<PAGE> 1
This filing is made pursuant
to Rule 424(b)(5) under the
Securities Act of 1933 in
connection with Registration
No. 333-27181
PROSPECTUS SUPPLEMENT
(To Prospectus dated July 28, 1997)
LOGO
IRVINE APARTMENT COMMUNITIES, L.P.
$100,000,000
7% Notes due 2007
Interest payable April 1 and October 1
ISSUE PRICE: 99.208%
Interest on the 7% Notes due 2007 (the "Notes") of Irvine Apartment Communities,
L.P. (the "Operating Partnership") offered hereby is payable semi-annually on
April 1 and October 1, commencing April 1, 1998. See "Description of
Notes -- Principal and Interest." The Notes will mature on October 1, 2007. The
Notes will not be subject to any sinking fund.
The Notes may be redeemed at any time at the option of the Operating
Partnership, in whole or in part, at a redemption price equal to the sum of (i)
the principal amount of the Notes being redeemed plus accrued interest thereon
to the redemption date and (ii) the Make-Whole Amount (as hereinafter defined),
if any. See "Description of Notes -- Optional Redemption."
The Notes will be represented by one or more Global Notes (as hereinafter
defined) registered in the name of The Depository Trust Company ("DTC") or its
nominee. Interests in the Global Notes will be shown on, and transfers thereof
will be effected only through, records maintained by DTC and its participants.
Except as provided herein, Notes in definitive form will not be issued. See
"Description of Notes."
SEE "RISK FACTORS" BEGINNING ON PAGE S-11 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE NOTES.
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 SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND OPERATING
PUBLIC(1) COMMISSIONS(2) PARTNERSHIP(1)(3)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note 99.208% .650% 98.558%
- ----------------------------------------------------------------------------------------------------------
Total $99,208,000 $650,000 $98,558,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from October 1, 1997.
(2) The Operating Partnership and the Company (as hereinafter defined) have
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(3) Before deducting expenses payable by the Operating Partnership estimated at
$300,000.
The Notes are offered subject to prior sale, when, as, and if delivered to and
accepted by the Underwriters and subject to approval of certain legal matters by
Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters. It is
expected that delivery of the Notes will be made on or about October 1, 1997,
through the facilities of DTC, against payment therefor in immediately available
funds.
J.P. MORGAN & CO.
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
September 25, 1997
<PAGE> 2
[IRVINE APARTMENT COMMUNITIES MARKETS MAP]
UNTIL DECEMBER 24, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
S-2
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES. SPECIFICALLY,
THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING, AND MAY BID FOR,
AND PURCHASE, THE NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE OPERATING PARTNERSHIP OR ANY UNDERWRITER. THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH THEY RELATE OR ANY OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
SUCH SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE OPERATING PARTNERSHIP SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE HEREIN OR THEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary...................................................................................... S-4
Risk Factors................................................................................. S-11
Recent Developments.......................................................................... S-14
Use of Proceeds.............................................................................. S-15
Ratio of Earnings to Fixed Charges........................................................... S-15
Capitalization............................................................................... S-15
Business and Properties...................................................................... S-16
Economic and Demographic Factors Affecting the Operating Partnership......................... S-22
Management................................................................................... S-27
Description of Notes......................................................................... S-29
Underwriting................................................................................. S-37
Legal Matters................................................................................ S-37
PROSPECTUS
PAGE
Available Information........................................................................ 2
Incorporation of Certain Information by Reference............................................ 3
The Operating Partnership.................................................................... 4
Use of Proceeds.............................................................................. 4
Consolidated Ratios of Earnings to Fixed Charges............................................. 5
Description of the Debt Securities........................................................... 5
Plan of Distribution......................................................................... 9
Experts...................................................................................... 10
Legal Matters................................................................................ 10
</TABLE>
S-3
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by the more detailed
financial and other information appearing elsewhere in this Prospectus
Supplement and the accompanying Prospectus or incorporated herein or therein by
reference. Unless otherwise indicated, all information in this Prospectus
Supplement relates to the properties of the Operating Partnership as of June 30,
1997. In addition, all property, statistical and operating data relating to the
Existing Communities (as defined below) in this Prospectus Supplement presented
as of any date prior to, or for any period ending on or prior to, June 30, 1997
excludes data for The Villas of Renaissance (as defined below), which the
Operating Partnership acquired on June 30, 1997. All data relating to the
Existing Communities presented as of June 30, 1997 includes data for The Villas
of Renaissance. See "Recent Developments -- 'Off-Ranch' Expansion."
THE OPERATING PARTNERSHIP
Irvine Apartment Communities, L.P., a Delaware limited partnership (the
"Operating Partnership"), is engaged in the development and operation of
multifamily rental apartment communities in California. The Operating
Partnership's management and operating decisions are under the unilateral
control of Irvine Apartment Communities, Inc., a Maryland corporation (the
"Company"), a self-administered equity real estate investment trust. The
Operating Partnership and the Company were formed in December 1993 to continue
and expand the apartment community business of The Irvine Company, a real estate
and community development company. At June 30, 1997, the Company had a 45.1%
general partnership interest in the Operating Partnership and was its sole
managing general partner. At such date, the limited partners of the Operating
Partnership had a 54.9% interest in the Operating Partnership, with The Irvine
Company and certain of its affiliates owning a 54.7% limited partnership
interest in the Operating Partnership.
As of June 30, 1997, the Operating Partnership owned and operated 14,991 units
in 51 high-quality apartment communities (the "Existing Communities"), two of
which (totalling 527 units) were in lease-up, and had four additional apartment
communities aggregating 1,110 units under construction (the "Communities Under
Construction" and, together with the Existing Communities, the "Properties").
Upon completion of the Communities Under Construction, the Operating Partnership
will own a total of 16,101 units in 55 apartment communities, representing an
increase in units of approximately 42% since the Company's initial public
offering (the "Initial Public Offering") in December 1993. Through July 2020,
the Company and the Operating Partnership hold the exclusive right, but not the
obligation, to acquire land from The Irvine Company, the owner and developer of
the Irvine Ranch since 1864, for development of additional apartment communities
on the Irvine Ranch. Fifty-three of the Properties aggregating 14,836 units (the
"Irvine Ranch Properties") are or will be located on the Irvine Ranch, of which
50 constitute Existing Communities (14,068 units) and three constitute
Communities Under Construction (768 units).
In 1997, the Operating Partnership commenced an "off-Ranch" expansion program
through the acquisition of rights to purchase three apartment community
development sites located in Northern California's Silicon Valley. The Operating
Partnership has exercised its right with respect to one of these sites and has
begun construction on a 342-unit apartment community on the site. Preliminary
design and jurisdictional approvals are also in process with respect to both of
the remaining development sites. In addition, on June 30, 1997, the Operating
Partnership purchased for $127 million an existing 923-unit apartment community
("The Villas of Renaissance") located in Northern San Diego County (the "Villas
of Renaissance Acquisition"). See "Recent Developments -- 'Off-Ranch'
Expansion." The Operating Partnership believes that the economic expansion being
experienced by the State of California provides the Company with significant
growth potential.
The Irvine Ranch is located in central Orange County, California between San
Diego and Los Angeles. The western boundary of the Irvine Ranch borders
approximately six miles of the Pacific Ocean. Today, the portion of the Irvine
Ranch which is still owned by The Irvine Company covers approximately 50,000
acres and includes the largest remaining privately-owned undeveloped acreage in
Orange County. The developed portion of the Irvine Ranch, which includes the
city of Irvine and significant parts of the cities of Newport Beach and Tustin,
is one of the largest urban master-planned communities in the United States. The
Irvine Ranch has been developed over the past 30 years in accordance with an
original master plan (the "Master Plan") which, over time, has been refined to
accord with locally approved general plans. The Irvine Ranch is one of the major
commercial, industrial, retail and residential centers in Southern California.
The Operating Partnership believes that a variety of factors have contributed to
the strong apartment market in Orange County, the successful operating
performance of the Existing Communities located on the Irvine Ranch and the
S-4
<PAGE> 5
existence of significant opportunities for the development of additional
apartment communities on the Irvine Ranch. Most important among these factors
are:
- The dominant market position of the Operating Partnership, which owns
over 85% of all apartment communities having 100 or more units on the
Irvine Ranch;
- The Operating Partnership's 23-year exclusive right to acquire land
from The Irvine Company for development of additional rental apartment
communities on the Irvine Ranch;
- The limited supply of developable land, other than on the Irvine
Ranch, adjacent to major employment centers in Orange County;
- The Irvine Company's Master Plan strategy which emphasizes market
segmentation in order to ensure adequate and appropriate allocation of
land uses which support sustained growth for the long-term;
- The high quality of design, construction and maintenance of the Irvine
Ranch Properties and their location in or near the City of Irvine,
which was ranked by the Federal Bureau of Investigation as among the
safest cities in the United States with a population of 100,000 or
more;
- The close proximity of the Irvine Ranch Properties and of future
development sites to major employment centers, the Pacific Ocean, high
quality schools, and extensive resort, recreational and open space
amenities;
- An affluent, growing population and diversified employment base in
Orange County and on the Irvine Ranch;
- The Operating Partnership's ability to defer the purchase of land on
the Irvine Ranch under its land rights agreement until site and zoning
entitlements have been obtained, the land is ready for construction
and the Operating Partnership determines favorable market conditions
exist;
- The operating efficiencies available to the Operating Partnership
because the Irvine Ranch Properties are located in a single geographic
area;
- An average of over 20 years of experience of the Company's 10 most
senior members of management in the design, development, construction,
property management and financing of apartment communities; and
- The effectiveness of management's policies regarding property
management and expense control.
The Operating Partnership's intent is to create new market positions in the
Silicon Valley and Northern San Diego County, which possess strong rental
demographics and economic growth prospects similar to those on the Irvine Ranch.
S-5
<PAGE> 6
THE PROPERTIES
As of June 30, 1997, the Operating Partnership owned and operated 14,991
apartment units in the Existing Communities and had four Communities Under
Construction. The Operating Partnership believes that the Properties are high
quality apartment communities with superior locations near major employment
centers and, in the case of Irvine Ranch Properties, within master-planned
villages. The Properties are located within the following individual
jurisdictions:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF PERCENT OF
LOCATION PROPERTIES(1) UNITS(2) TOTAL UNITS
-------------------------------------------------------- ------------- ---------- -----------
<S> <C> <C> <C>
ORANGE COUNTY
Irvine................................................ 37 9,849 61.2%
Newport Beach......................................... 8 2,305 14.3
Tustin................................................ 7 2,170 13.5
Newport Coast......................................... 1 512 3.2
SILICON VALLEY
Cupertino............................................. 1 342 2.1
NORTHERN SAN DIEGO COUNTY
La Jolla(3)........................................... 1 923 5.7
---------- ---------- ----------
TOTAL................................................... 55 16,101 100.0%
========== ========== ==========
</TABLE>
- ---------------
(1) Four of these Properties are Communities Under Construction.
(2) 1,110 of these units are in Communities Under Construction.
(3) Acquired on June 30, 1997 in the Villas of Renaissance Acquisition.
S-6
<PAGE> 7
THE OFFERING
ISSUER............................... Irvine Apartment Communities, L.P.
SECURITIES OFFERED................... $100,000,000 aggregate principal amount
of 7% Notes due 2007.
MATURITY............................. October 1, 2007.
INTEREST PAYMENT DATES............... Semi-annually on April 1 and October 1,
commencing April 1, 1998.
RANKING.............................. The Notes will be senior unsecured
obligations of the Operating Partnership
and will rank equally with the Operating
Partnership's other unsecured and
unsubordinated indebtedness. The Notes
will not be obligations of the Company.
The Notes will be effectively
subordinated to (i) mortgages and other
secured indebtedness of the Operating
Partnership, which totalled $533.6
million at June 30, 1997, and (ii) all
indebtedness and other liabilities of any
subsidiaries of the Operating
Partnership, of which none was
outstanding at June 30, 1997.
USE OF PROCEEDS...................... To repay indebtedness under the Operating
Partnership's Credit Facility (as
hereinafter defined), which indebtedness
was incurred to finance the Villas of
Renaissance Acquisition. See "Use of
Proceeds."
OPTIONAL REDEMPTION BY THE OPERATING
PARTNERSHIP........................ The Notes are redeemable at any time at
the option of the Operating Partnership,
in whole or in part, at a redemption
price equal to the sum of (i) the
principal amount of the Notes being
redeemed plus accrued interest to the
redemption date and (ii) the Make-Whole
Amount, if any. See "Description of
Notes -- Optional Redemption."
LIMITATIONS ON INCURRENCE OF
INDEBTEDNESS......................... The Notes contain various covenants
including the following:
- Neither the Operating Partnership nor
any of its Subsidiaries (as hereinafter
defined) may incur any Indebtedness (as
hereinafter defined) if, after giving
effect thereto, the aggregate principal
amount of all outstanding Indebtedness
of the Operating Partnership and its
Subsidiaries on a consolidated basis is
greater than 60% of the sum of (i) the
Total Assets (as hereinafter defined)
of the Operating Partnership and its
Subsidiaries as of the end of the most
recent calendar quarter and (ii) the
purchase price or cost of any real
estate assets or mortgages receivable
acquired or developed, and the amount
of any securities offering proceeds
received (to the extent that such
proceeds were not used to acquire real
estate assets or mortgages receivable,
to develop real estate assets or to
reduce Indebtedness), by the Operating
Partnership or any of its Subsidiaries
since the end of such calendar quarter,
including those proceeds obtained in
connection with the incurrence of such
additional Indebtedness.
- Neither the Operating Partnership nor
any of its Subsidiaries may incur any
Indebtedness secured by any Encumbrance
(as hereinafter defined) upon any of
the property of the Operating
Partnership or any of its Subsidiaries
if, after
S-7
<PAGE> 8
giving effect thereto, the aggregate
principal amount of all outstanding
Indebtedness of the Operating
Partnership and its Subsidiaries on a
consolidated basis which is secured by
any Encumbrance on property of the
Operating Partnership or any of its
Subsidiaries is greater than 40% of the
sum of (i) the Total Assets of the
Operating Partnership and its
Subsidiaries as of the end of the most
recent calendar quarter and (ii) the
purchase price or cost of any real
estate assets or mortgages receivable
acquired or developed, and the amount
of any securities offering proceeds
received (to the extent that such
proceeds were not used to acquire real
estate assets or mortgages receivable,
to develop real estate assets or to
reduce Indebtedness), by the Operating
Partnership or any of its Subsidiaries
since the end of such calendar quarter,
including those proceeds obtained in
connection with the incurrence of such
additional Indebtedness.
- The Operating Partnership and its
Subsidiaries may not at any time own
Total Unencumbered Assets (as
hereinafter defined) equal to less than
150% of the aggregate outstanding
principal amount of the Unsecured
Indebtedness (as hereinafter defined)
of the Operating Partnership and its
Subsidiaries on a consolidated basis.
- Neither the Operating Partnership nor
any of its Subsidiaries may incur any
Indebtedness if, after giving effect
thereto, the ratio of Consolidated
Income Available for Debt Service (as
hereinafter defined) to the Annual
Service Charge (as hereinafter defined)
for the four consecutive fiscal
quarters most recently ended prior to
the date on which such additional
Indebtedness is to be incurred shall
have been less than 1.5:1 on a pro
forma basis after giving effect to
certain assumptions.
For a more complete description of the
terms and definitions used in the
foregoing limitations, see "Description
of Notes -- Certain Covenants."
---------------------
As of June 30, 1997, as adjusted to reflect the offering of the Notes and the
application of the net proceeds therefrom as described under "Use of Proceeds,"
the Operating Partnership's ratio of Indebtedness to Total Assets would have
been 33.5%, its ratio of Indebtedness subject to Encumbrances to Total Assets
would have been 27.4% and its ratio of Total Unencumbered Assets to Unsecured
Indebtedness would have been 501.8% and for the four consecutive fiscal quarters
ended June 30, 1997, as so adjusted, the Operating Partnership would have had a
ratio of Consolidated Income Available for Debt Service to the Annual Service
Charge of 3.95:1.
S-8
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The following Summary Consolidated Financial and Other Information (other than
statistical and property data) has been derived from the Operating Partnership's
or the Operating Partnership's predecessor's (the "Predecessor's") consolidated
financial statements. Information as of December 31, 1996 and 1995 and for each
of the years in the three year period ended December 31, 1996 has been derived
from the Operating Partnership's audited financial statements incorporated by
reference herein and in the accompanying Prospectus. Information for the year
ended December 31, 1993 has been derived from audited financial statements of
the Company and the Predecessor and is on a combined and consolidated historical
basis for the Operating Partnership and the Predecessor. Information at December
31, 1994 and 1993 has been derived from the Company's audited financial
statements not incorporated by reference herein and in the accompanying
Prospectus and information at and for the year ended December 31, 1992 has been
derived from the Predecessor's audited financial statements not incorporated by
reference herein and in the accompanying Prospectus. Information at June 30,
1997 and for the respective six month periods ended June 30, 1997 and 1996 has
been derived from the Operating Partnership's unaudited consolidated financial
statements incorporated by reference herein and in the accompanying Prospectus
and which, in the opinion of the Operating Partnership, reflect all adjustments
considered necessary for a fair presentation. Results for the six month period
ended June 30, 1997 are not necessarily indicative of results for the full year.
All such financial information is qualified in its entirety by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements (including the notes thereto) incorporated by reference herein and in
the accompanying Prospectus. See "Incorporation of Certain Information by
Reference" in the accompanying Prospectus.
For pro forma financial information for the year ended December 31, 1996 and the
three months ended March 31, 1997 relating to the Villas of Renaissance
Acquisition, see the Company's Current Report on Form 8-K/A filed on July 23,
1997, incorporated by reference herein and in the accompanying Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- --------------------------------------------------------------------
1997 1996 1996 1995 1994 1993(1) 1992
------------ ------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PROPERTY INFORMATION AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Rental income................. $85,441 $74,430 $154,925 $133,678 $127,338 $123,101 $119,097
Other income.................. 1,941 1,440 3,162 2,079 1,585 1,659 2,097
Interest income............... 571 186 611 411 1,313 60 --
------------ ------------ ------------ ------------ ------------ ------------ ------------
87,953 76,056 158,698 136,168 130,236 124,820 121,194
------------ ------------ ------------ ------------ ------------ ------------ ------------
Expenses:
Property expenses............. 18,536 16,212 33,859 31,761 33,105 34,057 35,685
Real estate taxes............. 6,930 6,695 13,496 12,002 11,786 10,729 9,921
Property management fees...... 2,471 2,168 4,502 3,893 3,800 3,881 4,393
Interest expense, net......... 13,389 15,092 29,506 25,894 26,827 50,248 49,154
Amortization of deferred
financing costs............. 1,296 1,320 2,627 8,510 15,942 3,012 1,474
Depreciation and
amortization................ 13,734 13,557 27,239 23,143 21,055 20,002 19,808
General and administrative.... 2,988 3,168 6,277 5,909 5,442 3,278 2,359
------------ ------------ ------------ ------------ ------------ ------------ ------------
59,344 58,212 117,506 111,112 117,957 125,207 122,794
------------ ------------ ------------ ------------ ------------ ------------ ------------
Income (loss) before
extraordinary item............ 28,609 17,844 41,192 25,056 12,279 (387) (1,600)
Extraordinary item -- charge
related to debt
extinguishment................ -- -- -- (23,427) -- (12,487) --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net income (loss)............... $28,609 $17,844 $41,192 $1,629 $12,279 $(12,874) $(1,600)
============ ============ ============ ============ ============ ============ ============
STATISTICAL AND PROPERTY DATA:
Total stabilized communities (at
period end)(2)................ 49 44 48 43 43 42 42
Apartment units (at period
end).......................... 14,991 13,411 13,656 12,776 11,358 11,334 10,952
Average units in stabilized
communities(2)(3)............. 13,541 11,395 12,139 11,334 11,334 10,799 10,446
Average physical occupancy in
stabilized
communities(2)(3)............. 94.9% 94.7% 94.9% 94.6% 95.6% 96.3% 96.2%
</TABLE>
S-9
<PAGE> 10
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- --------------------------------------------------------------------
1997 1996 1996 1995 1994 1993(1) 1992
------------ ------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PROPERTY INFORMATION AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Average monthly rent per
unit(3)(4)(5)................. $1,086 $1,001 $1,025 $996 $981 $963 $950
Capital replacements per
unit(3)(5)(6)................. $125 $166 $393 $399 $490 $482 $458
EBITDA(7)....................... $57,028 $47,813 $100,564 $82,603 $76,103 $72,875 $68,836
Ratio of EBITDA to interest
expense(7).................... 4.26x 3.17x 3.41x 3.19x 2.84x 1.45x 1.40x
Cash flows provided by (used
in):
Operating activities.......... $ 42,084 $ 35,688 $ 73,037 $ 55,403 $ 49,786 $ 10,249 $ 16,171
Investing activities.......... $(175,839) $(26,545) $(66,616) $(128,218) $(50,918) $(23,649) $(19,285)
Financing activities.......... $ 135,828 $ (9,245) $ (7,608) $ 73,739 $(23,316) $ 36,428 $ 3,516
Total Undepreciated Real Estate
Assets(8)..................... $1,269,375 $1,036,425 $1,084,235 $1,005,633 $869,756 $792,510 $768,861
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, ------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Total assets........................... $1,075,316 $900,998 $853,230 $757,240 $740,120 $654,694
Total debt............................. 651,587 553,064 563,286 540,689 513,943 555,491
Total liabilities...................... 678,831 580,654 588,664 566,191 527,776 564,420
Partners' capital...................... 396,485 320,344 264,566 191,049 212,344 90,274
</TABLE>
- ---------------
(1) Includes the operations of the Predecessor through December 7, 1993 and of
the Operating Partnership from December 8 through December 31, 1993.
(2) A property is stabilized at the earlier of (i) one year after completion of
construction or (ii) when it achieves 95% occupancy.
(3) Excludes The Villas of Renaissance.
(4) Average monthly rent per unit is calculated by dividing the average rental
revenue per unit by average economic occupancy.
(5) With respect to each period presented for communities that have been
stabilized for less than one year, reflects data from the date of stabilized
occupancy.
(6) Data for the year ended December 31, 1992 exclude capital replacements
totaling $534 relating to a major renovation program at the Operating
Partnership's Promontory Point apartment community due to the nonrecurring
nature of the program.
(7) EBITDA represents earnings before interest, depreciation and amortization
and extraordinary items. EBITDA should not be considered as an alternative
to operating income, as determined in accordance with generally accepted
accounting principles ("GAAP"), as an indicator of the Operating
Partnership's operating performance, or to cash flows from operating
activities (as determined in accordance with GAAP) as a measure of
liquidity.
(8) Total Undepreciated Real Estate Assets represents the cost (original cost
plus capital improvements) of real estate assets of the Operating
Partnership and its Subsidiaries (as hereinafter defined) on such date,
before depreciation and amortization, determined on a consolidated basis in
accordance with GAAP.
S-10
<PAGE> 11
RISK FACTORS
Prospective investors should carefully consider the following information in
conjunction with the other information contained or incorporated by reference in
this Prospectus Supplement and the accompanying Prospectus before making an
investment in the Notes.
FACTORS RELATING TO REAL ESTATE OPERATIONS AND DEVELOPMENT
General. Real property investments are subject to varying degrees of risk. The
investment returns available from equity investments in real estate depend in
large part on the amount of income earned and capital appreciation generated by
the related properties as well as the expenses incurred. If the Properties do
not generate revenue sufficient to meet operating expenses, including debt
service and capital expenditures, the Operating Partnership's income and ability
to service its debt, including the Notes, will be adversely affected. In
addition, the Properties consist primarily of apartment communities located in
Orange County. Income from and the performance of the Irvine Ranch Properties
may therefore be adversely affected by the general economic climate in Orange
County, including unemployment rates and local conditions such as the supply of
and demand for apartments in the area, the attractiveness of the Irvine Ranch
Properties to residents, zoning or other regulatory restrictions, competition
from other available apartments and alternative forms of housing, the
affordability of single family homes, the ability of the Operating Partnership
to provide adequate maintenance and insurance and the potential of increased
operating costs (including real estate taxes). Certain significant expenditures
associated with an investment in real estate (such as mortgage and other debt
payments, real estate taxes and maintenance costs) generally are not reduced
when circumstances cause a reduction in revenue from the investment. In
addition, income from properties and real estate values are also affected by a
variety of other factors, such as governmental regulations and applicable laws
(including real estate, zoning and tax laws), interest rate levels and the
availability of financing. The Irvine Ranch Properties in the aggregate
historically have generated positive cash flow from operations; however, no
assurance can be given that such will be the case in the future.
In 1997, the Operating Partnership commenced an "off-Ranch" expansion program
through the acquisition of rights to purchase three apartment community
development sites located in Northern California's Silicon Valley. The Operating
Partnership commenced construction of a 342-unit apartment community on one of
such sites in May 1997, and on June 30, 1997, the Operating Partnership acquired
an existing 923-unit apartment community located in Northern San Diego County.
These new Properties represent the Operating Partnership's first strategic
expansion off the Irvine Ranch and the Operating Partnership may make additional
investments in Northern California and the San Diego area in the future. The
development, construction and operation of rental apartment communities in such
new markets may present risks different from or in addition to the risks
discussed above related to the Irvine Ranch Properties, which are located
entirely in Orange County. No assurance can be given that the Operating
Partnership will be successful in pursuing any additional "off-Ranch" expansion
or that any "off-Ranch" apartment communities will be successful.
Equity real estate investments, such as the investments made by the Operating
Partnership in the Properties and any additional properties that may be
developed or acquired by the Operating Partnership, are relatively illiquid.
Such illiquidity limits the ability of the Operating Partnership to vary its
portfolio in response to changes in economic or other conditions. In addition,
the Internal Revenue Code of 1986, as amended, places limits on the Company's
ability to sell properties held for fewer than four years, which may affect the
ability of the Operating Partnership to sell properties.
The Properties are subject to all operating risks common to apartment ownership
in general. Such risks include: the Operating Partnership's ability to rent
units at the Properties, including the 1,110 units in the Communities Under
Construction; competition from other apartment communities; excessive building
of comparable properties which might adversely affect apartment occupancy or
rental rates; increases in operating costs due to inflation and other factors,
which increases may not necessarily be offset by increased rents; increased
affordable housing requirements that might adversely affect rental rates;
inability or unwillingness of residents to pay rent increases; and future
enactment of rent control laws or other laws regulating apartment housing,
including present and possible future laws relating to access by disabled
persons. 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. If any of the above occurred, the Operating
Partnership's ability to meet its debt service requirements, including with
respect to the Notes, could be adversely affected.
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Real Estate Development and Acquisition. A primary focus of the Operating
Partnership is on development of new apartment communities on sites acquired or
that may be acquired in the future primarily from The Irvine Company, although
the Operating Partnership also plans to develop new rental apartment communities
on sites acquired or that may be acquired in the future from third parties. The
Operating Partnership has also acquired and may continue to acquire completed
rental apartment communities. See "Recent Developments -- 'Off-Ranch'
Expansion." The real estate development business involves significant risks in
addition to those involved in the ownership and operation of established
apartment communities, including the risks that specific project approvals may
take more time and resources to obtain than expected, that construction may not
be completed on schedule or budget and that apartment communities may not
achieve anticipated rent or occupancy levels. In addition, if long-term debt or
equity financing is not available on acceptable terms to refinance new
development or acquisitions undertaken without long-term financing, further
development activities or acquisitions might be curtailed or cash available for
debt service might be adversely affected.
Insurance. The Operating Partnership carries comprehensive liability, fire,
extended coverage and rental loss insurance covering all of the Properties, with
policy specifications and insured limits which the Operating Partnership
believes are adequate and appropriate under the circumstances. There are,
however, certain types of losses (such as from earthquakes) that are not
generally insured because they are either uninsurable or not economically
insurable. The Operating Partnership does not carry earthquake insurance on any
of the Properties. Should an uninsured loss or a loss in excess of insured
limits occur, the Operating Partnership 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 recourse to the Operating Partnership, would remain
obligated for any mortgage debt or other financial obligations related to the
property. Any such loss would adversely affect the Operating Partnership. The
Operating Partnership believes that the Properties are adequately insured. In
addition, in light of the California earthquake risk, California building codes
since the early 1970s have established construction standards for all newly
built and renovated buildings, including apartment buildings, the current and
strictest construction standards having been adopted in 1984. Thirty-two of the
51 Existing Communities (representing approximately 68.9% of the units in the
Existing Communities) have been completed and occupied since January 1, 1985 and
the Company believes that all of the Existing Communities were constructed, and
all of the Communities Under Construction are being constructed, in full
compliance with the applicable standards existing at the time of construction.
In addition, the Operating Partnership's apartment communities contain multiple
buildings, all of which are of wood frame construction. While earthquakes have
occurred from time to time in California, the Operating Partnership has not
experienced any material losses as a result of earthquakes. No assurance can be
given that this will be the case in the future.
CONFLICTS OF INTEREST
The Company has adopted certain policies and entered into certain agreements
with The Irvine Company and Donald Bren designed to eliminate or minimize
potential conflicts of interest. The Board of Directors of the Company has
adopted a policy and has provided in its Bylaws that no transaction between the
Company or the Operating Partnership and either The Irvine Company, affiliates
of The Irvine Company or Mr. Bren may be entered into without the approval of
the Independent Directors Committee of the Company's Board of Directors. Members
of the Independent Directors Committee are unaffiliated with The Irvine Company.
In addition, the Independent Directors Committee engages an independent
consultant to assist it in evaluating all land transactions with The Irvine
Company. However, there can be no assurance that these 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 the Operating Partnership.
Exclusive Land Rights; Non-Competition Arrangements. Purchases of property by
the Operating Partnership from The Irvine Company under the Land Rights
Agreement may be made only with the approval of a majority of the Independent
Directors Committee. The Irvine Company determines which land is designated for
apartment community development in accordance with the Master Plan for the
Irvine Ranch, and therefore which land is eligible for purchase by the Operating
Partnership pursuant to the Land Rights Agreement. No assurance can be given
that The Irvine Company will entitle land for development of additional
apartment communities at a rate consistent with prior development. In addition,
The Irvine Company controls the application for related entitlements and also
has certain approval rights with respect to the architectural design and
physical layout of the rental apartment communities. The Irvine Company and Mr.
Bren have agreed not to directly or indirectly acquire or develop, or acquire an
equity ownership interest in any entity that has an ownership interest in, any
apartment community, whether on or off the Irvine Ranch. The prohibition of The
Irvine Company and Mr. Bren from developing apartment communities on the Irvine
Ranch will terminate on July 31, 2020. The Irvine Company and Mr. Bren remain
prohibited from
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<PAGE> 13
engaging in any such activity off the Irvine Ranch until the date on which both
of the following conditions are satisfied: (i) no nominee of The Irvine Company
is a member of the Company's Board of Directors and (ii) The Irvine Company and
certain related persons beneficially own less than 20% of the outstanding Common
Stock of the Company in the aggregate (including for these purposes shares of
Common Stock issuable upon exercise of the rights to exchange units of limited
partnership interest ("OP Units") in the Operating Partnership, subject to the
ownership limit provision in the Company's Articles of Amendment and Restatement
(the "Articles of Incorporation")). As of June 30, 1997, The Irvine Company
owned 1,200,000 shares of Common Stock of the Company and 24,012,330 OP Units
exchangeable for Common Stock of the Company on a one-for-one basis, subject to
adjustment. The Land Rights Agreement may be terminated earlier upon the
occurrence of certain events not within the control of The Irvine Company
including (i) the failure of the stockholders of the Company to elect as
directors of the Company the number of directors The Irvine Company is entitled
to nominate, (ii) the failure of the Company's Board of Directors to elect a
person designated by The Irvine Company to fill a vacancy created by the
departure from the Board (for any reason) of a director designated by The Irvine
Company and (iii) the taking of certain actions requiring the approval of more
than a majority of the Board of Directors of the Company without the consent of
The Irvine Company. See "Management -- Certain Rights of The Irvine Company with
Respect to the Company's Board of Directors."
Other Business Activities of The Irvine Company. The Irvine Company has
significant business interests in developed industrial, commercial and other
properties and in the future development of such properties on the Irvine Ranch,
the value of which exceeds the value of its aggregate interest in the Company
and the Operating Partnership. The feasibility and development of other
apartment communities by the Operating Partnership on the Irvine Ranch may be
affected by the feasibility and development of commercial, industrial and
residential for-sale properties by The Irvine Company on the Irvine Ranch. No
assurance can be given that The Irvine Company will not determine that certain
potential apartment community sites on undeveloped portions of the Irvine Ranch
should be developed as single family, for-sale homes or condominiums or as
industrial or commercial properties.
RISKS ASSOCIATED WITH DEBT FINANCING
Where possible, the Operating Partnership seeks to use leverage to increase the
rate of return on its investments and to allow the Operating Partnership to make
more investments than it otherwise could. Such use of leverage presents an
element of risk in the event that the cash flow from the Operating Partnership's
properties is insufficient to meet the Operating Partnership's debt service
requirements (including with respect to the Notes). Subject to the limitations
contained in the Indenture and the Credit Facility, to the extent the Operating
Partnership determines to obtain additional debt financing in the future, it may
do so through mortgages on some or all of its Properties. As of June 30, 1997,
$533.6 million of the Operating Partnership's outstanding debt was secured by
mortgages. The existing mortgages, a substantial portion of which are
cross-collateralized, are non-recourse to the Operating Partnership. Any future
mortgages may be on recourse, non-recourse or cross-collateralized bases. To the
extent indebtedness is cross-collateralized, lenders may seek to foreclose upon
Properties which are not the primary collateral for their loans, which may, in
turn, result in acceleration of other indebtedness secured by the Properties.
Holders of indebtedness which is secured by any of the Properties will have a
claim against such Properties which is senior to the claim of holders of the
Notes. Foreclosure on Properties would result in a loss of income and asset
value to the Operating Partnership.
The Operating Partnership's new $250 million Credit Facility is guaranteed by
the Company. The Notes will be senior unsecured indebtedness of the Operating
Partnership, of which the Company is the general partner, but will not be
guaranteed by the Company. As a result of the guarantee under the Credit
Facility, such lenders may have prior claims to, and procedural advantages in
respect of claims to, the assets, if any, owned directly by the Company.
LACK OF PUBLIC MARKET
The Notes are a new issue of securities for which there is currently no active
trading market. If any of the Notes are traded after their initial issuance,
they may trade at a discount from their initial offering price, depending upon
prevailing interest rates, the market for similar securities and other factors,
including general economic conditions and the financial condition of,
performance of, and prospects for, the Operating Partnership. There can be no
assurance as to the development of any market, or the liquidity of any market
that may develop, for the Notes. The Underwriters have informed the Operating
Partnership that they intend to make a market in the Notes offered hereby;
however, they are not obligated to do so and any such market-making may be
terminated at any time without notice to the Holders of the Notes. See
"Underwriting." The Operating Partnership does not intend to apply for listing
of the Notes on any securities exchange or for quotation of the Notes on the
Nasdaq National Market.
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<PAGE> 14
RECENT DEVELOPMENTS
"OFF-RANCH" EXPANSION
On February 4, 1997, the Operating Partnership acquired, for $2.0 million in OP
Units, the assets, including rights to purchase three apartment community
development sites located in the Silicon Valley, of Thompson Residential
Company, Inc. ("TRC"), a privately held, Northern California-based multi-family
development company. The three senior real estate executives at TRC also joined
the Company with primary responsibility for the Operating Partnership's
"off-Ranch" California operations. The Operating Partnership has exercised one
of the options and has commenced construction of a 342-unit apartment community
on the site. The site is located in Cupertino, California, at the intersection
of Interstate 280 and Wolfe Road in the center of the Silicon Valley, and is
immediately adjacent to major office and manufacturing facilities, including an
over 1,000,000 square foot Hewlett-Packard Co. facility. If the Cupertino
apartment community achieves greater than a specified project yield for the
first year following stabilized occupancy, then under the terms of the
acquisition agreement, the Operating Partnership would be required to pay TRC a
portion of the amount in excess of such specified yield, not exceeding $2.0
million in the aggregate, in cash or, at TRC's option, in additional OP Units.
Preliminary design and jurisdictional approvals are also in process with respect
to the construction of apartment communities on both of the remaining
development sites. However, as of the date of this Prospectus Supplement, the
Operating Partnership has not yet determined whether to construct an apartment
community on either of the remaining development sites.
On June 30, 1997, the Operating Partnership acquired for $127 million an
existing 923-unit apartment community, known as The Villas of Renaissance,
located in Northern San Diego County. Situated in La Jolla, California, the
project is located in University Town Center ("UTC") and enjoys free access from
the La Jolla Village Road/ Interstate 805 interchange. The property is within
walking distance of 4,300,000 square feet of office buildings in the UTC
financial district and the 1,300,000 square foot UTC regional shopping mall that
is anchored by Nordstrom's, Macy's, Sears and Robinsons-May. For pro forma
financial information for the year ended December 31, 1996 and the three months
ended March 31, 1997 relating to the Villas of Renaissance Acquisition, see the
Company's Current Report on Form 8-K/A filed on July 23, 1997, incorporated by
reference herein and in the accompanying Prospectus.
The Operating Partnership's intent is to create new market positions in the
Silicon Valley and Northern San Diego County, which possess strong rental
demographics and economic growth prospects similar to those on the Irvine Ranch.
The Operating Partnership currently has no commitment or understanding to
acquire any other specific businesses or assets and there can be no assurance
that it will be successful pursuing any other acquisition opportunities.
MANAGEMENT AND BOARD OF DIRECTORS CHANGES
On July 2, 1997, the Board of Directors of the Company elected William H.
McFarland, a director of the Company since December 1996, as President and Chief
Executive Officer to replace Donald Bren, the Company's founder, who remains
Chairman of the Board of Directors of the Company. Mr. McFarland has been
Executive Vice President, Land and Residential Development, of The Irvine
Company since 1984 and was responsible for the operations and development
activities of the Predecessor prior to the Company's and the Operating
Partnership's formation in 1993. Concurrently with his appointment as President
and Chief Executive Officer of the Company, Mr. McFarland resigned from his
position with The Irvine Company.
Pursuant to its rights under the Miscellaneous Rights Agreement, The Irvine
Company nominated Raymond L. Watson to the Company's Board of Directors as an
Irvine Company Board Representative and on July 25, 1997 the Board of Directors
of the Company elected Mr. Watson as a director of the Company to serve until
the 1998 Annual Meeting of the Company's shareholders. Mr. Watson filled a
vacancy on the Board of Directors and replaced Mr. McFarland, who remains a
director of the Company, as one of the three Irvine Company Board
Representatives on the Company's Board of Directors. See "Management -- Certain
Rights of The Irvine Company with Respect to the Company's Board of Directors."
Mr. Watson was a director of the Company from its formation in 1993 until
December 1994. Mr. Watson has been Vice Chairman of the Board of The Irvine
Company since 1986. From 1973 to 1977, Mr. Watson was President and Chief
Executive Officer of The Irvine Company and he has been a member of the
Executive Committee of the Board of Directors of The Irvine Company since 1983.
Mr. Watson is a member of the Board of Directors of Pacific Mutual Life
Insurance Company, Mitchell Energy and Development Company, Tejon Ranch Company
and the Walt Disney Company, where he is also a Chairman of the Executive
Committee.
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<PAGE> 15
NEW LINE OF CREDIT
On June 27, 1997, the Operating Partnership entered into a new $250 million
three-year unsecured revolving line of credit (the "Credit Facility") which
replaced its prior facility. The interest rate payable on outstanding borrowings
and fees are lower under the Credit Facility than under the prior facility. The
Operating Partnership used borrowings under the Credit Facility to finance the
Villas of Renaissance Acquisition and in the future intends to use the Credit
Facility for its ongoing rental property development program, for potential
acquisitions, and for general working capital needs. The Credit Facility is
guaranteed by the Company.
USE OF PROCEEDS
The net proceeds to the Operating Partnership from the offering of the Notes,
after deducting Underwriters' discounts and commissions and offering expenses,
are expected to be approximately $98.3 million. Such net proceeds will be used
by the Operating Partnership to repay indebtedness outstanding under the Credit
Facility, which indebtedness was incurred to finance the Villas of Renaissance
Acquisition. The Credit Facility had a balance as of June 30, 1997 of $118.0
million with an average interest rate of 6.69% and, as of September 25, 1997,
the Credit Facility had an outstanding balance of approximately $132.0 million,
$118.0 million of which was incurred in connection with the Villas of
Renaissance Acquisition on June 30, 1997.
Morgan Guaranty Trust Company of New York, an affiliate of J.P. Morgan
Securities Inc., one of the Underwriters, is a lender under the Credit Facility.
Approximately $11.2 million of the net proceeds from the offering of the Notes
will be used to repay Morgan Guaranty Trust Company of New York for a portion of
the outstanding borrowings of the Operating Partnership under the Credit
Facility. See "Underwriting."
A member of the Board of Directors of the Company is Chairman, President and
Chief Executive Officer of First Bank System, Inc., an affiliate of the Trustee.
In addition, an affiliate of the Trustee is a lender under the Credit Facility.
RATIO OF EARNINGS TO FIXED CHARGES
The consolidated ratio of earnings to fixed charges for the Operating
Partnership for the six month periods ended June 30, 1996 and June 30, 1997 was
1.90:1 and 2.52:1, respectively.
CAPITALIZATION
The following table sets forth the capitalization of the Operating Partnership
as of June 30, 1997, and as adjusted to give effect to the offering of the Notes
and the application of the net proceeds therefrom of approximately $98.3
million. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
AS
ACTUAL ADJUSTED
---------- ----------
(UNAUDITED, IN
THOUSANDS)
<S> <C> <C>
Mortgages and Notes
Notes offered hereby...................................................... $ -- $ 100,000
Credit Facility(1)........................................................ 118,000 19,742
Tax-exempt mortgage bond financings....................................... 327,479 327,479
Conventional mortgage financings.......................................... 133,533 133,533
Mortgage notes payable to The Irvine Company.............................. 50,817 50,817
Tax-exempt assessment district debt....................................... 21,758 21,758
Partners' Capital
43,902 partnership units outstanding at June 30, 1997:
General partner, 19,815 partnership units at June 30, 1997................ 210,457 210,457
Limited partner, 24,087 partnership units at June 30, 1997................ 186,028 186,028
---------- ----------
Total Capitalization........................................................ $1,048,072 $1,049,814
========== ==========
</TABLE>
- ---------------
(1) As of September 25, 1997, the Credit Facility had an outstanding balance of
approximately $132.0 million, approximately $98.3 million of which will be
repaid with the net proceeds of the offering of the Notes.
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<PAGE> 16
BUSINESS AND PROPERTIES
BUSINESS STRATEGY
The Operating Partnership's primary business objective is to deliver strong,
consistent total annual returns to its partners while enhancing the long-term
growth in value of its real estate portfolio. The Operating Partnership believes
it is well positioned to meet this objective given the size and strength of the
economic regions in which it operates, the quality of its existing apartment
community portfolio and the significant opportunities for new development within
its primary market, and in similar high growth regions of California, such as
the Silicon Valley and the Northern San Diego market place. Through adherence to
specific operating and development strategies, the most important of which are
discussed below, the Operating Partnership seeks to achieve growth in its funds
from operations through maximization of cash flow from its Existing Communities
and the development of new apartment communities.
OPERATING STRATEGIES
- - Provide an exceptional living environment for residents. The Existing
Communities on the Irvine Ranch have been developed and are maintained to
appeal to the highly educated, relatively affluent base of renters attracted
to the Irvine Ranch. As a result of the region's closely managed
master-planning process, the Irvine Ranch Properties are situated amid parks
and other open space, and in close proximity to employment centers, schools,
retail centers, and recreational facilities. They provide generous
amenities, are well maintained and offer a high standard of customer
service. The Operating Partnership's success in providing an exceptional
quality of life for its residents is evidenced in part by the strong average
rental rates the Existing Communities on the Irvine Ranch command relative
to average rental rates for Orange County as a whole. In 1996, the
stabilized Existing Communities on the Irvine Ranch produced an average
monthly rent of $1,025 per unit, which was approximately $200 more than the
average monthly rent in Orange County.
- - Enhance efficiency of operations. Management of the Company selectively
subcontracts on-site staffing, personnel management and accounting functions
to three independent property management firms which enables it to focus on
marketing, product pricing and positioning, and approval of operating
budgets. Management additionally directs and tests the standards of
property-level activities conducted by the firms, including training of
on-site staff. Management also seeks to enhance operating efficiency and, as
a result, property expenses were reduced by 2.8% during 1996 within
communities on the Irvine Ranch stabilized more than two years.
- - Capitalize on strong brand identity with enhanced marketing and
merchandising programs. The Operating Partnership has enhanced certain of
its marketing programs to broaden its already strong brand name recognition
in order to attract new residents into its portfolio and broaden the
existing resident base. The Operating Partnership's marketing programs
include: a website and a single source 800 telephone number to provide
information on the Properties; rental information centers within major
shopping centers and the University of California, Irvine; and a targeted
advertising campaign promoting the Operating Partnership's portfolio and its
strong quality of life characteristics.
DEVELOPMENT STRATEGIES
- - Develop new communities to complement and expand the Operating Partnership's
existing rental market base. A diverse regional economy, continuing
population growth, and an attractive quality of life all contribute to a
broad and varied demand for rental housing on the Irvine Ranch. As a result,
opportunities exist for a variety of apartment property types and amenity
levels, including projects designed for the family, luxury and senior
markets, and the area's large population of young professionals. The
Operating Partnership's development program on the Irvine Ranch seeks to
capitalize on these opportunities through market segmentation. Supported by
consumer research and focus group studies, market segmentation decisions are
made at the earliest planning stages, when new residential villages for the
Irvine Ranch are conceived and the villages' largest and most important
amenities are selected. Location of schools, recreational facilities, retail
centers, open space and views are all important considerations. Individual
development decisions -- including site location, product design, amenities
and marketing programs -- are also geared to appeal to the needs and desires
of the target rental market.
- - Utilize experienced management to create high-quality, well-built properties
designed to sustain value. The Operating Partnership brings considerable
management expertise to all aspects of the development, construction and
leasing process. Senior management of the Company is actively involved in
new project development from the inception of a new Irvine Ranch village and
is responsible for target market identification; design of site
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<PAGE> 17
plans, building plans, and floor plans; project and unit amenity selection;
and site-specific governmental approvals. In addition, the Operating
Partnership directs the bidding and contracting of all major construction
activities, in essence acting as general contractor. The Operating
Partnership engages experienced independent construction managers to act as
intermediaries with subcontractors and to manage on-site activities under
the close supervision of the Operating Partnership's internal construction
group. The Operating Partnership builds properties using only high-quality
construction materials and techniques, and believes that this higher initial
investment in quality enhances long-term value creation by sustaining high
community rental income levels and reducing long-term expense levels.
"OFF-RANCH" EXPANSION
While the Operating Partnership's principal focus has been on the development of
apartment communities on the Irvine Ranch, the Operating Partnership has
commenced an "off-Ranch" expansion program and will continue to consider other
opportunities to acquire or develop apartment communities, principally in
California, that offer attractive risk-adjusted returns. The Operating
Partnership's intent is to create new market positions in the Silicon Valley and
Northern San Diego County, which possess strong rental demographics and economic
growth prospects similar to those on the Irvine Ranch. In addition, the three
senior real estate executives at TRC have joined the Company with primary
responsibility for the Operating Partnership's "off-Ranch" California
operations.
FLEXIBLE AND CONSERVATIVE CAPITAL STRUCTURE
The Operating Partnership has and plans to continue to maintain a flexible and
conservative capital structure that enhances its access to capital markets on
favorable terms and promotes future earnings growth.
The Operating Partnership's financial position reflects its conservative
financial strategy:
- The Operating Partnership manages its financings to minimize its
exposure to debt maturities. After giving effect to the offering of
the Notes, the Operating Partnership's weighted average maturity would
have been 14.8 years.
- Total debt to total market capitalization of 33.6% at June 30, 1997.
The Company, as general partner of the Operating Partnership, has
established a debt policy relative to its total market capitalization,
a ratio commonly employed by REITs, rather than to the book value of
its assets, because the Company believes that the book value of its
assets (which to a large extent is the depreciated value of its
apartments) does not accurately reflect its ability to borrow and to
meet debt service requirements. The market capitalization of the
Company, however, is more variable than book value and does not
necessarily reflect the fair market value of the underlying assets of
the Operating Partnership.
- The ratio of EBITDA to interest expense for the six month period
ending June 30, 1997 was 4.26:1. Management does not expect such ratio
to change materially as a result of the offering of the Notes, as net
proceeds from the offering of the Notes will be used primarily to
refinance interim debt with a current interest rate comparable to the
Notes.
IRVINE RANCH MASTER PLAN
The urbanization of the Irvine Ranch began in the 1960s with the adoption of the
pioneering comprehensive Master Plan for future community development which
originally constituted a large map of the Irvine Ranch and a series of
supporting maps detailing land uses. Subsequently, The Irvine Company worked
closely with the various local jurisdictions who govern the Irvine Ranch to
adopt general plans for the future development of their jurisdictions. The
Irvine Company's overall Master Plan was refined to accord with the approved
general plans and the residential, commercial, industrial, environmental and
aesthetic balance desired by each jurisdiction. As a result, today the Irvine
Ranch Master Plan is a compilation of the various interlocking general plans
described above. The Irvine Company continuously engages in planning activities
and the Master Plan refinement process is ongoing. The Irvine Company works
closely with local government representatives, community residents and other
civic and environmental groups to obtain the necessary local support and
entitlements for its developments. The goal of the Master Plan was and remains
to create innovative urban and suburban environments through the well-planned,
coordinated development of residential communities and employment centers (which
include major business and retail centers, and research and development and
industrial parks) as well as civic, cultural, recreational, educational and
other supportive facilities, all with an emphasis on improving the quality of
life and achieving long-term balanced regional economic growth.
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<PAGE> 18
The success of the Irvine Ranch as a master-planned development is in the large
part attributable to the early creation of a broad employment base. The Irvine
Company has emphasized the promotion of job creation on the Irvine Ranch and has
been involved in creating four major employment centers on the Irvine Ranch,
each easily accessible by apartment residents and the surrounding area. The
Irvine Company has been the sole developer of the Irvine Spectrum, a 3,600-acre
research, technology and employment center which houses more than 2,200
companies and approximately 44,000 employees and includes more than 2.0 million
square feet of office and other commercial space and over 15.5 million square
feet of industrial space. The Irvine Business Complex, which surrounds the John
Wayne airport, houses over 100,000 employees and includes more than 24 million
square feet of office and other commercial space and over 14 million square feet
of industrial space. Newport Center contains over 4.4 million square feet of
office space, a 1.3 million square-foot regional mall (Fashion Island), a tennis
club and two country clubs. In addition, The Irvine Company donated land to the
University of California at Irvine, a 1,489-acre campus which currently has more
than 16,000 students and 5,500 employees. The proximity of the Irvine Ranch
Properties to these employment centers makes them attractive residential
locations.
MARKET SEGMENTATION AND THE VILLAGE CONCEPT
The Irvine Company's land use planning emphasizes market segmentation in order
to ensure adequate and appropriate allocation of land uses which support
sustained growth for the long term. Through careful planning, design and
marketing, The Irvine Company also promotes compatibility and synergy among
properties of the same type in order to maximize the likelihood of success of
new projects, to preserve and build value for existing projects and to build
sustainable long-term market value for homeowners, local merchants and
employers. In accordance with the Master Plan, The Irvine Company has created
twelve villages which are used as micro-planning areas in an effort to
facilitate the desired segmentation of products.
Each village across the Irvine Ranch has a thematic identity which characterizes
the primary features and attributes of the village and helps to identify the
target market for the Operating Partnership's product. For example, Tustin
Ranch, in the City of Tustin, is a family-oriented village featuring an 18-hole
champion golf course, athletic fields, jogging, hiking and equestrian trails.
Along the ocean is the village of Newport Coast, an upscale community featuring
ocean views and million-dollar custom built homes. The village of Westpark, in
Irvine, caters to young professionals with growing families and offers the
highly renowned public school system and recreational facilities of the City of
Irvine.
Within each village, the Operating Partnership's target market is further
defined. The primary factor which determines the appropriate target for the
Operating Partnership's product is location. For example, the conventional
product which is targeted towards young professionals is typically located near
major business centers and in close proximity to entertainment, retail
establishments and major transportation corridors. The student product, on the
other hand, is located within walking distance of a college or university,
student-oriented retail centers, and public transportation.
Finally, the Operating Partnership specifically designs its products to appeal
to a target market. The Operating Partnership's luxury product is typically in a
unique location with ocean or golf course views. The family products offer
spacious play areas and tot lots, a children's multi-purpose room with an
activities coordinator, individual garages and in-unit washers and dryers.
EXCLUSIVE LAND RIGHTS AGREEMENT
The Company, the Operating Partnership and The Irvine Company are parties to the
Land Rights Agreement pursuant to which, through July 31, 2020, the Company and
the Operating Partnership have the exclusive right, but not the obligation, to
acquire all land sites to be entitled for residential use and designated by The
Irvine Company as ready for apartment community development in accordance with
The Irvine Company's Master Plan. The determination to exercise an option with
respect to a site is made solely by the Independent Directors Committee of the
Company's Board of Directors. Under this Agreement, the Operating Partnership
has purchased ten apartment community land sites since the Initial Public
Offering, seven of which are now Existing Communities and three of which are now
the Communities Under Construction. Under the terms of the Land Rights
Agreement, through July 31, 2000, the purchase price for any apartment community
sites acquired may be paid with either cash, Common Stock or OP Units, at the
option of the Company. After July 31, 2000, the choice of consideration will
revert to The Irvine Company. In no event shall the purchase price for any
apartment community land site exceed 95% of the value of such site as determined
by independent appraisals. In addition, the purchase price for apartment sites
which encompassed the first 1,800 apartment units the Operating Partnership
developed commencing in mid-1995 were set at an amount such that each project's
budgeted pro forma unleveraged return on costs for the first 12 months following
stabilized occupancy
S-18
<PAGE> 19
was between 10.0% and 10.5%. Ten land sites, encompassing 3,502 units in the
aggregate, have been purchased under this arrangement. Accordingly, as of the
date hereof the purchase price for all future land sites will be no greater than
95% of the appraised value. Independent appraisals will be obtained by each of
the Operating Partnership and The Irvine Company for all future sites, prior to
the Independent Directors Committee determining whether the Operating
Partnership will exercise its right to purchase a land site. If the Operating
Partnership elects not to exercise its option for any site, the Operating
Partnership will thereafter have a right of first refusal on the sale of such
site to a third party if the terms of such sale are more favorable than those
offered to the Operating Partnership. The determination to exercise an option or
the right of first refusal under the Land Rights Agreement with respect to any
site will be made solely by a majority of the Independent Directors Committee.
Pursuant to the Land Rights Agreement, The Irvine Company and Mr. Bren have
agreed to certain restrictions on their ability to engage in activities that may
compete with the Operating Partnership or the Company. These restrictions
terminate upon the occurrence of certain conditions. See "Risk
Factors -- Conflicts of Interest -- Exclusive Land Rights; Non-Competition
Arrangements."
THE PROPERTIES
EXISTING COMMUNITIES
The Existing Communities consist of 51 apartment communities of two, three or
four stories, containing 14,991 units. The Company believes that the Existing
Communities are well maintained and have no material deferred maintenance
requirements. The average age of the Existing Communities is approximately 11
years. The oldest of the Existing Communities was completed in 1969, and 32 of
the 51 Existing Communities, totaling 10,323 units or approximately 68.9% of the
units in the Existing Communities, have been completed since January 1, 1985.
The number of units per apartment community ranges from 58 units to 923 units,
with an average of approximately 294 units. Approximately 88% of the units are
one- or two-bedroom apartments. The apartment units average 946 square feet.
Excluding The Villas of Renaissance, 43 of the Existing Communities,
representing 11,334 units, achieved stabilized occupancy prior to January 1,
1996, and for the six months ended June 30, 1997, these Existing Communities had
an average physical occupancy rate of 95.0% and an average monthly rent per unit
of $1,057. Five Existing Communities, containing 2,207 units, were in lease-up
throughout 1995 and achieved stabilized occupancy during 1996. For the six
months ended June 30, 1997 these five Existing Communities had an average
physical occupancy of 94.4%. The Operating Partnership also acquired The Villas
of Renaissance (containing 923 units) on June 30, 1997. See "Recent
Developments -- 'Off-Ranch' Expansion." The two remaining Existing Communities
containing 527 units were in lease-up at June 30, 1997, with 489 units rented
and generating revenue at such date. By July 20, 1997, each such community had
achieved stabilization.
All of the Existing Communities offer apartment residents numerous amenities and
include extensive landscaping. Approximately 80% of the 51 Existing Communities
contain a swimming pool, spa, air conditioning and covered parking. Additional
amenities may include a fitness center, recreational room, sauna and tennis
courts. Each apartment unit includes a patio, entry porch or balcony. Many
apartment units offer one or more of certain additional features, such as
vaulted ceilings, fireplaces, enclosed garages, refrigerators, washers and
dryers and microwave ovens.
The Operating Partnership seeks to assure that the Properties remain attractive
dwellings for apartment residents and desired locations for prospective
apartment residents. Local property manager maintenance, custodial and
groundskeeping personnel perform regular maintenance and upkeep on the
Properties to preserve the enhanced physical and aesthetic attributes. The
physical appearance of, and apartment residents' satisfaction with, the
Properties and with the performance of the local property managers is monitored
and evaluated on an ongoing basis by the Company's senior management.
S-19
<PAGE> 20
STABILIZED COMMUNITY INFORMATION(1)
<TABLE>
<CAPTION>
1996
AVERAGE AVERAGE
UNIT MONTHLY 1996
SIZE RENTAL AVERAGE
YEAR NUMBER (SQUARE RATE PER PHYSICAL
COMMUNITY COMPLETED OF UNITS FEET) UNIT OCCUPANCY
- -------------------------------------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PROPERTIES STABILIZED OVER TWO YEARS:
Irvine, CA:
Amherst Court....................... 1991 162 724 $ 976 94.0%
Berkeley Court...................... 1986 152 828 1,032 92.5
Cedar Creek......................... 1985 176 811 897 94.9
Columbia Court...................... 1984 58 852 975 95.2
Cornell Court....................... 1984 109 894 1,043 95.2
Cross Creek......................... 1985 136 935 959 95.9
Dartmouth Court..................... 1986 294 896 1,032 92.6
Deerfield........................... 1975/1983 192/96 849 879 94.8
Harvard Court....................... 1986 112 826 978 94.5
Northwood Park...................... 1985 168 944 907 95.0
Northwood Place..................... 1986 604 954 907 95.0
Orchard Park........................ 1982 60 971 1,009 99.9
Park West........................... 1970/71/72 256/276/348 1,004 934 94.1
Parkwood............................ 1974 296 886 921 94.1
Rancho San Joaquin.................. 1976 368 896 975 96.2
San Carlo........................... 1989 354 1,074 1,158 96.4
San Leon............................ 1987 248 951 1,006 94.3
San Marco........................... 1988 426 923 950 95.4
San Marino.......................... 1986 200 926 981 94.6
San Mateo........................... 1990 283 720 919 95.6
San Paulo........................... 1993 382 1,001 934 95.0
San Remo............................ 1986/1988 136/112 963 968 94.3
Stanford Court...................... 1985 320 799 951 95.0
The Parklands....................... 1983 121 794 1,135 99.8
Turtle Rock Canyon.................. 1991 217 1,024 1,218 96.7
Turtle Rock Vista................... 1976/1977 112/140 1,155 1,161 96.3
Windwood Glen....................... 1985 196 878 916 96.5
Windwood Knoll...................... 1983 248 906 899 95.2
Woodbridge Oaks..................... 1983 120 976 1,072 99.9
Woodbridge Pines.................... 1976 220 872 935 94.6
Woodbridge Villas................... 1982 258 867 919 94.9
Woodbridge Willows.................. 1984 200 894 937 95.9
------------ ---------- ---------- ----------
Subtotal......................... 8,156 923 $ 972 95.1%
------------ ---------- ---------- ----------
Newport Beach, CA:
Bayport............................. 1971 104 867 $ 991 97.0%
Bayview............................. 1971 64 1,154 1,208 96.4
Baywood............................. 1973/1984 320/68 1,074 1,106 96.1
Mariner Square...................... 1969 114 1,104 1,109 95.0
Newport North....................... 1986 570 947 1,058 94.7
Promontory Point.................... 1974 520 1,056 1,566 92.7
------------ ---------- ---------- ----------
Subtotal......................... 1,760 1,020 $1,224 94.6%
------------ ---------- ---------- ----------
</TABLE>
S-20
<PAGE> 21
<TABLE>
<CAPTION>
1996
AVERAGE AVERAGE
UNIT MONTHLY 1996
SIZE RENTAL AVERAGE
YEAR NUMBER (SQUARE RATE PER PHYSICAL
COMMUNITY COMPLETED OF UNITS FEET) UNIT OCCUPANCY
- -------------------------------------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Tustin, CA:
Rancho Alisal....................... 1988/1991 344/12 967 $ 956 93.9%
Rancho Maderas...................... 1989 266 939 1,003 94.5
Rancho Mariposa..................... 1992 238 856 973 94.4
Rancho Tierra....................... 1989 252 1,031 1,052 95.3
Sierra Vista........................ 1992 306 852 1,028 94.5
------------ ---------- ---------- ----------
Subtotal......................... 1,418 930 $1,000 94.5%
------------ ---------- ---------- ----------
TOTAL PORTFOLIO STABILIZED OVER TWO YEARS 11,334 939 $1,015 95.0%
------------ ---------- ---------- ----------
PROPERTIES STABILIZED LESS THAN TWO YEARS:
Villa Coronado...................... 1996 513 929 $1,170 92.6%
Santa Rosa.......................... 1996 368 895 1,110 94.8
Santa Clara......................... 1996 378 967 1,181 95.5
Rancho Monterey..................... 1996 436 932 1,176 95.1
Newport Ridge....................... 1996 512 951 1,376 94.5
------------ ---------- ---------- ----------
TOTAL PORTFOLIO STABILIZED LESS THAN
TWO YEARS........................... 2,207 936 $1,169 94.4%
------------ ---------- ---------- ----------
TOTAL STABILIZED PORTFOLIO............ 13,541 938 $1,025 94.9%
============ ========== ========== ==========
</TABLE>
- ---------------
(1) Excludes The Villas of Renaissance, an apartment community acquired by the
Operating Partnership on June 30, 1997. See "Recent
Developments -- 'Off-Ranch' Expansion."
COMMUNITIES IN LEASE-UP (AT JUNE 30, 1997)(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
UNITS UNITS
COMMUNITY TOTAL UNITS OCCUPIED OCCUPIED
- ---------------------------------------------------------------- ----------- ---------- -------------
<S> <C> <C> <C>
Baypointe....................................................... 300 273 91.0%
Santa Maria..................................................... 227 216 95.2
---------- ---------- ----------
Total...................................................... 527 489 92.8%
========== ========== ==========
</TABLE>
- ---------------
(1) These communities began deliveries of units in the fourth quarter of 1996,
with the final units being delivered in June 1997. Each such community had
achieved stabilized occupancy by July 20, 1997.
COMMUNITIES UNDER CONSTRUCTION
The Operating Partnership had four Communities Under Construction (The Colony,
Santa Rosa II and Rancho Santa Fe on the Irvine Ranch; and The Hamptons at
Cupertino in Cupertino, California) at June 30, 1997, which will comprise a
total of 1,110 units upon completion. No units were ready for occupancy at June
30, 1997. The Communities Under Construction will include amenities
substantially similar to those in the Existing Communities.
S-21
<PAGE> 22
ECONOMIC AND DEMOGRAPHIC FACTORS AFFECTING
THE OPERATING PARTNERSHIP
The Operating Partnership believes that Orange County has been and will continue
to be an attractive market in which to own apartment communities. Orange County
is an appealing residential location for a variety of reasons, including a
moderate climate, a broad array of recreational and cultural opportunities, a
diversified and growing employment base, a high quality educational system, and
attractive master-planned communities. Growth in employment in Orange County was
facilitated by the major area airports and seaports located in close proximity
to the area as well as by the four major employment centers located on the
Irvine Ranch. The Operating Partnership's belief is based on the information,
including the forecasts, set forth below. However, no assurance can be given
that actual results will not vary from forecasted trends.
DIVERSIFIED AND GROWING EMPLOYMENT BASE
Since the early 1970s, Orange County has developed its employment base more
rapidly than households. An important factor behind the "employment first"
strategy was the development of the Irvine Ranch, whose Master Plan emphasized
employment growth followed by residential housing growth. This strategy
effectively stimulated the formation of a separate, thriving economy with a
balance of industries and an economic size which makes Orange Country's economy
equivalent to that of a medium-sized state, and ranks its employment base 14th
among U.S. metropolitan areas in 1996.
Between 1980 and 1990, Orange County's job growth outpaced both the California
and national economies. Orange County added more than 300,000 jobs in the 1980s,
averaging 3.4% growth per year -- faster than the 2.4% comparable growth rate in
California and the 1.9% national growth rate.
Beginning in 1990, the Orange County economy was adversely affected by the
decline in defense spending and the Southern California recession. Between 1990
and 1995, the county lost jobs at a compound annual rate of -0.3% in comparison
to a rate for California of -0.1% and national job gains of 1.4% per year.
Since 1995, Orange County's economy has recovered, as has California's
generally. Led by gains in technology manufacturing, professional services, and
foreign trade, the county reached record job levels in 1997. Job gains averaged
2.8% per year between 1995 and May 1997 -- almost 1% greater than the comparable
national growth rate and nearly equal to the rate for California.
In 1997, the Center for Continuing Study of the California Economy projected
that job growth in Orange County will continue to outpace the national and state
average. Orange County is projected to add nearly 300,000 nonfarm wage and
salary jobs between 1997 and 2005 for a compound annual growth rate of 2.7%.
This is higher than the projected state (2.0% per year) and national (1.1% per
year) job growth rates.
EMPLOYMENT GROWTH
(IN THOUSANDS)
<TABLE>
<CAPTION>
AVERAGE ANNUAL GROWTH RATE
TOTAL EMPLOYMENT 1980- 1990- 1995- 1997-
1980 1990 1995 1997 2005 1990 1995 1997 2005
--------- --------- --------- --------- --------- --------- --------- --------- ---------
(ESTIMATED) (ESTIMATED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States......... 90,406 109,419 117,203 121,837 133,154 1.9% 1.4% 2.0% 1.1%
California............ 9,849 12,500 12,422 13,141 15,475 2.4% -0.1% 2.9% 2.0%
Orange County......... 836 1,172 1,152 1,218 1,508 3.4% -0.3% 2.8% 2.7%
</TABLE>
- ---------------
Sources: U.S. Bureau of Labor Statistics; Center for Continuing Study of the
California Economy (unpublished); California Employment Development
Department.
Additionally, the County's employment growth has been extremely diverse,
creating a highly educated, skilled employment base which is less prone to
single industry downturns. Orange County's private sector employment base
exhibits a balance of employment between three general sectors of the economy
(Services (37.9%), Manufacturing (25.8%) and Trade (25.0%)) which span a broad
spectrum of industries. Public Sector jobs comprise 11.0% of the employment
base. In addition, no employment sub-sector represents more than 19% of the
total employment base in Orange County. For example, in the Manufacturing sector
of the economy the County has developed a balance between the Basic
Manufacturing sub-sector (9.0%) which includes textiles, rubber products, etc.,
and the more highly-skilled, value-added sub-sector of Computer, Electronic,
Instrumentation Manufacturing (8.4%). In summary, Orange County has developed a
diverse employment base whose growth is projected to be in sectors of the
economy which typically produce high value-added products.
S-22
<PAGE> 23
The Operating Partnership believes that this past and projected broad base of
employment growth (i) has been a key factor in limiting Orange County's compound
annual rate of job loss through the recession to less than 1.0% and (ii) will
enable Orange County to continue to grow, at a projected rate exceeding both the
state and national levels. The diversity of industries in Orange County in 1996
is illustrated by the table below.
ORANGE COUNTY EMPLOYMENT BASE
JOB DISPERSION
<TABLE>
<S> <C>
SERVICES
Business/Health/Engineering/Management Services........................ 18.7%
Financial/Real Estate/Insurance........................................ 7.2%
Other Services......................................................... 12.0%
MANUFACTURING
Basic Manufacturing.................................................... 9.0%
Computer, Electronic, Instrumentation Manufacturing.................... 8.4%
Construction........................................................... 4.4%
Transportation & Public Utilities...................................... 3.6%
Other Durables Manufacturing........................................... 0.4%
TRADE
Retail Trade........................................................... 17.5%
Wholesale Trade........................................................ 7.5%
PUBLIC SECTOR
Local Government & Education........................................... 6.6%
Federal & State Government............................................. 3.0%
County Government...................................................... 1.4%
</TABLE>
- ---------------
Source: California Employment Development Department.
Approximately 97% of all companies in Orange County have fewer than 100
employees. Historically, small, entrepreneurial businesses have been the primary
source of employment growth. A number of these small businesses are in the high
technology, biotechnology and information systems industries, industries which
are projected to continue to grow during the remainder of the decade. Many of
these businesses have been attracted to the area by the University of California
at Irvine and the 3,600-acre, master-planned Irvine Spectrum business center,
both of which have become important centers for high technology/biotechnology
research and associated industry development. The Operating Partnership believes
that these business centers, located in the City of Irvine, represent the
largest accumulation of well-located industrial/research and development sites
in the County. The Operating Partnership believes that its ability to control
apartment development sites proximate to these centers creates a significant
competitive advantage.
Orange County's historically low unemployment rate is further support of the
positive impact of a diverse employment base. Over the past six years,
unemployment rates in Orange County remained below unemployment rates in
California and the nation. The following table highlights unemployment
statistics for certain areas since 1990:
UNEMPLOYMENT RATES
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 1996 MAY 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States..... 5.6% 6.8% 7.5% 6.9% 6.1% 5.6% 5.4% 4.8%
California........ 5.8% 7.7% 9.3% 9.4% 8.6% 7.8% 7.2% 6.3%
Orange County..... 3.5% 5.3% 6.8% 6.8% 5.7% 5.1% 4.1% 3.2%
City of Irvine.... 2.5% 3.6% 4.6% 4.7% 4.1% 3.6% 2.9% 2.2%
</TABLE>
- ---------------
Source: U.S. Department of Labor; California Employment Development Department;
The UCLA Forecast for the Nation and California.
While the unemployment rate in Orange County increased each year from 1990 to
1993, it remained below national and state unemployment levels, and has
continued to remain below each of these regions through May 1997, when the
Orange County unemployment rate stood at 3.2%. In addition, the unemployment
rate for the City of Irvine, a city in which over 61% of the Company's Irvine
Ranch Properties are or will be located, did not exceed 4.7% throughout the
recession, and has remained at least 2.0% below the national average for the
past six years.
S-23
<PAGE> 24
POPULATION GROWTH AND DEMOGRAPHICS
Historically, Orange County has exhibited sustained population growth which
continued through the recession and is projected to continue throughout the
remainder of the decade. This growth was primarily due to the County's rapid
employment growth and quality of life. From 1980 through 1990, the U.S. and
California population bases experienced compound annual growth rates of 0.9% and
2.3%, respectively. From 1990 through 1996, the compound annual growth rate
increased to 1.0% on a national level and declined to 1.4% within California. In
comparison, from 1980 through 1990, Orange County experienced a compound annual
growth rate of 2.2%. From 1990 through 1996, the County's population continued
to grow at a compound annual growth rate of 1.6%, a rate in excess of both
national and state growth rates. With a current estimated population base of
2,649,800, the County is forecasted to continue to grow in the next decade at a
pace in excess of the national average. The chart below summarizes these
statistics:
POPULATION
(IN THOUSANDS)
<TABLE>
<CAPTION>
AVERAGE ANNUAL GROWTH RATE
1980 1990 JULY 1, JULY 1, 1980- 1990- 1996-
CENSUS CENSUS 1996 2005 1990 1996 2005
---------- ---------- ---------- ---------- ---------- ---------- ----------
(ESTIMATED) (ESTIMATED)
<S> <C> <C> <C> <C> <C> <C> <C>
United States..... 226,546 248,718 265,284 285,981 0.9% 1.1% 0.8%
California........ 23,668 29,758 32,383 38,208 2.3% 1.4% 1.9%
Orange County..... 1,933 2,411 2,650 3,006 2.2% 1.6% 1.4%
</TABLE>
- ---------------
Source: U.S. Bureau of the Census; California Department of Finance; Center for
Continuing Study of the California Economy.
Population growth may indicate a continued need for housing, but the
characteristics of the population are equally important to the Operating
Partnership as it strives to design apartment communities whose functionality,
amenities and cost correctly respond to a specific market demand. Based on 1990
U.S. Census data, the population of Orange County is relatively young and
educated, with a median age of 30.4 years. In 1996, 28% of the population had
received a bachelor's degree, as compared to 20% for the United States. On the
Irvine Ranch, 52% of the adult population has received a bachelor's degree. The
Irvine Ranch's median household income in 1996 was $61,975, as compared to
$36,625 for the nation. Despite the area's relative affluence, in 1997, only 38%
of the population in Orange County could afford to purchase a home in the median
price range, compared to 53% for the nation, according to the California
Association of Realtors. The Operating Partnership believes that this relative
unaffordability of home ownership contributes to the strong demand for high
quality rental housing in Orange County.
THE ORANGE COUNTY APARTMENT MARKET
As of March 31, 1997, the Orange County apartment market consisted of
approximately 105,427 units in apartment communities of 100 units or more. The
Operating Partnership believes this segment of the market competes more directly
with a significant portion of the Irvine Ranch Properties, since a large number
of units are typically necessary to support project amenities comparable to
those offered by the Irvine Ranch Properties.
CONSTRAINED APARTMENT SUPPLY
Based on a survey conducted by The Research Network Ltd., delivery of new
apartment units in Orange County averaged in excess of 6,200 units per year from
1986 to 1989. Construction during this period was driven by high occupancy rates
in Orange County, increasing rents during the mid-1980s and the availability of
financing for real estate development. Throughout this period of high deliveries
of apartment units, average apartment occupancy in Orange County remained
relatively stable.
S-24
<PAGE> 25
Apartment deliveries in Orange County declined from 6,770 units in 1988 to zero
units in 1994. The supply of apartment units has been limited in recent years,
in part by the limited availability of financing for real estate development. As
a result of low levels of apartment deliveries in recent years, average physical
occupancy rates in Orange County have shown an increase from 1992 to 1996. The
table below provides an historical perspective of apartment deliveries and
average physical occupancy rates in Orange County since 1986:
APARTMENT DELIVERIES AND AVERAGE PHYSICAL OCCUPANCY RATES
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) OCCUPANCY UNIT DELIVERIES
<S> <C> <C>
1986 97.7 6568
1987 97.8 5870
1988 96.9 6770
1989 96.3 5871
1990 96.5 2939
1991 96.5 2967
1992 95.3 674
1993 96.0 810
1994 95.5 0
1995 95.8 1759
1996 95.0 1296
1997 96.8
</TABLE>
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
----- ----- ----- ----- ----- ----- ---- ---- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Occupancy(1).......... 97.7% 97.8% 96.9% 96.3% 96.5% 96.5% 95.3% 96.0% 95.5% 95.8% 95.0% 96.8%
Units Delivered....... 6,568 5,870 6,770 5,871 2,939 2,967 674 810 -- 1,759 1,296 n/a
</TABLE>
- ---------------
Source: The Research Network Ltd.
n/a: Not available.
(1) Average for apartment communities in Orange County based on survey data
obtained during the first quarter of each year.
Except for development on the Irvine Ranch, the Operating Partnership expects
that new apartment construction in Orange County will remain at relatively low
levels over the next several years due to the lack of developable land in the
Operating Partnership's principal market.
RENTAL RATES
Since 1991, average apartment rental rates for the stabilized Existing
Communities on the Irvine Ranch have exceeded average apartment rental rates for
all apartment communities in the Orange County market. Through June 30, 1997,
the average apartment rental rate for such Communities was $1,086 per unit, as
compared to an average apartment rental rate of $846 per unit for all apartment
communities in Orange County. Moreover, the percentage difference between the
average apartment rental rate for the stabilized Existing Communities on the
Irvine Ranch and the average apartment rental rate for apartment communities in
Orange County increased from 18.0% in 1991 to 28.4% in June 1997. The Operating
Partnership believes that the high average apartment rental rates which it
achieved relative to the average apartment rental rates in Orange County can be
attributed to the location and high quality of its Existing Communities on the
Irvine Ranch. It further believes that the trends discussed above will continue
to create demand for apartment housing during the next several years. The
following table provides an historical overview of
S-25
<PAGE> 26
average apartment rental rates for the stabilized Existing Communities on the
Irvine Ranch and for apartment communities located in Orange County:
AVERAGE APARTMENT RENTAL RATES(1)
<TABLE>
<CAPTION>
IRVINE RANCH
MEASUREMENT PERIOD EXISTING
(FISCAL YEAR COVERED) COMMUNITIES ORANGE COUNTY
<S> <C> <C>
1991 937 794
1992 950 778
1993 963 775
1994 981 782
1995 996 781
1996 1025 802
1997 1086 846
</TABLE>
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Irvine Ranch Stabilized Existing
Communities...................... $937 $950 $963 $981 $996 $1,025 $1,086
Orange County...................... $794 $778 $775 $782 $781 $ 802 $ 846
</TABLE>
- ---------------
Source: The Research Network Ltd.
(1) Average monthly rents per unit for the stabilized Existing Communities on
the Irvine Ranch are the averages for the period. Average monthly rents per
unit for Orange County represent the averages of the median asking rents
obtained from apartment communities surveyed during the first quarter of
each year.
S-26
<PAGE> 27
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION OF OFFICES HELD
- ------------------------------------------ --- ----------------------------------------------------
<S> <C> <C>
Donald Bren(1)(2)......................... 65 Chairman of the Board of Directors
William H. McFarland(1)(2)................ 57 President and Chief Executive Officer and Director
Richard E. Lamprecht...................... 38 Senior Vice President, President, Irvine Ranch
Division
James E. Mead............................. 38 Senior Vice President, Chief Financial Officer and
Secretary
William W. Thompson....................... 52 Senior Vice President, President, California
Division
Alfred L. Baker........................... 49 Vice President, Marketing
Bruce N. Dorfman.......................... 37 Vice President, Development, California Division
Shawn Howie............................... 42 Vice President, Corporate Finance and Controller
Robert J. Hughes.......................... 47 Vice President, Construction, California Division
David A. McAllister....................... 63 Vice President, Construction, Irvine Ranch Division
Kevin P. Payne............................ 39 Vice President, Development, Irvine Ranch Division
Scott A. Reinert.......................... 38 Vice President, Operations
Anthony M. Frank(3)(5).................... 66 Director
John F. Grundhofer(3)(5).................. 58 Director
Bowen H. McCoy(2)(3)(4)................... 60 Director
Michael D. McKee(2)....................... 51 Director
Jack W. Peltason(2)(3)(5)................. 74 Director
John F. Seymour, Jr.(3)(4)................ 59 Director
Raymond L. Watson(1)(2)................... 70 Director
</TABLE>
- ---------------
(1) See "Recent Developments -- Management and Board of Directors Changes."
(2) Member of Executive Committee
(3) Member of Independent Directors Committee
(4) Member of Compensation Committee
(5) Member of Audit Committee
Pursuant to the Company's Articles of Incorporation and Amended Bylaws (the
"Bylaws") a majority of the Directors of the Company must be persons who are not
(i) affiliates, or an officer, director or employee, of The Irvine Company or
(ii) the spouse, ancestor or lineal descendant or brother or sister of Mr. Bren
("Unaffiliated Directors").
In accordance with the Company's Bylaws, the Board of Directors has established
an Independent Directors Committee which is responsible for approving all
transactions between (i) the Company or the Operating Partnership and (ii) The
Irvine Company and affiliates of The Irvine Company or Mr. Bren, including, but
not limited to, whether or not the Operating Partnership shall exercise any of
its rights under the Land Rights Agreement and the terms of any agreement
between the Company or the Operating Partnership and The Irvine Company or
affiliates of The Irvine Company or Mr. Bren. In addition, the Independent
Directors Committee is responsible for selecting the independent appraiser on
behalf of the Company pursuant to the Land Rights Agreement. Pursuant to the
Company Bylaws, the Independent Directors Committee consists of at least five
persons, each of whom is an Unaffiliated Director and a person who has not been
employed by The Irvine Company or any of its subsidiaries within the five years
preceding such person's election as a director of the Company. The Independent
Directors Committee has also retained an independent real estate consultant to
advise it with respect to land acquisitions under the Land Rights Agreement.
CERTAIN RIGHTS OF THE IRVINE COMPANY WITH RESPECT TO THE COMPANY'S BOARD OF
DIRECTORS
Pursuant to the Miscellaneous Rights Agreement, the Irvine Persons (as
hereinafter defined) have the right, and will continue to have the right so long
as The Irvine Company, its shareholders and affiliates and Mr. Bren and his
affiliates (the "Irvine Persons") beneficially own at least 20% of the
outstanding Common Stock of the Company (including for this purpose Common Stock
issuable upon exchange of OP Units in the Operating Partnership), to nominate
three persons (each, an "Irvine Company Board Representative") for election to
the Board of Directors of the Company. In the event this ownership falls below
20% but is at least 15%, the Irvine Persons will have the right to nominate two
persons for election to the Board of Directors; and if this ownership falls
below 15% but is at least 10%, the Irvine Persons will have the right to
nominate one person for election to the Board of Directors. In connection with
the
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foregoing, The Irvine Company is authorized to act for the Irvine Persons. The
three current Directors nominated by the Irvine Persons are Messrs. Bren, McKee
and Watson.
Two provisions of the Company's By-Laws give The Irvine Company additional
rights with respect to the Company's Board of Directors:
First, the Company's By-Laws provide that a majority of the entire Board of
Directors of the Company including at least one Irvine Company Board
Representative shall constitute a quorum for Board of Directors action at any
meeting.
Second, the Company's By-Laws provide that approval of more than 75% of the
entire Board of Directors is required to approve (i) a change of control (as
defined therein) of the Company or the Operating Partnership; (ii) any amendment
to the Company's Articles of Incorporation or Bylaws or the partnership
agreement of the Operating Partnership; (iii) any waiver or modification of the
ownership limit provisions of the Company's Articles of Incorporation; (iv) any
merger, consolidation, statutory share exchange or sale of all or substantially
all of the assets of the Company or the Operating Partnership; (v) subject to
certain exceptions, the issuance of equity securities of the Company; (vi) the
Company taking title to assets or conducting business other than through the
Operating Partnership, or for the Company or the Operating Partnership engaging
in another line of business; (vii) the Company or the Operating Partnership
making a general assignment for the benefit of creditors or instituting (or
consent to the institution of) proceedings in bankruptcy or for the liquidation,
dissolution, reorganization or winding up of the Company or the Operating
Partnership; and (viii) termination of the Company's status as a real estate
investment trust for federal income tax purposes.
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<PAGE> 29
DESCRIPTION OF NOTES
The following description of the particular terms of the Notes offered hereby
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of the "Debt Securities" set forth in the
accompanying Prospectus under "Description of the Debt Securities," to which
reference is hereby made.
GENERAL
The Notes will constitute a separate series of Debt Securities (which are more
fully described in the accompanying Prospectus) to be issued under an Indenture,
to be dated as of October 1, 1997 (the "Original Indenture"), as supplemented by
Supplemental Indenture No. 1, to be dated as of October 1, 1997 (the
"Supplemental Indenture" and together with the Original Indenture, the
"Indenture"), between the Operating Partnership and First Trust of California,
National Association (the "Trustee"). The form of the Original Indenture has
been filed as an exhibit to the Registration Statement of which this Prospectus
Supplement is a part and the Supplemental Indenture will be filed as an exhibit
to a Current Report on Form 8-K of the Operating Partnership. Each such document
is available for inspection at the offices of the Operating Partnership. The
Indenture is subject to, and governed by, the Trust Indenture Act of 1939, as
amended (the "TIA"). The statements made hereunder relating to the Indenture and
the Notes are summaries of certain provisions thereof, do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all provisions of the Indenture and the Notes. All capitalized terms used
but not defined herein shall have the respective meanings set forth in the
Indenture.
The Notes will be limited to an aggregate principal amount of $100,000,000. The
Notes will be direct, senior unsecured obligations of the Operating Partnership
and will rank senior to all future subordinated indebtedness of the Operating
Partnership and pari passu with all other current and future unsecured and
unsubordinated indebtedness of the Operating Partnership. The Notes will be
effectively subordinated to mortgages and other secured indebtedness of the
Operating Partnership and to all Indebtedness and other liabilities of
Subsidiaries. Accordingly, such prior indebtedness will have to be satisfied in
full before holders of the Notes will be able to realize any value from
encumbered or indirectly held Properties.
As of June 30, 1997, on a pro forma basis after giving effect to the offering of
the Notes and the application of the net proceeds therefrom as described under
"Use of Proceeds," the Operating Partnership would have had approximately $653.3
million of Indebtedness, of which approximately $533.6 million would have been
secured, and the Subsidiaries of the Operating Partnership would have had no
Indebtedness or other liabilities. The Operating Partnership and its
Subsidiaries may incur additional indebtedness, including secured indebtedness,
subject to the provisions described below under "-- Certain
Covenants -- Limitations on Incurrence of Indebtedness."
The Operating Partnership's $250 million Credit Facility is guaranteed by the
Company. The Notes will be senior unsecured indebtedness of the Operating
Partnership, of which the Company is the general partner, but will not be
guaranteed by the Company. The Company currently has no significant assets on an
unconsolidated basis. As a result of the guarantee under the Credit Facility,
such lenders may have prior claims to, and procedural advantages in respect of
claims to, the assets, if any, owned directly by the Company.
The Notes will only be issued in fully registered form in denominations of
$1,000 and integral multiples thereof.
PRINCIPAL AND INTEREST
The Notes will bear interest at 7% per annum and will mature on October 1, 2007.
The Notes will bear interest from October 1, 1997 or from the immediately
preceding Interest Payment Date (as defined below) to which interest has been
paid, payable semi-annually in arrears on April 1 and October 1 of each year,
commencing April 1, 1998 (each, an "Interest Payment Date"), to the Persons in
whose name the Notes are registered in the Security Register on the preceding
March 15 or September 15 (whether or not a Business Day, as defined below), as
the case may be (each, a "Regular Record Date"). Interest on the Notes will be
computed on the basis of a 360-day year of twelve 30-day months.
If any Interest Payment Date or Stated Maturity falls on a day that is not a
Business Day, the required payment shall be made on the next Business Day as if
it were made on the date such payment was due and no interest shall accrue on
the amount so payable for the period from and after such Interest Payment Date
or Stated Maturity, as the case may be. "Business Day" means any day, other than
a Saturday or Sunday, that is neither a legal holiday nor a day on which banks
in the City of New York or in the City of St. Paul, Minnesota are authorized or
required by law, regulation or executive order to close.
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<PAGE> 30
The principal of and interest on the Notes will be payable at the corporate
trust office of First Trust National Association, on behalf of the Trustee (the
"Paying Agent"), in the City of St. Paul, Minnesota, initially located at 180
East Fifth Street, St. Paul, Minnesota 55101, provided that, at the option of
the Operating Partnership, payment of interest may be made by check mailed to
the address of the Person entitled thereto as it appears in the Security
Register or by wire transfer of funds to such Person at an account maintained
within the United States.
REGISTRATION AND TRANSFER
Subject to certain limitations imposed upon the Notes issued in book-entry form
as described below under "-- Book-Entry System," the Notes will be exchangeable
for any authorized denomination of a like aggregate principal amount and tenor
upon surrender of such Notes at the corporate trust office of the Trustee or at
the office of any transfer agent designated by the Operating Partnership for
such purpose. In addition, subject to certain limitations imposed upon the Notes
issued in book-entry form as described below under "-- Book-Entry System," the
Notes may be surrendered for registration of transfer or exchange thereof at the
corporate trust office of the Trustee or at the office of any transfer agent
designated by the Operating Partnership for such purpose. Every Note surrendered
for registration of transfer or exchange must be duly endorsed or accompanied by
a written instrument of transfer in form satisfactory to the Operating
Partnership and the Trustee. No service charge will be made for any registration
of transfer or exchange of any Notes, but the Trustee or the Operating
Partnership may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith.
Neither the Operating Partnership nor the Trustee shall be required (i) to
register the transfer of or exchange Notes for a period of 15 days next
preceding the first mailing of a notice of redemption of any Notes that may be
selected for redemption; or (ii) to register the transfer of or exchange any
Notes, or portion thereof, so selected for redemption, in whole or in part,
except the unredeemed portion of any Note being redeemed in part.
OPTIONAL REDEMPTION
The Notes may be redeemed at any time at the option of the Operating
Partnership, in whole or in part, at a redemption price equal to the sum of (i)
the principal amount of the Notes being redeemed plus accrued interest thereon
to the redemption date and (ii) the Make-Whole Amount, if any, with respect to
such Notes (the "Redemption Price"). If notice has been given as provided in the
Indenture and funds for the redemption of any Notes called for redemption shall
have been made available on the redemption date referred to in such notice, such
Notes will cease to bear interest on the date fixed for such redemption
specified in such notice and the only right of the Holders of the Notes will be
to receive payment of the Redemption Price.
Notice of any optional redemption of any Notes will be given to Holders at their
addresses, as shown in the Security Register, not more than 60 nor less than 30
days prior to the date fixed for redemption. The notice of redemption will
specify, among other items, the Redemption Price and the principal amount of the
Notes held by such Holder to be redeemed.
If less than all the Notes are to be redeemed at the option of the Operating
Partnership, the Operating Partnership will notify the Trustee at least 45 days
prior to the redemption date (or such shorter period as is satisfactory to the
Trustee) of the aggregate principal amount of Notes to be redeemed and their
redemption date. The Trustee shall select, in such manner as it shall deem fair
and appropriate, the Notes to be redeemed in whole or in part. Notes may be
redeemed in part in the minimum authorized denomination for Notes or in any
integral multiple thereof.
As used herein:
"Make-Whole Amount" means, in connection with any optional redemption or
accelerated payment of any Note, the excess, if any, of (i) the aggregate
present value as of the date of such redemption or accelerated payment of
each dollar of principal being redeemed or paid and the amount of interest
(exclusive of interest accrued to the date of redemption or accelerated
payment) that would have been payable in respect of such dollar if such
redemption or accelerated payment had not been made, determined by
discounting, on a semi-annual basis, such principal and interest at the
Reinvestment Rate (determined on the third Business Day preceding the date
such notice of Redemption is given or declaration of acceleration is made)
from the respective dates on which such principal and interest would have
been payable if such redemption or accelerated payment had not been made,
over (ii) the aggregate principal amount of the Notes being redeemed or
paid.
"Reinvestment Rate" means .25% (twenty-five one hundredths of one
percent) plus the arithmetic mean of the yields under the respective
headings "This Week" and "Last Week" published in the Statistical Release
under the caption "Treasury Constant Maturities" for the maturity (rounded
to the nearest month) correspond-
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<PAGE> 31
ing to the remaining life to maturity of the Notes, as of the payment date
of the principal being redeemed or paid. If no maturity exactly corresponds
to such maturity, yields for the two published maturities most closely
corresponding to such maturity shall be calculated pursuant to the
immediately preceding sentence and the Reinvestment Rate shall be
interpolated or extrapolated from such yields on a straight-line basis,
rounding in each of such relevant periods to the nearest month. For such
purposes of calculating the Reinvestment Rate, the most recent Statistical
Release published prior to the date of determination of the Make-Whole
Amount shall be used.
"Statistical Release" means the statistical release designated
"H.15(519)" or any successor publication which is published weekly by the
Federal Reserve System and which establishes yields on actively traded
United States government securities adjusted to constant maturities or, if
the statistical release is not published at the time of any determination
under the Indenture, then such other reasonably comparable index which
shall be designated by the Operating Partnership.
CERTAIN COVENANTS
Limitations on Incurrence of Indebtedness. The Operating Partnership will not,
and will not permit any Subsidiary to, incur any Indebtedness (as defined below)
if, immediately after giving effect to the incurrence of such additional
Indebtedness and the application of the proceeds thereof, the aggregate
principal amount of all outstanding Indebtedness of the Operating Partnership
and its Subsidiaries on a consolidated basis determined in accordance with GAAP
is greater than 60% of the sum of (without duplication) (i) the Total Assets (as
defined below) of the Operating Partnership and its Subsidiaries as of the end
of the most recently completed calendar quarter of the Operating Partnership for
which financial information is available prior to the incurrence of such
additional Indebtedness and (ii) the purchase price or cost of any real estate
assets or mortgages receivable acquired or developed, and the amount of any
securities offering proceeds received (to the extent that such proceeds were not
used to acquire real estate assets or mortgages receivable, to develop real
estate assets or to reduce Indebtedness), by the Operating Partnership or any
Subsidiary since the end of such calendar quarter, including those proceeds
obtained in connection with the incurrence of such additional Indebtedness.
In addition to the foregoing limitation on the incurrence of Indebtedness, the
Operating Partnership will not, and will not permit any Subsidiary to, incur any
Indebtedness secured by any Encumbrance (as defined below) upon any of the
property of the Operating Partnership or any Subsidiary if, immediately after
giving effect to the incurrence of such additional Indebtedness and the
application of the proceeds thereof, the aggregate principal amount of all
outstanding Indebtedness of the Operating Partnership and its Subsidiaries on a
consolidated basis which is secured by any Encumbrance on property of the
Operating Partnership or any Subsidiary is greater than 40% of the sum of
(without duplication) (i) the Total Assets of the Operating Partnership and its
Subsidiaries as of the end of the most recently completed calendar quarter of
the Operating Partnership for which financial information is available prior to
the incurrence of such additional Indebtedness and (ii) the purchase price or
cost of any real estate assets or mortgages receivable acquired or developed,
and the amount of any securities offering proceeds received (to the extent that
such proceeds were not used to acquire real estate assets or mortgages
receivable, to develop real estate assets or to reduce Indebtedness), by the
Operating Partnership or any Subsidiary since the end of such calendar quarter,
including those proceeds obtained in connection with the incurrence of such
additional Indebtedness.
The Operating Partnership and its Subsidiaries may not at any time own Total
Unencumbered Assets (as defined below) equal to less than 150% of the aggregate
outstanding principal amount of the Unsecured Indebtedness (as defined below) of
the Operating Partnership and its Subsidiaries on a consolidated basis.
In addition to the foregoing limitations on the incurrence of Indebtedness, the
Operating Partnership will not, and will not permit any Subsidiary to, incur any
Indebtedness if the ratio of Consolidated Income Available for Debt Service (as
defined below) to the Annual Service Charge (as defined below) for the four
consecutive fiscal quarters most recently ended prior to the date on which such
additional Indebtedness is to be incurred shall have been less than 1.5:1 on a
pro forma basis after giving effect thereto and to the application of the
proceeds therefrom, and calculated on the assumption that (i) such Indebtedness
and any other Indebtedness incurred by the Operating Partnership and its
Subsidiaries since the first day of such four-quarter period and the application
of the proceeds therefrom, including to refinance other Indebtedness, had
occurred at the beginning of such period; (ii) the repayment or retirement of
any other Indebtedness by the Operating Partnership and its Subsidiaries since
the first day of such four-quarter period had been repaid or retired at the
beginning of such period (except that, in making such computation, the amount of
Indebtedness under any revolving credit facility shall be computed based upon
the average daily balance of such
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Indebtedness during such period); (iii) in the case of Acquired Indebtedness (as
defined below) or Indebtedness incurred in connection with any acquisition since
the first day of such four-quarter period, the related acquisition had occurred
as of the first day of such period with the appropriate adjustments with respect
to such acquisition being included in such pro forma calculation; (iv) in the
case of any acquisition or disposition by the Operating Partnership or its
Subsidiaries of any asset or group of assets since the first day of such
four-quarter period, whether by merger, stock purchase or sale, or asset
purchase or sale, such acquisition or disposition or any related repayment of
Indebtedness had occurred as of the first day of such period with the
appropriate adjustments with respect to such acquisition or disposition being
included in such pro forma calculation and (v) Consolidated Interest Expense
attributable to any Indebtedness (whether existing or being incurred) computed
on a pro forma basis and bearing a floating interest rate shall be computed as
if the rate in effect on the date of computation (taking into account if such
Person or any of its Subsidiaries is a party to an interest rate agreement or
other interest protection agreement applicable to such floating rate
Indebtedness if such agreement shall remain in effect for the twelve month
period after the date of the transaction giving rise to the need to calculate
the ratio of Consolidated Income Available for Debt Service to Annual Service
Charge) had been the applicable rate for the entire period.
For purposes of determining any particular amount of Indebtedness under these
covenants, guarantees of, liens securing, or letters of credit that support, in
each case, Indebtedness otherwise included in the determination of such
particular amount of Indebtedness, shall not be included. In addition, the
amount of Indebtedness issued at a price that is less than the principal amount
thereof shall be equal to the amount of the liability in respect thereof
determined in accordance with GAAP.
Provision of Financial Information. Whether or not the Operating Partnership is
subject to Section 13 or 15(d) of the Exchange Act, the Operating Partnership
will, to the extent permitted under the Exchange Act, file with the Commission
the annual reports, quarterly reports and other documents which the Operating
Partnership would have been required to file with the Commission pursuant to
such Section 13 or 15(d) if the Operating Partnership were so subject, such
documents to be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which the Operating Partnership would have been
required so to file such documents if the Operating Partnership were so subject.
The Operating Partnership will also in any event (x) within 15 days of each
Required Filing Date (i) if the Operating Partnership is not then subject to
such Section 13 or 15(d), transmit by mail to all Holders of Notes, as their
names and addresses appear in the Security Register, without cost to such
Holders, copies of the annual reports and quarterly reports that the Operating
Partnership would have been required to file with the Commission pursuant to
Section 13 or 15(d) of the Exchange Act if the Operating Partnership were
subject to such Sections and (ii) file with the Trustee copies of the annual
reports, quarterly reports and other documents that the Operating Partnership
would have been required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act if the Operating Partnership were subject to such
sections and (y) if filing such documents by the Operating Partnership with the
Commission is not permitted under the Exchange Act, promptly upon written
request and payment of the reasonable costs of duplication and delivery, supply
copies of such documents to any prospective Holder.
Waiver of Certain Covenants. The Operating Partnership may omit to comply with
any term, provision or condition of the foregoing covenants, and with any other
term, provision or condition with respect to the Notes (except any such term,
provision or condition which could not be amended without the consent of all
Holders of Notes), if before or after the time for such compliance the Holders
of at least a majority in principal amount of all the outstanding Notes either
waive such compliance in such instance or generally waive compliance with such
covenant or condition. Except to the extent so expressly waived, and until such
waiver shall become effective, the obligations of the Operating Partnership and
the duties of the Trustee in respect of any such term, provision or condition
shall remain in full force and effect.
As used herein, and in the Indenture:
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at
the time such Person becomes a Subsidiary or (ii) assumed in connection
with the acquisition of assets from such Person, in each case, including
(without duplication) Indebtedness incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary or such acquisition.
Acquired Indebtedness shall be deemed to be incurred on the date of the
related acquisition of assets from any Person, whether by merger or
otherwise, or the date the acquired Person becomes a Subsidiary.
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<PAGE> 33
"Annual Service Charge" for any period means the sum of the Consolidated
Interest Expense for such period of the Operating Partnership and its
Subsidiaries and the amount of dividends which are payable in cash during
such period in respect of any Disqualified Stock.
"Capital Stock" means, with respect to any Person, any capital stock
(including preferred stock), shares, interests, participations or other
ownership interests (however designated) of such Person and any rights
(other than debt securities convertible into or exchangeable for capital
stock), warrants or options to purchase any thereof.
"Consolidated Income Available for Debt Service" for any period means
Earnings from Operations of the Operating Partnership and its Subsidiaries
plus amounts which have been deducted, and minus amounts which have been
added, for the following (without duplication): (i) Consolidated Interest
Expense of the Operating Partnership and its Subsidiaries, (ii) provision
for taxes of the Operating Partnership and its Subsidiaries based on
income, (iii) provisions for gains and losses on properties and property
depreciation and amortization, (iv) the effect of any non-cash charge
resulting from a change in accounting principles in determining Earnings
from Operations for such period and (v) amortization of deferred charges.
"Consolidated Interest Expense" for any period means, without
duplication, all interest (including the interest component of rentals on
capitalized leases, letter of credit fees, commitment fees and other like
financial charges) and all amortization of debt discount on Indebtedness
(including, without limitation, payment-in-kind, zero coupon and other like
securities), but excluding legal fees, title insurance charges, and other
out-of-pocket fees and expenses incurred in connection with the issuance of
Indebtedness and the amortization of any such debt issuance costs that are
capitalized, all determined on a consolidated basis in accordance with
GAAP.
"Disqualified Stock" means, with respect to any Person, any Capital
Stock of such Person which by the terms of such Capital Stock (or by the
terms of any security into which it is convertible or for which it is
exchangeable or exercisable), upon the happening of any event or otherwise
(i) matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise (other than Capital Stock which is redeemable
solely in exchange for common stock), (ii) is convertible into or
exchangeable or exercisable for Indebtedness or Disqualified Stock or (iii)
is redeemable at the option of the holder thereof, in whole or in part
(other than Capital Stock which is redeemable solely in exchange for
Capital Stock which is not Disqualified Stock or the redemption price of
which may, at the option of such Person, be paid in Capital Stock which is
not Disqualified Stock), in each case on or prior to the Stated Maturity of
the Notes. For purposes of this definition, it is expressly understood that
the OP Units shall not constitute Disqualified Stock.
"Earnings from Operations" for any period means net earnings excluding
gains and losses on sales of investments, extraordinary items and property
valuation losses, net as reflected in the financial statements of the
Operating Partnership and its Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP.
"Encumbrance" means any mortgage, lien, charge, pledge or security
interest of any kind.
"Indebtedness" of the Operating Partnership or any Subsidiary means any
indebtedness of the Operating Partnership or any Subsidiary, whether or not
contingent, in respect of (i) borrowed money or evidenced by bonds, notes,
debentures or similar instruments whether or not such indebtedness is
secured by any Encumbrance existing on property owned by the Operating
Partnership or any Subsidiary, (ii) indebtedness for borrowed money of a
Person other than the Operating Partnership or a Subsidiary which is
secured by any Encumbrance existing on property owned by the Operating
Partnership or any Subsidiary, to the extent of the lesser of (x) the
amount of indebtedness so secured and (y) the fair market value of the
property subject to such Encumbrance, (iii) the reimbursement obligations,
contingent or otherwise, in connection with any letters of credit actually
issued or amounts representing the balance deferred and unpaid of the
purchase price of any property or services, except any such balance that
constitutes an accrued expense or trade payable, or all conditional sale
obligations or obligations under any title retention agreement, (iv) the
principal amount of all obligations of the Operating Partnership or any
Subsidiary with respect to redemption, repayment or other repurchase of any
Disqualified Stock or (v) any lease of property by the Operating
Partnership or any Subsidiary as lessee which is reflected on the Operating
Partnership's consolidated balance sheet as a capitalized lease in
accordance with GAAP, to the extent, in the case of items of indebtedness
under (i) through (iii) above, that any such items (other than letters of
credit) would appear as a liability on the Operating Partnership's
consolidated balance sheet in accordance with GAAP, and also includes, to
the extent not otherwise included, any obligation by the Operating
Partnership or
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any Subsidiary to be liable for, or to pay, as obligor, guarantor or
otherwise (other than for purposes of collection in the ordinary course of
business), Indebtedness of another Person (other than the Operating
Partnership or any Subsidiary) (it being understood that Indebtedness shall
be deemed to be incurred by the Operating Partnership or any Subsidiary
whenever the Operating Partnership or such Subsidiary shall create, assume,
guarantee or otherwise become liable in respect thereof). For purposes of
this definition, Indebtedness (i) shall not include obligations of any
Person (x) arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently drawn
against insufficient funds in the ordinary course of business, provided
that such obligations are extinguished within two Business Days of their
incurrence unless covered by any overdraft line and (y) resulting from the
endorsement of negotiable instruments for collection in the ordinary course
of business and consistent with past business practices; (ii) which
provides that an amount less than the principal amount thereof shall be due
upon any declaration of acceleration thereof shall be deemed to be incurred
or outstanding in an amount equal to the accreted value thereof at the date
of determination determined in accordance with GAAP; and (iii) shall not
include obligations under performance bonds, performance guarantees, surety
bonds and appeal bonds, stand-by letters of credit or similar obligations,
incurred in the ordinary course of business and on ordinary business terms
(to the extent the foregoing items are not drawn upon, or if drawn, such
items are repaid within three Business Days).
"Non-Recourse Indebtedness" means Indebtedness with respect to which
recourse is limited to (i) specific assets related to a particular Property
or group of Properties subject to an Encumbrance securing such Indebtedness
or (ii) any Subsidiary (provided that if a Subsidiary is a partnership,
there is no recourse to the Operating Partnership as a general partner of
such partnership); provided, however, that personal recourse of the
Operating Partnership for any such Indebtedness for fraud,
misrepresentation, misapplication of cash, waste, environmental claims and
liabilities and other circumstances customarily excluded by institutional
lenders from exculpation provisions and/or included in separate
indemnification agreements in non-recourse financing of real estate shall
not, by itself, prevent such Indebtedness from being characterized as
Non-Recourse Indebtedness.
"Property" means, with respect to any Person, any real or personal
property, building, facility, structure, equipment or unit, or other asset
owned by such Person.
"Subsidiary" means, with respect to any Person, any corporation or other
entity of which a majority of (i) the voting power of the voting equity
securities or (ii) the outstanding equity or partnership interests of which
are owned, directly or indirectly, by such Person. For purposes of this
definition, "voting equity securities" means equity securities having
voting power for the election of directors, whether at all times or only so
long as no senior class of security has such voting power by reason of any
contingency.
"Total Assets" as of any date means the sum of (i) $1,289,618,606 (which
represents the product of (x) the sum of the number of shares of Common
Stock of the Company outstanding on June 30, 1997 (19,815,057 shares) and
the number of OP Units not held by the Company outstanding on June 30, 1997
(24,086,853 OP Units) and (y) $29.375 (the last reported sales price per
share of the Common Stock of the Company on the New York Stock Exchange on
June 30, 1997), (ii) $651,587,000 (which represents the principal amount of
the outstanding consolidated debt of the Operating Partnership and its
Subsidiaries on June 30, 1997), (iii) the purchase price or cost of any
real estate assets or mortgages receivable acquired (including the value at
the time of such acquisition, of any OP Units or shares of Common Stock of
the Company issued in connection therewith) or developed after June 30,
1997 by the Operating Partnership or any Subsidiary, and (iv) cash and
restricted cash on the Operating Partnership's balance sheet; provided,
however, that Total Assets shall be reduced by the amount of the proceeds
of any real estate assets disposed of, or mortgages receivable written off
as non-collectible, after June 30, 1997 by the Operating Partnership or any
Subsidiary.
"Total Unencumbered Assets" means the sum of (i) those Undepreciated
Real Estate Assets not subject to an Encumbrance for borrowed money
(excluding infrastructure assessment bonds (totalling approximately $21.8
million as of December 31, 1996)) and (ii) all other assets of the
Operating Partnership and its Subsidiaries not subject to an Encumbrance
for borrowed money, determined in accordance with GAAP (but excluding
accounts receivable and intangibles).
"Undepreciated Real Estate Assets" as of any date means the cost
(original cost plus capital improvements) of real estate assets of the
Operating Partnership and its Subsidiaries on such date, before
depreciation and amortization, determined on a consolidated basis in
accordance with GAAP.
S-34
<PAGE> 35
"Unsecured Indebtedness" means Indebtedness which is not secured by any
Encumbrance upon any of the properties of the Operating Partnership or any
Subsidiary.
EVENTS OF DEFAULT
The provisions of Article 4 of the Indenture relating to "Events of Default,"
which are described under "Description of the Debt Securities -- Events of
Default" in the accompanying Prospectus, will apply to the Notes, except that
whenever the principal amount of the Notes may be declared or shall become
automatically due and payable following an Event of Default, references to
"principal amount" shall be deemed to include a reference to any Make-Whole
Amount payable on the Notes. In addition, the following shall constitute Events
of Default with respect to the Notes: (a) failure to pay the Make-Whole Amount
on any Notes when due; (b) default under any Indebtedness other than
Non-Recourse Indebtedness of the Operating Partnership (or of any Subsidiary,
the repayment of which the Operating Partnership has guaranteed or for which the
Operating Partnership is directly responsible or liable as obligor or
guarantor), having an aggregate principal amount outstanding of at least
$10,000,000, whether such indebtedness now exists or shall hereafter be created,
which default shall have resulted in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise have
become due and payable, without such indebtedness having been discharged, or
such acceleration having been rescinded or annulled, within a period of 10 days
after written notice to the Operating Partnership as provided in the Indenture
and (c) the entry by a court of competent jurisdiction of one or more judgments,
orders or decrees against the Operating Partnership or any Subsidiary in an
aggregate amount (excluding amounts covered by insurance) in excess of
$10,000,000 and such judgments, orders or decrees remain undischarged, unstayed
and unsatisfied in an aggregate amount (excluding amounts covered by insurance)
in excess of $10,000,000 for a period of 30 consecutive days.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The provisions of Article 9 of the Indenture relating to defeasance and covenant
defeasance, which are described under "Description of the Debt
Securities -- Discharge, Defeasance and Covenant Defeasance" in the accompanying
Prospectus, will apply to the Notes. Each of the covenants described under
"-- Certain Covenants" herein will be subject to covenant defeasance.
BOOK-ENTRY SYSTEM
The Notes will be issued in the form of one or more full registered global notes
("Global Notes") which will be deposited with, or on behalf of, DTC, and
registered in the name of DTC's nominee, Cede & Co. Except under the
circumstance described below, the Notes will not be issuable in definitive form.
Unless and until it is exchanged in whole or in part for the individual Notes
represented thereby, a Global Note may not be transferred except as a whole by
DTC to a nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC
or by DTC or any nominee of DTC to a successor depository or any nominee of such
successor.
Upon the issuance of a Global Note, DTC or its nominee will credit on its
book-entry registration and transfer system the respective principal amounts of
the individual Notes represented by such Global Note to the accounts of persons
that have accounts with DTC ("Participants"). Such accounts shall be designated
by the underwriters, dealers or agents with respect to the Notes. Ownership of
beneficial interests in a Global Note will be limited to Participants or persons
that may hold interests through Participants. Ownership of beneficial interests
in such Global Note will be shown on, and the transfer of that ownership will be
effected only through, records maintained by DTC or its nominee (with respect to
beneficial interests of Participants) and records of Participants (with respect
to beneficial interests of persons who hold through Participants). The laws of
some states require that certain purchasers of securities take physical delivery
of securities in definitive form. Such limits and laws may impair the ability to
own, pledge or transfer beneficial interest in a Global Note.
So long as DTC or its nominee is the registered owner of such Global Note, DTC
or its nominee, as the case may be, will be considered the sole owner or holder
of the Notes represented by such Global Note for all purposes under the
Indenture and the beneficial owners of the Notes will be entitled only to those
rights and benefits afforded to them in accordance with DTC's regular operating
procedures. Except as provided below, owners of beneficial interest in a Global
Note will not be entitled to have any of the individual Notes registered in
their names, will not receive or be entitled to receive physical delivery of any
such Notes in definitive form and will not be considered the owners or holders
thereof under the Indenture.
S-35
<PAGE> 36
Payments of principal of, any Make-Whole Amount on, and any interest on,
individual Notes represented by a Global Note registered in the name of DTC or
its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the Global Note representing such Notes. None of the
Operating Partnership, the Trustee, any Paying Agent or the Security Registrar
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Note for such Notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
The Operating Partnership expects that DTC or its nominee, upon receipt of any
payment of principal, Make-Whole Amount or interest in respect of a permanent
Global Note representing any Notes, immediately will credit Participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
DTC or its nominee. The Operating Partnership also expects that payments by
Participants to owners of beneficial interests in such Global Note held through
such Participants will be governed by standing instructions and customary
practices, as is the case with securities held for the account of customers in
bearer form or registered in "street name." Such payments will be the
responsibility of such Participants.
If DTC is at any time unwilling, unable or ineligible to continue as depositary
and a successor depositary is not appointed by the Operating Partnership within
90 days, the Operating Partnership will issue individual Notes in exchange for
the Global Note or Notes representing the Notes. In addition, the Operating
Partnership may, at any time and in its sole discretion, determine not to have
any Notes represented by one or more Global Notes and, in such event, will issue
individual Notes in exchange for the Global Note or Notes representing the
Notes. Individual Notes so issued will be issued in denominations, unless
otherwise specified by the Operating Partnership, of $1,000 and integral
multiples thereof.
DTC has advised the Operating Partnership of the following information regarding
DTC: DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC holds securities that its Participants deposit with
DTC. DTC also facilitates the settlement among its Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic computerized book-entry changes in its Participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct Participants of DTC include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations. DTC is owned by a number of its direct Participants and by the
New York Stock Exchange, the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain a custodial relationship with a direct
Participant of DTC, either directly or indirectly. The rules applicable to DTC
and its participants are on file with the Commission.
CONCERNING THE TRUSTEE
A member of the Board of Directors of the Company is Chairman, President and
Chief Executive Officer of First Bank System, Inc., an affiliate of the Trustee.
In addition, an affiliate of the Trustee is a lender under the Credit Facility.
S-36
<PAGE> 37
UNDERWRITING
Subject to the terms and conditions in the Underwriting Agreement dated the date
hereof (the "Underwriting Agreement"), the Operating Partnership has agreed to
sell to each of the Underwriters named below (the "Underwriters"), severally,
and each of the Underwriters has severally agreed to purchase, the principal
amount of Notes set forth opposite its name below.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITER OF NOTES
- -------------------------------------------------------------------------------------- ------------
<S> <C>
J.P. Morgan Securities Inc............................................................ $ 60,000,000
Goldman, Sachs & Co................................................................... 20,000,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............................................................. 20,000,000
------------
Total............................................................................ $100,000,000
============
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the Underwriters
will be obligated to purchase all of the Notes if any are purchased.
The Underwriters have advised the Operating Partnership that they propose
initially to offer the Notes directly to the public at the public offering price
set forth on the cover page of this Prospectus Supplement, and to certain
dealers at such price less a concession not in excess of .400% of the principal
amount of the Notes. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of .250% of the principal amount of the Notes to
certain other dealers. After the initial public offering, the public offering
price and such concession may be changed.
The Notes are a new issue of securities with no established trading market. The
Operating Partnership has been advised by the Underwriters that the Underwriters
intend to make a market in the Notes but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Notes.
The Operating Partnership and the Company have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act or to contribute to payments the Underwriters may be required to
make in respect thereof.
In the ordinary course of their respective business, certain of the Underwriters
and/or affiliates of such Underwriters have engaged, or may in the future
engage, in investment banking, investment advisory and/or commercial banking
transactions with the Operating Partnership and its affiliates for which
customary compensation has been, and will be, received. J.P. Morgan Securities
Inc., one of the Underwriters, is Syndication Agent, and Morgan Guaranty Trust
Company of New York, an affiliate of J.P. Morgan Securities Inc., is a lender,
under the Credit Facility. Approximately $11.2 million of the net proceeds from
the offering of the Notes will be used to repay Morgan Guaranty Trust Company of
New York for a portion of the outstanding borrowings of the Operating
Partnership under the Credit Facility. See "Use of Proceeds." Since the amount
to be repaid to Morgan Guaranty Trust Company of New York exceeds 10% of the net
proceeds from the sale of the Notes, the offering of the Notes is being made
pursuant to the provisions of Rule 2710(c)(8) of the Conduct Rules of the
National Association of Securities Dealers, Inc.
In connection with this offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Notes.
Specifically, the Underwriters may overallot in connection with such offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase the Notes in the open market to cover syndicate short positions or
to stabilize the price of the Notes. Finally, the underwriting syndicate may
reclaim selling concessions allowed for distributing Notes in this offering, if
the syndicate repurchases previously distributed Notes in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Notes above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Operating
Partnership by Davis Polk & Wardwell, New York, New York. Davis Polk & Wardwell
will rely as to matters of Maryland law on Piper & Marbury L.L.P., Baltimore,
Maryland. Certain legal matters relating to the offering of the Notes will be
passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York.
S-37
<PAGE> 38
PROSPECTUS
$350,000,000
IRVINE APARTMENT COMMUNITIES, L.P.
DEBT SECURITIES
------------------------
Irvine Apartment Communities, L.P. (the "Operating Partnership") may offer and
issue from time to time senior, unsecured, non-convertible investment grade debt
securities (the "Debt Securities"). The Debt Securities may be offered in one or
more series, in amounts, at prices and on terms to be determined by market
conditions at the time of sale and to be set forth in a supplement or
supplements to this Prospectus (a "Prospectus Supplement"). The aggregate
offering price of the Debt Securities will not exceed $350,000,000.
Certain terms of any Debt Securities in respect of which this Prospectus is
being delivered will be set forth in the accompanying Prospectus Supplement
including, without limitation, the specific designation, aggregate principal
amount, purchase price, maturity, interest rate (which may be fixed or variable)
and time of payment of interest (if any), terms (if any) for the redemption
thereof, listing (if any) on a securities exchange and any other specific terms
of the Debt Securities.
------------------------
SEE "RISK FACTORS" IN THE PROSPECTUS SUPPLEMENT FOR A DESCRIPTION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PURCHASERS OF THE DEBT SECURITIES OFFERED
HEREBY.
------------------------
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 ON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The Debt Securities may be sold on a negotiated or competitive bid basis to or
through underwriters or dealers designated from time to time or to other
purchasers directly or through agents designated from time to time. Certain
terms of the offering and sale of the Debt Securities, including, where
applicable, the names of the underwriters, dealers or agents, if any, the
purchase price of the Debt Securities and the proceeds to the Operating
Partnership from such sale, and any applicable commissions, discounts and other
items constituting compensation of such underwriters, dealers or agents, will
also be set forth in the accompanying Prospectus Supplement.
------------------------
The date of this Prospectus is July 28, 1997.
<PAGE> 39
IN CONNECTION WITH AN OFFERING, CERTAIN PERSONS PARTICIPATING IN SUCH OFFERING
MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE
PRICE OF THE DEBT SECURITIES. SPECIFICALLY, THE UNDERWRITERS FOR SUCH OFFERING
MAY OVERALLOT IN CONNECTION WITH SUCH OFFERING, AND MAY BID FOR, AND PURCHASE,
THE DEBT SECURITIES IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "PLAN OF DISTRIBUTION."
No dealer, salesman or other person has been authorized to give any information
or to make any representation not contained or incorporated by reference in this
Prospectus or any Prospectus Supplement, and, if given or made, such information
or representation must not be relied upon as having been authorized by the
Operating Partnership, by Irvine Apartment Communities, Inc., a Maryland
corporation, the sole general partner of the Operating Partnership, or by any
underwriter, agent or dealer. This Prospectus and any Prospectus Supplement
shall not constitute an offer to sell or a solicitation of an offer to buy any
of the Debt Securities offered hereby in any jurisdiction to any person to whom
it is unlawful to make such offer or solicitation in such jurisdiction. Neither
the delivery of this Prospectus and any Prospectus Supplement nor any sale made
thereunder shall, under any circumstances, create any implication that the
information therein is correct as of any time subsequent to the date thereof.
------------------------
AVAILABLE INFORMATION
The Operating Partnership and the sole general partner of the Operating
Partnership, Irvine Apartment Communities, Inc. (the "Company"), are each
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith file reports
and other information with the Securities and Exchange Commission (the
"Commission"). Reports, proxy statements and other information filed by the
Company or the Operating Partnership with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 or at its Regional Offices
located at Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661 and at Seven World Trade Center, 13th Floor, New York,
New York 10048, and copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. The Company's Common Stock is listed on the New York
Stock Exchange, Inc. (the "New York Stock Exchange") and the Pacific Stock
Exchange, Inc. (the "Pacific Stock Exchange"). In addition, reports, proxy
statements and other information concerning the Company can be inspected at the
offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005 and at the offices of the Pacific Stock Exchange, 301 Pine Street, San
Francisco, California 94104. Such material may also be accessed electronically
by means of the Commission's home page on the Internet at http://www.sec.gov.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(together with all amendments and exhibits thereto, the "Registration
Statement") filed with the Commission under the Securities Act of 1933, as
amended (the "Securities Act"). This Prospectus omits certain of the information
set forth in such Registration Statement in accordance with the rules and
regulations of the Commission. Reference is hereby made to such Registration
Statement and to the exhibits relating thereto for further information with
respect to the Operating Partnership and the Debt Securities. Any statements
contained herein concerning the provisions of any document are not necessarily
complete, and in each instance reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission for a more complete description of the matter involved. Each such
statement is qualified in its entirety by such reference.
2
<PAGE> 40
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, which have been filed with the Commission, are hereby
incorporated by reference:
1. Registration Statement on Form 10 of the Operating Partnership dated
May 15, 1997;
2. Quarterly Report on Form 10-Q of the Operating Partnership for the
quarter ended March 31, 1997;
3. Current Report on Form 8-K of the Operating Partnership filed on July
15, 1997, as amended by the Current Report on Form 8-K/A of the Operating
Partnership filed on July 23, 1997; and
4. Current Report on Form 8-K of the Operating Partnership filed on July
16, 1997.
All documents filed by the Operating Partnership after the date of this
Prospectus pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act,
prior to the termination of the offering of the Debt Securities offered hereby,
shall be deemed to be incorporated herein by reference and to be a part hereof
from the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein (or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein) modifies or
supersedes such statement. Any statements so modified or superseded shall be
deemed to constitute a part of this Prospectus, except as so modified or
superseded.
The Operating Partnership will provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus is delivered, upon
written or oral request of such person, a copy of any or all of the documents
referred to above which have been or may be incorporated by reference in this
Prospectus (other than certain exhibits to such documents). Requests for such
documents should be directed to Irvine Apartment Communities, L.P., 550 Newport
Center Drive, Suite 300, Newport Beach, California 92660, Attention: Investor
Relations (Telephone: (714) 720-5500).
3
<PAGE> 41
THE OPERATING PARTNERSHIP
The Operating Partnership is engaged in the development and operation of
multifamily rental apartment communities on the Irvine Ranch in Orange County,
California and, beginning in 1997, in other locations in California. The
Operating Partnership's management and operating decisions are under the
unilateral control of Irvine Apartment Communities, Inc., a Maryland corporation
(the "Company"), a self-administered equity real estate investment trust. The
Operating Partnership and the Company were formed in December 1993 to continue
and expand the apartment community business of The Irvine Company, a real estate
and community development company. At March 31, 1997 the Company had a 45.1%
general partnership interest in the Operating Partnership and was its sole
managing general partner. At such date, the limited partners of the Operating
Partnership had a 54.9% interest in the Operating Partnership, with The Irvine
Company and certain of its affiliates owning a 54.7% limited partnership
interest in the Operating Partnership.
At March 31, 1997, the Operating Partnership owned and operated 13,843 units in
53 apartment communities on the Irvine Ranch. Within its portfolio of properties
stabilized for more than two years are 43 apartment communities. These
properties had an average physical occupancy of 95.1% for the quarter ended
March 31, 1997. Within its portfolio of properties stabilized for less than two
years are 5 apartment communities. These properties had an average physical
occupancy of 94.0% for the quarter ended March 31, 1997. The Company also had
1,295 units in 5 additional apartment communities under construction or
lease-up, with 302 units completed at March 31, 1997 (together with completed
communities, the "Properties"). Additionally, as described below, the Company
recently acquired an apartment community development site located in Northern
California's Silicon Valley and an apartment community in Northern San Diego
County. All of the Properties, excluding these two sites, are located on the
Irvine Ranch. Through July 2020, the Operating Partnership holds the exclusive
right, but not the obligation, to acquire land from The Irvine Company for
development of additional apartment communities on the Irvine Ranch. The
developed portion of the Irvine Ranch, which borders approximately six miles of
the Pacific Ocean, includes significant parts of the cities of Irvine, Newport
Beach and Tustin. The Irvine Ranch has been developed over the past 30 years in
accordance with an original master plan and is now one of the major commercial,
industrial, retail and residential centers in Southern California.
The Operating Partnership has recently commenced an "off-Ranch" expansion
program. In February 1997, the Operating Partnership acquired rights to purchase
three apartment community development sites located in Northern California's
Silicon Valley. The Operating Partnership has exercised its right with respect
to one of these sites and began construction in May 1997. On June 30, 1997, the
Operating Partnership purchased, for approximately $127 million in cash, The
Villas of Renaissance, a 923-unit apartment community in La Jolla, California,
just north of San Diego. The Operating Partnership's intent is to create new
market positions in the Silicon Valley and Northern San Diego County, which
possess strong rental demographics and economic growth prospects similar to
those on the Irvine Ranch.
On June 27, 1997, the Operating Partnership entered into a new $250 million
three-year unsecured revolving line of credit which replaced its former line of
credit, due to expire in December 1997. The interest rate payable on outstanding
borrowings and fees are lower under the new line of credit than under the prior
facility. The Operating Partnership used borrowings under the new line of credit
to finance the La Jolla acquisition referred to above and in the future intends
to use the new line of credit for its ongoing rental property development
program, for potential acquisitions, and for general working capital needs. The
new line of credit is guaranteed by the Company.
The Operating Partnership is a Delaware limited partnership formed in 1993. The
Operating Partnership's executive offices are located at 550 Newport Center
Drive, Newport Beach, California 92660, telephone number: (714) 720-5500.
USE OF PROCEEDS
Unless otherwise set forth in the applicable Prospectus Supplement, proceeds
from the sale of the Debt Securities will be used by the Operating Partnership
for general corporate purposes, including the repayment of existing
indebtedness, ongoing development activities and acquisitions of additional
properties. Proceeds from the sale of Debt Securities initially may be
temporarily invested in short-term securities.
4
<PAGE> 42
CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES
The following table sets forth the consolidated ratios of earnings to fixed
charges for the Operating Partnership.
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------- --------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges.......... 2.44x 1.86x 2.07x 1.44x 1.25x .99x .96x
</TABLE>
For the purpose of calculating the ratio of earnings to fixed charges, earnings
consist of net earnings before income taxes, extraordinary items and fixed
charges. Fixed charges consist of interest expense, capitalized interest and
amortization of deferred financing costs.
Prior to completion of the Company's initial public offering in December 1993,
the predecessor of the Company and the Operating Partnership operated in a
highly leveraged manner. As a result, although the Company, the Operating
Partnership and the predecessor have historically generated positive net cash
flow, the financial statements of the predecessor show net losses for the
periods prior to December 8, 1993. Consequently, the computations of the ratio
of earnings to fixed charges for such periods indicate that earnings were
inadequate to cover fixed charges by approximately $0.6 million and $2.2 million
for the years ended December 31, 1993 and 1992, respectively.
DESCRIPTION OF THE DEBT SECURITIES
The following sets forth certain general terms and provisions of the indenture
under which the Debt Securities are to be issued (the "Indenture"). The
particular terms of the Debt Securities will be set forth in a Prospectus
Supplement relating to such Debt Securities.
The Debt Securities will represent senior, unsecured, general obligations of the
Operating Partnership, unless otherwise provided in the Prospectus Supplement.
As indicated in the applicable Prospectus Supplement, the Debt Securities will
be senior debt, senior to all future subordinated indebtedness of the Operating
Partnership and pari passu with other current and future unsecured,
unsubordinated indebtedness of the Operating Partnership. The Debt Securities
will be issued under an indenture to be executed by the Operating Partnership
and a trustee (the "Trustee"). The Indenture will be in the form that has been
filed as an exhibit to the Registration Statement of which this Prospectus is a
part, subject to such amendments or supplements as are adopted from time to time
(the "Indenture"). The following summary of certain provisions of the Indenture
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, all the provisions of the Indenture, including the definitions
therein of certain terms. Wherever particular sections or defined terms of the
Indenture are referred to, it is intended that such sections or defined terms
shall be incorporated herein by reference.
GENERAL
The Indenture will not limit the amount of Debt Securities which may be issued
thereunder. Reference is made to the Prospectus Supplement for the following
terms of the Debt Securities offered pursuant thereto: (i) designation,
aggregate principal amount, purchase price and denomination; (ii) the date of
maturity; (iii) interest rate or rates (or method by which such rate will be
determined), if any; (iv) the dates on which any such interest will be payable;
(v) the place or places where the principal of and interest, if any, on the Debt
Securities will be payable; (vi) any redemption or sinking fund provisions;
(vii) if other than the principal amount thereof, the portion of the principal
amount of the Debt Securities which will be payable upon declaration of
acceleration of the maturity thereof or provable in bankruptcy; (viii) whether
the Debt Securities will be issued in global form or bearer form or as
uncertificated securities; (ix) any Events of Default in addition to or in lieu
of those described herein and remedies therefor; (x) any trustees,
authenticating or paying agents, transfer agents or registrars or any other
agents with respect to the Debt Securities; (xi) listing (if any) on a
securities exchange; (xii) whether such Debt Securities will be certificated or
in book-entry form; and (xiii) any other specific terms of the Debt Securities,
including any additional events of default or covenants provided for with
respect to the Debt Securities, and any terms which may be required by or
advisable under United States laws or regulations.
Debt Securities may be presented for exchange or transfer in the manner, at the
places and subject to the restrictions set forth in the Debt Securities and the
Prospectus Supplement. Such services will be provided without charge, other than
any tax or other governmental charge payable in connection therewith, but
subject to the limitations provided in the Indenture.
5
<PAGE> 43
Debt Securities will bear interest at a fixed rate or a floating rate. Debt
Securities bearing no interest or interest at a rate which, at the time of
issuance, is below the prevailing market rate, will be sold at a discount below
its stated principal amount. Special United States federal income tax
considerations applicable to any such discounted Debt Securities or to any Debt
Securities issued at par which is treated as having been issued at a discount
for United States income tax purposes will be described in the relevant
Prospectus Supplement.
Unless otherwise specified in a Prospectus Supplement, the Indenture will not
contain any covenant or other specific provision affording protection to Holders
of the Debt Securities in the event of a highly leveraged transaction or a
change in control of the Operating Partnership or the Company, except to the
limited extent described under "Consolidation, Merger and Sale of Assets."
MODIFICATION AND WAIVER
The Indenture will provide that modifications and amendments thereto may be made
by the Operating Partnership and the Trustee, with the consent of the Holders of
a majority in aggregate principal amount of the outstanding Debt Securities
issued under the Indenture which are affected by the modification or amendment
voting as one class; provided that no such modification or amendment may,
without the consent of the Holder of each such Debt Security affected thereby,
among other things: (a) extend the final maturity of such Debt Securities, or
reduce the principal amount thereof, or reduce the rate or extend the time of
payment of interest thereon, or reduce any amount payable on redemption thereof,
or reduce the amount of the principal of Debt Securities issued with original
issue discount that would be due and payable upon an acceleration of the
maturity thereof or the amount thereof provable in bankruptcy, or extend the
time or reduce the amount of any payment to any sinking fund or analogous
obligation relating to such Debt Securities, or impair or affect the right of
any Holder of Debt Securities to institute suit for the payment thereof or, if
such Debt Securities provide therefor, any right of repayment at the option of
the Holder, (b) reduce the aforesaid percentage of such Debt Securities of any
series, the consent of the Holders of which is required for any such
supplemental indenture, or (c) reduce the percentage of such Debt Securities of
any series necessary to consent to waive any past default under the Indenture to
less than a majority, or (d) modify any of the provisions of the sections of the
Indenture relating to supplemental indentures with the consent of the Holders,
except to increase any such percentage or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent of
each Holder affected thereby, provided, however, that this clause shall not be
deemed to require the consent of any Holder with respect to changes in the
references to "the Trustee" and concomitant changes in such section or the
deletion of this proviso. (Indenture sec. 7.02)
The Indenture will provide that a supplemental indenture which changes or
eliminates any covenant or other provision of the Indenture which has expressly
been included solely for the benefit of one or more particular series of Debt
Securities, or which modifies the rights of the Holders of such series with
respect to such covenant or other provision, shall be deemed not to affect the
rights under the Indenture of the Holders of Debt Securities of any other
series. (Indenture sec. 7.02)
The Indenture will provide that modifications and amendments of the Indenture
may be made by the Operating Partnership and the Trustee, without the consent of
the Holders of any series of Debt Securities issued thereunder: (1) to secure
any Debt Securities issued thereunder; (2) to evidence the succession of another
entity to the Operating Partnership and the assumption by any such successor of
the covenants, agreements and obligations of the Operating Partnership, in the
Indenture and in the Debt Securities issued thereunder; (3) to add to the
covenants, restrictions, conditions or provisions for the protection of the
Holders of the Operating Partnership or to add any additional events of default;
(4) to cure any ambiguity, to correct or supplement any provision in the
Indenture that may be inconsistent with any other provision of the Indenture or
to make any other provisions with respect to matters or questions arising under
the Indenture, provided that such action shall not adversely affect the
interests of the Holders of any series of Debt Securities issued thereunder in
any material respect; (5) to establish the form and terms of Debt Securities
issued thereunder; (6) to evidence and provide for a successor trustee under the
Indenture with respect to one or more series of Debt Securities issued
thereunder or to provide for or facilitate the administration of the trusts
under the Indenture by more than one trustee; (7) to permit or facilitate the
issuance of Debt Securities in global form or bearer form or to provide for
uncertificated Debt Securities to be issued thereunder; (8) to change or
eliminate any provision of the Indenture, provided that any such change or
elimination shall become effective only when there are no Debt Securities
outstanding of any series created prior to the execution of such supplemental
indenture which are entitled to the benefit of such provision; or (9) to amend
or supplement any provision contained in the Indenture, which was required to be
contained in the Indenture in order for the Indenture to be qualified under the
Trust Indenture Act of 1939, if the Trust Indenture Act of 1939 or regulations
thereunder change what is so required to be included in
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qualified indentures, in any manner not inconsistent with what then may be
required for such qualification. (Indenture sec. 7.01)
EVENTS OF DEFAULT
The following will be events of default under the Indenture with respect to each
series of Debt Securities issued thereunder: (a) failure to pay principal (or
premium, if any) on such series of the Debt Securities outstanding under the
Indenture when due; (b) failure to pay any interest on such series of the Debt
Securities outstanding under the Indenture when due, continued for 30 days; (c)
default in the payment, if any, of any sinking fund installment when due,
payable by the terms of such series of Debt Securities; (d) failure to perform
any other covenant or warranty of the Operating Partnership contained in the
Indenture or such Debt Securities continued for 60 days after written notice
specifying such default or breach; (e) certain events of bankruptcy, insolvency
or reorganization of the Operating Partnership; and (f) any other event of
default provided in the supplemental indenture or resolution of the Board of
Directors under which such Debt Securities are issued. In case an event of
default described in (a), (b) or (c) above shall occur and be continuing with
respect to any series of the Debt Securities, the Trustee or the Holders of not
less than 25% in aggregate principal amount of the Debt Securities of such
series then outstanding (each such series acting as a separate class) may
declare the principal (or, in the case of discounted Debt Securities, the amount
specified in the terms thereof) of such series and the interest accrued thereon
to be due and payable immediately. In case an event of default described in (d)
or (f) above shall occur and be continuing, the Trustee or the Holders of not
less than 25% in aggregate principal amount of all Debt Securities of each
affected series then outstanding under the Indenture (treated as one class) may
declare the principal (or, in the case of discounted Debt Securities, the amount
specified in the terms thereof) of all Debt Securities of all such series to be
due and payable. If an event of default described in (e) above shall occur and
be continuing then the principal amount (or, in the case of discounted Debt
Securities, the amount specified in the terms thereof) of all the Debt
Securities outstanding shall be and become due and payable immediately, without
notice or other action by any Holder or the Trustee, to the full extent
permitted by law. Any event of default with respect to particular series of Debt
Securities under the Indenture may be waived by the Holders of a majority in
aggregate principal amount of the outstanding Debt Securities of such series
(voting as a class), except in each case a failure to pay principal of or
premium, if any, or interest on such Debt Securities or a default in respect of
a covenant or provision which cannot be modified or amended without the consent
of each Holder affected thereby. (Indenture sec.sec. 4.01, 4.10)
The Indenture will provide that the Trustee may withhold notice to the Holders
of any default with respect to any series of Debt Securities (except in payment
of principal of or interest or premium on, or sinking fund payment in respect
of, the Debt Securities) if the Trustee considers it in the interest of Holders
to do so. (Indenture sec. 4.11)
The Operating Partnership will be required to furnish to the Trustee annually a
statement as to its compliance with all conditions and covenants in the
Indenture. (Indenture sec. 3.05)
The Indenture will contain a provision entitling the Trustee to be indemnified
by the Holders before proceeding to exercise any trust or power under the
Indenture at the request of such Holders (Indenture sec. 5.02). The Indenture
will provide that the Holders of a majority in aggregate principal amount of the
then outstanding Debt Securities of any series may direct the time, method and
place of conducting any proceedings for any remedy available to the Trustee or
of exercising any trust or power conferred upon the Trustee with respect to the
Debt Securities of such series, provided, however, that the Trustee may decline
to follow any such direction if, among other reasons, the Trustee, determines in
good faith that the actions or proceedings as directed may not lawfully be
taken, would involve the Trustee in personal liability or would be unduly
prejudicial to the Holders of the Debt Securities of such series not joining in
such direction (Indenture sec. 4.09). The right of a Holder to institute a
proceeding with respect to the Indenture will be subject to certain conditions
precedent including, without limitation, that the Holders of not less than 25%
in aggregate principal amount of the Debt Securities of such series then
outstanding under the Indenture make a written request upon the Trustee to
exercise its powers under the Indenture, indemnify the Trustee and afford the
Trustee reasonable opportunity to act, but the Holder has an absolute right to
receipt of the principal of, premium, if any, and interest when due on the Debt
Securities, to require conversion of Debt Securities if the Indenture provides
for convertibility at the option of the Holder and to institute suit for the
enforcement thereof (Indenture sec.sec. 4.06, 4.07).
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Indenture will provide that the Operating Partnership may not consolidate
with, merge into or sell, convey or lease all or substantially all of its assets
to any Person unless the Operating Partnership is the surviving entity or the
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successor Person is an entity organized under the laws of any domestic
jurisdiction and assumes the Operating Partnership's obligations on the Debt
Securities issued thereunder, and under the Indenture, and after giving effect
thereto no event of default, and no event which, after notice or lapse of time
or both, would become an event of default shall have occurred and be continuing,
and that certain other conditions are met. (Indenture sec.sec. 8.01, 8.02)
NO CONVERSION RIGHTS
The Debt Securities will not be convertible into or exchangeable for any capital
stock of the Company or equity interest in the Operating Partnership.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
The Indenture will provide with respect to each series of Debt Securities issued
thereunder that the Operating Partnership may terminate its obligations under
such Debt Securities of a series and the Indenture with respect to Debt
Securities of such series if: (i) all Debt Securities of such series previously
authenticated and delivered, with certain exceptions, have been delivered to the
Trustee for cancellation and the Operating Partnership has paid all sums payable
by it under the Indenture; or (ii) (A) the Debt Securities of such series mature
within one year or all of them are to be called for redemption within one year
under arrangements satisfactory to the Trustee for giving the notice of
redemption, (B) the Operating Partnership irrevocably deposits in trust with the
Trustee, as trust funds solely for the benefit of the Holders of such Debt
Securities, for that purpose, money or U.S. Government Obligations or a
combination thereof sufficient (unless such funds consist solely of money, in
the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee), without
consideration of any reinvestment, to pay principal of and interest on the Debt
Securities of such series to maturity or redemption, as the case may be, and to
pay all other sums payable by it under the Indenture, and (C) the Operating
Partnership delivers to the Trustee an officers' certificate and an opinion of
counsel, in each case stating that all conditions precedent provided for in the
Indenture relating to the satisfaction and discharge of the Indenture with
respect to the Debt Securities of such series have been complied with. With
respect to the foregoing clause (i), only the Operating Partnership's
obligations to compensate and indemnify the Trustee under the Indenture shall
survive. With respect to the foregoing clause (ii) only the Operating
Partnership's obligations to execute and deliver Debt Securities of such series
for authentication, to maintain an office or agency in respect of the Debt
Securities of such series, to have moneys held for payment in trust, to register
the transfer or exchange of Debt Securities of such series, to deliver Debt
Securities of such series for replacement or to be canceled, to compensate and
indemnify the Trustee and to appoint a successor trustee, and its right to
recover excess money held by the Trustee shall survive until such Debt
Securities are no longer outstanding. Thereafter, only the Operating
Partnership's obligations to compensate and indemnify the Trustee, and its right
to recover excess money held by the Trustee shall survive. (Indenture sec. 9.01)
The Indenture will provide that the Operating Partnership (i) will be deemed to
have paid and will be discharged from any and all obligations in respect of the
Debt Securities issued thereunder of any series, and the provisions of the
Indenture will, except as noted below, no longer be in effect with respect to
the Debt Securities of such series ("legal defeasance") and (ii) may omit to
comply with any term, provision, covenant or condition of the Indenture, and
such omission shall be deemed not to be an Event of Default under clause (d) of
the first paragraph of "-- Events of Default" with respect to the outstanding
Debt Securities of such series ("covenant defeasance"); provided that the
following conditions shall have been satisfied: (A) the Operating Partnership
has irrevocably deposited in trust with the Trustee as trust funds solely for
the benefit of the Holders of the Debt Securities of such series, for payment of
the principal of and interest of the Debt Securities of such series, money or
U.S. Government Obligations or a combination thereof sufficient (unless such
funds consist solely of money, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee) without consideration of any reinvestment and after
payment of all federal, state and local taxes or other charges and assessments
in respect thereof payable by the Trustee, to pay and discharge the principal of
and accrued interest on the outstanding Debt Securities of such series to
maturity or earlier redemption (irrevocably provided for under arrangements
satisfactory to the Trustee), as the case may be; (B) such deposit will not
result in a breach or violation of, or constitute a default under, the Indenture
or any other material agreement or instrument to which the Operating Partnership
is a party or by which it is bound; (C) no default with respect to such Debt
Securities of such series shall have occurred and be continuing on the date of
such deposit; (D) the Operating Partnership shall have delivered to the Trustee
an opinion of counsel that (1) the Holders of the Debt Securities of such series
will not recognize income, gain or loss for federal income tax purposes as a
result of the Operating Partnership's exercise of its option under this
provision of the Indenture and will be subject to federal income tax on the same
amount and in the same
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manner and at the same times as would have been the case if such deposit and
defeasance had not occurred and (2) the Holders of the Debt Securities of such
series have a valid security interest in the trust funds subject to no prior
liens under the Uniform Commercial Code, and (E) the Operating Partnership has
delivered to the Trustee an officers' certificate and an opinion of counsel, in
each case stating that all conditions precedent provided for in the Indenture
relating to the defeasance contemplated have been complied with. In the case of
legal defeasance under clause (i) above, the opinion of counsel referred to in
clause (D)(1) above may be replaced by a ruling directed to the Trustee received
from the Internal Revenue Service to the same effect. Subsequent to a legal
defeasance under clause (i) above, the Operating Partnership's obligations to
execute and deliver Debt Securities of such series for authentication, to
maintain an office or agency in respect of the Debt Securities of such series,
to have moneys held for payment in trust, to register the transfer or exchange
of Debt Securities of such series, to deliver Debt Securities of such series for
replacement or to be canceled, to compensate and indemnify the Trustee and to
appoint a successor trustee, and its right to recover excess money held by the
Trustee shall survive until such Debt Securities are no longer outstanding.
After such Debt Securities are no longer outstanding, in the case of legal
defeasance under clause (i) above, only the Operating Partnership's obligations
to compensate and indemnify the Trustee and its right to recover excess money
held by the Trustee shall survive. (Indenture sec.sec. 9.02 and 9.03)
No recourse under or upon any obligation, covenant or agreement contained in the
Indenture, or in any Debt Security, or because of any indebtedness evidenced
thereby, shall be had against any incorporator, as such or against any past,
present or future stockholder, officer or director, as such, of the Operating
Partnership or the Company or of any successor, either directly or through the
Operating Partnership or any successor, under any rule of law, statute or
constitutional provision or by the enforcement of any assessment or by any legal
or equitable proceeding or otherwise, all such liabilities being expressly
waived and released by the acceptance of the Debt Securities by the holders
thereof and as part of the consideration for the issue of the Debt Securities.
(Indenture sec.sec. 10.01)
APPLICABLE LAW
The Indenture will provide that the Debt Securities and the Indenture will be
governed by and construed in accordance with the laws of the State of New York.
(Indenture sec. 10.08)
PLAN OF DISTRIBUTION
The Debt Securities may be sold (i) through agents, (ii) through underwriters,
(iii) through dealers or (iv) directly to purchasers (through a specific bidding
or auction process or otherwise). The distribution of Debt Securities may be
effected from time to time in one or more transactions at a fixed price or
prices, which may be changed, or at market prices prevailing at the time of
sale, at prices relating to such prevailing market prices or at negotiated
prices.
Offers to purchase the Debt Securities may be solicited by agents designated by
the Operating Partnership from time to time. Any such agent involved in the
offer or sale of the Debt Securities will be named, and any commissions payable
by the Operating Partnership to such agent will be set forth in the Prospectus
Supplement. Unless otherwise indicated in the Prospectus Supplement, any such
agent will be acting on a best efforts basis for the period of its appointment.
Any such agent may be deemed to be an underwriter, as that term is defined in
the Securities Act, of the Debt Securities so offered and sold.
If an underwriter or underwriters are utilized in the sale of Debt Securities,
the Operating Partnership will execute an underwriting agreement with such
underwriter or underwriters at the time an agreement for such sale is reached,
and the names of the specific managing underwriter or underwriters, as well as
any other underwriters, and the terms of the transactions, including
compensation of the underwriters and dealers, if any, will be set forth in the
Prospectus Supplement, which will be used by the underwriters to make resales of
the Debt Securities.
If a dealer is utilized in the sale of the Debt Securities, the Operating
Partnership will sell such Debt Securities to the dealer, as principal. The
dealer may then resell such Debt Securities to the public at varying prices to
be determined by such dealer at the time of resale. The name of the dealer and
the terms of the transactions will be set forth in the Prospectus Supplement
relating thereto.
Offers to purchase the Debt Securities may be solicited directly by the
Operating Partnership and sales thereof may be made by the Operating Partnership
directly to institutional investors or others. The terms of any such sales,
including the terms of any bidding or auction process, if utilized, will be
described in the Prospectus Supplement relating thereto.
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Agents, underwriters and dealers may be entitled under agreements which may be
entered into with the Operating Partnership to indemnification by the Operating
Partnership against certain liabilities, including liabilities under the
Securities Act, and any such agents, underwriters or dealers, or their
affiliates may be customers of, engage in transactions with or perform services
for the Operating Partnership in the ordinary course of business.
If so indicated in the Prospectus Supplement, the Operating Partnership will
authorize agents and underwriters to solicit offers by certain institutions to
purchase Debt Securities from the Operating Partnership at the public offering
price set forth in the Prospectus Supplement pursuant to Delayed Delivery
Contracts ("Contracts") providing for payment and delivery on the date stated in
the Prospectus Supplement. Such Contracts will be subject to only those
conditions set forth in the Prospectus Supplement. A commission indicated in the
Prospectus Supplement will be paid to underwriters and agents soliciting
purchases of Debt Securities pursuant to Contracts accepted by the Operating
Partnership.
In connection with an offering, the Underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price of the Debt Securities or
other securities of the Operating Partnership or the Company. Specifically, the
Underwriters may overallot such offering, creating a syndicate short position.
In addition, the Underwriters may bid for, and purchase, the Debt Securities in
the open market to cover syndicate shorts or to stabilize the price of the Debt
Securities. Finally, the underwriting syndicate may reclaim selling concessions
allowed for distributing the Debt Securities in such offering, if the syndicate
repurchases previously distributed Debt Securities in syndicate covering
transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Debt Securities
above independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
EXPERTS
The consolidated financial statements of the Operating Partnership included in
the Registration Statement on Form 10 of the Operating Partnership have been
audited by Ernst & Young LLP, independent auditors, as stated in their report
dated January 31, 1997 and are incorporated herein by reference in reliance upon
the report of such firm, which report is given upon their authority as experts
in accounting and auditing.
The statement of revenues and certain operating expenses of Renaissance Villas
for the year ended December 31, 1996 incorporated in this Prospectus by
reference from the Operating Partnership's Current Report on Form 8-K/A dated
July 22, 1997 has been audited by Deloitte & Touche LLP, independent
accountants, as stated in their report which is incorporated herein by
reference, and has been so incorporated in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
Any financial statements and schedules hereafter incorporated by reference in
the registration statement of which this prospectus is a part that have been
audited and are the subject of a report by independent auditors will be
incorporated herein by reference in reliance upon such reports and upon the
authority of such firms as experts in accounting and auditing to the extent
covered by consents filed with the Commission.
LEGAL MATTERS
The validity of the Debt Securities offered hereby will be passed upon for the
Operating Partnership by Davis Polk & Wardwell, New York, New York. Davis Polk &
Wardwell will rely as to matters of Maryland law on Piper & Marbury L.L.P.,
Baltimore, Maryland.
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