
Total.................... 348 3,131,119(1) 99.82%(1) $ 75,232 100.00%
=== ========= ===== ======= ======
</TABLE>
- ---------------
(1) Excludes an aggregate of 5,704 square feet (or .17% of total leased square
feet) with respect to four management offices occupied by the Company.
80
<PAGE> 320
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 August 31, 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. As of August 31, 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 0 37,439 11,858 63,572 50,684
Percentage of Total Leased Sq. Ft.............. -- 0.0% 8.4% 2.7% 14.3% 11.4%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 29,292 $1,793,160 $ 682,680 $2,475,300 $ 2,260,116
Percentage of Total Annualized Rent(1)......... -- 0.1% 8.6% 3.3% 11.8% 10.8%
Number of Leases Expiring...................... 0 0 7 1 3 7
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ -- $ -- $ 47.90 $ 57.57 $ 38.94 $ 44.59
Company Quoted Rental Rate Per Sq. Ft.(2)(3)... $ 38.00
286 MADISON AVENUE
Square Footage of Expiring Leases.............. 3,734 5,119 8,468 2,400 27,386 23,821
Percentage of Total Leased Sq. Ft.............. 3.5% 4.8% 8.0% 2.3% 25.8% 22.4%
Annualized Rent of Expiring Leases(1).......... $ 93,720 $ 137,868 $ 252,348 $ 48,972 $ 561,744 $ 550,956
Percentage of Total Annualized Rent(1)......... 3.8% 5.5% 10.2% 2.0% 22.7% 22.3%
Number of Leases Expiring...................... 2 3 3 3 10 8
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 25.10 $ 26.93 $ 29.80 $ 20.41 $ 20.51 $ 23.13
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 23.00
290 MADISON AVENUE
Square Footage of Expiring Leases.............. 0 15,966 0 5,322 0 5,322
Percentage of Total Leased Sq. Ft.............. -- 41.5% -- 13.8% -- 13.8%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 454,992 $ 0 $ 155,148 $ 0 $ 121,836
Percentage of Total Annualized Rent(1)......... -- 43.1% -- 14.7% -- 11.5%
Number of Leases Expiring...................... 0 1 0 1 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 28.50 -- $ 29.15 -- $ 22.89
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 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%
Annualized Rent of Expiring Leases(1).......... $ 228,036 $ 426,780 $ 0 $ 678,120 $ 400,968 $ 255,756
Percentage of Total Annualized Rent(1)......... 4.4% 8.2% -- 13.0% 7.7% 4.9%
Number of Leases Expiring...................... 0 3 0 4 2 2
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 22.55 $ 29.47 -- $ 27.57 $ 25.43 $ 18.94
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 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%
Annualized Rent of Expiring Leases(1).......... $ 222,888 $4,737,120 $ 5,554,476 $ 0 $3,135,348 $20,890,380
Percentage of Total Annualized Rent(1)......... 1.1% 22.7% 26.6% -- 15.0% 100%
Number of Leases Expiring...................... 1 5 5 0 4 33
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 32.99 $ 61.61 $ 51.33 -- $ 35.75 --
Company Quoted Rental Rate Per Sq. Ft.(2)(3)...
286 MADISON AVENUE
Square Footage of Expiring Leases.............. 10,116 9,366 13,149 0 2,600 106,159
Percentage of Total Leased Sq. Ft.............. 9.5% 8.8% 12.4% -- 2.4% 100%
Annualized Rent of Expiring Leases(1).......... $ 242,004 $ 220,620 $ 311,892 $ 0 $ 53,952 $ 2,474,076
Percentage of Total Annualized Rent(1)......... 9.8% 8.9% 12.6% -- 2.2% 100%
Number of Leases Expiring...................... 2 3 4 0 1 39
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 23.92 $ 23.56 $ 23.72 -- $ 20.75 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
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%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 324,840 $ 0 $ 0 $ 0 $ 1,056,816
Percentage of Total Annualized Rent(1)......... -- 30.7% -- -- -- 100%
Number of Leases Expiring...................... 0 1 0 0 0 4
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 27.29 -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
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%
Annualized Rent of Expiring Leases(1).......... $ 563,184 $ 220,872 $ 2,187,996 $ 0 $ 250,080 $ 5,211,792
Percentage of Total Annualized Rent(1)......... 10.8% 4.2% 42.0% -- 4.8% 100%
Number of Leases Expiring...................... 3 1 2 0 2 19
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 30.73 $ 21.84 $ 30.51 -- $ 39.65 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
</TABLE>
81
<PAGE> 321
<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>
100 WALL STREET
Square Footage of Expiring Leases.............. 0 35,372 1,603 156,771 0 62,159
Percentage of Total Leased Sq. Ft.............. -- 8.7% 0.4% 38.5% -- 15.3%
Annualized Rent of Expiring Leases(1).......... $ 0 $1,116,240 $ 49,560 $4,721,172 $ 0 $ 1,546,896
Percentage of Total Annualized Rent(1)......... -- 9.9% 0.4% 42.1% -- 13.8%
Number of Leases Expiring...................... 0 2 1 2 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 31.56 $ 30.92 $ 30.12 $ 24.89
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 27.00
120 MINEOLA BOULEVARD
Square Footage of Expiring Leases.............. 0 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%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 152,388 $1,058,592 $ 120,384 $ 116,712 $ 96,900
Percentage of Total Annualized Rent(1)......... -- 6.2% 43.1% 4.9% 4.8% 3.9%
Number of Leases Expiring...................... 0 1 6 1 2 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 22.46 $ 30.29 $ 22.01 $ 26.52 $ 21.83
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 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%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 288,876 $ 0 $ 2,650,764
Percentage of Total Annualized Rent(1)......... -- -- -- 9.8% -- 90.0%
Number of Leases Expiring...................... 0 0 0 0 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- $ 19.17 -- $ 15.69
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 17.75
CORPORATE CENTER BUILDING 10040
Square Footage of Expiring Leases.............. 1,305 11,865 3,255 0 2,769 0
Percentage of Total Leased Sq. Ft. ............ 5.6% 51.2% 14.1% -- 12.0% --
Annualized Rent of Expiring Leases(1).......... $ 20,316 $ 209,712 $ 63,060 $ 0 $ 53,208 $ 0
Percentage of Total Annualized Rent(1)......... 5.3% 55.1% 16.6% -- 14.0% --
Number of Leases Expiring...................... 1 3 3 0 2 0
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 15.57 $ 17.67 $ 19.37 -- $ 19.22 --
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 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%
Annualized Rent of Expiring Leases(1).......... $ 51,576 $ 159,036 $ 235,572 $ 118,128 $ 94,893 $ 49,188
Percentage of Total Annualized Rent(1)......... 7.3% 22.4% 33.3% 16.7% 13.4% 6.9%
Number of Leases Expiring...................... 2 3 3 1 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 15.05 $ 15.86 $ 16.67 $ 17.85 $ 17.63 $ 17.50
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 17.75
<CAPTION>
100 WALL STREET
Square Footage of Expiring Leases.............. 0 7,041 50,122 77,601 16,442 407,111
Percentage of Total Leased Sq. Ft.............. -- 1.7% 12.3% 19.1% 4.0% 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 214,524 $ 1,350,840 $1,805,304 $ 417,756 $11,222,292
Percentage of Total Annualized Rent(1)......... -- 1.9% 12.1% 16.1% 3.7% 100%
Number of Leases Expiring...................... 0 2 4 3 2 17
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 30.47 $ 26.95 $ 23.26 $ 25.41 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
120 MINEOLA BOULEVARD
Square Footage of Expiring Leases.............. 15,943 12,086 7,819 0 0 91,894
Percentage of Total Leased Sq. Ft. ............ 17.3% 13.2% 8.5% -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 390,600 $ 325,056 $ 196,896 0 0 $ 2,457,528
Percentage of Total Annualized Rent(1)......... 15.9% 13.2% 8.0% -- -- 100%
Number of Leases Expiring...................... 1 1 2 0 0 15
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 24.50 $ 26.90 $ 25.18 -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
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%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 6,972 $ 2,946,612
Percentage of Total Annualized Rent(1)......... -- -- -- -- 0.2% 100%
Number of Leases Expiring...................... 0 0 0 0 1 2
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- $ 1.50 --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
CORPORATE CENTER BUILDING 10040
Square Footage of Expiring Leases.............. 0 2,404 0 0 0 21,598
Percentage of Total Leased Sq. Ft. ............ -- 10.4% -- -- -- 93.3%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 34,068 $ 0 $ 0 $ 0 $ 380,364
Percentage of Total Annualized Rent(1)......... -- 9.0% -- -- -- 100%
Number of Leases Expiring...................... 0 1 0 0 0 10
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 14.17 -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
CORPORATE CENTER BUILDING 10050
Square Footage of Expiring Leases.............. 0 0 0 0 0 42,398
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 708,396
Percentage of Total Annualized Rent(1)......... -- -- -- -- -- 100%
Number of Leases Expiring...................... 0 0 0 0 0 10
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
</TABLE>
82
<PAGE> 322
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1997 1998 1999 2000 2001 2002
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
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%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 290,148 $ 0 $ 294,396 $ 121,056
Percentage of Total Annualized Rent(1)......... -- -- 41.1% -- 41.7% 17.2%
Number of Leases Expiring...................... 0 0 1 0 2 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- $ 13.52 -- $ 17.50 $ 17.75
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 17.75
CORPORATE CENTER BUILDING 10220
Square Footage of Expiring Leases.............. 0 0 0 0 24,128 0
Percentage of Total Leased Sq. Ft.............. -- -- -- -- 100.0% --
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 421,536 $ 0
Percentage of Total Annualized Rent(1)......... -- -- -- -- 100% --
Number of Leases Expiring...................... 0 0 0 0 1 0
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- $ 17.47 --
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 17.75
CORPORATE CENTER BUILDING 9630(4)
Square Footage of Expiring Leases.............. 0 13,340 0 5,790 61,838 31,800
Percentage of Total Leased Sq. Ft.............. -- 10.2% -- 4.4% 47.5% 24.4%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 223,860 $ 0 $ 105,912 $1,051,356 $ 532,164
Percentage of Total Annualized Rent(1)......... -- 9.4% -- 4.4% 44.1% 22.3%
Number of Leases Expiring...................... 0 2 0 3 3 2
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 16.78 $ 18.29 $ 17.00 $ 16.73
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 17.75
2800 NORTH CENTRAL(5)
Square Footage of Expiring Leases.............. 9,850 26,267 72,105 0 65,034 63,859
Percentage of Total Leased Sq. Ft.............. 3.0% 8.1% 22.1% -- 20.0% 19.6%
Annualized Rent of Expiring Leases(1).......... $ 139,980 $ 386,400 $1,193,712 $ 0 $ 971,328 $ 1,100,376
Percentage of Total Annualized Rent(1)......... 2.6% 7.3% 22.6% -- 18.4% 20.8%
Number of Leases Expiring...................... 5 9 6 0 4 9
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 14.21 $ 14.71 $ 16.56 -- $ 14.94 $ 17.23
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 17.50
CENTURY PLAZA
Square Footage of Expiring Leases.............. 1,300 18,063 120,693 12,096 3,227 26,647
Percentage of Total Leased Sq. Ft.............. 0.7% 9.8% 65.2% 6.5% 1.7% 14.4%
Annualized Rent of Expiring Leases(1).......... $ 14,892 $ 242,148 $1,539,540 $ 149,400 $ 42,360 $ 378,240
Percentage of Total Annualized Rent(1)......... 0.6% 10.1% 63.9% 6.2% 1.8% 15.7%
Number of Leases Expiring...................... 1 7 10 6 1 2
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 11.46 $ 13.41 $ 12.76 $ 12.35 $ 13.13 $ 14.19
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 16.50
<CAPTION>
2007 AND
YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 BEYOND TOTAL
- ----------------------------------------------- ---------- ---------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
CORPORATE CENTER BUILDING 10210
Square Footage of Expiring Leases.............. 0 0 0 0 0 45,100
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 705,600
Percentage of Total Annualized Rent(1)......... -- -- -- -- -- 100%
Number of Leases Expiring...................... 0 0 0 0 0 4
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
CORPORATE CENTER BUILDING 10220
Square Footage of Expiring Leases.............. 0 0 0 0 0 24,128
Percentage of Total Leased Sq. Ft.............. -- -- -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 421,536
Percentage of Total Annualized Rent(1)......... -- -- -- -- -- 100%
Number of Leases Expiring...................... 0 0 0 0 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
CORPORATE CENTER BUILDING 9630(4)
Square Footage of Expiring Leases.............. 0 396 0 8,000 9,000 130,164
Percentage of Total Leased Sq. Ft.............. -- 0.3% -- 6.1% 6.9% 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 5,928 $ 0 $ 264,372 $ 202,368 $ 2,385,960
Percentage of Total Annualized Rent(1)......... -- 0.2% -- 11.1% 8.5% 100%
Number of Leases Expiring...................... 0 1 0 1 1 13
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 14.97 -- $ 33.05 $ 22.49 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
2800 NORTH CENTRAL(5)
Square Footage of Expiring Leases.............. 17,829 37,486 31,954 0 0 324,384
Percentage of Total Leased Sq. Ft.............. 5.5% 11.5% 9.8% -- -- 99.6%
Annualized Rent of Expiring Leases(1).......... $ 250,440 $ 580,056 $ 668,604 $ 0 $ 0 $ 5,290,896
Percentage of Total Annualized Rent(1)......... 4.7% 11.0% 12.6% -- -- 100%
Number of Leases Expiring...................... 1 2 1 0 0 37
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 14.05 $ 15.47 $ 20.92 -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
CENTURY PLAZA
Square Footage of Expiring Leases.............. 0 2,979 0 0 0 185,005
Percentage of Total Leased Sq. Ft.............. -- 1.6% -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 41,892 $ 0 $ 0 $ 0 $ 2,408,472
Percentage of Total Annualized Rent(1)......... -- 1.7% -- -- -- 100%
Number of Leases Expiring...................... 0 1 0 0 0 28
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 14.06 -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
</TABLE>
83
<PAGE> 323
<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 EAST BROADWAY
Square Footage of Expiring Leases.............. 5,209 17,443 11,689 25,831 33,162 59,407
Percentage of Total Leased Sq. Ft.............. 2.6% 8.6% 5.8% 12.8% 16.4% 29.4%
Annualized Rent of Expiring Leases(1).......... $ 40,980 $ 287,316 $ 197,004 $ 439,164 $ 561,840 $ 980,844
Percentage of Total Annualized Rent(1)......... 1.3% 8.8% 6.0% 13.4% 17.2% 30.0%
Number of Leases Expiring...................... 3 5 6 9 10 8
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 7.87 $ 16.47 $ 16.85 $ 17.00 $ 16.94 $ 16.51
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 16.50
ONE ORLANDO CENTER
Square Footage of Expiring Leases.............. 1,727 378 26,133 29,699 24,954 142,967
Percentage of Total Leased Sq. Ft. ............ 0.5% 0.1% 7.4% 8.4% 7.0% 40.2%
Annualized Rent of Expiring Leases(1).......... $ 41,076 $ 4,452 $ 492,780 $ 565,704 $ 503,316 $ 3,739,920
Percentage of Total Annualized Rent(1)......... 0.5% 0.1% 6.0% 6.9% 6.2% 45.9%
Number of Leases Expiring...................... 1 2 5 7 4 6
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 23.78 $ 11.78 $ 18.86 $ 19.05 $ 20.17 $ 26.16
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 21.00
5750 MAJOR BOULEVARD
Square Footage of Expiring Leases.............. 5,954 2,495 3,709 0 0 0
Percentage of Total Leased Sq. Ft. ............ 30.6% 12.8% 19.0% -- -- --
Annualized Rent of Expiring Leases(1).......... $ 83,748 $ 32,436 $ 54,036 0 0 0
Percentage of Total Annualized Rent(1)......... 28.1% 10.9% 18.1% -- -- --
Number of Leases Expiring...................... 9 2 1 0 0 0
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 14.07 $ 13.00 $ 14.57 -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 18.75
MAITLAND FORUM
Square Footage of Expiring Leases.............. 19,674 8,649 1,532 5,840 72,239 11,676
Percentage of Total Leased Sq. Ft. ............ 7.4% 3.3% 0.6% 2.2% 27.2% 4.4%
Annualized Rent of Expiring Leases(1).......... $ 255,768 $ 139,536 $ 24,516 $ 104,064 $1,129,716 $ 166,488
Percentage of Total Annualized Rent(1)......... 6.2% 3.4% 0.6% 2.5% 27.3% 4.0%
Number of Leases Expiring...................... 1 3 1 2 2 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 13.00 $ 16.13 $ 16.00 $ 17.82 $ 15.64 $ 14.26
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 17.00
2601 MAITLAND CENTER PARKWAY
Square Footage of Expiring Leases.............. 0 10,342 0 0 0 0
Percentage of Total Leased Sq. Ft. ............ -- 100.0% -- -- -- --
Annualized Rent of Expiring Leases(1).......... $ 0 $ 157,548 $ 0 $ 0 $ 0 $ 0
Percentage of Total Annualized Rent(1)......... -- 100.0% -- -- -- --
Number of Leases Expiring...................... 0 1 0 0 0 0
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 15.23 -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)...... $ 15.50
<CAPTION>
5151 EAST BROADWAY
Square Footage of Expiring Leases.............. 30,118 0 0 18,577 0 201,436
Percentage of Total Leased Sq. Ft.............. 14.9% -- -- 9.2% -- 99.5%
Annualized Rent of Expiring Leases(1).......... $ 433,356 $ 0 $ 0 $ 328,548 $ 0 $ 3,269,052
Percentage of Total Annualized Rent(1)......... 13.2% -- -- 10.1% -- 100%
Number of Leases Expiring...................... 2 0 0 2 0 45
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 14.39 -- -- $ 17.69 -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
ONE ORLANDO CENTER
Square Footage of Expiring Leases.............. 1,842 31,708 30,400 25,541 38,271 353,620
Percentage of Total Leased Sq. Ft. ............ 0.5% 8.9% 8.6% 7.2% 10.8% 99.5%
Annualized Rent of Expiring Leases(1).......... $ 35,460 $ 752,604 $ 683,700 $ 519,828 $ 815,604 $ 8,154,444
Percentage of Total Annualized Rent(1)......... 0.4% 9.2% 8.4% 6.4% 10.0% 100%
Number of Leases Expiring...................... 1 2 2 1 3 34
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 19.25 $ 23.74 $ 22.49 $ 20.35 $ 21.31 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
5750 MAJOR BOULEVARD
Square Footage of Expiring Leases.............. 0 0 0 0 7,314 19,472
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- 37.6% 100.0%
Annualized Rent of Expiring Leases(1).......... 0 0 0 0 $ 127,992 $ 298,212
Percentage of Total Annualized Rent(1)......... -- -- -- -- 42.9% 100%
Number of Leases Expiring...................... 0 0 0 0 1 13
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- $ 17.50 --
Company Quoted Rental Rate Per Sq. Ft.(3)......
MAITLAND FORUM
Square Footage of Expiring Leases.............. 126,992 0 150 19,088 0 265,840
Percentage of Total Leased Sq. Ft. ............ 47.8% -- 0.1% 7.2% -- 100%
Annualized Rent of Expiring Leases(1).......... $2,018,196 $ 0 $ 1,608 $ 299,880 $ 0 $ 4,139,772
Percentage of Total Annualized Rent(1)......... 48.8% -- 0.0% 7.2% -- 100%
Number of Leases Expiring...................... 4 0 1 1 -- 16
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 15.89 -- $ 10.72 $ 15.71 -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
2601 MAITLAND CENTER PARKWAY
Square Footage of Expiring Leases.............. 0 0 0 0 0 10,342
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 157,548
Percentage of Total Annualized Rent(1)......... -- -- -- -- -- 100%
Number of Leases Expiring...................... 0 0 0 0 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3)......
</TABLE>
84
<PAGE> 324
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION 1997 1998 1999 2000 2001 2002
- ----------------------------------------------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
2603 MAITLAND PARKWAY
Square Footage of Expiring Leases.............. 0 0 8,743 0 0 0
Percentage of Total Leased Sq. Ft. ............ -- -- 100% -- -- --
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 113,976 $ 0 $ 0 $ 0
Percentage of Total Annualized Rent(1)......... -- -- 100% -- -- --
Number of Leases Expiring...................... 0 0 2 0 0 0
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- $ 13.04 -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 15.50
2605 MAITLAND PARKWAY
Square Footage of Expiring Leases.............. 0 2,185 5,827 15,184 0 15,368
Percentage of Total Leased Sq. Ft. ............ -- 5.7% 15.1% 39.4% -- 39.9%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 32,820 $ 71,952 $ 222,288 $ 0 $ 211,308
Percentage of Total Annualized Rent(1)......... -- 6.1% 13.4% 41.3% -- 39.2%
Number of Leases Expiring...................... -- 1 1 2 0 1
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- $ 15.02 $ 12.35 $ 14.64 -- $ 13.75
Company Quoted Rental Rate Per Sq. Ft.(3) ..... $ 15.50
PORTFOLIO TOTALS/WEIGHTED AVG.
Square Footage of Expiring Leases(6) .......... 62,292 198,782 371,732 322,546 420,684 690,179
Percentage of Total Leased Sq. Ft. ............ 2.0% 6.3% 11.9% 10.3% 13.4% 22.0%
Annualized Rent of Expiring Leases(1).......... $ 970,092 $4,192,824 $7,429,956 $8,400,012 $8,678,676 $14,762,808
Percentage of Total Annualized Rent(1)......... 1.29% 5.57% 9.88% 11.17% 11.54% 19.62%
Number of Leases Expiring...................... 25 48 56 42 46 52
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 15.57 $ 21.09 $ 19.99 $ 26.04 $ 20.63 $ 21.39
Weighted Average Company Quoted Rental Rate Per
Sq. Ft.(3) ................................... $ 22.51
<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.............. 0 0 0 0 0 8,743
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 113,976
Percentage of Total Annualized Rent(1)......... -- -- -- -- -- 100%
Number of Leases Expiring...................... 0 0 0 0 0 2
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
2605 MAITLAND PARKWAY
Square Footage of Expiring Leases.............. 0 0 0 0 0 38,564
Percentage of Total Leased Sq. Ft. ............ -- -- -- -- -- 100%
Annualized Rent of Expiring Leases(1).......... $ 0 $ 0 $ 0 $ 0 $ 0 $ 538,368
Percentage of Total Annualized Rent(1)......... -- -- -- -- -- 100%
Number of Leases Expiring...................... 0 0 0 0 0 5
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... -- -- -- -- -- --
Company Quoted Rental Rate Per Sq. Ft.(3) .....
PORTFOLIO TOTALS/WEIGHTED AVG.
Square Footage of Expiring Leases(6) .......... 227,921 202,369 313,527 148,807 172,280 3,131,119
Percentage of Total Leased Sq. Ft. ............ 7.3% 6.5% 10.0% 4.7% 5.5% 99.8%(6)
Annualized Rent of Expiring Leases(1).......... $4,156,128 $7,457,580 $10,956,012 $3,217,932 $5,010,072 $75,232,092
Percentage of Total Annualized Rent(1)......... 5.52% 9.91% 14.56% 4.28% 6.66% 100%
Number of Leases Expiring...................... 15 20 21 8 15 348
Annualized Rent Per Sq. Ft. of Expiring
Leases(1)..................................... $ 18.23 $ 36.85 $ 34.94 $ 21.62 $ 29.08 --
Weighted Average Company Quoted Rental Rate Per
Sq. Ft.(3) ...................................
</TABLE>
- ---------------
(1) Represents Annualized Rent as of August 31, 1997.
(2) Represents the weighted average of high-rise space, mid-rise space and
low-rise space present in the Property.
(3) Represents average rental rates per square foot quoted by the Company at the
Property as of August 31, 1997.
(4) Includes data with respect to two free-standing restaurants adjacent to this
Property, which account for, in the aggregate, Annualized Rent of $466,000
pursuant to two leases which expire in 2006 ($264,000) and 2007 ($202,000).
(5) Data presented without proration on account of the Company's partial
ownership interest.
(6) Excludes an aggregate of 5,704 square feet (or .18% of total leased square
feet) with respect to four management offices occupied by the Company.
85
<PAGE> 325
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;
United Healthcare's expansion in One Orlando Center from 29,809 square feet to
39,240 square feet; and American Express has expanded in 10050 Corporate Center,
9630 Corporate Center and 10010-10030 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
1994 1995 1996 1997 JUNE 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....................................... 11,199 129,750 297,306 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 and 100 Wall Street
because these Properties 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 due to a 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 have been 74.81%. Accordingly, the Company believes a 70% retention
ratio is more representative of future results.
86
<PAGE> 326
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 and 100 Wall Street Properties which
are being acquired from unaffiliated third parties 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.
87
<PAGE> 327
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 and 100 Wall Street Properties which are being acquired from
unaffiliated third parties 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 at the Properties (other than the Century Plaza
and 100 Wall Street Properties which are being acquired from unaffiliated third
parties concurrently with the consummation of the Offering), which primarily
relate to major capital improvements such as lobby and elevator renovations, and
mechanical equipment improvements (e.g., new elevators and new chillers):
<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............................. -- -- $1.27 --
</TABLE>
- ---------------
(1) Excludes data with respect to the 2800 North Central Property 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, the per square foot amount
is computed by annualizing the capital expenditures amount to a pro forma
full year cost.
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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 AUGUST 31, 1997
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE
TOTAL OF
PORTFOLIO PORTFOLIO
NUMBER OF RENTABLE RENTABLE ANNUALIZED ANNUALIZED
PROPERTIES SQUARE FEET SQUARE FEET RENT RENT
---------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Midtown Manhattan Market
Grand Central North Submarket...... 3 337,412 9.94% $ 8,742,684 11.62%
Times Square Submarket............. 1 443,114 13.06 20,890,380 27.77
Downtown Manhattan Market
Financial Submarket................ 1 458,848 13.52 11,222,292 14.92
Long Island Market
Central Nassau County Submarket.... 1 100,810 2.97 2,457,528 3.27
Metropolitan Orlando, Florida Market
Maitland Center Submarket.......... 4 325,670 9.60 4,949,664 6.58
Southwest Orlando Submarket........ 1 92,828 2.74 298,212 0.40
Downtown Orlando Submarket......... 1 357,184 10.53 8,154,444 10.84
Metropolitan Phoenix, Arizona Market
Northwest Phoenix Submarket........ 6 453,559 13.37 7,548,468 10.03
Uptown Phoenix Submarket........... 2 577,692 17.02 7,699,368 10.23
Metropolitan Tucson, Arizona Market
Tucson East Submarket.............. 1 246,486 7.26 3,269,052 4.35
--
--------- ----- ----------- -----
Total...................... 21 3,393,603 100.00% $75,232,092 100.00%
== ========= ===== =========== =====
</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 $30.60 per square foot in 1993. Since 1993 the average asking
rental rate for Class A space in this submarket has risen to $33.45 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 3,080 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 August 31, 1997, this
Property
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was 100% leased and the Annualized Rent was $47.14 per leased square foot as
compared to an average market rental rate, as of that date, of $38.00 per leased
square foot. Major tenants include D.E. Shaw & Co., L.P., a securities trading
and financial services company (63,871 rentable square feet), Equitable Life
Assurance Society of the United States (44,081 rentable square feet), NEC
Business Communications Systems (East), Inc., an international
telecommunications company (15,200 rentable square feet), U.S. Government,
General Services Agency (11,386 rentable square feet), King & Spalding, a
national law firm (35,574 rentable square feet), Shell Mining Company, a mining
and exploration company (11,858 rentable square feet), and Brown Raysman,
Milstein, Felder & Steiner LLP, a national law firm (38,237 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 10.3% 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 1993 and then moderately increasing to $36.19 per square foot in
1996; Class B average asking rents were $27.63 per square foot in 1992, $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 111,999 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. As
of August 31, 1997, this Property was 94.8% leased and the Annualized Rent was
$23.31 per leased square foot as compared to a market rental rate, as of that
date, 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 August 31,
1997 the building was 100% leased and the Annualized Rent was $27.44 per leased
square foot as compared to a market rental rate, as of that date, 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. As of
August 31, 1997, this Property was 98.9% leased and the Annualized Rent was
$28.18 per leased square foot as compared to a market rental rate, as of that
date, of $25.00 per leased
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square foot. The major tenant is TBWA CHIAT/DAY, INC., a national advertising
firm ("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 Annualized Rent of $26.52 per square foot as
of August 31, 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 the
Company intends to fund through working capital or finance through the Line of
Credit, and 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.
Downtown Manhattan Financial Submarket
The Financial submarket, consisting of the World Trade, Financial and
Insurance districts, contains approximately 97.3 million square feet of office
space and accounts for approximately 76% of the downtown Manhattan office
market's inventory. Approximately 61% of the office space in the Financial
submarket consists of Class A office space (approximately 59.8 million square
feet). According to Landauer, the current direct vacancy rate for Class A office
space in this submarket decreased from 16.4% in 1992 to 14.7% in 1996. The
availability rate for all classes of space in the Financial submarket declined
from 18.5% in 1992 to 17.0% in 1996, with 4.0 million square feet absorbed while
at the same time there were almost no additions to the inventory supply. The
positive impact of supply reductions on rent levels lagged behind absorption; in
1992 average asking rents for Class A space in this submarket were $34.22 before
falling during the mid-1990s to $29.72 per square foot in 1996. The average
asking rental rate for Class A space in this submarket is $29.38 per square foot
as of June 30, 1997. During the first six months of 1997, the Class A direct
vacancy rate in the Financial submarket decreased from 14.7% to 12.2% and there
was a positive net absorption of approximately 1.4 million square feet.
Description of Downtown Manhattan Financial Submarket Property
100 Wall Street (New York, New York)
100 Wall Street is a twenty-nine-story, 458,848 square foot Class A
building located in downtown Manhattan. The building was designed by Emory Roth
& Sons, P.C. and completed in 1969. In 1994 the
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building underwent an extensive modernization program and was the recipient of
the 1994 Builders Owners and Managers Association (BOMA) award for
modernization/restoration. As of August 31, 1997, this Property was 88.7% leased
and the Annualized Rent was $27.57 per leased square foot as compared to an
average market rental rate as of that date of $27.00 per leased square foot.
Major tenants include Credit Suisse, an international bank and financial
institution (95,310 rentable square feet), Waterhouse Securities, Inc., a
national securities firm (94,358 rentable square feet), Swiss American
Corporation, an international bank and financial institution (61,461 rentable
square feet), and MCI Telecommunications Corporation, an international
telecommunications company (34,250 rentable square feet).
Central Nassau County Submarket
The Central Nassau County Submarket contains approximately 1.9 million
square feet of space and accounts for 10.7% 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 six months of 1997, the vacancy rate in this submarket
decreased further to 9.7%, there was net absorption of 130,000 square feet and
average asking rental rates increased to $24.81 per square foot. There was no
new construction in this submarket during the first six months 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 1984. 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 1992 at a cost of
approximately $80,000. As of August 31, 1997, the building was 91.2% leased and
the Annualized Rent was $26.74 per leased square foot as compared to a market
rental rate, as of that date, of $23.00 per leased square foot. The major
tenants are Kraft Foods, Inc., an international manufacturer and distributor of
retail goods (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 Northwest Phoenix 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 six months of 1997, the vacancy rate in this submarket increased to 14.2%,
there was net absorption of 32,000 square feet and asking rents increased to
$14.00 per square foot. There are 108,000 square feet under construction in this
submarket during the first six months 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: 188,614 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
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9630: 113,164 square feet; and (vii) two restaurants: 17,000 square feet). The
Corporate Center Properties are 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 the Corporate Center Properties 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 August 31, 1997, the Corporate Center Properties were leased in
the following percentages: (i) Building 10010-30: 100% leased; (ii) Building
10040: 100.0% 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 Rent and the market rental rate for such period were
as follows: (i) Building 10010-30: $15.62 per leased square foot as compared to
a market rental rate, as of that date, of $17.75 per leased square foot; (ii)
Building 10040: $16.43 per leased square foot as compared to a market rental
rate, as of that date, of $17.75 per leased square foot; (iii) Building 10050:
$16.71 per leased square foot as compared to a market rental rate, as of that
date, of $17.75 per leased square foot; (iv) Building 10210: $15.65 per leased
square foot as compared to a market rental rate, as of that date, of $17.75 per
leased square foot; (v) Building 10220: $17.47 per leased square foot as
compared to a market rental rate, as of that date, of $17.75 per leased square
foot; and (vi) Building 9630: $18.33 per leased square foot as compared to a
market rental rate, as of that date, of $17.75 per leased square foot. The major
tenants at the Corporate Center Properties are as follows: (i) Building
10010-30: American Express which occupies an aggregate of 183,965 square feet;
(ii) Building 10040: Toyota Motor Credit Corporation, a national lending
institution, which occupies an aggregate of 10,384 square feet; (iii) Building
10050: American Express, Insurers Administrative Corporation, a national
insurance company, and Amica Mutual Insurance Company, a national insurance
company, which occupy an aggregate of 11,147, 8,796 and 5,663 square feet,
respectively; (iv) Building 10210: Insurers Administrative Corporation, a
national insurance company, Principal Mutual Life Insurance Company, a national
insurance company, and Gary A. Blake dba Farmers Insurance Exchange, a regional
insurance company, which occupy an aggregate of 21,454, 14,603 and 6,820 square
feet, respectively; (v) Building 10220: U.S. West Communications, Inc., an
international communications conglomerate, which occupies an aggregate of 24,128
square feet; and (vi) Building 9630: American Express, Hartford Fire Insurance
Company, a national insurance company, General Motors Acceptance Corporation dba
GMAC, a national lending institution, Employers Mutual Casualty Company, a
national insurance company, St. Paul Fire & Marine Insurance Company, a national
insurance company, and Crawford & Company, an consulting firm, which occupy an
aggregate of 37,717, 18,615, 23,625, 10,281, 7,271 and 6,068, respectively.
American Express occupies an aggregate of 232,829 square feet in the Corporate
Center Properties 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 Phoenix submarket contains approximately 10.3 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 Phoenix 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 six months of 1997, the vacancy rate in
this submarket decreased further to 11.6%, there was net absorption of 175,000
square feet and asking rents increased to $15.50 per square foot. There was no
new construction in this submarket during the first six months 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, acquired in May 1996. The building also
features an ancillary two-story 7,000 square foot pavilion offering retail space
which is
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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., an
international telecommunications company (22,459 rentable square feet), U.S.
West Communications, Inc., an international communications company (37,486
rentable square feet), Bryan Cave, McPheeters & McRoberts, a national law firm
(31,954 square feet), and Southwest Catholic Health Network, Inc. d/b/a
MercyCare, a regional not-for-profit healthcare organization (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 August
31, 1997, this Property was 91.0% leased and the Annualized Rent was $16.24 per
leased square foot as compared to a market rental rate, as of that date, of
$17.50 per leased square foot.
The 2800 North Central Property is owned in a joint venture with an
affiliate of 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 an affiliate 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 "Lack of Control Over Property Owned
Through Partnerships and Joint Ventures Could Result in Decisions Inconsistent
with the Company's Objectives." In addition, under the 2800 Partnership
Agreement, each of the Company and an affiliate of 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 a
15-story Class B office building located two and one-half miles west of downtown
Phoenix along the Central Avenue corridor. The building was built in 1974 and
contains 219,769 rentable square feet with parking for 600 vehicles. As of
August 31, 1997, this property was 84.2% leased and the Annualized Rent was
$13.02 per leased square foot as compared to a market rental rate as of such
date of $16.50 per leased square foot. The major tenants are Veterans
Administration -- GSA, a U.S. governmental agency (90,873 square feet) and
Arizona Department of Economic Security (58,240 square feet).
Tucson Eastside Submarket
The Tucson Eastside submarket contains approximately 3.5 million square
feet of office space and accounts for approximately 34% of the Metropolitan
Tucson office market's inventory. The direct vacancy rate in the Tucson Eastside
submarket decreased from 20.8% in 1992 to only 10.2% in 1996. This vacancy rate
has further declined to approximately 7.0% as of June 30, 1997. During the
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 Eastside submarket have increased from $13.50 in 1992 to
$17.58 as of June 30, 1997. According to Landauer, there is currently a low
supply of Class A space in the Tucson Eastside submarket which is expected to
remain among the most competitive submarkets in the Tucson office market.
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Description of Tucson Eastside Submarket Property
5151 East Broadway (Tucson, Arizona). 5151 East Broadway is the largest
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 246,486 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 August 31,
1997, this Property was 82.1% leased and the Annualized Rent was $16.15 per
leased square foot as compared to a market rental rate as of that date of $16.50
per leased square foot. The major tenants are The Winters Company, a regional
engineering firm (25,800 rentable square feet), U.S. Home Corporation, a
national home builder (15,358 rentable square feet), Dean Witter Reynolds, Inc.,
an international bank and financial institution (12,900 square feet), Allstate
Insurance Company, a national insurance company (12,524 square feet), Tucson
Realty & Trust Company, a local commercial real estate concern (7,801 rentable
square feet), and Equitable Life, an international insurance and financial
services company (6,730 rentable square feet).
Downtown Orlando Submarket
The Downtown Orlando submarket of the Orlando Metropolitan office market
contains 5.3 million square feet of space and accounts for approximately 25% of
the Orlando Metropolitan 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 six months of 1997, the vacancy
rate in this submarket decreased further to 7.9%, net absorption was
approximately 118,000 square feet and asking rents have increased to $20.35 per
square foot. There was no new construction in this submarket during the six
months 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 Property 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 357,184 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 August 31, 1997, this property was 99.5% leased
and the Annualized Rent was $22.94 per leased square foot as compared to a
market rental rate, as of that date, of $21.00 per leased square foot. The major
tenants at the Property are First Union Bank, a national bank (69,364 square
feet), American Express, an international financial institution (13,387 square
feet), United Healthcare Services, Inc., a national healthcare provider (39,240
square feet)and Hansen, Lind & Meyer, a national architectual and engineering
firm (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
six months of 1997, the vacancy rate in this submarket decreased considerably to
8.0%, while net absorption totaled
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approximately 155,500 square feet. Asking rental rates in the submarket
increased from $13.03 per square foot in 1992 to $14.48 per square foot at June
30, 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 the Company intends to fund with working capital or through borrowings
under the Line of Credit, and which is expected to be completed in January 1998.
The Company believes the capital improvement program will reposition this
Property into a Class A property, attracting higher quality tenants and
corresponding market rental rates. As of August 31, 1997, this Property was
21.0% leased and the Annualized Rent was $15.31 per leased square foot as
compared to a market rental rate, as of that date, of $18.75 per leased square
foot. The Property would be 74.5% leased if all space that was leased as of
August 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., a national
engineering and architectural firm, for 37,888 net rentable square feet, Apollo
Group Inc. a national educational services company for 18,944 net rentable
square feet, and Thruput Systems, Inc., a local computer software developer, for
7,314 net rentable square feet; and expects such tenants to occupy its leased
space during the remainder of 1997.
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 six
months of 1997, the vacancy rate in this submarket increased to 13.4%,
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 December 31, 1996 to $17.58 at June 30, 1997.
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 4, and is in close proximity to downtown
Orlando. The Maitland Forum Property was built in 1985 and contains 266,060
rentable square feet and includes 944 parking spaces. As of August 31, 1997 this
Property was 99.9% leased and the Annualized Rent was $15.57 per leased square
foot as compared to a market rental rate, as of that date, of $17.00 per leased
square foot. The major tenants at this Property are Honor Technologies, Inc., a
national banking services company (59,609 square feet), Florida Power
Corporation, a regional public utility (the utility company) (52,622 rentable
square feet), ITT Educational Services, Inc., a national educational services
company (34,422 rentable square feet), and Reliance Insurance Company, a
national 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 buildings share 249 parking spaces.
Maitland West I is also located within Maitland Center, Central Florida's
largest office complex, off Interstate 4, and is in close proximity to downtown
Orlando. As of August 31, 1997, the Maitland West Properties were leased in the
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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 Rent and the market rate as of that date were as
follows: (i) 2601 Maitland Center Parkway: $15.23 per leased square foot as
compared to a market rental rate, as of that date, 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, as of that date, of $15.50 per leased square
foot; and (iii) 2605 Maitland Center Parkway: $13.96 per leased square foot as
compared to a market rental rate, as of that date, 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, a local insurance company, which
occupies an aggregate of 10,342 square feet; (ii) 2603 Maitland Center Parkway:
CCL Consultants, Inc., a regional consulting practice, and Blazer Financial
Services, Inc., a national financial services company, which occupy an aggregate
of 5,693 and 3,050 square feet, respectively; and (iii) 2605 Maitland Center
Parkway: Health Plans of America, Inc., a regional health insurance company,
Community Care Network, Inc., a national health insurance company, FJW
Enterprises Inc., a regional restaurant chain, Systems One Services, Inc., a
national personnel services firm and General Electric Corporation, an
international financial services company, 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, which the Company intends to fund with working capital or through
project financing. 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, which
the Company intends to fund with working capital or through project financing.
There can be no assurance that such development will take place.
LAND PARCEL OPTIONS
Phoenix Land Parcel. The Company will acquire, at no cost, an option held
by certain Primary Contributors that will provide the Company with the right to
acquire from an unaffiliated third party for approximately $10.3 million,
approximately 43 acres of undeveloped land in Phoenix that can support 1.0
million square feet of development. The site is located adjacent to the Black
Canyon which is the only interstate freeway providing north access out of
Phoenix. This freeway, when fully completed, together with an adjoining
interstate, will form a complete loop around Phoenix. Site plans call for up to
1 million square feet of office space development. Within a 30-minute drive from
the site is the Deer Valley Airport (private planes) and the Sky Harbor
International Airport. As of September 30, 1997, the Primary Contributors had
paid approximately $200,000 in exchange for receipt of the option and the
Company had advanced approximately $450,000 for preliminary development work and
option extension fees relating to this land. The right to acquire the land
expires on October 31, 1997, subject to one 30-day extension that requires the
payment of a $100,000 extension fee. Pursuant to the Company's Bylaws, the
Company is authorized to exercise this option only if the Independent Directors
unanimously approve the exercise of such option even if the Independent
Directors constitute less than a quorum.
One Orlando Center Land Parcel. The Company holds a five-year option from
certain Primary Contributors to acquire certain additional properties and
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,
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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
appraised value of the land as of May 9, 1997), which equates to approximately
$4.75 per buildable square foot. Pursuant to the Company's Bylaws, the Company
is authorized to exercise this option only if (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 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.
The exercise of these options by the Company is subject to a number of
contingencies, including the completion of due diligence, completion of the
Company's analysis of the development opportunity and the receipt of appropriate
Board approval and, therefore, are not deemed probable.
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 August 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 (which equates to a purchase price of approximately $13
million as of August 31, 1997).
120 Mineola Boulevard. The Company is the tenant under a lease for a
parking garage. The lease expires in October 2013, 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
The Tower 45, One Orlando Center and 100 Wall Street Properties
(collectively, the "Significant Properties") are deemed "significant" because
they each accounted for more than 10% of the Company's gross revenues for its
last fiscal year and the book value of such Significant Properties amounted to
10% or more of the Company's total assets for such period. For federal income
tax purposes, the basis, net of accumulated depreciation, in the Tower 45 and
One Orlando Center Properties aggregated approximately $133 million at June 30,
1997. Similar data for the 100 Wall Street Property is not available because the
Company did not own the Property during that period (and will not own it until
the closing of the Offering). The real property associated with those
Significant 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. The 1996 annual real estate taxes
paid on the 100 Wall Street Property were approximately $2.35 million. The New
York City real estate tax rate is $10.402 per each $100 of assessed value.
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OCCUPANCY, EFFECTIVE RENT AND OTHER DATA 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, NET 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) 68% 75% 99.1% 99.3% (1) (1) $19.50 $20.02 $19.95
100 Wall Street............ 82.2% 70.9% 80.1% 82.9% 95.5% (1) (1) (1) (1) (1)
</TABLE>
- ---------------
(1) Data not available because the Company did not own the Property during the
applicable period and the previous unaffiliated owners of such Properties have
advised the Company that such data is unavailable.
As of August 31, 1997: (i) one tenant occupied 10% or more of the rentable
square footage at the Tower 45 Property (D.E. Shaw & Co., L.P.); (ii) two
tenants each occupied 10% or more of the rentable square footage at the One
Orlando Center Property (First Union Bank and United Healthcare Services, Inc.);
and (iii) three tenants each occupied 10% or more of the rentable square feet at
the 100 Wall Street Property (Credit Suisse, Waterhouse Securities, Inc., and
Swiss American Corporation). The loss of one or more of these significant
tenants at one of these Properties could have a material adverse effect on the
financial performance of such Property. Further information with respect to
significant tenants at the Significant Properties and the markets in which they
are located is set forth under "-- Submarket and Property Information -- Times
Square Submarket and -- Description of Times Square Submarket Property (Tower
45), -- Downtown Orlando Submarket and -- Description of Downtown Orlando
Submarket Property (One Orlando Center), and -- Downtown Manhattan Financial
Submarket and -- Description of Downtown Manhattan Financial Submarket Property
(100 Wall Street)." See also "Risk Factors -- Impact of Competition on Occupancy
Levels, Rent Charged, Acquisitions and Management Services."
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, consist 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 of their business time and
attention 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 $113.7 million
(including its pro rata share of Joint Venture Debt), representing approximately
20.7% of the Company's Total Market Capitalization. Approximately $54.0 million
of the Mortgage Debt will consist 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
will consist of prior indebtedness of the Tower Predecessor including $35.0
million relating to the Tower 45 Property. The Company will have the right to
prepay, commencing 40 days following the Offering and prior to maturity, the
$35.0 million of mortgage indebtedness that will be collateralized by the Tower
45 Property following the consummation of the Offering. If the Company
determines to prepay the loan prior to maturity, the Company is positioned to
finance such prepayment by drawing upon the remaining $35.0 million of available
borrowing capacity 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 84
One Orlando Center, 286, 290
and 292 Madison Avenue
Properties................. 54,000 (2) None (3) (4) 3,758
Tower 45(5).................. 35,000 LIBOR + None December 31, 1998 2,436
1.75%
2800 North Central(6)........ 2,658 9.41% None May 31, 1999(7) $ 250
----------- ---- ----------
Total/Weighted
Average........... $113,658 7.14% October 1, 2003(8) $ 8,114
=========== ==== ==========
</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 6.06% as of October 9, 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 $107
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. If the Term Loan is so used to prepay the
Tower 45 loan, the Tower 45 Property will secure the Term Loan and the three
Madison Avenue Properties will become unencumbered.
(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 $54.0 million Term
Loan 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.
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LINE OF CREDIT
Neither the Company's Bylaws nor its Charter will limit the amount of
indebtedness the Company may incur. To ensure the Company has sufficient
liquidity to conduct its operations, including to finance its acquisition of
additional office properties, to refinance existing indebtedness and for general
working capital requirements, the Company has obtained a commitment from Merrill
Lynch Capital Corporation for the $200 million Line of Credit. The Line of
Credit will be used primarily to finance the acquisition of, and investment in,
office properties, to refinance existing indebtedness, and for general working
capital needs. The Line of Credit will be unsecured and will have a three-year
term which will commence upon or shortly after the closing of the Offering.
While the Line of Credit permits borrowings up to $200 million, the Operating
Partnership's total outstanding indebtedness including aggregate advances under
the Line of Credit, is expected to be limited to 55% of the Total Value (as
defined below) during the first year of the term of the Line of Credit and 50%
of the Total Value thereafter. "Total Value" shall mean Cash Flow (as defined
below) capitalized at 9.5% plus (i) 100% of out-of-pocket costs for assets under
development (subject to a maximum of 10% of Total Value), and (ii) 100% of cash
and cash equivalents (excluding restricted deposits). "Cash Flow" shall mean the
sum of (a) Funds from Operations, (adjusted for non-recurring items and non-cash
revenue, including, without limitation, the effect of straight-lining the rents
pursuant to GAAP) and (b) interest expense. Outside of the Line of Credit, the
Company and the Operating Partnership may not incur secured indebtedness which
exceeds 40% of the Total Value during the first year of the term of the Line of
Credit and 35% thereafter. Recourse indebtedness of the Company and the
Operating Partnership, exclusive of the Line of Credit, shall not exceed 5% of
Total Value. Neither the Company nor the Operating Partnership shall make any
distributions in a quarter which, when added to all distributions made during
the immediately preceding three quarters exceeds 95% of Funds from Operations.
Borrowings under the Line of Credit are expected to bear interest at a variable
rate equal to (subject to certain exceptions): (x) LIBOR plus 125 basis points
if the Operating Partnership's total outstanding indebtedness is less than 30%
of Total Value; (y) LIBOR plus 137.5 basis points if the Operating Partnership's
total outstanding indebtedness is greater than or equal to 30% of Total Value
but less than 45% of Total Value; and (z) LIBOR plus 162.5 basis points if the
Operating Partnership's total outstanding indebtedness is greater than or equal
to 45% of Total Value but less than 55% of Total Value; in each case, calculated
based on interest periods of one, two, three or six months at the option of the
Operating Partnership. Economic conditions could result in higher interest
rates, which could increase debt service requirements on borrowings under the
Line of Credit and which could, in turn, reduce the amount of Cash Available for
Distribution. See "Risk Factors -- Changes in Policies, Such as the Company's
Debt Policy, without Stockholder Approval Could Adversely Affect the Company."
The Company will pay a loan fee of approximately $1.0 million upon the closing
of the Line of Credit. The closing of the Line of Credit is subject to the
satisfaction of customary conditions, including the negotiation and execution of
customary loan documents. Accordingly, there can be no assurance that the Line
of Credit will close on the terms set forth in its commitment with Merrill Lynch
Capital Corporation.
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 -- The Company's
Performance and Value are Subject to Risks Associated with the Real Estate
Industry -- Uninsured Losses Could Adversely Affect the Company's Cash Flow."
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
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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 -- The Company's Performance and Value are Subject to Risks Associated
with the Real Estate Industry -- Liability for Environmental Matters Could
Adversely Affect the Company's Financial Condition."
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 its
major competitors are local real estate companies in its markets that specialize
in the redevelopment and development of office buildings and (i) in the New York
City office market; SL Green Realty Corp., (ii) in the Metropolitan Orlando
office market; Highwoods Properties, Inc., and (iii) in the Metropolitan Phoenix
office market; Prentiss Properties Trust and CarrAmerica Realty Corporation. The
Company believes that the Offering, the Line of Credit and its access as a
public company to 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 70 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. Pursuant to the Charter, upon election of the director nominees, there
will be a majority of directors who are Independent Directors. Moreover, 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, Chief
Financial Officer and Treasurer
Eric S. Reimer...................... 38 Vice President -- Leasing
Reuben Friedberg.................... 71 Vice President -- Finance
Stephen B. Siegel................... 53 Director Nominee 2000
Esko I. Korhonen.................... 42 Director Nominee 1998(1)
Robert M. Adams..................... 56 Director Nominee 1998
Richard M. Wisely................... 52 Director Nominee 1998
Lester S. Garfinkel................. 43 Director 1999
</TABLE>
- ---------------
(1) Mr. Korhonen agreed to serve as a director of the Company at the same time
that Carlyle agreed to purchase $10.0 million in Common Stock pursuant to
the Concurrent Private Placements. The Company does not have any arrangement
to nominate or elect Mr. Korhonen as a director in the future.
The following is a biographical summary of each of the directors, director
nominees and executive officers of the Company:
LAWRENCE H. FELDMAN. Mr. Feldman serves as Chairman of the Board, Chief
Executive Officer and President of the Company. Since March 1990, Mr. Feldman
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, the Real Estate Board of New York and NAREIT. 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. Since December 1995, Mr. Cox 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 where his main responsibilities included supervising all of Tower
Equities's construction
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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 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, Chief
Financial Officer and Treasurer of the Company. Since February 1996, 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 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 Realty Fund, 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. Since 1987, 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. Since 1992, 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.
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 Wharton Business School's Real Estate Center and New York University's
Real Estate Council, and is a director of Liberty Property Trust.
ESKO I. KORHONEN. Mr. Korhonen is a principal of Carlyle Realty, L.P., an
affiliate of Carlyle, a Washington, D.C. based merchant banking firm, and since
April, 1995, he has been part of a group that is responsible for coordinating
the firm's real estate acquisitions. From 1991 to April, 1995, Mr. Korhonen was
Vice President of ING Real Estate, a subsidiary of the Netherlands based ING
Groep N.V., a financial services company ("ING"), where he directed acquisition
and asset management activities for ING's North American real estate portfolio.
From 1988 to 1991, Mr. Korhonen was a partner and regional manager at Richard
Ellis Inc., an investment advisory firm, where he acted as a principal-side
advisor to foreign and domestic institutional investors for the acquisition and
asset management of North American real estate. Mr. Korhonen began his real
estate career in 1983 as a developer with the Trammell Crow Company in Houston,
Texas. Mr. Korhonen graduated in 1977 with a B.A. from Colgate University and an
M.B.A. in 1983 from The J.L. Kellogg Graduate School of Business at Northwestern
University.
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
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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.
RICHARD M. WISELY. Mr. Wisely currently serves as Chairman of the Board
and Chief Executive Officer of LungCheck Inc., a highly specialized diagnostic
laboratory and lung cancer research facility that he co-founded in 1996. From
1990 until his retirement in August 1995, Mr. Wisely served as Sr. Vice
President and Chief Operating Officer of Rexall Sundown, Inc., a publicly-traded
vitamin and over-the-counter pharmaceutical manufacturer. Prior to joining
Rexall Sundown as the Sr. Vice President of Operations in 1985, Mr. Wisely had
spent 17 years with Dart Industries, principally with the former Rexall Drug
Company of St. Louis; his last position there was Vice President of Operations.
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. 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.
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. Since December 1995, 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 since 1987. 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 (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
served as Controller of Tower Equities since October 1995. 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.
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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.
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 initially 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
Placements, 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.
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EXECUTIVE COMPENSATION
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 the four other
most highly compensated executive officers of the Company (the "Named Executive
Officers"). Information for 1996 is not presented because the Company had no
operations during such period and the Named Executive Officers were employed by
other affiliated entities, as well as Tower Equities and certain members of the
Tower Predecessor.
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
Chairman of the Board, Chief Executive Officer and
President................................................. $175,000 201,000
Robert L. Cox
Executive Vice President, Chief Operating Officer......... $150,000 201,000
Joseph D. Kasman
Senior Vice President, Chief Financial Officer............ $150,000 110,000
Eric S. Reimer
Vice President -- Leasing................................. $150,000 68,000
Reuben Friedberg
Vice President -- Finance................................. $107,000 31,000
</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
875,000 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.
OPTION GRANTS IN FISCAL YEAR 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES PERCENT OF TOTAL COMMON SHARE PRICE
UNDERLYING OPTIONS TO BE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE PRICE OPTION TERM(1)
TO BE EMPLOYEES IN PER COMMON ----------------------
NAME GRANTED(2) FISCAL YEAR SHARE(3) EXPIRATION DATE 5%(4) 10%(5)
- ---------------------- ---------- ---------------- -------------- ------------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Lawrence H. Feldman... 201,000 23.0% $26.00 (6) $3,286,350 $8,329,440
Robert L. Cox......... 201,000 23.0% $26.00 (6) $3,286,350 $8,329,440
Joseph D. Kasman...... 110,000 12.6% $26.00 (6) $1,798,500 $4,558,400
Eric S. Reimer........ 68,000 7.8% $26.00 (6) $1,111,800 $2,817,920
Reuben Friedberg...... 31,000 3.5% $26.00 (6) $ 506,850 $1,284,640
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission,
these amounts are the hypothetical gains or "option spreads" that would
exist for the respective options based on assumed rates of annual compound
share price appreciation of 5% and 10% from the date the options were
granted over the full option term. No gain to the optionee is possible
without an increase in the price of the Common Stock, which would benefit
all stockholders.
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<PAGE> 347
(2) All options are granted at the fair market value of the shares of Common
Stock at the date of grant. Options granted are for a term of not more than
ten years from the date of grant and vest in three equal annual installments
(rounded to the nearest whole share of Common Stock) over three years.
(3) Based on the assumed Offering Price. The exercise price per share will be
equal to the Offering Price.
(4) An annual compound share price appreciation of 5% from the Offering price of
$26.00 per Common Share yields a price of $42.35 per Common Share.
(5) An annual compound share price appreciation of 10% from the Offering price
of $26.00 per Common Share yields a price of $67.44 per Common Share.
(6) The expiration date of the options is the ten year anniversary of the
closing of the Offering.
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 automatic one-year extensions, 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 in
the case of Mr. Cox, to automatic one-year extensions, 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, 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 each
case, payable within 30 days of each such officer's termination. In the case of
an officer's death or disability, salary is continued for a twelve-month period.
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. Pursuant to the employment agreements, such
options are subject to vesting, but will vest upon an officer's death or
disability or a change in control of the Company.
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, renovation 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 Period"), unless such termination was without cause or was made
by the officer with good reason. In the event of the termination of Messrs.
Feldman, Cox, or Kasman's employment by the Company without cause, or by the
officer for good reason, 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. See "Risk
Factors -- The Company Relies on Key Personnel Whose Continued Service is Not
Guaranteed."
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 Compen-
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sation 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.
Certain Federal Income Tax Consequences Relating to Options. In general, a
Participant will not recognize taxable income upon the grant or exercise of an
Incentive Stock Option ("ISO"). However, upon the exercise of an ISO, the excess
of the fair market value of the shares received on the date of exercise over the
exercise price of the shares will be treated as an adjustment to alternative
minimum taxable income. When a Participant disposes of shares acquired by
exercise of an ISO, the Participant's gain (the difference between the sale
proceeds and the price paid by the Participant for the shares) upon the
disposition will be taxed as capital gain, provided the Participant (i) does not
dispose of the shares within two years after the date of grant nor within one
year after the date of exercise, and (ii) exercises the option while an employee
of the Company or of an affiliate of the Company or within three months after
termination of employment for reasons other than death or disability. If the
first condition is not met, the Participant generally will realize ordinary
income in the year of the disqualifying disposition. If the second condition is
not met, the Participant generally will recognize ordinary income upon exercise
of the option.
In general, a Participant who receives a nonqualified stock option will
recognize no income at the time of the grant of the option. Upon exercise of a
nonqualified stock option, a Participant will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date of
exercise over the exercise price of the option. Special timing rules may apply
to a Participant who is subject to Section 16(a) of the Exchange Act.
The Company will be entitled to claim a federal income tax deduction on
account of the exercise of a nonqualified option. The amount of the deduction
will be equal to the ordinary income recognized by the Participant. The employer
will not be entitled to a federal income tax deduction on account of the grant
of any
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option or the exercise of an ISO. The employer may claim a federal income tax
deduction on account of certain disqualifying dispositions of Common Stock
acquired upon the exercise of an ISO.
Section 162(m) of the Code places a limitation of $1,000,000 on the amount
of compensation payable to each of the named executive officers that the Company
may deduct for federal income tax purposes. The limit does not apply to certain
performance-based compensation paid under a plan that meets the requirements of
the Code and regulations promulgated thereunder. While the 1997 Plan generally
complies with the requirements for performance-based compensation, stock awards
granted under the 1997 Plan will not satisfy those requirements.
Certain Federal Income Tax Consequences Relating to Options. In general, a
Participant will not recognize taxable income upon the grant or exercise of an
Incentive Stock Option ("ISO"). However, upon the exercise of an ISO, the excess
of the fair market value of the shares received on the date of exercise over the
exercise price of the shares will be treated as an adjustment to alternative
minimum taxable income. When a Participant disposes of shares acquired by
exercise of an ISO, the Participant's gain (the difference between the sale
proceeds and the price paid by the Participant for the shares) upon the
disposition will be taxed as capital gain, provided the Participant (i) does not
dispose of the shares within two years after the date of grant nor within one
year after the date of exercise, and (ii) exercises the option while an employee
of the Company or of an affiliate of the Company or within three months after
termination of employment for reasons other than death or disability. If the
first condition is not met, the Participant generally will realize ordinary
income in the year of the disqualifying disposition. If the second condition is
not met, the Participant generally will recognize ordinary income upon exercise
of the option.
In general, a Participant who receives a nonqualified stock option will
recognize no income at the time of the grant of the option. Upon exercise of a
nonqualified stock option, a Participant will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date of
exercise over the exercise price of the option. Special timing rules may apply
to a Participant who is subject to Section 16(a) of the Exchange Act.
The Company will be entitled to claim a federal income tax deduction on
account of the exercise of a nonqualified option. The amount of the deduction
will be equal to the ordinary income recognized by the Participant. The employer
will not be entitled to a federal income tax deduction on account of the grant
of any option or the exercise of an ISO. The employer may claim a federal income
tax deduction on account of certain disqualifying dispositions of Common Stock
acquired upon the exercise of an ISO.
Section 162(m) of the Code places a limitation of $1,000,000 on the amount
of compensation payable to each of the named executive officers that the Company
may deduct for federal income tax purposes. The limit does not apply to certain
performance-based compensation paid under a plan that meets the requirements of
the Code and regulations promulgated thereunder. While the 1997 Plan generally
complies with the requirements for performance-based compensation, stock awards
granted under the 1997 Plan will not satisfy those requirements.
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 the closing date of the Offering (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 commencement of the
term of office of such Non-Founding Director. 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
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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.
Certain Federal Income Tax Consequences Relating to Options. Generally, an
eligible director does not recognize any taxable income, and the Company is not
entitled to a deduction upon the grant of an option. Upon the exercise of an
option, the eligible director recognizes ordinary income equal to the excess of
the fair market value of the shares acquired over the option exercise price, if
any. Special rules may apply as a result of Section 16 of the Exchange Act. The
Company is generally entitled to a deduction equal to the compensation taxable
to the eligible director as ordinary income. Eligible directors may be subject
to backup withholding requirements for federal income tax.
Certain Federal Income Tax Consequences Relating to Options. Generally, an
eligible director does not recognize any taxable income, and the Company is not
entitled to a deduction upon the grant of an option. Upon the exercise of an
option, the eligible director recognizes ordinary income equal to the excess of
the fair market value of the shares acquired over the option exercise price, if
any. Special rules may apply as a result of Section 16 of the Exchange Act. The
Company is generally entitled to a deduction equal to the compensation taxable
to the eligible director as ordinary income. Eligible directors may be subject
to backup withholding requirements for federal income tax.
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
officer 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,
against any claim or liability to which he may become subject by reason of such
status. 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
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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 permits a corporation to advance reasonable expenses to a
director or officer upon the corporation's receipt of (a) a written affirmation
by the director or officer of his good faith belief that he has met the standard
of conduct necessary for indemnification by the corporation and (b) a written
undertaking by or on his behalf to repay the amount paid or reimbursed by the
corporation if it shall ultimately be determined that the standard of conduct
was not met. 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 21 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 Placements, 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 12,015,000 shares of Common Stock in the Offering
and 1,153,845 shares of Common Stock in the Concurrent Private Placements
(769,230 to the Morgan Stanley Investors and 384,615 to the Carlyle
Funds). All the net proceeds to the Company from the Offering and the
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<PAGE> 352
Concurrent Private Placements 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 90.5%. 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 89.5% 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 1,128,160 shares of restricted Common Stock,
1,583,640 OP Units, approximately $118.7 million in cash, and the
assumption of approximately $244.6 million in 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 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 1,509,490 OP Units (valued at
approximately $39.2 million based on the Offering Price); and
- The Company will acquire from persons other than the Primary
Contributors, directly or indirectly, debt, equity and fee interests
in the Properties (including an interest in the Maitland Forum ground
lease) in exchange for 1,128,160 shares of restricted Common Stock
(valued at approximately $29.3 million based on the Offering Price),
74,150 OP Units (valued at approximately $1.9 million based on the
Offering Price) and $118.7 million in cash.
- The Operating Partnership is expected to enter into the $107 million
seven-year Term Loan with Merrill Lynch Credit Corporation and will
borrow approximately $54 million under such facility at the closing of
the Offering.
- The Operating Partnership will utilize $246.5 million of the net proceeds
of the Offering, the Concurrent Private Placements and the Term Loan 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 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 common stock and 5% of the voting
common 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 886,200 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 of the
Excluded Properties are controlled by certain Primary Contributors and
have non-cancellable management contracts (except upon a sale of such
property). 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.
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- The Operating Partnership will acquire, at no cost, an option held by
certain Primary Contributors that will provide the Operating Partnership
with the right to acquire from an unaffiliated third party for
approximately $10.3 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. In addition, the Operating
Partnership will acquire from certain Primary Contributors for no
additional consideration an option to acquire for approximately $3.8
million (approximately $4.75 per buildable square foot) (75% of the
appraised value of the land as of May 9, 1997) the One Orlando Center
Land Parcel that can support approximately 800,000 square feet of
development. See "The Properties -- Land Parcel Options."
- The Company will establish the three-year $200 million unsecured
revolving Line of Credit at or shortly after the closing of the Offering,
which will be used primarily to finance the acquisition of, and
investment in, office properties, to refinance existing indebtedness, and
for general working capital needs.
- The Company will pay to an affiliate of Carlyle $925,000 in consideration
of obtaining the consent to the transfer of an interest in the 2800 North
Central Avenue Property to the Company.
- 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 90.5% 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 Placements, purchasers of Common Stock in
the Offering will hold approximately 71.9% of the equity of the Company, the
purchasers of Common Stock in the Concurrent Private Placements (the Morgan
Stanley Investors and the Carlyle Funds) will hold approximately 6.9% of the
equity of the Company, recipients of other restricted shares of Common Stock
will hold approximately 11.7% of the equity of the Company, the Primary
Contributors will directly or indirectly hold approximately 9.0% of the
consolidated equity of the Company, and the other Continuing Investors will
directly or indirectly hold approximately .5% 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; Substantial Benefits to Related Parties," "-- Benefits to Related
Parties," "Principal Stockholders," and "Partnership Agreement -- Exchange
Rights."
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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 approximately 6.5% 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 and Continuing Investors 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.
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 1,509,490 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 manage-
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ment and leasing businesses, in connection with the Formation
Transactions. These OP Units (representing approximately 9.0% of the
equity interests in the Company on a consolidated basis) will have a
total value of approximately $39.2 million based on the Offering Price,
compared to a deficiency in net tangible book value of the assets
contributed to the Operating Partnership by the Primary Contributors of
approximately $75.5 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 Merrill Lynch, Pierce, Fenner &
Smith Incorporated. 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.
- Messrs. Feldman and Cox will each serve as a director and officer of the
Company, Messrs. Adams and Wisely will serve as directors 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, options to purchase
an aggregate of 711,000 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. Certain of 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. In addition, the aggregate liability of those Primary
Contributors to the Company under the applicable supplemental representations,
warranties and indemnity agreement relating to the Properties is limited to the
initial value of the OP Units received by them in the Formation Transactions
(approximately $36.9 million). These representations and warranties will survive
the closing of the Offering for a period of one year. See "Risk
Factors -- Conflicts of Interest in the Business of the Company -- Possible Less
Vigorous Enforcement of Terms of Contribution and Other Agreements by the
Company."
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CERTAIN RELATIONSHIPS AND TRANSACTIONS
FORMATION TRANSACTIONS
The terms of the acquisition of interests in the Properties and in Tower
Equities and Properties Atlantic 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 received from
the Company consulting fees of approximately $132,000 for the year ended
December 31, 1996 and fees of approximately $66,000 through March 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; Substantial
Benefits to Related Parties," "Formation and Structure of the
Company -- Benefits to Related Parties" and "Partnership Agreement -- Exchange
Rights."
REGISTRATION RIGHTS
For a description of certain registration rights held by the Primary
Contributors, the Morgan Stanley Investors, and the Carlyle Funds, 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 201,000, 201,000 and 110,000 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 of the Excluded Properties are controlled by certain Primary
Contributors and have non-cancellable management contracts (except upon the sale
of such property). 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."
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EXECUTIVE OFFICER AND DIRECTOR DISTRIBUTIONS AND FEES
The executive officers and directors of the Company 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 $24,044,800 of restricted Common Stock and $23,120,000 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................................ 881,025 5.8% 5.3%
Robert L. Cox...................................... 106,723 * *
Joseph D. Kasman................................... 109,421 * *
Eric S. Reimer..................................... 78,722 * *
Reuben Friedberg................................... 30,119 * *
Lester S. Garfinkel(4)............................. -- -- --
Robert M. Adams(5)................................. 53,993 * *
Stephen B. Siegel(6)............................... -- -- --
Richard M. Wisely(7)............................... 38,000 * *
Esko I. Korhonen(8)(9)............................. 384,615 2.5 2.3
DRA Opportunity Fund(10)........................... 465,400 3.1 2.8
Office Invest Sub LLC(11).......................... 459,400 3.0 2.8
Morgan Stanley Asset Management Inc.(12)........... 1,655,430 10.9 9.9
All executive officers, directors and director
nominees as a group (10 persons)................. 1,682,618 11.1% 10.1%
</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 15,118,205 shares of Common Stock outstanding immediately following
the Offering and the Concurrent Private Placements. 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 16,701,845 shares of Common Stock and OP Units
outstanding immediately following the Offering (15,118,205 shares of Common
Stock and 1,583,640 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 Insignia/Edward S. Gordon Co., 200
Park Avenue, 19th Floor, New York, New York 10166.
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(7) The business address of Mr. Wisely is LungCheck, Inc., 8255 East Raintree
Drive, Scottsdale, Arizona, 85260-2515.
(8) The business address of Mr. Korhonen is The Carlyle Group, 1001
Pennsylvania Avenue N.W., Suite 220 South, Washington, D.C. 20004-2505.
(9) Includes 384,615 shares of Common Stock to be purchased by the Carlyle
Funds in the Concurrent Private Placements, which may be deemed
beneficially to be owned by Mr. Korhonen as he is a principal of Carlyle
Realty, L.P., an affiliate of Carlyle.
(10) The business address of DRA Opportunity Fund is 1180 Avenue of the
Americas, New York, New York 10036.
(11) The business address of Office Invest Sub LLC is c/o DRA Advisors, Inc.,
1180 Avenue of the Americas, New York, New York 10036.
(12) 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 beneficially to own the shares of Common Stock
beneficially owned by the Morgan Stanley 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. MSAM disclaims
beneficial ownership of such shares of Common Stock.
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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 150,000,000
shares of Common Stock, par value $0.01 per share, and 50,000,000 shares of
preferred stock, $0.01 par value per share (the "Preferred Stock"). Upon
completion of the Offering, 15,118,205 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 provides
that, except as specifically provided otherwise in the Charter, any action
requiring a greater number of affirmative votes of stockholders shall be
effective and valid if approved by the affirmative vote of all of the votes
entitled to be cast on the matter. The Charter provides that the provisions on
restrictions on transfers will not be amended, altered, changed or repealed
without the approval of the Board of Directors (including the affirmative vote
of all Independent Directors) and the holders of not less than two-thirds of the
outstanding shares of stock of the Company entitled to vote generally in the
election of directors, voting together as a single class. Moreover, no amendment
to the Charter may be made unless the same is approved by the Board of Directors
in accordance with Section 2-604 of the MGCL and the Charter is thereafter
approved by the affirmative vote of the holders of two-thirds of the outstanding
shares of Capital Stock of the Company entitled to vote on such amendment,
voting together as a single class, and the affirmative vote of the holders of
two-thirds of the outstanding shares of each class entitled to vote thereon as a
class (except to amend any provision of the Charter relating to the
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authority of the Company to issue shares of its Capital Stock, only a majority,
rather than two-thirds, is needed).
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 from time to time into one or more classes or
series, as authorized by the Board of Directors. Prior to issuance of shares of
each series, the Board is required by the MGCL and the Charter of the Company to
set, subject to the provisions of the Charter regarding the restrictions on
transfer of stock, the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each such series. Thus,
the Board could authorize the issuance of shares of Preferred Stock with terms
and conditions which could have the effect of delaying, deferring or preventing
a 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") (subject to the Look-Through Ownership Limitation
applicable to certain stockholders, as described below). Certain types of
entities, such as pension trusts qualifying under section 401(a) of the Code,
mutual funds qualifying as regulated investment companies under section 851 of
the Code, and corporations, will be looked through for purposes of the "closely
held" test in section 856(h) of the Code. Subject to certain limited exceptions,
the Charter will allow such an entity under the Look-Through Ownership
Limitation to own up to 15.0% of the shares of any class or series of the
Company's stock, provided that such ownership does not cause any
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individual beneficial owner of such entity to exceed the Ownership Limitation or
otherwise result in a violation of the tests described in clauses (ii), (iii)
and (iv) of the second sentence of the succeeding paragraph.
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 or the Look-Through Ownership Limitation, if
applicable, (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 real property of the Company, 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 Limitation (or the Look-Through Ownership
Limitation, if applicable). 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 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. In
addition, the Board of Directors may give a Look-Through Entity an exception to
the Look-Through Ownership Limit if the Look-Through Entity satisfies the Board
of Directors that such share ownership will not adversely affect the Company's
ability to qualify as a REIT.
If, notwithstanding the restrictions described above, and subject to
certain exceptions described herein, any purported transfer of Common Stock that
would (i) result in any person owning, directly or indirectly, shares of Common
Stock in excess of the Ownership Limitation (or the Look-Through Ownership
Limitation, if applicable), (ii) result in the shares of Common Stock being
owned by fewer than 100 persons (determined without reference to any rules of
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, such shares
will be designated as "Shares-in-Trust" and will be transferred automatically to
a trust (a "Trust"), effective on the business day before the purported transfer
of such shares of Common Stock. The record holder of the shares of Common Stock
that are designated as Shares-in-Trust (the "Prohibited Owner") will be required
to submit such number of shares of Common 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
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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 irreversible 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 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
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(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 or the
Look-Through Ownership Limit, as applicable.
The Ownership Limitation (or the Look-Through Ownership Limitation, as
applicable) generally will not apply to the acquisition of shares of capital
stock by an underwriter that participates in a public offering of such shares.
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 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. Any individual so
elected as director will hold office until the next annual meeting of
stockholders and until his successor is elected and qualifies.
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 only upon the recommendation of
the Board of Directors in accordance with Section 2-604 of the MGCL and the
approval of the stockholders. In addition to any other vote of the stockholders
that is required by applicable law, the affirmative vote of two-thirds of the
outstanding shares of the capital stock of the Company entitled to vote on such
amendment, voting together as a single class, and the affirmative vote of
two-thirds of the outstanding shares of each class entitled to vote thereon as a
class, is required to amend any provision of the Charter (except to amend any
provision of the Charter relating to the authority of the Company to issue
shares of its capital stock, only a majority rather than two-thirds is
required).
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 two-thirds of all of the
votes entitled to be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (a) with respect to an annual
meeting of stockholders, nominations of persons for election to the Board of
Directors and the proposal of business to be considered by stockholders may be
made only (i) pursuant to the Company's notice of the meeting; (ii) by 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 25% of all votes entitled to be cast at the meeting.
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.
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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. 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").
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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 or other entities engaged in real
estate activities. In addition, the Company may, but does not presently intend
to, invest in securities of other issuers, including for the purpose of
exercising control over such entities. See "-- Policies with Respect to Other
Activities."
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 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 20.7% (19.1% if
the Underwriters' over-allotment 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.
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.
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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, Such as
the Company's Debt Policy, Without Stockholder Approval Could Adversely Affect
the Company" 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 or an affiliate of the Company). 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 of each
class 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 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 a director or officer 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 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
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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 Placements, 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 15,118,205 shares of Common Stock issued and outstanding
(16,920,455 shares if the Underwriters' over-allotment option is exercised in
full). In addition, (i) 1,583,640 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
1,949,360 shares of Common Stock issued in the Formation Transactions, the
1,153,845 shares of Common Stock issued in the Concurrent Private Placements and
the 1,583,640 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 executive 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 acquired at the time of the
Offering 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 and the Carlyle Funds, 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 and Restricted Stock Plans
and -- Compensation of Directors." The Company intends to issue options to
purchase approximately 975,000 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 twelve-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
Placements 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
agreements 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 and Continuing Investors, 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) alter the rights of a partner to receive certain distributions
or allocations.
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
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856(i) of the Code; or (iii) the transfer occurs in connection with a
transaction which includes a merger, 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 Placements, in partial
consideration of which it will receive an approximate 1.0% general partner
interest and an approximate 89.5% 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
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Partnership may not satisfy a Limited Partner's Exchange Right if and to the
extent that the delivery of 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 approximately 1,583,640. 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 Placements 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
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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 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. The Taxpayer Relief Act
of 1997 (the "1997 Act") was enacted on August 5, 1997. The 1997 Act contains
many provisions which generally make it easier to operate and to continue to
qualify as a REIT for taxable years beginning after the date of enactment
(which, for the Company, would be applicable commencing with its taxable year
beginning January 1, 1998). 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.
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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 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. Battle Fowler LLP ("Counsel") has acted as special tax
counsel to the Company in connection with the election to be taxed as a REIT.
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 Battle Fowler LLP, the Company, commencing with
the taxable year ending December 31, 1997, will be organized in conformity with
the requirements for qualification as a REIT, and its proposed method of
operation will enable it to meet the requirements for qualification and taxation
as a REIT under the Code, 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
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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 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. Pursuant to the 1997 Act,
for the Company's taxable years commencing on and after January 1, 1998, if the
Company complies with regulatory rules pursuant to which it is required to send
annual letters to certain of its shareholders requesting information regarding
the actual ownership of its stock, but does not know, or exercising reasonable
diligence would not have known, whether it failed to meet the requirement that
it not be closely held, the Company will be treated as having met the "five or
fewer" requirement. If the Company were to fail to comply with these regulatory
rules for any year, it would be subject to a $25,000 penalty. If the Company's
failure to comply was due to intentional disregard of the requirements, the
penalty is increased to $50,000. However, if the Company's failure to comply was
due to reasonable cause and not willful neglect, no penalty would be imposed.
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 is
owned by the REIT. For the Company's 1997 taxable year, all of such stock must
be owned by the Company from the commencement of such corporation's existence.
For taxable years of the Company beginning on and after January 1, 1998, the
Company must own all of the stock of such subsidiary but not from the
commencement of such subsidiary'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
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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. It should be noted that for its
1998 taxable year and all taxable years thereafter, the third test noted above
is no longer applicable.
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"). For the Company's taxable year which begins on January
1, 1998 and for all taxable years thereafter, only partners who own 25% or more
of the capital or profits interest in a partnership are included in the
determination of whether a tenant is 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
geographic area in which the property is located (i.e., services which are not
considered rendered to the occupant of the property). In addition, for its 1998
taxable year and thereafter, the Company is permitted to receive up to 1% of the
gross income from each Property from the provision of non-customary services and
still treat all other amounts received from such Property as "rents from real
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 common 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
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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. For the Company's taxable year, which
begins on January 1, 1998, and for all taxable years thereafter, income from
hedging transactions which is qualifying income for the 95% gross income test
also includes payments to the Company under an option, futures contract, forward
rate agreement, or any similar financial instrument. Furthermore, for the
Company's 1997 taxable year 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.
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 for its 1997 taxable year, 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.
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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 non-voting 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 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 (plus, for the
Company's 1998 taxable year and thereafter, income from cancellation of
indebtedness, original issue discount, and coupon interest) 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
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taxable income," it will be subject to tax thereon at regular corporate tax
rates. For the Company's taxable year beginning on January 1, 1998 and for all
taxable years thereafter, undistributed capital gains may be so designated by
the Company and are includable in the income of the holders of shares of Common
Stock. Such holders are treated as having paid the capital gains tax imposed on
the Company on the designated amounts included in their income as long-term
capital gains. Such stockholders would get an increase in their basis for income
recognized and a decrease in their basis for taxes paid by the Company. In
addition, 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 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
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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 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
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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. 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 characterized as ordinary income or as capital gain, are not eligible
for the 70% dividends received deduction for corporations.
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
gain from the sale or exchange of a capital asset held for more than one year 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 without regard to the
period for which a holder has held his shares in the Company. It is not clear
under the 1997 Act whether, for a U.S. stockholder who is an individual or an
estate or trust, such amounts will be taxable at the rate applicable to mid-term
capital gain (i.e., gains from the sale of capital assets held for more than one
year but not more than 18 months) or at the rate applicable to long-term capital
gains (i.e., gains from the sale of capital assets held for more than 18
months). This uncertainty may be clarified by future legislation or regulations.
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.
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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
"Federal Income Tax Considerations -- 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. 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
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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 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
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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.
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
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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 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;
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(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 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.
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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 (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
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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 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
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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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UNDERWRITING
Subject to the terms and conditions in the international purchase agreement
(the "International Purchase Agreement"), between the Company and each of the
underwriters named below (the "International Managers"), and concurrently with
the sale of the 9,712,000 shares of Common Stock to the U.S. Underwriters (as
defined below), the Company has agreed to sell to each of the International
Managers, for whom Merrill Lynch International, Legg Mason Wood Walker,
Incorporated, Morgan Stanley & Co. International Limited, Prudential-Bache
Securities (U.K.) Inc., Smith Barney Inc. and NationsBanc Montgomery Securities,
Inc. are acting as Lead Managers (the "Lead Managers"), and each of the
International Managers has severally agreed to purchase from the Company, the
respective number of Common Shares set forth below opposite their respective
names:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGER SHARES
--------------------- ---------
<S> <C>
Merrill Lynch International....................................... 440,600
Legg Mason Wood Walker, Incorporated.............................. 440,600
Morgan Stanley & Co. International Limited........................ 440,600
Prudential-Bache Securities (U.K.) Inc. .......................... 440,600
Smith Barney Inc. ................................................ 440,600
NationsBanc Montgomery Securities, Inc. .......................... 100,000
---------
Total................................................ 2,303,000
=========
</TABLE>
The Company has also entered into a purchase agreement (the "U.S. Purchase
Agreement" and, together with the International Purchase Agreement, the
"Purchase Agreements") with certain underwriters in the United States and Canada
(the "U.S. Underwriters" and, together with the International Managers, the
"Underwriters")for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, Legg
Mason Wood Walker, Incorporated, Morgan Stanley & Co. Incorporated, Prudential
Securities Incorporated, Smith Barney Inc. and NationsBanc Montgomery
Securities, Inc. are acting as representatives. Subject to the terms and
conditions set forth in the U.S. Purchase Agreement and concurrently with the
sale of 2,303,000 shares of Common Stock to the International Managers pursuant
to the International Purchase Agreement, the Company has agreed to sell to the
U.S. Underwriters, and the U.S. Underwriters have severally agreed to purchase
from the Company, an aggregate of 9,712,000 shares of Common Stock. The initial
public offering price per share and the total underwriting discount per share
are identical under the U.S. Purchase Agreement and the International Purchase
Agreement.
In each Purchase Agreement, the several U.S. Underwriters and the several
International Managers have agreed, respectively, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all of the shares
of Common Stock being sold pursuant to such Purchase Agreement if any of such
shares of Common Stock are purchased. Under certain circumstances, the
commitments of non-defaulting U.S. Underwriters or International Managers (as
the case may be) may be increased. The sale of Common Stock pursuant to the U.S.
Purchase Agreement and the International Purchase Agreement are conditioned upon
each other.
The Lead Managers have advised the Company that the International Managers
propose initially to offer the shares of Common Stock to the public at the
public offering price per share set forth on the cover page of this Prospectus,
and to certain banks, brokers and dealers (the "Selling Group") at such price
less a concession not in excess of $1.02 per share. The International Managers
may allow, and such dealers may re-allow, a discount not in excess of $.10 per
share on sales to certain other International Managers and members of the
Selling Group. After the date of this Prospectus, the initial public offering
price, concession and discount may be changed. The Company has been informed
that the U.S. Underwriters and the International Managers have entered into an
agreement (the "Intersyndicate Agreement") providing for the coordination of
their activities. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Under the terms
of
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the Intersyndicate Agreement, the International Managers and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of Common
Stock to persons who are United States persons or Canadian persons or to persons
they believe intend to resell to persons who are United States persons or
Canadian persons, and the U.S. Underwriters and any dealer to whom they sell
Common Stock will not offer to sell or sell Common Stock to persons who are
non-United States and non-Canadian persons or to persons they believe intend to
resell to non-United States and non-Canadian persons, except in each case for
transactions pursuant to the Intersyndicate Agreement.
The Company has granted the International Managers an option exercisable
for 30 days after the date hereof to purchase up to 345,450 additional shares of
Common Stock to cover over-allotments, if any, at the initial public offering
price, less the underwriting discount set forth on the cover page of this
Prospectus. If the International Managers exercise this option, each
International Manager will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof which the
number of shares of Common Stock to be purchased by it shown in the foregoing
table bears to such International Managers initial amount reflected in the
foregoing table. The Company has also granted an option to the U.S.
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to 1,456,800 additional shares of Common Stock to
cover over-allotments, if any, on terms similar to those granted to the
International Managers.
At the request of the Company, the U.S. Underwriters have reserved up to
575,000 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 U.S. Underwriters to the
general public on the same terms as the other shares offered by this Prospectus.
Each of the Company and the International Managers has represented and
agreed that (a) it has not offered or sold, and prior to the date six months
after the date of this Prospectus will not offer or sell any shares of Common
Stock to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purpose of their businesses or
otherwise in circumstances which do not constitute an offer to the public in the
United Kingdom for the purposes of the Public Offers of Securities Regulations
1995, (b) it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the Common Stock in, form or otherwise the United Kingdom and (c) it has only
issued or passed on and will only issue or pass on in the United Kingdom any
document received by it in connection with the issue or sale of the Common Stock
to a person who is of a kind described in Article II(3) of the Financial
Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a
person to whom the document may otherwise lawfully be issued or passed on.
Purchasers of shares of Common Stock offered hereby may be required to pay
stamp taxes and other charges in accordance with the laws and practices of the
country of purchase, in addition to the price per share to the public set forth
on the cover page of this Prospectus.
In the Purchase Agreements, the Company and the Operating Partnership have
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 and the
Operating Partnership have 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.
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In connection with the Offering, the Continuing Investors, the Primary
Contributors, the Morgan Stanley Investors and the Carlyle Funds 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 two years for the Primary Contributors and one year for
the other Continuing Investors, the Morgan Stanley Investors and the Carlyle
Funds 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 was determined through
negotiations between the Company and the U.S. Representatives. Among the factors
considered in such negotiations, in addition to prevailing market conditions,
were dividend yields and financial characteristics of publicly traded REITs that
the Company and the U.S. Representatives believe to be comparable to the
Company, the expected results of operations of the Company (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 Stock 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 Stock. As an
exception to these rules, the U.S. Representatives and the International
Managers are permitted to engage in certain transactions that stabilize the
price of the Common Stock. Such transactions may consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, i.e., if they sell more Common Stock than are set
forth on the cover page of this Prospectus, the U.S. Representatives and the
International Managers, respectively, may reduce that short position by
purchasing Common Stock in the open market. The U.S. Representatives and the
International Managers, respectively, may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.
The U.S. Representatives and the International Managers may also impose a
penalty bid on certain Underwriters and selling group members. This means that
if the U.S. Representatives or the International Managers purchase Common Stock
in the open market to reduce the Underwriters' short position or to stabilize
the price of the Common Stock, 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 otherwise 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 U.S.
Representatives or the International Managers 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 (i) an advisory fee equal to
.50% of the gross proceeds of the Offering (including any exercise of the
Underwriters' over-allotment option) plus $1,487,500 for advisory services
rendered in connection with the evaluation, analysis and structuring of the
Offering and (ii) a $600,000 acquisition advisory fee for services rendered in
connection with the evaluation, analysis and structuring of the acquisition of
the 100 Wall Street Property.
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Merrill Lynch Capital Corporation, an affiliate of Merrill Lynch, has
committed to be the syndication agent for the Line of Credit and Merrill Lynch
Credit Corporation, an affiliate of Merrill Lynch, has agreed to provide to the
Company the Term Loan. In connection with the closing of these loans, the
Company shall pay Merrill Lynch fees of approximately $2.1 million.
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 Morgan Stanley Investors, advised by MSAM, an affiliate of Morgan
Stanley & Co. Incorporated, have agreed to purchase 769,230 shares of Common
Stock in the Concurrent Private Placements. The Underwriters will not receive a
discount or commission on the sale of Common Stock in the Concurrent Private
Placements. The closing of the Concurrent Private Placements is subject to the
closing of the Offering and the satisfaction of other customary conditions.
Upon consummation of the Offering, the Company will repay the outstanding
balance of and the accrued interest on the MSAM Notes by issuing to the Morgan
Stanley Investors 886,200 shares of restricted Common Stock in complete
satisfaction of the MSAM Notes. The Company has granted to the Morgan Stanley
Investors certain registration rights with respect to sale of Common Stock
received by the Morgan Stanley Investors or any affiliates in connection with
the Concurrent Private Placements and the cancellation of the MSAM Notes,
including the right to include such shares in a shelf registration statement the
Company has agreed to file within fifteen days after the expiration of the
one-year period following completion of the Offering. 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 time of the
Offering.
The Common Stock has been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "TOW." In order to meet one of the
requirements for listing the Common Stock on the NYSE, the Underwriters have
undertaken to sell lots of 100 or more shares of Common Stock to a minimum of
2,000 beneficial holders.
EXPERTS
The consolidated balance sheet of the Company as of June 30, 1997 and the
related consolidated statement of operations, shareholder's equity and cash
flows for the period from March 27, 1997 through June 30, 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, 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 and the statements of revenues and certain operating expenses for 100
Wall Street for the year ended December 31, 1996, 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.
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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. Battle Fowler LLP will rely on Ballard
Spahr Andrews & Ingersoll as to certain matters of Maryland law. Certain legal
matters will be passed upon for the Underwriters by Hogan & Hartson L.L.P.
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.
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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
August 31, 1997 of a Property divided by the Investment Cost.
"American Express" means American Express Financial Advisors, Inc. and its
affiliates.
"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 August 31, 1997" means the net
operating income of the Property for the period month August 31, 1997,
annualized.
"Annualized Rent" means the annualized monthly Base Rent in effect plus
estimated 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 August 31, 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.
"Appraised Property" means the Maitland Forum Property.
"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.
"Carlyle" means The Carlyle Group, a Washington, D.C. based merchant
banking firm.
"Carlyle Funds" means the private investment funds sponsored by Carlyle
that have agreed to purchase shares of Common Stock in the Concurrent Private
Placements.
"Cash Available for Distribution" means Funds From Operations adjusted for
certain non-cash items, less reserves for capital expenditures.
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"Cash Flow" means the sum of (a) Funds from Operations (adjusted for
non-recurring items and non-cash revenue, including, without limitation, the
effect of straight-lining the rents pursuant to GAAP) and (b) interest expense.
"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.
"Closing Price" means 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 for, if the shares of Common Stock are not listed or admitted to
trading on any 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.
"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.
"Concurrent Private Placements" means the private placement by the Company
of $20 million of Common Stock to the Morgan Stanley Investors and $10 million
to the Carlyle Funds 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 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.
"DRA" means DRA Realty Advisors.
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"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.
"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 Exchange Rights 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 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 in the United
States.
"General Partner" means the sole general partner of the Operating
Partnership.
"ICIP" means The Industrial Commercial Incentive Program, a program
established to provide incentives to developers and redevelopers of property in
New York City.
"Independent Director" means a director of the Company who is not an
officer or employee of the Company or the Operating Partnership or an affiliate
of the Company or the Operating Partnership.
"Interested Stockholder" means a stockholder holding 10% or more of the
voting securities in a Maryland corporation, such as the Company.
"International Managers" means the underwriters outside of the United
States and Canada named in this Prospectus for whom Merrill Lynch International;
Legg Mason Wood Walker, Incorporated; Morgan Stanley & Co. International
Limited; Prudential-Bache Securities (U.K.) Inc., Smith Barney Inc. and
NationsBanc Montgomery Securities, Inc. are acting as lead managers.
"International Offering" means the public offering of the Common Stock of
the Company outside the United States and Canada.
"International Purchase Agreement" means the purchase agreement between the
Company and the International Managers.
"Intersyndicate Agreement" means the agreement between the U.S.
Underwriters and the International Managers providing for the coordination of
their activities.
"Investment Cost" means as of August 31, 1997 the aggregate investment
cost of a Property, including the applicable purchase price amount, closing
costs, tenant improvements, leasing commissions and capital
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expenditures less any applicable depreciation and amortization of tenant
improvements, leasing commissions and capital expenditures.
"IRA" means individual retirement account.
"IRS" means the United States 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 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.
"LIBOR" means the London Interbank Offering Rate.
"Limited Partners" means the limited partners of the Operating
Partnership.
"Line of Credit" means the $200 million unsecured line of credit for which
the Company has obtained a commitment.
"Lock-up Period" means the one- or two-year period (as applicable)
commencing from the date of this Prospectus.
"Look-Through Ownership Limitation" means the ownership of as much as up to
15.0% of any class of the Company's stock by mutual funds and certain other
entities.
"Management Company" means Tower Equities Management, Inc., a Delaware
corporation.
"Market Price" means the average of the Closing Price for the five
consecutive Trading Days ending on such date.
"Merrill Lynch" means Merrill Lynch & Co., Inc.
"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 shares of Common
Stock in the Concurrent Private Placements.
"MSAM" means Morgan Stanley Asset Management Inc.
"MSAM Notes" means the convertible notes of the Company held by the Morgan
Stanley Investors in the aggregate principal amount of approximately $12.3
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.
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"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
$26.00 per share.
"One Orlando Land Parcel" means the approximately 3.8 acres of undeveloped
land in Orlando, Florida that the Company holds an option to purchase.
"Operating Partnership" means Tower Realty 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%, or up to 15%
in the case of certain stockholders, 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 DOL 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 M. Wisely (a nominee for director
of the Company), 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), 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.
"Properties" means the 21 office buildings referred to herein in which the
Company has an interest.
"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.
"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.
"Restricted Shares" means the 1,949,360 shares of Common Stock received by
MSAM and certain Continuing Investors in the Formation Transactions, the
1,153,845 shares of Common Stock issued in the
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Concurrent Private Placements, and the 1,583,640 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 $107 million loan facility that the Company expects
to enter into concurrent with the consummation of the Offering and for which it
has obtained a commitment.
"Total Market Capitalization" means the Company's total equity market
capitalization plus its consolidated indebtedness and pro rata share of
indebtedness of unconsolidated investments.
"Total Value" means Cash Flow capitalized at 9.5% plus (i) 100% of
out-of-pocket costs for assets under development (subject to a maximum of 10% of
Total Value), and (ii) 100% of cash and cash equivalents (excluding restricted
deposits).
"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.
"Tower Predecessor" means 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 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.
"Trading Day" means 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.
"Transaction" means any transaction resulting in a change of control of
the Operating Partnership 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.
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"UBTI" means unrelated business taxable income.
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"Underwriters" means the U.S. Underwriters and the International Managers.
"U.S. Offering" means the public offering of the Common Stock of the
Company in the United States and Canada.
"U.S. Purchase Agreement" means the purchase agreement between the Company
and the U.S. Underwriters.
"U.S. Representatives" means Merrill Lynch, Pierce, Fenner & Smith,
Incorporated; Legg Mason Wood Walker, Incorporated; Morgan Stanley & Co.
Incorporated; Prudential Securities Incorporated, Smith Barney Inc. and
NationsBanc Montgomery Securities, Inc.
"U.S. Underwriters" means the Underwriters for the United States and
Canada named in the prospectus for whom the U.S. Representatives are acting as
representatives.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Tower Realty Trust, Inc.
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1997 (unaudited)...... F-2
Pro Forma Condensed Consolidated Statement of Operations for the six months ended
June 30, 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-18
Consolidated Balance Sheet as of June 30, 1997...................................... F-19
Consolidated Statement of Operations for the period from March 27, 1997 (date of
inception) through June 30, 1997................................................. F-20
Consolidated Statement of Shareholder's Equity for the period from March 27, 1997
(date of inception) through June 30, 1997........................................ F-21
Consolidated Statement of Cash Flows for the period from March 27, 1997 (date of
inception) through June 30, 1997................................................. F-22
Notes to Consolidated Financial Statements.......................................... F-23
Tower Predecessor
Report of Independent Accountants................................................... F-29
Combined Balance Sheets as of December 31, 1996 and 1995 and (unaudited) as of June
30, 1997......................................................................... F-30
Combined Statements of Operations for each of the three years in the period ended
December 31, 1996 and (unaudited) for the six months ended June 30, 1997 and
1996............................................................................. F-31
Combined Statements of Owners' Deficit for each of the three years in the period
ended December 31, 1996 and (unaudited) for the six months ended June 30, 1997... F-32
Combined Statements of Cash Flows for each of the three years in the period ended
December 31, 1996 and (unaudited) for the six months ended June 30, 1997 and
1996............................................................................. F-33
Notes to Combined Financial Statements.............................................. F-34
Schedule III: Real Estate and Accumulated Depreciation as of December 31, 1996...... F-44
DRA Joint Ventures
Report of Independent Accountants................................................... F-46
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 six months ended June 30, 1997
and 1996......................................................................... F-47
Notes to Combined Statements of Revenues and Certain Operating Expenses............. F-48
100 Wall Street
Report of Independent Accountants................................................... F-51
Statements of Revenues and Certain Operating Expenses for the year ended December
31, 1996 and (unaudited) for the six months ended June 30, 1997 and 1996......... F-52
Notes to Statements of Revenues and Certain Operating Expenses...................... F-53
</TABLE>
F-1
<PAGE> 410
TOWER REALTY TRUST, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
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 Placements, the MSAM Notes
and Term Loan and the application of the net proceeds therefrom had occurred on
June 30, 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 June 30, 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 PLACEMENTS ADJUSTMENTS
HISTORICAL HISTORICAL (A) (B) (C) PRO FORMA
---------- ----------- ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Real estate, net........................ $ 127,577 $ 326,818 $454,395
Deferred charges, net................... $7,640 12,041 $ (7,640) $ 1,094 13,135
Receivables, net........................ 3,436 (936) 2,500
Unbilled rent receivable................ 14,580 (14,580)
Escrowed funds.......................... 421 (421)
Cash and cash equivalents............... 4 4,326 (400,755) 317,676 84,084 5,335
Investments in joint ventures........... 60 4,745 2,098 (4,745) 2,158
Other assets............................ 3,506 3,120 (3,506) 3,120
---------- ----------- ----------- -------------- ----------- ---------
Total assets.................... $7,704 $ 170,632 $ (68,719) $310,036 $ 60,990 $480,643
======== ========= ========= ============ ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Debt on real estate..................... $7,279 $ 193,381 $ (149,015) $ 59,355 $111,000
Accounts payable and other
liabilities........................... 1,689 25,537 (14,275) 12,951
Amounts due to (from) affiliates........ (1,182) 10,374 (9,192)
---------- ----------- ----------- ----------- ---------
Total liabilities............... 7,786 229,292 (149,015) 35,888 123,951
---------- ----------- ----------- ----------- ---------
Minority interest in Operating
Partnership........................... 8,580 25,306 33,886
----------- ----------- ---------
Shareholders' equity:
Preferred shares, 50,000,000 shares
authorized, none issued and
outstanding.........................
Common shares, $.01 par value,
150,000,000 shares authorized; 1,000
shares issued and outstanding
(historical) and 15,118,205 shares
issued and outstanding (pro
forma).............................. 1 10 $ 132 8 151
Additional paid-in capital............ 29,318 309,904 (16,484) 322,738
Owners' equity (deficit).............. (83) (58,660) 42,388 16,272 (83)
---------- ----------- ----------- -------------- ----------- ---------
Total shareholders' equity
(deficit)..................... (82) (58,660) 71,716 310,036 (204) 322,806
---------- ----------- ----------- -------------- ----------- ---------
Total liabilities and
shareholders' equity
(deficit)..................... $7,704 $ 170,632 $ (68,719) $310,036 $ 60,990 $480,643
======== ========= ========= ============ ========== ========
</TABLE>
The accompanying notes are an integral part of this pro forma condensed
consolidated balance sheet.
F-2
<PAGE> 411
TOWER REALTY TRUST, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 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
Placements, 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>
SIX MONTHS ENDED JUNE 30, 1997
PRO FORMA ADJUSTMENTS
-------------------------
THE ACQUISITION OTHER
COMPANY PREDECESSOR PROPERTIES ADJUSTMENTS
HISTORICAL HISTORICAL (A) (B) PRO FORMA
---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income..................... $13,521 $21,316 $ 1,908 $36,745
Management fees................... 245 (245)
Construction, leasing, and other
fees........................... 33 474 1,316 (1,304) 519
---- ------- ------- ------- -------
Total revenues............ 33 14,240 22,632 359 37,264
---- ------- ------- ------- -------
Expenses:
Property operating and
maintenance.................... 2,703 6,579 9,282
Real estate taxes................. 2,331 3,043 (50) 5,324
General office and
administration................. 1,746 701 (700) 1,747
Interest expense.................. 176 7,028 (3,184) 4,020
Depreciation and amortization..... 3,494 3,351 6,845
Ground rent and air rights
expense........................ 299 299
---- ------- ------- ------- -------
Total expenses............ 176 17,601 10,323 (583) 27,517
Equity in income (loss) of joint
ventures....................... 60 68 368 496
---- ------- ------- ------- -------
Income (loss) before minority
interest.......................... (83) (3,293) 12,309 1,310 10,243
Minority interest in Operating
Partnership....................... 973 973
---- ------- ------- ------- -------
Net income (loss)................... $(83) $(3,293) $12,309 $ 337 $ 9,270
==== ======= ======= ======= =======
Net income per share................ $ 0.61
=======
Weighted average number of common
shares outstanding................ 15,118
=======
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidated statements of operations.
F-3
<PAGE> 412
TOWER REALTY TRUST, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 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 $42,731 $ 3,608 $72,939
Management fees..................... 1,261 (1,261)
Construction, leasing, and other
fees............................. 1,335 2 2,374 (2,008) 1,703
------- ---- ------- ------- -------
Total revenues.............. 28,734 464 45,105 339 74,642
------- ---- ------- ------- -------
Expenses:
Property operating and
maintenance...................... 5,481 193 12,939 18,613
Real estate taxes................... 4,722 79 6,310 (100) 11,011
General office and administration... 3,494 47 1,552 (1,730) 3,363
Interest expense.................... 15,511 (7,471) 8,040
Depreciation and amortization....... 6,853 6,789 13,642
Ground rent and air rights
expense.......................... 599 599
------- ---- ------- ------- -------
Total expenses.............. 36,660 319 20,801 (2,512) 55,268
Equity in income (loss) of joint
ventures......................... 461 (63) 398
------- ---- ------- ------- -------
Income (loss) before minority
interest............................ (7,465) 145 24,304 2,788 19,772
Minority interest in Operating
Partnership......................... 1,878 1,878
------- ---- ------- ------- -------
Net income (loss)..................... $(7,465) $145 $24,304 $ 910 $17,894
======= ==== ======= ======= =======
Net income per share.................. $ 1.18
=======
Weighted average number of common
shares outstanding.................. 15,118
=======
</TABLE>
The accompanying notes are an integral part of these pro forma condensed
consolidated statements of operations.
F-4
<PAGE> 413
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 -- JUNE 30, 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
$194.6 million in cash (including repayment of indebtedness), 72,942 OP
Units (approximate value of $1.9 million based on a value of $26.00 per
OP Unit) and 203,360 shares of restricted Common Stock (approximate value
of $5.3 million based on a value of $26 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 2800 North Central. The
acquisitions of certain partnership interests in 2800 North Central,
excluding Lawrence Feldman's interest, for approximately $.9 million in
cash and 45,131 OP Units (approximate value of $1.2 million based on a
value of $26.00 per OP Unit) is accounted for utilizing the purchase
method of accounting. The acquisition of Larry Feldman's interest in 2800
North Central is accounted for at historical cost. In total, the pro
forma consolidated balance sheet includes an approximate 10% ownership
interest in 2800 North Central.
- Acquisition of partnership interests in the entities comprising the DRA
Joint Ventures, including acquisitions of the 5151 East Broadway and
Corporate Center Land Parcels. The acquisitions of all partnership
interests in the DRA Joint Ventures, excluding Lawrence H. Feldman's
interest, for approximately $28.0 million in cash plus assumption of
$22.0 million of indebtedness and assumption of and repayment of
indebtedness aggregating approximately $107.2 million, 85,923 OP Units
(approximate value of $2.2 million based on a value of $26.00 per OP
Unit) and 924,800 shares of restricted Common Stock (approximate value
$24.0 million based on a value of $26.00 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 $11.7 million in cash and 6,000
OP Units (approximate value of $.2 million based on a value of $26.00 per
common share) 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 $3.1 million based on
a value of $26.00 per OP Unit) is accounted for utilizing the purchase
method of accounting.
- Acquisition of 100 Wall Street. The acquisition of 100 Wall Street from
an unrelated third party for approximately $58.0 million in cash, plus
$1.2 million of transfer taxes and other costs, is accounted for
utilizing the purchase method of accounting.
F-5
<PAGE> 414
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 interest in 2800
North Central), DRA Joint Ventures, Century Plaza, Properties Atlantic and 100
Wall Street are as follows:
<TABLE>
<CAPTION>
DRA 100
TOWER JOINT CENTURY PROPERTIES WALL
PREDECESSOR VENTURES PLAZA ATLANTIC STREET TOTAL
----------- --------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Real estate..................... $ 72,228 $ 183,494 $ 11,857 $ 59,239 $ 326,818
Cash and cash equivalents....... (194,600)(a) (135,215)(b) (11,701) (59,239) (400,755)
Investment in joint ventures.... 2,098 2,098
Prepaid expenses and other
assets........................ $3,120 3,120
--------- --------- -------- ------ -------- ---------
$ (120,274) $ 48,279 $ 156 $3,120 $ $ (68,719)
========= ========= ======== ====== ======== =========
Debt............................ $ (171,015)(c) $ 22,000 (149,015)
Minority interest in Operating
Partnership................... 3,070 2,234 $ 156 $3,120 8,580
Common shares................... 2 9 11
Additional paid in capital...... 5,281 24,036 29,317
Owners' equity.................. 42,388 42,388
--------- --------- -------- ------ -------- ---------
$ (120,274) $ 48,279 $ 156 $3,120 $ $ (68,719)
========= ========= ======== ====== ======== =========
</TABLE>
- ---------------
(a) The following details the use of cash and cash equivalents in the Tower
Predecessor transaction:
<TABLE>
<CAPTION>
TOWER
PREDECESSOR
--------
<S> <C>
Repayment of indebtedness:
Tower 45..................................................... $123,064(1)
Maitland Forum............................................... 28,875
Maitland West................................................ 4,548
120 Mineola Boulevard........................................ 11,260
5750 Major Boulevard......................................... 3,268(2)
--------
171,015
Cash payments:
Tower 45..................................................... 10,746
Maitland Forum and Maitland West............................. 3,697
120 Mineola Boulevard........................................ 275
5750 Major Boulevard......................................... 4,469
2800 North Central........................................... 925
Transfer taxes and other expenses............................ 3,473
--------
$194,600
========
</TABLE>
- ---------------
(1) 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
($35.0 million), and will then be repaid with proceeds from the Term
Loan. The Term Loan amount in pro forma adjustment C(6) reflects the
repayment of this Tower 45 debt.
F-6
<PAGE> 415
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(2) Indebtedness relating to 5750 Major Boulevard at June 30, 1997 is $3.3
million. At the date of the Offering it is expected that the
indebtedness will increase to $4.7 million to fund construction
expenditures of $1.4 million expected to be incurred.
(b) The use of cash and cash equivalents in the DRA Joint Ventures transaction
of $135.2 million is comprised of (i) payments of $107.2 million for the
partners in the DRA Joint Ventures to repay indebtedness associated with the
properties, and (ii) payments of $28.0 million to DRA and other parties.
(c) Historical debt on real estate for Tower Predecessor at June 30, 1997 is
$193.4 million. The debt on real estate has been reduced by $22.4 million to
reflect anticipated reduction from debt restructurings.
The following table reconciles the aforementioned adjustments to cash to
the $246.5 million for repayment of certain indebtedness described in the
section captioned "Use of Proceeds" within this Registration Statement:
<TABLE>
<S> <C>
Tower Predecesor -- footnote 1A(a) $171,015
DRA Joint Ventures -- footnote 1A(b) 107,225
5750 Major Boulevard -- footnote 1A(a)(2) 1,383
Other -- prepayment penalties 1,880
Less:
Tower 45 debt -- footnote 1A(a)(1) (35,000)
--------
Total cash for repayment of indebtedness as per Use of Proceeds $246,503
========
</TABLE>
The following table reconciles the aforementioned adjustments to cash to
the $118.7 million to acquire certain equity, debt and fee interests in the
properties described in the section captioned "Use of Proceeds" in this
Registration Statement:
<TABLE>
<S> <C>
Tower 45 -- footnote 1A(a) $ 10,746
Maitland Forum and West -- footnote 1A(a) 3,697
120 Mineola Boulevard -- footnote 1A(a) 275
5750 Major Boulevard -- footnote 1A(a) 4,469
2800 North Central -- footnote 1A(a) 925
100 Wall Street 59,239
Century Plaza 11,701
DRA -- footnote 1A(b) 27,990
Other (300)
--------
Total cash to acquire certain equity, debt and fee interests in
the properties as per Use of Proceeds $118,742
========
</TABLE>
The other historical assets and liabilities of Tower Predecessor, DRA Joint
Ventures, Century Plaza, 100 Wall Street 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 of
approximately $2.5 million for a portion of this liability which is expected to
be recovered from tenants. This deferred real estate tax 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.
F-7
<PAGE> 416
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
B. THE OFFERING AND CONCURRENT PRIVATE PLACEMENTS
Reflects the initial capitalization of the Company and the issuance of
13,168,845 shares of Common Stock in connection with the Offering (12,015,000
shares) and Concurrent Private Placements (1,153,845 shares) at an assumed
initial public offering price of $26.00 per share. The estimated costs of the
Offering include $20.3 million of underwriters' discount and $12.0 million of
other offering costs (of which $7.6 million has been recorded as a deferred
charge on the Company's historical balance sheet at June 30, 1997), which have
been reflected as a reduction to additional paid-in capital (there is no
underwriters' discount for the shares sold in the Concurrent Private
Placements). The resulting net proceeds of the Offering and Concurrent Private
Placements total approximately $310.0 million.
The following details the shares of Common Stock and OP Units issued in
connection with the Offering, Concurrent Private Placements, the MSAM Notes and
related Formation Transactions:
<TABLE>
<CAPTION>
TRANSACTION COMMON SHARES OP UNITS
---------------------------------------------------------- ------------- ---------
<S> <C> <C>
Tower Predecessor 203,360 72,942
2800 North Central 45,131
DRA Joint Ventures 924,800 85,923
Properties Atlantic 120,000
Century Plaza 6,000
Offering 12,015,000
Concurrent Private Placements 1,153,845
Conversion of MSAM Notes 821,200
OP Units issued to Primary Contributors related to Tower
Predecessor, 2800 North Central and DRA Joint Ventures
transactions 1,253,644
------------- ---------
15,118,205 1,583,640
============ ========
</TABLE>
F-8
<PAGE> 417
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
BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
INVEST- DEBT
PRO UNBILLED CASH MENTS IN ON
FORMA ADJUST- DEFERRED RENT ESCROWED AND CASH JOINT OTHER REAL
MENT CHARGES RECEIVABLES RECEIVABLE FUNDS EQUIVALENTS VENTURES ASSETS ESTATE
- ---------------------------- --------- ---------- ----------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C(1) Adjustment to deferred
charges................ $ 1,094 $ (2,431) $ (1,100)
C(2) Elimination of other
assets and liabilities
of Tower Predecessor
and intercompany
receivables............ $ (936) $(421) (4,326) (2,406)
C(3) Elimination of unbilled
rent receivable of
Tower Predecessor...... $ (14,580)
C(4) Elimination of invest-
ment in DRA Joint Ven-
tures.................. $ (4,745)
C(5) Conversion of MSAM
Notes debt............. 3,721 $ (7,279)
C(6) Debt activity.......... 89,000 66,634
C(7) Prepayment penalties... (1,880)
C(8) Allocation to minority
interest in Operating
Partnership............
C(9) Reclass historical
Tower Predecessor
owners' equity to
additional paid-in
capital................
------ ------- -------- ------ ------- ------- ------- -------
$ 1,094 $ (936) $ (14,580) $(421) $ 84,084 $ (4,745) $ (3,506) $ 59,355
====== ======= ======== ====== ======= ======= ======= =======
<CAPTION>
MINORITY
ACCOUNTS INTEREST
PAYABLE AMOUNTS IN
PRO AND DUE TO OPERATING ADDITIONAL OWNERS'
FORMA ADJUST- OTHER (FROM) PARTNER- COMMON PAID-IN EQUITY
MENT LIABILITIES AFFILIATES SHIP STOCK CAPITAL (DEFICIT)
- ---------------------------- ------------ ---------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
C(1) Adjustment to deferred
charges................ $ (2,437)
C(2) Elimination of other
assets and liabilities
of Tower Predecessor
and intercompany
receivables............ $ (14,275) $ (9,192) 15,378
C(3) Elimination of unbilled
rent receivable of
Tower Predecessor...... (14,580)
C(4) Elimination of invest-
ment in DRA Joint Ven-
tures.................. (4,745)
C(5) Conversion of MSAM
Notes debt............. $ 8 $ 10,992
C(6) Debt activity.......... 22,366
C(7) Prepayment penalties... (1,880)
C(8) Allocation to minority
interest in Operating
Partnership............ $ 25,306 (25,306)
C(9) Reclass historical
Tower Predecessor
owners' equity to
additional paid-in
capital................ (2,170) 2,170
-- -- --
-------- ------- ------- -------- -------
$ (14,275) $ (9,192) $ 25,306 $ 8 $ (16,484) $ 16,272
======== ======= ======= ====== ======== =======
</TABLE>
The following pro forma adjustments represent other aspects of the Offering
and related Formation Transactions.
(1) Represents the write-off to owners' equity of historical Tower
Predecessor's previously capitalized deferred financing costs on mortgage
loans ($1.3 million) and organizational costs ($1.1 million). Also includes
the capitalization of $2.4 million of deferred financing fees to be
incurred on the Term Loan and Line of Credit.
(2) 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 tax 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. Also
represents the elimination of $1.2 million of the Company's amounts due
from affiliates.
(3) Represents the elimination of unbilled rent receivable of the
Tower Predecessor due to the acquisition of the Properties on June 30,
1997.
(4) 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.
(5) Represents the issuance and conversion of certain debt held by
certain investment funds advised by MSAM (the "MSAM Notes") assumed to be
incurred of $11.0 million to 821,200 shares of restricted Common Stock
(approximate value of $21.4 million based on a value of $26.00 per
restricted Common
F-9
<PAGE> 418
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Stock). Other MSAM notes totalling $1.3 million were previously assumed, in
the acquisition of partnership interests in the Tower Predecessor, to be
converted to 65,000 shares of restricted Common Stock (approximate value of
$1.7 million based on a value of $26.00 per share of restricted Common
Stock). See pro forma adjustment 1A. Also represents the redemption of
1,000 shares from the initial incorporation of the Company. The pro forma
adjustment is to increase cash by $3.7 million since this amount will be
borrowed under the MSAM Notes subsequent to June 30, 1997.
(6) Represents the new borrowings under the Term Loan of $89.0 million
partially offset by debt forgiveness of $22.4 million.
Pro forma debt outstanding at June 30, 1997 is as follows:
<TABLE>
<S> <C>
Corporate Center.................................................. $ 22,000
Term Loan......................................................... 89,000
---------
$111,000
=========
</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 then be repaid with proceeds from the Term Loan. The
above Term Loan amount of $107.0 million reflects the repayment of this
Tower 45 debt.
(7) Represents prepayment penalties on Tower Predecessor debt of $1.9
million.
(8) Represents the equity attributable to OP Units owned. The Company
is the sole general partner of the Operating Partnership and will own
approximately 90.5% of the Operating Partnership. Total OP Units
outstanding will be 1,583,640 which will represent an approximate 9.5%
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.
The holders of the OP Units will have the right to cause the Operating
Partnership to exchange the 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.
(9) Reclassifies remaining historical Tower Predecessor owners' equity
to additional paid-in capital.
2. PRO FORMA ADJUSTMENTS TO THE STATEMENT OF OPERATIONS -- JUNE 30, 1997
A. ACQUISITION PROPERTIES
The statements of operations information for the six months ended June 30,
1997 reflects the historical operations of the DRA Joint Ventures, Century
Plaza, Properties Atlantic and 100 Wall Street as follows:
<TABLE>
<CAPTION>
DRA JOINT CENTURY PROPERTIES 100 WALL
VENTURES PLAZA ATLANTIC STREET TOTAL
--------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Rental income....................... $14,503 $ 1,207 $5,606 $21,316
Other income........................ 83 25 $890 318 1,316
------- ------ ---- ------ -------
Total revenues............ 14,586 1,232 890 5,924 22,632
------- ------ ---- ------ -------
Property operating and
maintenance....................... 3,959 665 1,955 6,579
Real estate taxes................... 1,796 55 1,192 3,043
Other expenses...................... 452 81 71 97 701
------- ------ ---- ------ -------
Total expenses............ 6,207 801 71 3,244 10,323
------- ------ ---- ------ -------
Revenues in excess of certain
operating expenses................ $ 8,379 $ 431 $819 $2,680 $12,309
======= ====== ==== ====== =======
</TABLE>
F-10
<PAGE> 419
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 SIX MONTHS ENDED JUNE 30, 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.............. $1,908
2B(2) Elimination of
property management
and other fees...... $(245) $ (1,304) $ (727) $ 475
2B(3) Real estate
taxes............... $(50)
2B(4) General office and
administration...... 27
2B(5) Interest
expense............. $ (2,927)
2B(6) Amortization of
deferred financing
fees................ (257)
2B(7) Depreciation
expense............. $3,351
2B(8) Consolidation of DRA
Joint Ventures...... (68)
2B(9) Equity investment in
2800 North
Central............. (39)
2B(10) Minority interest in
Operating
Partnership.........
------ ----- ------- ---- ----- ------ ------ ----
Total............... $1,908 $(245) $ (1,304) $(50) $ (700) $ (3,184) $3,351 $ 368
====== ===== ======= ==== ===== ====== ====== ====
<CAPTION>
MINORITY
INTEREST IN
PRO FORMA OPERATING
ADJUSTMENT PARTNERSHIP
- ---------- -----------
<C> <S> <C>
2B(1) Straight line rental
income..............
2B(2) Elimination of
property management
and other fees......
2B(3) Real estate
taxes...............
2B(4) General office and
administration......
2B(5) Interest
expense.............
2B(6) Amortization of
deferred financing
fees................
2B(7) Depreciation
expense.............
2B(8) Consolidation of DRA
Joint Ventures......
2B(9) Equity investment in
2800 North
Central.............
2B(10) Minority interest in
Operating
Partnership......... $ 973
-------
Total............... $ 973
=======
</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 historical management fees ($245) and
construction, leasing and other fees ($1,304) and property management fee
expense ($727) related to the DRA Joint Ventures, Century Plaza and 100 Wall
Street for the six months ended June 30, 1997 and the Tower Predecessor for the
three months ended June 30, 1997. The Management Company was formed as a 95%
owned equity investment of the Company on March 27, 1997. As a result of the
Company's prospective ownership and management of these properties, these
historical amounts will no longer be changed. The Management Company will only
include amounts related to the Excluded Properties and third party management
contracts.
F-11
<PAGE> 420
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
As a result of this pro forma adjustment, the pro forma statement of
operations of the Management Company for the six months ended June 30, 1997 is
as follows (represents revenues and expenses from the Excluded Properties and
third party management contracts):
<TABLE>
<S> <C>
Management fees.............................................................. $ 342
Construction, leasing and other fees......................................... 234
Properties Atlantic third party representation fees.......................... 890
General office and administrative............................................ (600)
-----
Income before income taxes.............................................. 866
Income taxes............................................................ (303)
-----
Net income.............................................................. $ 563
=====
95% equity in earnings of the Management Company recorded by the Company..... $ 535
Management Company earnings included in the Company's historical statement of
operations for the six months ended June 30, 1997.......................... (60)
-----
Pro forma adjustment......................................................... $ 475
=====
</TABLE>
(3) 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).
(4) Reflects a net increase of $27 in general office and administrative
expense which is a result of estimated additional costs of operating as a public
company partially by certain expenses (such as separate partnership accounting
fees and reductions in salaries of certain officers) that are no longer
required.
(5) 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% $ 793
Corporate Center..................................... 1,000 8.37% 42
Term Loan(a)......................................... 89,000 6.96% 3,097
-------- -------
Total...................................... $ 111,000
========
Pro forma annual interest expense.................... 3,932
Historical interest expense, excluding amortization
of deferred financing fees, in previous columns
(also see (6) below)............................... (6,859)
-------
Reduction to interest expense (also see (6)
below)................................... $ (2,927)
=======
</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 will then
be repaid with proceeds from the Term Loan. The above Term Loan amount of $89.0
million reflects the repayment of this Tower 45 debt. The interest rate is based
on the seven-year U.S. Treasury Note rate (6.06% at October 9, 1997) plus 90
basis points.
F-12
<PAGE> 421
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(6) Reflects the net decrease in the amortization of deferred financing
fees ($257) as a result of a reduction of the amortization expense associated
with historical deferred financing fees to be written off concurrent with the
Offering ($345) partially offset by the amortization of $1.2 million of deferred
financing fees associated with the Term Loan ($88) amortized over the seven year
term.
(7) Reflects the net increase in depreciation and amortization as a result
of the acquisition of Tower Predecessor, DRA Joint Ventures, Century Plaza,
Properties Atlantic and 100 Wall Street 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 SIX 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............. $ 72,228 $ 14,446 $ 57,782 40 years $ 722
DRA Joint Ventures............ 183,494 55,048 128,446 40 years 1,606
Century Plaza................. 11,857 2,371 9,486 40 years 119
Properties Atlantic........... $3,120 5 years 312
100 Wall Street............... 59,239 11,848 47,391 40 years 592
-------- ------ ------- -------- ------
Net increase in assets and
depreciation and
amortization expense........ $326,818 $3,120 $ 83,713 $ 243,105 $3,351
======== ====== ======= ======== ======
</TABLE>
(8) Reflects the elimination of the equity in earnings from the investment
in the DRA Joint Ventures from Tower Predecessor's historical statement of
operations ($68).
(9) Reflects the decrease of the equity in earnings from the investment in
2800 North Central to reflect the purchase of additional partnership interests,
10% of net loss or ($39).
(10) Reflects net income attributable to the minority interest of the
Operating Partnership. The Company is the sole general partner and will own
approximately 90.5% of the Operating Partnership.
(11) Historical debt on real estate for the Tower Predecessor has been
reduced by $23.7 million to reflect anticipated reduction from debt
restructurings. Also, prepayment penalties of approximately $1.9 million will be
paid on the Tower Predecessor debt on real estate. This extraordinary gain on
extinguishment of debt has not been included in the pro forma statements of
operations due to their nonrecurring nature.
F-13
<PAGE> 422
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 statements of operations information for the year ended December 31,
1996 reflect the historical operations of the DRA Joint Ventures, Century Plaza,
Properties Atlantic and 100 Wall Street as follows:
<TABLE>
<CAPTION>
DRA JOINT CENTURY PROPERTIES 100 WALL
VENTURES PLAZA ATLANTIC STREET TOTAL
--------- ------- ---------- -------- -------
<S> <C> <C> <C> <C> <C>
Rental income.................. $29,010 $ 2,404 $ 11,317 $42,731
Other income................... 288 194 $931 961 2,374
------- ------ ---- ------- -------
Total revenues....... 29,298 2,598 931 12,278 45,105
------- ------ ---- ------- -------
Property operating and
maintenance.................. 7,791 997 4,151 12,939
Real estate taxes.............. 3,572 214 2,524 6,310
Other expenses................. 1,083 174 152 143 1,552
------- ------ ---- ------- -------
Total expenses....... 12,446 1,385 152 6,818 20,801
------- ------ ---- ------- -------
Revenues in excess of certain
operating expenses........... $16,852 $ 1,213 $779 $ 5,460 $24,304
======= ====== ==== ======= =======
</TABLE>
F-14
<PAGE> 423
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>
EQUITY IN
INCOME MINORITY
CONSTRUCTION, GENERAL DEPRECIATION (LOSS) INTEREST IN
PRO FORMA RENTAL MANAGEMENT LEASING AND REAL OFFICE AND INTEREST AND OF JOINT OPERATING
ADJUSTMENT INCOME FEES OTHER FEES ESTATE TAXES ADMINISTRATION EXPENSE AMORTIZATION VENTURES PARTNERSHIP
- ---------------- ------ ---------- ------------- ------------ -------------- --------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3C(1) Straight
line
rental
revenue... $3,608
3C(2) Elimination
of
property
management
and
other
fees... $ (1,261) $(2,008) $ (2,443) $ 410
3C(3) Real
estate
taxes... $ (100)
3C(4) General
office
and
administration... 713
3C(5) Interest
expense... $ (7,143)
3C(6) Amortization
of deferred
financing
fees... (328)
3C(7) Depreciation
expense... $6,789
3C(8) Consolidation
of DRA Joint
Ventures... (461)
3C(9) Equity
investment
in 2800
North
Central... (12)
3C(10) Minority
interest
in
Operating
Partnership... $ 1,878
------ ------- ------- ------- ------- ------- ------ ----- ------
T $3,608 $ (1,261) $(2,008) $ (100) $ (1,730) $ (7,471) $6,789 $ (63) $ 1,878
====== ======= ======= ======= ======= ======= ====== ===== ======
</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 management fees ($1,261) and construction,
leasing and other fees ($2,008) and property management fee expense ($2,443)
related to the DRA Joint Ventures, Century Plaza, 5750 Major Boulevard and 100
Wall Street for the year ended December 31, 1996. As a result of the Company's
prospective ownership and management of these properties these historical
amounts will no longer be charged. The Management Company will only include
amounts related to the Excluded Properties and third party management contracts.
As a result of this pro forma adjustment, the pro forma statement of operations
of the Management Company for the year ended December 31, 1996 is as follows
(represents revenues and expenses from the Excluded Properties and third party
management contracts):
<TABLE>
<S> <C>
Management fees.................................................... $ 514
Construction, leasing and other fees............................... 419
Properties Atlantic third party representation fees................ 931
General office and administrative.................................. (1,200)
------
Income before income taxes.................................... 664
Income taxes.................................................. (232)
------
Net income.................................................... $ 432
======
95% equity in earnings of the Management Company recorded by the
Company.......................................................... $ 410
======
</TABLE>
F-15
<PAGE> 424
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(3) 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).
(4) Reflects a net increase of $713 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 expenses (such as separate
partnership accounting fees and reductions in salaries of certain officers) that
are no longer required.
(5) 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)................................ 89,000 6.96% 6,194
-------- --------
Total............................. $ 111,000
========
Pro forma annual interest expense........... 7,864
Historical interest expense, excluding
amortization of deferred financing fees,
in previous columns (also see (6)
below).................................... (15,007)
--------
Reduction to interest expense
(also see (6) below)............ $ (7,143)
========
</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 will then
be repaid with proceeds from the Term Loan. The above Term Loan amount of $89.0
million reflects the repayment of this Tower 45 debt. The interest rate is based
on the 7 year U.S. Treasury Note rate (6.06% at October 9, 1997) plus 90 basis
points.
(6) Reflects the net decrease in the amortization of deferred financing
fees ($328) as a result of reduction of the amortization expense associated with
historical deferred financing fees to be written off concurrent with the
Offering ($504) partially offset by the amortization of $1.2 million of deferred
financing fees associated with the Term Loan ($176) amortized over the seven
year term.
F-16
<PAGE> 425
TOWER REALTY TRUST, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) Reflects the net increase in depreciation and amortization as a result
of the acquisition of Tower Predecessor, DRA Joint Ventures, Century Plaza,
Properties Atlantic and 100 Wall Street 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.......... $ 72,228 $ 14,446 $ 57,782 40 years $1,444
DRA Joint Ventures......... 183,494 55,048 128,446 40 years 3,212
Century Plaza.............. 11,857 2,371 9,486 40 years 238
Properties Atlantic........ $3,120 5 years 624
100 Wall Street............ 59,239 11,848 47,391 40 years 1,184
Additional depreciation
expense for 5750 Major
Boulevard due to
acquisition in 1996...... 87
-------- ------ ------- -------- ------
Net increase in assets and
depreciation and
amortization expense..... $326,818 $3,120 $ 83,713 $ 243,105 $6,789
======== ====== ======= ======== ======
</TABLE>
(8) Reflects the elimination of the equity in earnings from the investment
in the DRA Joint Ventures from Tower Predecessor's historical statement of
operations ($461).
(9) Reflects the decrease of the equity in earnings from the investment in
2800 North Central to reflect the purchase of additional partnership interests,
10% of net loss or ($12).
(10) Reflects net income attributable to the minority interest of the
Operating Partnership. The Company is the sole general partner and will own
approximately 90.5% of the Operating Partnership.
(11) Historical debt on real estate for the Tower Predecessor has been
reduced by $23.7 million to reflect anticipated reduction from debt
restructuring. Also, prepayment penalties of approximately $1.9 million will be
paid on the Tower Predecessor debt on real estate. This extraordinary gain on
extinguishment of debt has not be included in the pro forma statements of
operations due to their nonrecurring nature.
F-17
<PAGE> 426
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 June 30, 1997 and the related consolidated statements
of operations, shareholder's equity and cash flows for the period from March 27,
1997 (date of inception) to June 30, 1997. These financial statements are the
responsibility of the management of Tower Realty Trust, Inc. Our responsibility
is to express an opinion on these financial statements 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
presents fairly, in all material respects, the financial position of Tower
Realty Trust, Inc. as of June 30, 1997, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
September 15, 1997
F-18
<PAGE> 427
TOWER REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<S> <C>
Cash............................................................................... $ 4
Amounts due from affiliates........................................................ 1,182
Investment in Tower Equities Management, Inc. ..................................... 60
Deferred charges................................................................... 7,640
-----
$ 8,886
=====
LIABILITIES AND SHAREHOLDER'S EQUITY
Accounts payable and accrued expenses.............................................. $ 1,689
Debt............................................................................... 7,279
-----
8,968
Commitments and contingencies (Notes 4 and 5)
Shareholder's equity (deficit):
Preferred shares, 50,000,000 shares authorized, none issued and outstanding........
Common shares, $.01 par value, 150,000,000 shares authorized; 1,000 shares issued
and outstanding.................................................................. 1
Accumulated deficit................................................................ (83)
-----
$ 8,886
=====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE> 428
TOWER REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 27, 1997 (DATE OF INCEPTION) THROUGH JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Revenues:
Interest income..................................................................... $ 33
----
Total revenues.............................................................. 33
----
Expenses
Interest expense.................................................................... 176
----
Total expenses.............................................................. 176
----
Equity in income of Tower Equities Management, Inc. .................................. 60
----
Net loss.................................................................... $(83)
====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE> 429
TOWER REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE PERIOD FROM MARCH 27, 1997 (DATE OF INCEPTION) THROUGH JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF ACCUMULATED
COMMON SHARES COMMON SHARES DEFICIT
------------- ------------- -----------
<S> <C> <C> <C>
Balance at March 27, 1997......................... -- -- --
Issuance of common shares....................... 1,000 $ 1
Net loss........................................ $ (83)
--
----- ----
Balance at June 30, 1997.......................... 1,000 $ 1 $ (83)
===== == ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE> 430
TOWER REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 27, 1997 (DATE OF INCEPTION) THROUGH JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flow from operating activities:
Net loss......................................................................... $ (83)
Adjustments to reconcile net loss to net cash provided by operating activities:
Equity in income of Tower Equities Management, Inc............................ (60)
Change in accounts payable and accrued expenses............................... 1,689
-------
Net cash flow provided by operating activities........................... 1,546
-------
Cash flow from investing activities:
Increase in deferred charges..................................................... (7,640)
Increase in due from affiliates.................................................. (1,182)
-------
Net cash flow used in investing activities............................... (8,822)
-------
Cash flow from financing activities:
Proceeds from issuance of debt................................................... 7,279
Proceeds from issuance of common stock........................................... 1
-------
Net cash flow provided by investing activities........................... 7,280
-------
Net increase in cash and cash equivalents.......................................... 4
Cash, beginning of year............................................................
-------
Cash, end of year.................................................................. $ 4
=======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE> 431
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 89.5% 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.
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. At June
30, 1997, the balance on the notes has been increased to approximately $7.3
million. The notes bear interest at a rate of 15% per annum and are payable
quarterly, in arrears. Subsequent to June 30, 1997, the Company issued an
additional $5.0 million of notes. All interests contributed in the previously
described transactions were recorded at zero as the historical carry-over basis
of these interests were negative. Under the Partnership agreements, these
partners are not required to fund any partners' deficit balances to the
Operating Partnership.
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.
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.
USE OF ESTIMATES IN THE PREPARATION OF THE FINANCIAL STATEMENTS
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-23
<PAGE> 432
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 has filed 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 Placements"). All the net proceeds to the
Company from the Offering and the Concurrent Private Placements will be
contributed either directly or indirectly to the Operating Partnership in
exchange for a sole 1% general partnership interest and an 89.5% 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
21 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 has entered into a $107.0 million seven year term
facility with Merrill Lynch Credit Corporation (the "Term Loan") and will borrow
approximately $54 million under such facility at the closing of the Offering.
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.
F-24
<PAGE> 433
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LINE OF CREDIT
The Company has obtained a commitment for a $200 million Line of Credit.
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.
4. INVESTMENT IN TOWER EQUITIES MANAGEMENT, INC.:
The Company records its investment in Tower Equities Management, Inc.
("TEMI") using the equity method of accounting and, therefore, reports its share
of income and expenses based on its 95% ownership interest in TEMI. Presented
below in condensed financial information of TEMI:
TOWER EQUITIES MANAGEMENT, INC.
BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Cash.................................................................. $136
Accounts receivable................................................... 297
Equipment............................................................. 113
----
Total assets................................................ $546
====
LIABILITIES AND OWNERS' EQUITY
Accounts payable and accrued expenses................................. $247
Due to affiliates..................................................... 237
Owners' equity........................................................ 62
----
Total liabilities and owners' equity........................ $546
====
</TABLE>
F-25
<PAGE> 434
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
TOWER EQUITIES MANAGEMENT, INC.
STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION (MARCH 27, 1997) THROUGH JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Revenues:
Management fees................................................... $1,002
Construction, leasing and other fees.............................. 186
------
Total revenues............................................ $1,188
------
Expenses:
General office and administration................................. 1,083
Depreciation and amortization..................................... 9
Total expenses................................................. 1,092
------
Income before taxes............................................ 96
Income tax expense.................................................. 34
------
Net income..................................................... $ 62
======
</TABLE>
5. STOCK INCENTIVE PLANS:
Prior to the Offering, the Board of Directors will 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 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. 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, 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. 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
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
F-26
<PAGE> 435
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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").
6. 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,
subject, in certain circumstances, to automatic one year extensions, 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, in
the case of Mr. Cox, to automatic one-year extensions, 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 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 each
case, payable within 30 days of each such officer's termination. In the case of
an officer's death or disability, salary is continued for a twelve-month period.
In addition, such employment agreements will provide for the grant of the
options and the stock awards previously described above. Pursuant to the
employment agreements, such options are subject to vesting, but will vest upon
an officer's death or disability or a change of control of the Company.
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).
F-27
<PAGE> 436
TOWER REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-28
<PAGE> 437
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
presents 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-29
<PAGE> 438
TOWER PREDECESSOR
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
JUNE 30, 1997 -------- --------
-------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate.............................................. $ 170,865 $169,619 $163,879
Less: accumulated depreciation......................... (43,288) (40,555) (35,741)
--------- --------- ---------
Real estate, net......................................... 127,577 129,064 128,138
Deferred charges, net.................................... 12,041 11,636 12,543
Receivables, net of allowance for doubtful accounts of 3,436 2,776 3,121
approximately $2.5 million for all periods.............
Unbilled rent receivable................................. 14,580 15,242 16,447
Escrowed funds........................................... 421 413 297
Cash and cash equivalents................................ 4,326 4,985 5,208
Investments in joint ventures............................ 4,745 5,316 4,538
Other assets............................................. 3,506 3,555 3,597
--------- --------- ---------
Total assets................................... $ 170,632 $172,987 $173,889
========= ========= =========
LIABILITIES AND OWNERS' DEFICIT
Real estate debt......................................... $ 193,381 $202,892 $199,962
Deferred real estate taxes............................... 12,951 12,951 12,951
Accounts payable and other liabilities................... 12,586 12,867 11,600
Amounts due to affiliates................................ 10,374 6,147 6,464
--------- --------- ---------
Total liabilities.............................. 229,292 234,857 230,977
Commitments and contingencies (Note 12)
Owners' deficit.......................................... (58,660) (61,870) (57,088)
--------- --------- ---------
Total liabilities and owners' deficit.......... $ 170,632 $172,987 $173,889
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-30
<PAGE> 439
TOWER PREDECESSOR
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- -------------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income...................... $13,521 $13,467 $26,138 $25,202 $25,994
Management fees.................... 245 626 1,261 961 82
Construction, leasing, and other
fees............................ 474 543 1,335 1,041 320
------- ------- -------- -------- --------
Total revenues............. 14,240 14,636 28,734 27,204 26,396
------- ------- -------- -------- --------
Expenses:
Property operating and
maintenance..................... 2,703 2,781 5,481 5,332 5,278
Real estate taxes.................. 2,331 2,360 4,722 4,571 3,971
General office and
administration.................. 1,746 1,767 3,494 3,497 2,512
Interest expense................... 7,028 7,172 15,511 15,150 12,751
Depreciation and amortization...... 3,494 3,384 6,853 6,897 7,415
Ground rent and air rights
expense......................... 299 299 599 599 599
------- ------- -------- -------- --------
Total expenses............. 17,601 17,763 36,660 36,046 32,526
------- ------- -------- -------- --------
Equity in income of joint ventures... 68 198 461 193 1
------- ------- -------- -------- --------
Net loss before
extraordinary gain on
early extinguishment of
debt..................... (3,293) (2,929) (7,465) (8,649) (6,129)
Extraordinary gain on early
extinguishment of debt............. 6,475
------- ------- -------- -------- --------
Net income (loss).......... $ 3,182 $(2,929) $(7,465) $(8,649) $(6,129)
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-31
<PAGE> 440
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 income (unaudited).......................................................... 3,182
Contributions, net (unaudited).................................................. 28
-------
Balance at June 30, 1997 (unaudited).............................................. $(58,660)
=======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-32
<PAGE> 441
TOWER PREDECESSOR
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ---------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss).......................... $ 3,182 $(2,929) $(7,465) $(8,649) $(6,129)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization........... 3,494 3,384 6,853 6,897 7,415
Amortization of deferred financing
costs................................. 345 252 504 575 574
Equity in income of joint ventures, net
of distributions...................... (5) (461) (193) (34)
Gain on disposal of assets.............. (39) (30) (81)
Extraordinary gain on early
extinguishment of debt................ (6,475)
Change in:
Deferred charges...................... (1,352) (765) (867) (373) 1,085
Receivables........................... (660) 352 345 2,673 (2,471)
Unbilled rent receivable.............. 662 239 1,205 3,084 2,437
Escrowed funds........................ (8) (462) (116) 268 69
Other assets.......................... 49 88 42 (616) (278)
Deferred real estate taxes............ 366 1,074
Accounts payable and other
liabilities........................ (281) (595) 1,267 90 (1,548)
Amounts due to affiliates............. 3,617 (252) (317) (2,330) 2,005
------- ------- ------- ------- -------
Net cash flow provided by (used in)
operating activities............. 2,573 (693) 951 1,762 4,118
------- ------- ------- ------- -------
Cash flow from investing activities:
Improvements to real estate................ (1,405) (1,329) (2,659) (967) (1,602)
Acquisitions of real estate................ (3,850)
Distribution from (contribution to) joint
ventures................................ 571 (317) (2,503) (1,808)
Proceeds from disposal of assets........... 39 30 273
------- ------- ------- ------- -------
Net cash flow used in investing
activities....................... (834) (1,329) (6,787) (3,440) (3,137)
------- ------- ------- ------- -------
Cash flow from financing activities:
Partners' contributions, net............... 28 1,239 2,683 2,730 2,429
Proceeds from real estate debt............. 2,186 1,657 7,039 424 780
Repayment of real estate debt.............. (4,612) (1,253) (4,109) (2,916) (3,179)
------- ------- ------- ------- -------
Net cash flow (used in) provided by
financing activities............. (2,398) 1,643 5,613 238 30
------- ------- ------- ------- -------
Net (decrease) increase in cash and cash
equivalents................................ (659) (379) (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...... $ 4,326 $ 4,829 $ 4,985 $ 5,208 $ 6,648
======= ======= ======= ======= =======
Supplemental cash flow information:
Cash paid for interest..................... $ 6,725 $ 6,373 $15,007 $14,575 $12,177
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-33
<PAGE> 442
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 89.5% 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 concurrent private placements (the "Concurrent Private
Placements"). The proceeds from the Offering and the Concurrent Private
Placements are expected to be used to purchase a
F-34
<PAGE> 443
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
sole 1% general partnership interest and 89.5% 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-35
<PAGE> 444
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 June 30, 1997 and for the six
months ended June 30, 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 six months ended June 30, 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,
JUNE 30, ---------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Land.............................................. $ 25,662 $ 25,662 $ 25,280
Buildings and improvements........................ 145,084 143,838 138,441
Furniture, fixtures and equipment................. 119 119 158
-------- -------- --------
Total................................... 170,865 169,619 163,879
Less: Accumulated depreciation.................... (43,288) (40,555) (35,741)
-------- -------- --------
$ 127,577 $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 six months ended June 30, 1997 and 1996 (unaudited)
was approximately $2.9 million and $2.8 million, respectively.
F-36
<PAGE> 445
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. DEFERRED CHARGES
Deferred charges consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, --------------------
1997 1996 1995
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Deferred financing costs........................... $ 2,248 $ 1,049 $ 2,214
Deferred leasing costs............................. 17,047 17,018 16,500
Deferred brokerage commissions..................... 7,971 7,330 7,132
-------- -------- --------
27,266 25,397 25,846
Less: Accumulated amortization................ (15,225) (13,761) (13,303)
-------- -------- --------
$12,041 $ 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.
F-37
<PAGE> 446
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Presented below is condensed combined financial information of the DRA
Joint Ventures:
DRA JOINT VENTURES
Combined Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate, net of accumulated depreciation.............. $ 140,285 $140,759 $139,169
Other assets.............................................. 19,401 19,249 10,759
-------- -------- --------
Total assets.................................... $ 159,686 $160,008 $149,928
======== ======== ========
LIABILITIES AND OWNERS' EQUITY
Debt on real estate....................................... $ 129,225 $126,517 $119,288
Accounts payable and other liabilities.................... 4,097 3,956 5,428
-------- -------- --------
Total liabilities............................... 133,322 130,473 124,716
Owners' equity............................................ 26,364 29,535 25,212
-------- -------- --------
Total liabilities and owners' equity............ $ 159,686 $160,008 $149,928
======== ======== ========
</TABLE>
DRA JOINT VENTURES
Combined Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- ----------------------------
1997 1996 1996 1995 1994
----------- ----------- ------- ------- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income......................... $14,503 $14,331 $29,010 $12,629 $207
Management fees and other............. 83 98 288 224
------ ------ ------- ------- ----
Total revenues................ 14,586 14,429 29,298 12,853 207
------ ------ ------- ------- ----
Expenses:
Property operating expenses, real
estate taxes and management fees... 6,207 6,564 12,446 6,283 170
Interest expense...................... 5,692 4,816 10,176 3,814
Depreciation and amortization......... 2,307 1,949 4,118 1,684 31
------ ------ ------- ------- ----
Total expenses................ 14,206 13,329 26,740 11,781 201
------ ------ ------- ------- ----
Net income.................... $ 380 $ 1,100 $ 2,558 $ 1,072 $ 6
====== ====== ======= ======= ====
</TABLE>
F-38
<PAGE> 447
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
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Real estate, net of accumulated depreciation........................ $31,151 $ 30,638
Other assets........................................................ 2,448 2,244
------- -------
Total assets.............................................. $33,599 $ 32,882
======= =======
LIABILITIES AND OWNERS' EQUITY
Debt on real estate................................................. $26,489 $ 25,021
Accounts payable and other liabilities.............................. 925 1,285
------- -------
Total liabilities......................................... 27,414 26,306
Owners' equity...................................................... 6,185 6,576
------- -------
Total liabilities and owners' equity...................... $33,599 $ 32,882
======= =======
</TABLE>
2800 NORTH CENTRAL PROPERTY
Statements of Operations
(in thousands)
<TABLE>
<CAPTION>
PERIOD FROM
SIX-MONTHS MAY 1996
ENDED THROUGH
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Rental income..................................................... $2,779 $3,615
Management fees and other......................................... 9 48
------ ------
Total revenues............................................ 2,788 3,663
------ ------
Expenses:
Property operating expenses, real estate taxes and management
fees........................................................... 1,360 1,687
Interest expense.................................................. 1,265 1,581
Depreciation and amortization..................................... 554 519
------ ------
Total expenses............................................ 3,179 3,787
------ ------
Net loss.................................................. $ (391) $ (124)
====== ======
</TABLE>
F-39
<PAGE> 448
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,
JUNE 30, ---------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Tower 45.................................................. $ 145,430 $147,616 $151,109
120 Mineola Boulevard..................................... 11,260 18,892 18,892
Maitland Forum............................................ 28,875 29,409 27,013
Maitland Center Parkway (3 properties).................... 4,548 4,437 2,948
5750 Major Boulevard...................................... 3,268 2,538
-------- -------- --------
$ 193,381 $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,
plus an additional rate ranging from 3.25% to 4.50% (8.76% to 9.51% at December
31, 1996 and 8.69% to 9.50% (unaudited) at June 30, 1997). 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 30-day LIBOR (5.50% and 5.69% (unaudited) on December 31, 1996 and
June 30, 1997, respectively), plus an additional rate ranging from 1.75% to
2.50%. 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>
During the six months ended June 30, 1997, the debt on 120 Mineola
Boulevard was extinguished with proceeds from another lender of $11,260. Gain on
the early extinguishment of debt totalled $6,475.
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-40
<PAGE> 449
TOWER PREDECESSOR
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The geographic concentration of the future minimum lease payments to be
received as of December 31, 1996 is 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,
JUNE 30, -------------------
1997 1996 1995
----------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Accrued interest............................................ $ 5,981 $ 6,022 $ 5,455
Accounts payable............................................ 3,151 3,336 4,161
Advance rent and deposits................................... 2,331 2,322 1,801
Deferred income............................................. 1,123 1,187 183
------- ------- -------
$12,586 $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 six
months ended June 30, 1997 and 1996, fees and costs derived from these
agreements totalled $0.2 million (unaudited) and $0.8 million (unaudited),
respectively.
Amounts due to affiliates at June 30, 1997 and 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-41
<PAGE> 450
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 six
months ended June 30, 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-42
<PAGE> 451
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-43
<PAGE> 452
SCHEDULE III
TOWER PREDECESSOR
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST COSTS
--------------------- CAPITALIZED
BUILDING AND SUBSEQUENT TO
PROPERTY NAME(1) LOCATION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITIONS
- ------------------------------ ---------------- ------------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Maitland Center Parkway....... Maitland, FL $ 4,437 $ 218 $ 2,400 $ 556
120 Mineola Boulevard......... Long Island, NY 18,892 3,216 16,885 390
Maitland Forum................ Maitland, FL 29,409 3,817 10,415 7,862
Tower 45...................... New York, NY 147,616 18,029 71,886 30,095
5750 Major Boulevard.......... Orlando, FL 2,538 382 3,468 --
-------- ------- ------- -------
$202,892 $25,662 $105,054 $38,903
======== ======= ======= =======
<CAPTION>
GROSS AMOUNT CARRIED
AT CLOSE OF PERIOD
-----------------------------------
LAND AND BUILDING AND ACCUMULATED DATE OF DATE DEPRECIABLE
PROPERTY NAME(1) IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED LIVES (YEARS)
- ------------------------------ ------------ ------------ -------- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Maitland Center Parkway....... $ 218 $ 2,956 3,174 355 -- 1992 (2)
120 Mineola Boulevard......... 3,216 17,275 20,491 4,701 -- 1988 (2)
Maitland Forum................ 3,817 18,277 22,094 7,666 1984 -- (2)
Tower 45...................... 18,029 101,981 120,010 27,814 1989 -- (2)
5750 Major Boulevard.......... 382 3,468 3,850 19 -- 1996 (2)
------- -------- -------- -------
$ 25,662 $143,957 $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-44
<PAGE> 453
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-45
<PAGE> 454
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 DRA Joint Ventures' revenues
and expenses.
In our opinion, the combined statements of revenues and certain operating
expenses referred to above present 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-46
<PAGE> 455
DRA JOINT VENTURES
COMBINED STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED YEAR ENDED NOVEMBER 21,
JUNE 30, DECEMBER 31, 1994 THROUGH
--------------------------- ------------------- DECEMBER 31,
1997 1996 1996 1995 1994
----------- ----------- ------- ------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income................... $13,994 $13,561 $27,592 11,672 $193
Unbilled rental income.......... 509 770 1,418 957 14
Other income.................... 83 98 288 224
------ ------ ------- ------- ----
Total revenues.......... 14,586 14,429 29,298 12,853 207
------ ------ ------- ------- ----
Certain operating expenses:
Property operating and
maintenance.................. 3,959 4,190 7,791 4,003 95
Real estate taxes............... 1,796 1,810 3,572 1,746 38
General office and
administration............... 40 169 282 164 31
Management fees................. 412 395 801 370 6
------ ------ ------- ------- ----
Total certain operating
expenses.............. 6,207 6,564 12,446 6,283 170
------ ------ ------- ------- ----
Revenues in excess of
certain operating
expenses.............. $ 8,379 $ 7,865 $16,852 $ 6,570 $ 37
====== ====== ======= ======= ====
</TABLE>
The accompanying notes are an integral part of these combined
statements of revenues and certain operating expenses.
F-47
<PAGE> 456
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 89.5%
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 concurrent private placements (the "Concurrent Private
Placements"). The proceeds from the Offering and the Concurrent Private
Placements will be used to purchase a sole 1% general partnership interest and
89.5% 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-48
<PAGE> 457
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 six months ended June 30, 1997, One Orlando Center and Corporate Center
comprise 30.0% and 26.5% 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 six months ended June
30, 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-49
<PAGE> 458
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 six
months ended June 30, 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 six months ended June
30, 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
six months ended June 30, 1997 and 1996, fees paid under these agreements
totalled $0.5 million (unaudited) and $0.6 million (unaudited), respectively.
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.
4. REAL ESTATE
The following is real estate and accumulated depreciation information for
DRA Joint Ventures as of December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
INITIAL COST COSTS
--------------------- CAPITALIZED
BUILDING AND SUBSEQUENT TO
PROPERTY NAME(1) LOCATION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITIONS
- ---------------------------- ------------- ------------ ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
286 Madison Avenue.......... New York, NY $ 7,909 $ 1,204 $ 5,693 $ 1,078
290 Madison Avenue.......... New York, NY 4,184 736 3,465 100
292 Madison Avenue.......... New York, NY 18,400 3,297 15,593 427
5151 East Broadway.......... Tucson, AZ 15,089 2,020 8,080 5,398
Corporate Center Building... Phoenix, AZ 22,000 8,510 25,531 992
One Orlando Center.......... Orlando, FL 58,935 6,100 54,900 2,991
-------- ------- ------- -------
$126,517 $21,867 $113,262 $10,986
======== ======= ======= =======
<CAPTION>
GROSS AMOUNT CARRIED
AT CLOSE OF PERIOD
-----------------------------------
LAND AND BUILDING AND ACCUMULATED DATE OF DATE DEPRECIABLE
PROPERTY NAME(1) IMPROVEMENTS IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED LIVES (YEARS)
- ---------------------------- ------------ ------------ -------- ----------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
286 Madison Avenue.......... $ 1,205 $ 6,770 $ 7,975 $ 316 -- 1995 (2)
290 Madison Avenue.......... 736 3,565 4,301 128 -- 1995 (2)
292 Madison Avenue.......... 3,301 16,016 19,317 584 -- 1995 (2)
5151 East Broadway.......... 2,040 13,458 15,498 887 -- 1994 (2)
Corporate Center Building... 8,510 26,523 35,033 969 -- 1995 (2)
One Orlando Center.......... 6,115 57,876 63,991 2,472 -- 1995 (2)
------- -------- -------- -------
$ 21,907 $124,208 $146,115 $ 5,356
======= ======== ======== =======
</TABLE>
- ---------------
Notes:
(1) Includes properties held by DRA Properties. For Corporate Center Building (6
properties), information is unavailable on an individual property basis.
(2) Buildings and improvements depreciated over 40 years.
F-50
<PAGE> 459
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Tower Realty Trust, Inc.
We have audited the accompanying statement of revenues and certain
operating expenses of 100 Wall Street for the year ended December 31, 1996. This
historical statement of revenues and certain operating expenses is the
responsibility of the management of 100 Wall Street. Our responsibility is to
express an opinion on this statement of revenues and certain operating expenses
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 historical statement of revenues and
certain operating expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the 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 statement
of revenues and certain operating expenses. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenues and certain operating expenses was
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 is not
intended to be a complete presentation of 100 Wall Street's revenues and
expenses.
In our opinion, the statement of revenues and certain operating expenses
referred to above presents fairly, in all material respects, the revenues and
certain operating expenses of 100 Wall Street, as described in Note 1, for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
September 15, 1997
F-51
<PAGE> 460
100 WALL STREET
STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED
--------------------------- DECEMBER 31,
1997 1996 1996
----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Revenues:
Rental income......................................... $ 5,606 $ 5,102 $ 11,317
Other income.......................................... 318 610 961
------ ------ -------
Total revenues................................ 5,924 5,712 12,278
------ ------ -------
Certain operating expenses:
Property operating and maintenance.................... 1,955 1,951 4,151
Real estate taxes..................................... 1,192 1,387 2,524
Other expenses........................................ 97 48 143
------ ------ -------
Total certain operating expenses.............. 3,244 3,386 6,818
------ ------ -------
Revenues in excess of certain operating
expenses.................................... $ 2,680 $ 2,326 $ 5,460
====== ====== =======
</TABLE>
The accompanying notes are an integral part of these
statements of revenues and certain operating expenses.
F-52
<PAGE> 461
100 WALL STREET
NOTES TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
The accompanying statements of revenues and certain operating expenses of
100 Wall Street have been presented on a historical cost basis 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
89.5% limited partnership interest in the Operating Partnership concurrent with
the Company's initial public offering. In management's opinion, these statements
of revenues and certain operating expenses include the revenues and expenses
associated with the operations of the property intended to be sold to the
Company.
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 concurrent private placements (the "Concurrent Private
Placements"). The proceeds from the Offering and the Concurrent Private
Placements will be used to purchase a sole 1% general partnership interest and
89.5% limited partnership interest in the Operating Partnership which will hold
the operating assets and liabilities of the Company.
The accompanying historical statements have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission and are
not representative of the actual operations of the property for the periods
presented. The statements exclude certain expenses such as interest,
depreciation and amortization and other costs not directly related to the future
operations of the property that may not be comparable to the expenses expected
to be incurred in the proposed future operations of the property.
REVENUE RECOGNITION
100 Wall Street, as a lessor, has retained substantially all of the risks
and benefits of ownership of the rental properties and accounts for its lease as
operating leases. Space is leased to tenants under leases ranging from 1 to 16
years. Rental income is recognized over the terms of the leases as it is earned.
FUTURE RENTAL REVENUE
The future minimum lease payments to be received by 100 Wall Street as of
December 31, 1996 under noncancelable operating leases, which expire on various
dates through September 2066, are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
------------------------------------------------ ------------
<S> <C>
1997....................................... $ 10,672,038
1998....................................... 11,445,587
1999....................................... 10,409,691
2000....................................... 6,171,497
2001....................................... 5,957,006
Thereafter................................. 27,698,050
-----------
$ 72,353,869
===========
</TABLE>
There were two major tenants which together represented approximately 51%
and 50% of 100 Wall Street total revenue income for the year ended December 31,
1996 and the six months ended June 30, 1997, respectively.
F-53
<PAGE> 462
100 WALL STREET
NOTES TO STATEMENTS OF REVENUES AND CERTAIN OPERATING EXPENSES -- (CONTINUED)
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of 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. Actual results could
differ from those estimates.
UNAUDITED INTERIM STATEMENTS
The revenues in excess of certain operating expenses for the six months
ended June 30, 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 statements have been included. The revenues in excess
of certain operating expenses for the six months ended June 30, 1997 are not
necessarily indicative of the 100 Wall Street future operations for the full
year ending December 31, 1997.
F-54
<PAGE> 463
======================================================
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.......................... 20
The Company........................... 34
Operating and Growth Strategies....... 36
Use of Proceeds....................... 40
Distributions......................... 41
Capitalization........................ 45
Dilution.............................. 46
Selected Combined Financial and
Operating Data...................... 47
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 52
Property Office Markets and Market
Economies........................... 61
The Properties........................ 75
Management............................ 103
Formation and Structure of the
Company............................. 112
Certain Relationships and
Transactions........................ 117
Principal Stockholders................ 119
Description of Capital Stock.......... 121
Certain Provisions of Maryland Law and
of the Company's Charter and
Bylaws.............................. 126
Policies with Respect to Certain
Activities.......................... 129
Shares Available for Future Sale...... 133
Partnership Agreement................. 135
Federal Income Tax Considerations..... 138
ERISA Considerations.................. 155
Underwriting.......................... 158
Experts............................... 161
Legal Matters......................... 162
Additional Information................ 162
Glossary.............................. 163
Index to Financial Statements......... F-1
</TABLE>
UNTIL NOVEMBER 4, 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.
======================================================
======================================================
12,015,000 SHARES
TOWER REALTY
TRUST, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH INTERNATIONAL
LEGG MASON WOOD WALKER
INCORPORATED
MORGAN STANLEY DEAN WITTER
PRUDENTIAL-BACHE SECURITIES
SMITH BARNEY INC.
NATIONSBANC MONTGOMERY
SECURITIES, INC.
OCTOBER 9, 1997
======================================================
