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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1997
REGISTRATION NO. 333-26363
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LEXREIT PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
------------------------
The Huntington Center
41 South High Street, 24th Floor
Columbus, Ohio 43215
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
JEFFREY D. MEYER, ESQ.
6954 Americana Parkway
Reynoldsburg, Ohio 43068
(614) 759-1566
(NAME AND ADDRESS OF AGENT FOR SERVICE)
------------------------
COPY TO:
BRADLEY A. VAN AUKEN, ESQ.
Benesch, Friedlander, Coplan & Aronoff LLP
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114
(216) 363-4500
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offer. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offer. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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TITLE OF SECURITIES AMOUNT BEING PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
BEING REGISTERED REGISTERED(1) PRICE PER SHARE(2) AGGREGATE PRICE(2) REGISTRATION FEE
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- -------------------------------------------------------------------------------------------------
Common Shares, without
par value............ 992,300 $1.50 $1,488,450 $451.05(3)
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</TABLE>
(1) Based upon the estimated maximum number of shares to be issued pursuant to
the Distribution, which is equal to the product of .2 times the number of
shares of CRSI Stock estimated to be issued and outstanding as of August 4,
1997.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
(3) $436.36 of the registration fee was previously paid in connection with the
filing of the Registration Statement on May 1, 1997.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(a) OF REGULATION S-K
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ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
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1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus................................ Inside Cover Page; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges.............. Outside Front Cover Page; Prospectus
Summary; Risk Factors; Policies and
Objectives With Respect to Certain
Activities; Shares Available for Future
Sale
4. Determination of Offering Price............. Outside Front Cover Page; The Distribution
5. Dilution.................................... Not Applicable
6. Selling Security Holders.................... Not Applicable
7. Plan of Distribution........................ Outside Front Cover Page; The Distribution
8. Use of Proceeds............................. Not Applicable
9. Selected Financial Data..................... Summary Combined Pro Forma Financial Data
10. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
11. General Information as to Registrant........ Prospectus Summary; The Company; Business
and Properties; The Formation;
Management
12. Policy With Respect to Certain Activities... Prospectus Summary; Policies and
Objectives with Respect to Certain
Activities
13. Investment Policies of Registrant........... Prospectus Summary; Policies and
Objectives with Respect to Certain
Activities; Business and Properties
14. Description of Real Estate.................. Prospectus Summary; Business and
Properties
15. Operating Data.............................. Business and Properties
16. Tax Treatment of Registrant and its Security
Holders................................... Prospectus Summary; Certain Federal Income
Tax Considerations
17. Market Price of and Dividends on the
Registrant's Common Equity and Related
Shareholder Matters....................... Distribution Policy; Capital Stock of the
Company
18. Description of Registrant's Securities...... Capital Stock of the Company
19. Legal Proceedings........................... Business and Properties -- Legal
Proceedings
20. Security Ownership of Certain Beneficial
Owners And Management..................... Principal Shareholders of the Company
21. Directors and Executive Officers............ Management
22. Executive Compensation...................... Management
</TABLE>
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<TABLE>
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ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
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23. Certain Relationships and Related
Transactions.............................. Prospectus Summary; Business and
Properties; Management; Certain
Transactions; Transactions with CRSI;
Operating Partnership Agreement;
Subscription Agreement
24. Selection, Management and Custody of
Registrant's Investments.................. Outside Front Cover Page; Prospectus
Summary; Business and Properties;
Management; Policies and Objectives with
Respect to Certain Activities
25. Policies With Respect to Certain
Transactions.............................. Risk Factors; Policies and Objectives with
Respect to Certain Activities
26. Limitations of Liability.................... Management
27. Financial Statements and Information........ Prospectus Summary; Selected Financial
Information; Financial Statements
28. Interests of Named Experts and Counsel...... Legal Matters; Experts
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE> 4
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 20, 1997
UP TO 992,300 SHARES
LEXREIT PROPERTIES, INC.
COMMON STOCK
(WITHOUT PAR VALUE)
------------------------
This Prospectus is being furnished in connection with the contemplated
distribution in the form of a dividend (the "Distribution") by Cardinal Realty
Services, Inc. ("CRSI") to holders of record of its Common Stock, without par
value ("CRSI Stock"), as of the close of business on August 4, 1997 (the
"Distribution Record Date"), of 93% of the outstanding shares of Common Stock,
without par value ("Company Common Stock"), of its subsidiary, Lexreit
Properties, Inc. (the "Company"). The Company was formed on April 4, 1997, and
100 shares of Company Common Stock were issued to CRSI for $1,000. Effective as
of the close of business on September 30, 1997 (the "Distribution Date"), CRSI
will contribute $999,000 in cash together with 60% of the Interests (defined
below) in each of the Partnerships (as defined in the Glossary) (79% in the case
of two limited liability companies) to the Company and will receive 100% of the
Class A Senior Preferred Stock (as defined in the Glossary) and up to 1,066,900
additional shares of Company Common Stock (depending upon the number of issued
and outstanding shares of CRSI Stock as of the Distribution Record Date),
constituting 100% of the Company Common Stock.
On or before the Distribution Date, the Company and CRSI will form Cardinal
Properties L.P., an Ohio limited partnership (the "Operating Partnership"). As
capital contributions, the Company will contribute all of the Interests it has
received from CRSI (other than a 21% member's interest in each of two limited
liability companies in which the Company will hold a 79% member's interest) to
the Operating Partnership, and CRSI and its wholly-owned subsidiaries (the "CRSI
Group") will contribute all of their remaining Interests in each of the
Partnerships (other than Interests in two limited liability companies for which
the CRSI Group will retain a 21% member's interest) to the Operating Partnership
while retaining the general partner's (or managing member's, as the case may be)
interest (representing a 1% to 10% equity ownership interest) in each
Partnership. The Company will be the sole general partner of the Operating
Partnership with a 60% economic interest and CRSI will be, at least initially,
the sole limited partner of the Operating Partnership with a 40% economic
interest. The Operating Partnership will hold limited partner's interests in
approximately 62 limited partnerships and member's interests in 2 limited
liability companies (with the Company holding a 79% member's interest in 2
limited liability companies) (collectively, the "Interests"), each of which owns
and will continue to own an apartment community (collectively, the
"Properties"). The general partner of each limited partnership and the managing
member of each limited liability company (the "Managing Partner") will continue
to be, directly or indirectly, CRSI. CRSI or its wholly-owned subsidiary,
Lexford Properties, Inc., manages and will continue to manage the Properties.
After the Distribution, CRSI's interests in the stock of the Company and in the
Operating Partnership and the Partnerships will represent approximately a 49%
aggregate equity ownership interest in the Properties.
Pursuant to the Subscription Agreement (as defined in the Glossary) between
the Company and CRSI, CRSI may contribute certain equity interests (the
"Additional Interests") in up to 11 additional apartment communities (the
"Additional Properties") to either the Company or the Company and the Operating
Partnership, as specified in the Subscription Agreement, upon obtaining the
consent of the mortgage lender or lenders to the Partnerships that own the
Additional Properties for the transfer of any such Additional Interests and a
determination by CRSI, in its sole discretion, that it is more feasible to
maintain an economic interest in the Additional Property and contribute the
associated Additional Interest to the Company than to sell (or otherwise dispose
of) the Additional Property, in exchange for the issuance to CRSI of additional
shares of the Class A Senior Preferred Stock. See "Subscription
Agreement--Contributions of Additional Interests" and "The
Formation--Contributions of Additional Interests."
The Distribution will be made beginning on or about the Distribution Date to
holders of CRSI Stock as of the Distribution Record Date on the basis of one
share of Company Common Stock for each five shares of CRSI Stock held. In
connection with the Distribution, on the Distribution Date, CRSI will pay a
one-time, special cash dividend (the "CRSI Cash Dividend") in an amount equal to
at least 25% of the anticipated taxable dividend value of the Company Common
Stock expected to be indicated on the IRS Form 1099-DIV distributed to each
holder of record of CRSI Stock as of the Distribution Record Date. Subject to
the fulfillment of certain conditions, CRSI anticipates that the Distribution
will be effected on the Distribution Date. The Distribution is conditioned upon
the approval of CRSI's shareholders of the Distribution at CRSI's annual meeting
currently expected to be held in late July 1997. No consideration will be
required to be paid by CRSI shareholders to CRSI for the shares of Company
Common Stock to be received in the Distribution. Although CRSI is separately
seeking approval by CRSI shareholders of the Distribution, no additional action
will be required to be taken by CRSI shareholders in order to receive the shares
of Company Common Stock. Neither CRSI nor the Company will receive any proceeds
from the Distribution.
There is currently no established public trading market for the Company
Common Stock. The Company Common Stock is expected to be traded on the OTC
Bulletin Board, which is a market for thinly traded and hence, fairly illiquid,
securities.
CRSI SHAREHOLDERS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS IN CONNECTION
WITH THE RECEIPT OF SHARES OF COMPANY COMMON STOCK IN THE DISTRIBUTION.
------------------------
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 SUCH STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Shareholders of CRSI with inquiries related to the Distribution should
contact CRSI's Investor Relations Department, 6954 Americana Parkway,
Reynoldsburg, Ohio 43068 at Telephone Number (614) 575-5277. After the
Distribution Date, shareholders of the Company with inquiries related to the
Distribution should contact the Company or its transfer agent. See "Available
Information."
------------------------
THE DATE OF THIS PROSPECTUS IS JUNE , 1997.
<PAGE> 5
Through October 25, 1997 (25 days following the Distribution), all dealers
effecting transactions in the securities offered hereby may be required to
deliver a copy of this Prospectus. This is in addition to the obligations of the
Company to deliver this Prospectus at the time of the initial distribution of
the Company Common Stock.
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
security other than the securities offered hereby, nor does it constitute an
offer to sell or a solicitation of an offer to buy the securities offered hereby
by anyone in any jurisdiction in which such offer or solicitation is not
authorized, or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this Prospectus nor any offer or sale
made hereunder shall, under any circumstances, create any implication that the
information herein is correct at any time subsequent to the date hereof.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company has filed a registration statement on Form S-11 ("Form S-11") with the
Securities and Exchange Commission ("Commission") under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the shares of Company
Common Stock to be distributed to CRSI shareholders in the Distribution. This
Prospectus, filed as part of the Form S-11, does not contain all of the
information set forth in the Form S-11 and the exhibits and schedules thereto.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to herein are not necessarily complete. With respect
to each such contract, agreement or other document filed as an exhibit to the
Form S-11, reference is made to such exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
The Form S-11 and the exhibits and schedules thereto filed by the Company
may be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as at the Regional Offices of the Commission at Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661 and 7 World
Trade Center, Suite 1300, New York, New York 10048. Copies of such information
can also be obtained by mail from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The Commission's Web site can be accessed at
http://www.sec.gov.
The Company intends to furnish to holders of Company Common Stock each
fiscal year an annual report which contains financial statements prepared in
accordance with United States generally accepted accounting principles and
audited and reported on, with an opinion expressed by, an independent public
accounting firm, and such other reports as may be required by law.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED.
THIS PROSPECTUS MAY CONTAIN ESTIMATES, PROJECTIONS AND OTHER
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS,
TRENDS AND OTHER UNCERTAINTIES, INCLUDING THOSE DISCUSSED IN THIS PROSPECTUS
UNDER THE HEADING "RISK FACTORS" AND GENERAL ECONOMIC CONDITIONS, INTEREST RATES
AND CHANGES IN THE MARKET FOR AVAILABLE RENTAL HOUSING THAT COULD CAUSE ACTUAL
RESULTS TO VARY FROM THOSE ESTIMATED OR PROJECTED. SHAREHOLDERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH ARE
<PAGE> 6
BASED ONLY ON CURRENT JUDGMENTS AND CURRENT KNOWLEDGE. THE ACCOMPANYING
INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION THE
INFORMATION UNDER THE HEADINGS "PROSPECTUS SUMMARY," "RISK FACTORS," "THE
COMPANY," "BUSINESS AND PROPERTIES--COMPETITION," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "POLICIES AND
OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES" AND "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS," IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES.
WITH RESPECT TO ANY SUCH FORWARD-LOOKING STATEMENT THAT INCLUDES A STATEMENT OF
ITS UNDERLYING ASSUMPTIONS OR BASES, THE COMPANY CAUTIONS THAT, WHILE IT
BELIEVES SUCH ASSUMPTIONS OR BASES TO BE REASONABLE AND HAS FORMED THEM IN GOOD
FAITH, ASSUMED FACTS OR BASES ALMOST ALWAYS VARY FROM ACTUAL RESULTS, AND THE
DIFFERENCES BETWEEN ASSUMED FACTS OR BASES AND ACTUAL RESULTS CAN BE MATERIAL
DEPENDING ON THE CIRCUMSTANCES. WHEN, IN ANY FORWARD-LOOKING STATEMENT, THE
COMPANY, OR ITS MANAGEMENT, EXPRESSES AN EXPECTATION OR BELIEF AS TO FUTURE
RESULTS, THAT EXPECTATION OR BELIEF IS EXPRESSED IN GOOD FAITH AND IS BELIEVED
TO HAVE A REASONABLE BASIS, BUT THERE CAN BE NO ASSURANCE THAT THE STATED
EXPECTATION OR BELIEF WILL RESULT OR BE ACHIEVED OR ACCOMPLISHED.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE> 7
TABLE OF CONTENTS
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PAGE
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PROSPECTUS SUMMARY.................................................................... 1
The Company...................................................................... 1
The Distribution................................................................. 2
Risk Factors..................................................................... 6
Investment Objectives and Policies............................................... 6
Initial Transactions............................................................. 7
Contributions of Additional Interests............................................ 8
Organizational Chart............................................................. 9
Distributions.................................................................... 10
Tax Status of the Company........................................................ 11
SUMMARY COMBINED PRO FORMA FINANCIAL DATA............................................. 12
RISK FACTORS.......................................................................... 14
Possibility of Operating Losses.................................................. 14
Lack of Liquidity................................................................ 14
No Limitation on Debt; Ability to Issue Blank Check Preferred Stock.............. 14
"Penny Stock" Rules.............................................................. 14
Absence of Prior Public Market for, and Possible Volatility of Price of, the
Company Common Stock............................................................ 15
Tax Risks........................................................................ 15
Apartment Industry Risks......................................................... 16
Real Estate Investment Risks..................................................... 16
Real Estate Financing Risks...................................................... 18
Potential Environmental Liability................................................ 18
The Company's Lack of Operating History and Relationship with CRSI............... 19
Dependence on the Manager and CRSI............................................... 20
Limitations on Change in Control................................................. 20
Board of Directors' Ability to Change Policies................................... 22
Potential Adverse Effect on the Value of Company Common Stock of Fluctuations in
Interest Rates or Equity Markets................................................ 22
Effect on Market Price of Shares Available for Future Sale....................... 22
Forward-Looking Statements....................................................... 23
Costs of Compliance with Certain Laws............................................ 23
THE DISTRIBUTION...................................................................... 24
Reasons for the Distribution..................................................... 24
Manner of Effecting the Distribution............................................. 25
Trading of Company Common Stock.................................................. 26
Certain Federal Income Tax Consequences of the Distribution...................... 26
Certain Consequences of the Distribution......................................... 27
Reason for Furnishing this Prospectus............................................ 28
THE COMPANY........................................................................... 28
General.......................................................................... 28
Investment Objectives and Policies............................................... 28
DISTRIBUTION POLICY................................................................... 30
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS........................... 31
CAPITALIZATION........................................................................ 37
SELECTED FINANCIAL DATA............................................................... 38
</TABLE>
i
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<TABLE>
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PAGE
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 41
Introduction..................................................................... 41
Results of Operations............................................................ 41
Liquidity and Capital Resources.................................................. 43
Financing and Debt Restructuring of the Properties............................... 43
Funds From Operations............................................................ 43
BUSINESS AND PROPERTIES............................................................... 44
Description of Properties and Additional Properties.............................. 44
Executive Officers; Contracts for Services with Manager and CRSI................. 44
Environmental Matters............................................................ 45
Competition...................................................................... 45
Legal Proceedings................................................................ 45
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES............................ 46
Investment Policies.............................................................. 46
Financing........................................................................ 47
Policies with Respect to Certain Other Activities................................ 47
Conflicts of Interest Policy..................................................... 47
THE FORMATION......................................................................... 47
MANAGEMENT............................................................................ 49
Company Directors and Executive Officers......................................... 49
Committees of the Board of Directors............................................. 50
Liability and Indemnification of Directors and Officers.......................... 50
Executive Compensation........................................................... 51
Compensation of Directors........................................................ 51
Conflicts of Interest............................................................ 51
CERTAIN TRANSACTIONS; TRANSACTIONS WITH CRSI.......................................... 52
Initial Transactions............................................................. 52
Contributions of Additional Interests............................................ 52
Agreements Between the Company and CRSI.......................................... 53
Management Agreements............................................................ 53
Corporate Services Agreement..................................................... 55
Asset Management Agreements...................................................... 55
Tax Indemnification Agreement.................................................... 56
OPERATING PARTNERSHIP AGREEMENT....................................................... 56
Management....................................................................... 56
Transferability of Interests..................................................... 57
Capital Contributions............................................................ 57
Tax Matters; Profits and Losses.................................................. 57
Operations....................................................................... 57
Termination of Management Agreements............................................. 58
Distributions.................................................................... 58
Term............................................................................. 59
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SUBSCRIPTION AGREEMENT................................................................ 60
General.......................................................................... 60
Consent of the Company to Certain Transactions................................... 60
Contributions of Additional Interests............................................ 60
Distribution of Net Proceeds..................................................... 60
Forfeitures...................................................................... 60
1997 PERFORMANCE EQUITY PLAN OF CRSI.................................................. 61
PRINCIPAL SHAREHOLDERS OF THE COMPANY................................................. 61
SHARES ISSUED AND OUTSTANDING......................................................... 62
CAPITAL STOCK OF THE COMPANY.......................................................... 63
General.......................................................................... 63
Company Common Stock............................................................. 64
Preferred Stock.................................................................. 64
Restrictions on Transfer......................................................... 66
Ohio Anti-Takeover Provisions.................................................... 67
SHARES AVAILABLE FOR FUTURE SALE...................................................... 68
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............................................. 69
General.......................................................................... 69
Taxation of the Company as a REIT................................................ 70
Requirements for Qualification as a REIT......................................... 70
Future Tax Legislation........................................................... 74
Tax Aspects of the Company's Investment in the Partnerships...................... 75
Taxation of Taxable Domestic Shareholders........................................ 76
Taxation of Tax-Exempt Shareholders.............................................. 77
Taxation of Foreign Shareholders................................................. 78
Other Tax Considerations......................................................... 79
ERISA CONSIDERATIONS.................................................................. 79
EXPERTS............................................................................... 80
LEGAL MATTERS......................................................................... 80
GLOSSARY.............................................................................. 81
INDEX TO FINANCIAL STATEMENTS......................................................... F-1
</TABLE>
iii
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial information and statements, and the notes thereto,
appearing elsewhere in this Prospectus. This Prospectus contains forward-looking
statements that involve risks and uncertainties. Unless the context otherwise
indicates, all references to the Company in this Prospectus shall include the
Company, as well as the Operating Partnership, the Partnerships and the
Properties and assumes that the actions set forth under "The Distribution" have
taken place.
See "Glossary" for the definitions of certain terms used in this
Prospectus.
THE COMPANY
The Company was formed to act as the General Partner of the Operating
Partnership and will operate as a real estate investment trust (a "REIT"). On
and after the Distribution Date, the Operating Partnership will hold limited
partner's interests in approximately 62 limited partnerships and member's
interests in 2 limited liability companies (with the Company holding member's
interests in 2 limited liability companies) (collectively, the "Interests"),
which own an aggregate of 66 apartment communities with approximately 5,100
rental units (collectively, the "Properties"). The apartment communities
constituting the Properties are located in Florida, Ohio, Indiana, Georgia,
Kentucky, Michigan, Illinois, Maryland, South Carolina, Pennsylvania, Alabama
and Tennessee and consist of multiple one-story buildings containing apartment
units offering tenants four basic floor plans with furnished and unfurnished
studios, one bedroom and two bedroom units.
Pursuant to the Subscription Agreement (as defined below) between the
Company and CRSI, CRSI may contribute certain equity interests (the "Additional
Interests") in entities owning up to 11 additional apartment communities (the
"Additional Properties") to either the Company or both of the Company and the
Operating Partnership, as specified in the Subscription Agreement, upon
obtaining the consent of the mortgage lender or lenders to the special purpose
corporations ("SPCs") and the limited partnerships owning the Additional
Properties for the transfer of any such Additional Interests and a determination
by CRSI, in its sole discretion, that it is more feasible to maintain an
economic interest in the Additional Property and contribute the associated
Additional Interest to the Company than to sell (or otherwise dispose of) the
Additional Property, in exchange for the issuance to CRSI of additional shares
of the Class A Senior Preferred Stock. See "Subscription
Agreement--Contributions of Additional Interests" and "The
Formation--Contributions of Additional Interests." The apartment communities
constituting the Additional Properties are located in Ohio, Florida, Georgia,
Illinois, Indiana, Maryland, Michigan, Texas and West Virginia. CRSI and the
Company presently intend that the Operating Partnership will also own all other
interests in real properties that may be acquired in the future by the Company,
if any.
1
<PAGE> 11
THE DISTRIBUTION
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Distributing Company............ Cardinal Realty Services, Inc., an Ohio corporation.
Distributed Company............. Lexreit Properties, Inc., an Ohio corporation (the "Company").
Shares to be Distributed........ Up to 992,300 shares of Company Common Stock based on an estimate of
not more than 4,942,000 shares of CRSI Stock expected to be
outstanding on the Distribution Record Date (and taking into account
the possible issuance of whole shares of Company Common Stock in lieu
of fractional shares). Such shares, together with the whole shares
representing the aggregate of the fractional share interests that will
be rounded up to the nearest whole share (discussed below), will
constitute 93% of the issued and outstanding shares of Company Common
Stock immediately following the Distribution. See "Capital Stock of
the Company" and "The Distribution -- Manner of Effecting the
Distribution."
Distribution Ratio.............. One share of Company Common Stock for every five shares of CRSI Stock
held on the Distribution Record Date. See "The Distribution -- Manner
of Effecting the Distribution."
Fractional Share Interests...... Fractional share interests will not be issued in the Distribution.
CRSI shareholders otherwise entitled to a fractional share of Company
Common Stock will instead receive one additional whole share of
Company Common Stock in lieu of such fractional share. See "The
Distribution -- Manner of Effecting the Distribution."
CRSI Cash Dividend.............. In connection with the Distribution, on the Distribution Date, CRSI
will pay a one-time, special cash dividend in an amount equal to at
least 25% of the anticipated taxable dividend value of the Company
Common Stock expected to be indicated on the IRS Form 1099-DIV (the
"Anticipated Dividend Value") distributed to each holder of CRSI Stock
as of the Distribution Record Date (the "CRSI Cash Dividend").
Although CRSI will make a good faith effort to estimate the
Anticipated Dividend Value at the time of the CRSI Cash Dividend, no
assurances can be given that the amount of the CRSI Cash Dividend will
be equal to at least 25% of the actual taxable value to be indicated
on such IRS Form 1099-DIV.
Risk Factors.................... Shareholders should consider certain factors discussed under the
heading "Risk Factors."
Reasons for the Distribution.... By effecting the Distribution, CRSI seeks to accomplish the following
objectives:
(1) To retain a portion of the economic benefits (both current cash
flow and future appreciation) of the Properties for CRSI and
CRSI's shareholders;
(2) To increase its net income and earnings per share;
(3) To remove nonrecourse mortgage indebtedness secured by the
Properties from CRSI's balance sheet;
(4) To improve its financial ratios (e.g., debt to equity, debt to
total market capitalization, operating margins, adjusted earnings
before interest, taxes, depreciation and amortization to revenues,
return on assets and return on equity);
</TABLE>
2
<PAGE> 12
<TABLE>
<S> <C>
(5) To allow each business (i.e., CRSI's real estate services business
and CRSI's real estate investment business) to more appropriately
address its specific requirements in a cost effective manner,
including capital requirements;
(6) To enable investors to evaluate each of the two businesses
independently and, therefore, better understand and analyze each
such business and direct their investments accordingly;
(7) To provide analysts, investors and lenders with a clear basis on
which to evaluate the business and operations of each company;
(8) To enable CRSI to better and more efficiently pursue growth
opportunities in its business and to finance such growth through
the issuance of capital stock (or other equity securities) of CRSI
(or an Affiliate), or through the proceeds of indebtedness, as
applicable; and
(9) To improve access to capital markets for CRSI and decrease CRSI's
costs of raising capital because separation of the two businesses
will enhance the ability of financial markets to appropriately
evaluate and value CRSI's real estate services business.
The foregoing statements constitute forward-looking statements.
Prospective investors are cautioned that any such forward-looking
statement is not a guarantee of future performance and involves
risks and uncertainties. See "Risk Factors--Forward-Looking
Statements."
Relationship with CRSI After the
Distribution.................. Following the Distribution, the Manager, CRSI or a wholly-owned
subsidiary of CRSI depending upon the Property in question, will
continue to manage the Properties and CRSI will provide certain
services to the Company. See "Certain Transactions; Transactions with
CRSI." Immediately following the Distribution, CRSI will own 100% of
the Company's Class A Senior Preferred Stock entitling it to receive
$1,620,000 per annum in cumulative dividends and will own 7% of the
Company Common Stock. In addition, CRSI will hold a 40% limited
partner's interest in the Operating Partnership and between a 1% and
10% general partner's or managing member's (21%, however, in the case
of two limited liability companies) interest (the "Managing
Interests") in the Partnerships. Following receipt of requisite
consents from mortgage lenders, CRSI, in its sole discretion, may
contribute the Additional Interests to the Company in exchange for
additional shares of Class A Senior Preferred Stock. If CRSI
contributes all of the Additional Interests to the Company, aggregate
cumulative annual dividends which will accrue on the Class A Senior
Preferred Stock will equal $1,980,000. See "--Contributions of
Additional Interests."
</TABLE>
3
<PAGE> 13
<TABLE>
<S> <C>
Federal Income Tax The Distribution and the CRSI Cash Dividend will be taxable events.
Consequences.................. Each CRSI shareholder will be required to recognize dividend income
(to the extent of CRSI's current and accumulated earnings and profits)
on the receipt of (i) the shares of Company Common Stock in the
Distribution in an amount up to the fair market value of the shares of
Company Common Stock received in the Distribution and (ii) the CRSI
Cash Dividend up to the amount received. To the extent the amount of
the distribution to a shareholder exceeds his allocable share of
CRSI's current or accumulated earnings and profits, such excess will
be treated first as a recovery of his basis in his CRSI Stock (which
will reduce his basis, if any, in his CRSI Stock) and the remainder as
taxable gain. In this regard, although CRSI did not have any
accumulated earnings and profits as of December 31, 1996, CRSI
anticipates that it will have sufficient current earnings and profits
for its taxable year ending December 31, 1997 to cause the entire
values of the Company Common Stock and CRSI Cash Dividend to be taxed
as a dividend. Although no assurances can be given, CRSI anticipates
that the fair market value of a share of Company Common Stock as of
the Distribution Date will be in the $.50--$2.00 range. The tax basis
of the shares of Company Common Stock received by a CRSI shareholder
in the Distribution will be the fair market value of such shares on
the Distribution Date and the holding period for such shares of
Company Common Stock will begin the day after the Distribution Date.
Following the completion of CRSI's 1997 taxable year, CRSI will send
shareholders a statement (on IRS Form
1099-DIV) as to CRSI's belief as to the fair market value of the
Company Common Stock as of the date of the Distribution and the
portion (up to the full amount) of such fair market value and CRSI
Cash Dividend that constitutes a taxable dividend. See "The
Distribution-- Certain Federal Income Tax Consequences of the
Distribution."
As a result of the Distribution, CRSI will be required to include in
its taxable income gain attributable to its receipt of the Interests,
by way of a distribution from certain of its subsidiaries, that will,
in turn, be contributed to the Company. The recognized gain will be an
amount equal to the excess of the fair market value of such Interests
as of the date they were distributed to CRSI over the distributing
subsidiary's income tax basis in such Interests at such time. Although
CRSI believes that it has sufficient tax attributes to offset such
income, it will likely incur an alternative minimum tax liability
equal to 2% of the amount of such gain recognized as a result of the
Initial Transactions. Although not free from doubt, CRSI expects to
take the position that the amount of this alternative minimum tax
liability will be approximately $300,000. In addition, CRSI is likely
to incur an additional alternative minimum tax liability if it
contributes Additional Interests to the Company on or after the
Distribution Date.
</TABLE>
4
<PAGE> 14
<TABLE>
<S> <C>
Post-Distribution Dividend The Company anticipates paying dividends sufficient to maintain its
Policies...................... status as a REIT (see "Risk Factors--Tax Risks"and "Distribution
Policy") for the foreseeable future; however, the Company Common Stock
is subject to the dividend preference of the Class A Senior Preferred
Stock and there can be no assurance that dividends will be paid to the
holders of Company Common Stock.
Trading Market.................. The Company Common Stock is expected to be traded, at least initially
on the OTC Bulletin Board, a thin, illiquid market.
Distribution Record Date........ Subject to receipt of approval by CRSI shareholders of the
Distribution at CRSI's annual shareholders meeting currently expected
to be held in late July 1997, the Distribution Record Date will be
August 4, 1997.
Distribution Agent, Transfer
Agent and Registrar........... Fifth Third Bank.
Distribution Date............... The Distribution will be effective as of the close of business on
September 30, 1997 (the "Distribution Date"). As soon as practicable
thereafter, the Distribution Agent will commence mailing certificates
representing shares of Company Common Stock and checks in payment of
the CRSI Cash Dividend. Holders of CRSI Stock will not be required to
make any payment or take any action, including tendering stock
certificates, in order to receive Company Common Stock. See "The
Distribution--Manner of Effecting the Distribution."
</TABLE>
5
<PAGE> 15
RISK FACTORS
An investment in the Company Common Stock involves numerous risks (see
"Risk Factors"), including, among others:
- the possibility of operating losses;
- the Company's lack of liquidity;
- risks associated with the "penny stock" rules;
- absence of prior public market for, and possible volatility of the price
of, the Company Common Stock;
- adverse tax consequences if the Company fails to qualify as a REIT;
- risks associated with distributing at least 95% of REIT taxable income,
including the risk that actual Cash Available for Distribution will be
insufficient to permit the Company to maintain its proposed initial
distribution rate;
- dependence of the Company on the Partnerships' net cash flow remaining
after debt service requirements for its sole source of cash
distributions;
- risks affecting the apartment industry generally and the Properties
specifically, including competition from other apartment developments,
renovation and capital improvements, and requirements and future
enactment of laws regulating multifamily housing;
- risks associated with the leasing, acquisition and development of real
property;
- the Company's lack of operating history and lack of experience in
operating in accordance with the requirements for maintaining its
qualification as a REIT;
- conflicts of interest between the Company and certain of its Affiliates,
including lack of arm's length negotiations in connection with the
Initial Transactions;
- dependence of the Company on the Manager and CRSI; and
- limitations on shareholders' ability to change control of the Company,
including restriction of ownership of the Company Common Stock by any
single person (except Bank of America National Trust and Savings
Association and CRSI) up to 9% of the outstanding Company Common Stock.
INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVES
The Company's investment objectives are to achieve long-term capital
appreciation through increases in cash flows and fair market values of the
Properties and to provide annual cash dividends to holders of its Company Common
Stock after regular quarterly cash dividends to holders of its Class A Senior
Preferred Stock (which, for the foreseeable future is expected to be and remain
CRSI); however, the Company Common Stock is subject to the dividend preference
of the Class A Senior Preferred Stock and there can be no assurance that any
dividends will ever be paid to the holders of the Company Common Stock. The
Company intends to cause the Operating Partnership initially to distribute
quarterly all Distributable Funds from Partnership Operations actually received
from the Partnerships, as well as all net proceeds of sales and refinancings
actually received from the Partnerships ("OP Distributable Funds"). The portion
of OP Distributable Funds equal to the net income of the Operating Partnership
as determined under generally accepted accounting principles, excluding gains
(losses) from a transaction that generates sales or refinancing proceeds
("Modified Net Income") will be distributed to the partners in accordance with
their respective percentage interests in the Operating Partnership. Any
remaining OP Distributable Funds, i.e., those in excess of Modified Net Income
of the Operating Partnership, will be distributed (i) 100% to the General
Partner if such distributions are attributable to Partnership operations;
provided, however, to the extent that distributions are made to the General
Partner as a result of the proviso in clause (ii) below, an equivalent amount of
distributions shall be made to the Limited Partner pursuant to this clause (i)
prior to any distributions being made to the General Partner pursuant to this
clause (i) or (ii) pro rata to the Partners in accordance with, and to the
extent of, their respective positive capital account balances until no Partner
has a positive capital
6
<PAGE> 16
account balance if such distributions are attributable to sales or refinancings
of Properties or Additional Properties by the Partnerships and thereafter to the
Partners in accordance with their respective percentage interests in the
Company; provided, however, in no event shall the sale or refinancing proceeds
to be distributed to the General Partner be less than the lesser of (x) the
amount of taxable gain allocable to the General Partner as a result of the event
giving rise to such sale or refinancing proceeds or (y) the amount necessary for
the General Partner to meet its minimum distribution requirements under Sections
857 and 4981 of the Code, as determined by the General Partner in its reasonable
discretion and taking into account the capacity of the General Partner to borrow
funds to satisfy such distribution requirements. As General Partner of the
Operating Partnership, the Company will control the declaration and payment of
any distributions by the Operating Partnership but has agreed with CRSI (in the
Operating Partnership Agreement), as Limited Partner, not to unreasonably
withhold or retain OP Distributable Funds. The Company believes its investment
objectives can be accomplished through the enhanced operation and management of,
and selected capital improvements to, the Properties, although the Company will
be initially dependent upon the efforts and decisions of CRSI and Manager in
this regard. See "Certain Transactions; Transactions with CRSI." While the
Company will not directly control or make capital financing, ownership or
management decisions affecting the Properties, the Company may withhold its
consent to the (i) mortgage financing, (ii) expansion and/or improvement or
(iii) sale of the Properties, in whole or in part, except in certain limited
circumstances. See "--Distributions" and "Distribution Policy" and "Subscription
Agreement."
Except as provided in the Subscription Agreement with respect to the
Additional Properties, the Company has no present plans to acquire or develop
additional properties, however, the Company intends to evaluate, and has been
structured so that it may take advantage of, future opportunities to acquire
interests in additional properties. The Operating Partnership Agreement
contemplates the possible issuance of additional limited partners' interests in
the Operating Partnership. Partnership interests in the Operating Partnership
could further be made convertible into shares of Company Common Stock. Equity
investments may be subject to existing mortgage financing and other indebtedness
which have priority over the equity interest of the Company. The Company also
may hold temporary cash investments from time to time pending investment or
distribution to shareholders. Although there are no immediate plans to acquire
or develop real estate, CRSI believes that an ownership structure that includes
the Operating Partnership will provide flexibility to the Company (through
conversion rights, new classes of and other special terms of limited partner's
interests) to finance future acquisitions, if any, of interests in additional
real properties.
The declaration and payment of any distributions by the Company will be at
the discretion of the Company's Board of Directors and will depend on, among
other things, the Company's receipt of cash distributions from the Operating
Partnership, the Company's level of indebtedness, any contractual restrictions
and other factors considered relevant by the Board. As General Partner of the
Operating Partnership, the Company will control the declaration and payment of
any distributions by the Operating Partnership. The Partnerships' cash
distributions of their respective Distributable Funds from Partnership
Operations will be determined, directly or indirectly, by CRSI (as Managing
Partner) in light of certain cash needs, including requirements for investing
and financing activities, maintenance reserves or escrows required by lenders or
otherwise, and other anticipated cash needs. CRSI, as Managing Partner of each
of the Partnerships, will agree with the Company (in the Operating Partnership
Agreement) not to unreasonably withhold or retain Distributable Funds from
Partnership Operations.
INITIAL TRANSACTIONS
The principal transactions (the "Initial Transactions") in connection with
the formation (the "Formation") of the Company as a REIT and the acquisition of
the Interests by the Company and the Operating Partnership are as follows:
- The Company was formed as an Ohio corporation and a wholly-owned
subsidiary of CRSI on April 4, 1997. One hundred shares of Company Common
Stock were issued to CRSI for $1,000.
- On or before the Distribution Date, CRSI will contribute additional cash
in the amount of $999,000 together with 60% of the Interests in each of
the Partnerships (79% in the case of two limited liability
7
<PAGE> 17
companies) to the Company and will receive 100% of the Class A Senior
Preferred Stock and up to 1,066,900 additional shares of Company Common
Stock, constituting 100% of the outstanding Company Common Stock.
- On or before the Distribution Date, the Company and CRSI will form the
Operating Partnership as an Ohio limited partnership, with the Company as
the General Partner with a 60% economic interest and CRSI as the Limited
Partner with a 40% economic interest in the Operating Partnership. As
capital contributions, the Company will contribute 60% of the Interests
in each of the Partnerships (excluding two limited liability companies in
which the Company will hold a 79% member's interest) to the Operating
Partnership, and the CRSI Group will contribute the remaining 40% of the
Interests in each of the Partnerships (excluding two limited liability
companies in which the CRSI Group will retain a 21% member's interest) to
the Operating Partnership.
See "The Formation" for a further discussion of the benefits to, and value
received by, CRSI in connection with the Initial Transactions.
CONTRIBUTIONS OF ADDITIONAL INTERESTS
Immediately prior to consummation of the Distribution, when CRSI will
contribute an Interest in each of the Partnerships (in most cases, 60%, but in
the case of two limited liability companies, 79%) to the Company, as described
above under "Initial Transactions," there will be 11 Additional Properties, 7 of
which are owned by SPCs, all of the issued and outstanding capital stock of
which is owned by CRSI, and 4 of which are owned by limited partnerships, with
CRSI as the general partner, the interests in which will not have been
transferred because each such transfer requires the consent of a mortgage lender
or lenders. A list of the Additional Properties is set forth on Exhibit 99.2 to
the Company's Registration Statement on Form S-11, of which this Prospectus
forms a part. CRSI will evaluate each Additional Property to determine whether
it is more feasible to maintain an economic interest in the Additional Property
and contribute the associated Additional Interest to the Company than to sell
(or otherwise dispose of) the Additional Property. If CRSI determines to
contribute Additional Interests to the Company, CRSI will continue to use its
reasonable best efforts to obtain the required mortgage lender consent or
consents and, upon obtaining the consent of the mortgage lender or lenders for
the transfer of any Additional Interests, (i) with respect to SPC-owned
Additional Properties, 100% of the capital stock of each SPC owning an
Additional Property will be contributed to the Company by CRSI, and (ii) with
respect to partnership-owned Additional Properties, a 60% limited partner's
interest in each of the partnerships owning such Additional Property will be
contributed to the Company by CRSI, in any case, in exchange for shares of Class
A Senior Preferred Stock in an amount equal to the Value of the Additional
Interest being contributed. As capital contributions, the Company will
contribute its Additional Interest in each of the partnerships owning the
partnership-owned Additional Properties to the Operating Partnership, and the
CRSI Group will contribute the remaining 40% of the Additional Interest in each
of such partnerships to the Operating Partnership. At the time of any additional
contribution as described in this paragraph, CRSI will provide to the Company a
representation and warranty that, to the best of CRSI's knowledge, there has
been no change to the underlying Additional Property or its operations that
would have a material adverse effect on the value of the Additional Property.
8
<PAGE> 18
ORGANIZATIONAL CHART
As a result of the Distribution and the Initial Transactions, the
relationships among the Company, CRSI, the Operating Partnership and the
Partnerships will be as follows:
<TABLE>
<S> <C> <C> <C>
CURRENT
SHAREHOLDERS
Distribution of 93% of OF CRSI 93% Company Common Stock
Company Common Stock |
|
------------------------------
|
CRSI
7% Company Common
(CRSI's interests in the Stock and 100% Preferred
stock of the Company, Stock for Contribution of COMPANY
the Operating $1,000,000 cash and 60% | 60% General Partner's Interest
Partnership and the of LP and LLC Interests(1) 40% LP Interest | for Contribution of
Partnerships represent for Contribution of | 60% of LP and LLC
approximately a 49%---------------------- 40% of LP and | Interests
equity interest in the | LLC Interests |
Properties)| | |
| | |
| | |
Distribution of | Managing | |
LP and LLC | Interest | |
Interests | Retained | |
| | OPERATING
| | PARTNERSHIP
| 100% | |
| | | LP and LLC Interests
CRSI | |
SUBS | |
| |
-------------------------------------PARTNERSHIPS
|
|
|
|
|
PROPERTIES
<FN>
- ---------------
(1) Includes contribution of 79% of LLC Interests in the case of two LLCs,
which LLC Interests will remain with the Company.
* Above references to "LP" shall mean limited partner's.
** Above references to "LLC" shall mean limited liability company.
</TABLE>
9
<PAGE> 19
DISTRIBUTIONS
In order to qualify as a REIT, the Company generally will be required each
year to distribute to its shareholders at least 95% of its net taxable income
(excluding any net capital gain). As a REIT, the Company will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (a) 85% of
its ordinary income plus (b) 95% of its net capital gain income for that year
plus (c) any such amounts not distributed in prior years. The Company intends to
make distributions to its shareholders to comply with the 95% distribution
requirement and to avoid the nondeductible excise tax. The Company's income will
consist primarily of its allocable share of the income of the Operating
Partnership, the two limited liability companies, Interests in which will be
held directly by the Company and, if and when contributed to the Company as
Additional Interests, the income of the SPCs, if any.
The Company intends to make regular annual cash distributions to holders of
Company Common Stock initially equal to $0.16 per share ($.04 per share on
account of the three months ending December 31, 1997); however, the Company
Common Stock is subject to the dividend preference of the Class A Senior
Preferred Stock and there can be no assurance that any dividends will ever be
paid to the holders of the Company Common Stock. The Company intends to make
regular quarterly distributions to holders of Class A Senior Preferred Stock
equal to $90 per share ($360 per share on an annual basis). Dividends on the
Class A Senior Preferred Stock not paid currently will accumulate. No dividends
or distribution will be made in respect of the Company Common Stock at any time
while accrued dividends on the Class A Senior Preferred Stock remain unpaid.
Following the receipt of requisite consents from mortgage lenders, CRSI, in its
sole discretion, may contribute the Additional Interests to the Company in
exchange for additional shares of Class A Senior Preferred Stock. If CRSI
contributes all of the Additional Interests to the Company, aggregate cumulative
annual dividends which will accrue on the Class A Senior Preferred Stock will
equal $1,980,000. The declaration and payment of any distributions by the
Company will be at the discretion of the Company's Board of Directors and will
depend on, among other things, the Company's receipt of cash distributions from
the Operating Partnership, the Company's level of indebtedness, any contractual
restrictions and other factors considered relevant by the Company's Board of
Directors.
The Company intends to cause the Operating Partnership initially to
distribute quarterly all OP Distributable Funds. The portion of OP Distributable
Funds equal to the Modified Net Income of the Operating Partnership will be
distributed to the partners in accordance with their respective percentage
interests in the Operating Partnership. Any remaining OP Distributable Funds,
i.e., those in excess of Modified Net Income of the Operating Partnership, will
be distributed (i) 100% to the General Partner if such distributions are
attributable to Partnership operations; provided, however, to the extent that
distributions are made to the General Partner as a result of the proviso in
clause (ii) below, an equivalent amount of such distributions shall be made to
the Limited Partner pursuant to this clause (i) prior to any distributions being
made to the General Partner pursuant to this clause (i) or (ii) pro rata to the
partners in accordance with, and to the extent of, their respective positive
capital account balances if such distributions are attributable to sales or
refinancings of Properties or Additional Properties by the Partnerships until no
Partner has a positive capital account balance and thereafter to the Partners in
accordance with their respective percentage interests in the Company; provided,
however, in no event shall the sale or refinancing proceeds to be distributed to
the General Partner be less than the lesser of (x) the amount of taxable gain
allocable to the General Partner as a result of the event giving rise to such
sale or refinancing proceeds or (y) the amount necessary for the General Partner
to meet its minimum distribution requirements under Sections 857 and 4981 of the
Code, as determined by the General Partner in its reasonable discretion and
taking into account the capacity of the General Partner to borrow funds to
satisfy such distribution requirements. As General Partner of the Operating
Partnership, the Company will control the declaration and payment of any
distributions by the Operating Partnership but has agreed with CRSI (in the
Operating Partnership Agreement), as Limited Partner, not to unreasonably
withhold or retain, OP Distributable Funds. The Partnerships' distributions of
their respective Distributable Funds from Partnership Operations will be
determined, directly or indirectly, by CRSI, as the Managing Partner of the
Partnerships in light of certain cash needs, including requirements for
investing and financing activities, maintenance reserves or escrows required by
lenders or otherwise, and other
10
<PAGE> 20
anticipated cash needs. As the Managing Partner of the Partnerships, CRSI (in
the Operating Partnership Agreement) has agreed not to unreasonably withhold or
retain Distributable Funds from Partnership Operations.
The statements in the two preceding paragraphs are forward-looking
statements involving certain risks and uncertainties that could cause actual
results to differ materially from those projected in such statements. Factors
that might cause such differences are discussed elsewhere in this Prospectus.
See "Distribution Policy" for information regarding the basis for the Company's
estimates and "Risk Factors."
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ending December 31,
1997. If the Company qualifies as a REIT, under current Federal income tax laws
the Company generally will not be subject to Federal income tax on income it
distributes to shareholders as long as it distributes at least 95% of its REIT
taxable income currently and satisfies a number of organizational and
operational requirements. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to Federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates, which would effectively impose on the Company's shareholders the "double
taxation" that generally results from investment in a corporation. See "Risk
Factors--Tax Risks--Failure to Qualify as a REIT" and "Certain Federal Income
Tax Considerations." Even if the Company qualifies for taxation as a REIT, the
Company may be subject to certain state and local taxes on its income and
property and may be subject to state income and, possibly, Federal excise taxes
on its undistributed income.
11
<PAGE> 21
SUMMARY COMBINED PRO FORMA FINANCIAL DATA
The following table presents financial data on a pro forma basis for the
Company, and on a historical basis for the Lexreit Properties Group. The
information set forth below should be read in conjunction with "Unaudited Pro
Forma Condensed Combined Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Combined
Historical Financial Statements and notes thereto included elsewhere in this
Prospectus. The Historical Statements of Operations Data set forth below for
each of the three years in the period ended December 31, 1996 and the Balance
Sheet Data at December 31, 1996 and 1995 are derived from, and are qualified by
reference to, the audited combined financial statements included elsewhere in
this Prospectus. The Pro Forma 1996 Statement of Operations Data and Balance
Sheet Data is derived from the Condensed Combined Pro Forma Financial Statements
and Notes thereto included elsewhere in this Prospectus. The Balance Sheet Data
at December 31, 1994, 1993 and 1992 are derived from unaudited combined
financial statements of the Lexreit Properties Group not included in this
Prospectus. The Statement of Operations Data for the period ended December 31,
1992 and for the year ended December 31, 1993 are derived from unaudited
combined financial statements of the Lexreit Properties Group not included in
this Prospectus.
The historical financial information of the Lexreit Properties Group and
the Company's Pro Forma financial information may not be indicative of the
Company's future performance and does not necessarily reflect what the financial
position and results of operations of the Company would have been had the
Company operated as a separate, stand-alone entity during the periods presented.
SUMMARY FINANCIAL AND OPERATING DATA (000S OMITTED, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------- PRO FORMA
1992 (1) 1993 1994 1995 1996 1996
-------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Rental and Other Revenues........... $ 6,684 $ 21,621 $ 22,646 $ 23,593 $ 25,148 $ 25,148
Operating Expenses.................. 2,900 9,268 9,724 10,493 10,772 10,932
-------- -------- -------- -------- -------- --------
Net Operating Income............ 3,784 12,353 12,922 13,100 14,376 14,216
-------- -------- -------- -------- -------- --------
Interest Expense.................... 2,208 7,190 7,922 7,684 8,605 8,576
Other Maintenance................... 434 1,329 1,531 2,349 1,481 1,595
Depreciation and Amortization (2)... -- -- -- -- 2,863 2,983
General and Administrative.......... -- -- -- -- -- 557
Other Costs......................... 559 622 1,139 897 590 705
-------- -------- -------- -------- -------- --------
3,201 9,141 10,592 10,930 13,539 14,416
-------- -------- -------- -------- -------- --------
Less: Amount credited to carrying
value of real estate (2).......... (583) (3,212) (2,330) (2,170) -- --
Income/(loss) before Extraordinary
Item, Taxes and Minority
Interest.......................... -- -- -- -- 837 (200)
-------- -------- -------- -------- -------- --------
Extraordinary gain/(loss) (4)....... -- 1,859 2,029 219 (2,475) --
Minority Interest................... -- -- -- -- -- (217)
-------- -------- -------- -------- -------- --------
Net Income/(loss) before Income
Taxes............................. -- 1,859 2,029 219 (1,638) (417)
Income Tax Provision/(Benefit)
(3)............................... -- 907 803 85 (639) --
-------- -------- -------- -------- -------- --------
Net Income/(loss)................... $ 0 $ 952 $ 1,226 $ 134 $ (999) (417)
======== ======== ======== ======== ========
--------
Preferred Stock Distributions....... (1,620)
--------
Net Income/(loss) attributable to
common shares..................... $ (2,037)
--------
Net (loss) per common share(6)...... ($ 2.43)
========
</TABLE>
12
<PAGE> 22
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------- PRO FORMA
1992 (1) 1993 1994 1995 1996 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Capital Expenditures (2)............ N/A N/A N/A N/A $ 373 $ 373
======== ======== ======== ======== ======== ========
Funds from Operations (5)........... $ 583 $ 3,212 $ 2,330 $ 2,170 $ 3,590 $ 2,554
======== ======== ======== ======== ======== ========
Number of Properties................ 64 64 64 65 66 66
======== ======== ======== ======== ======== ========
Number of Apartment Units........... 4,987 4,987 4,987 5,047 5,118 5,118
======== ======== ======== ======== ======== ========
BALANCE SHEET DATA
Land and Buildings(1)(2)............ $105,130 $101,924 $ 99,598 $ 98,775 $ 97,821 $ 97,821
Operating Cash...................... 2,000 3,025 2,310 1,681 2,110 3,110
Funds held in Escrow................ 3,017 2,623 4,049 3,824 4,367 4,367
Receivables......................... 656 532 543 516 529 529
Other Assets........................ 677 612 1,245 1,254 2,428 3,028
-------- -------- -------- -------- -------- --------
Total Assets.................... $111,480 $108,716 $107,745 $106,050 $107,255 $108,855
======== ======== ======== ======== ======== ========
Mortgage Debt....................... $ 89,790 $ 86,260 $ 86,356 $ 89,742 $ 93,043 $ 93,043
Other Liabilities................... 13,168 12,129 9,992 4,648 4,093 4,693
Investment by CRSI.................. 8,522 10,327 11,397 11,660 10,119 N/A
Minority Interest................... 4,594
Shareholders' Equity................ 6,525
-------- -------- -------- -------- -------- --------
Total Liabilities and Equity........ $111,480 $108,716 $107,745 $106,050 $107,255 $108,855
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) CRSI applied "Fresh Start" accounting upon its emergence from Chapter 11
bankruptcy on September 11, 1992. Fresh Start accounting was also applied to
the Properties wholly-owned by CRSI at that time. Therefore, the operations
for 1992 includes only the period from September 11, 1992 to December 31,
1992. In addition, as a result of applying Fresh Start accounting the
non-recourse mortgages on the Properties were adjusted to the estimated
value of the collateral as of September 11, 1992.
(2) During 1995 and prior years, CRSI had attempted to market and sell the
Properties and classified the Properties as Held for Sale. While the
Properties were held for sale, the results of operations from the Properties
were credited to the carrying value of the real estate and no revenues,
operating expenses or depreciation were included in the statements of
income. Due to this policy from 1992 through 1995 all expenditures were
capitalized. Commencing January 1, 1996 a capitalization program was
implemented to capitalize major improvements to the Properties.
(3) The income tax provision represents the Lexreit Properties Group's share of
CRSI's income tax provision which is intended to approximate the provision
that would have been reported had the Lexreit Properties Group filed
separate tax returns, and it does not affect the net investment by CRSI. All
tax provisions relate to the extraordinary gains or losses in 1993, 1994 and
1995. In 1996, the tax provision includes a provision of approximately
$326,000 related to operating income.
(4) The extraordinary gains and losses from the Properties are attributable to
the refinancing of Property mortgages. Such gains and losses were not
applied to the asset values but were reported as income or loss in the
period incurred.
(5) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), Funds From Operations (FFO) represents net income/(loss) before
minority interest, excluding depreciation on real estate, extraordinary
gains or losses and including income credited to carrying value of real
estate. See Note 2. In addition, the Company will review the capitalization
program for the Properties as compared with other REITs.
(6) Pro Forma Net Income Per Common Share equals Pro Forma Net Income divided by
the 837,000 shares of Company Common Stock outstanding on a pro forma basis
based upon the CRSI shares outstanding at December 31, 1996 converted based
on one Company share for every five CRSI shares, plus shares of Company
Common Stock issued to CRSI.
13
<PAGE> 23
RISK FACTORS
Holders should carefully consider, among other factors, the matters
described below, each of which could have adverse consequences to the Company
and adversely affect the value of the Company Common Stock.
POSSIBILITY OF OPERATING LOSSES
The Partnerships have incurred operating losses on a combined basis in four
of the five years since the date of confirmation (August 26, 1992) of the Third
Amended Plan of Reorganization of CRSI and its Substantively Consolidated
Subsidiaries (the "Chapter 11 Bankruptcy Plan of Reorganization"). There can be
no assurance that the Company will not experience operating losses or have Cash
Available for Distribution sufficient to effect any distributions to holders of
Company Common Stock or even to holders of the Class A Senior Preferred Stock in
the future.
LACK OF LIQUIDITY
The Company will maintain a relatively illiquid cash position. The Company
has no current line of credit and has no current intention of securing a line of
credit. The Company's sole significant asset will be its general partner's
interest in the Operating Partnership (and, if and when contributed, the capital
stock of the SPCs). Further, the fact that the Company must distribute 95% of
its REIT taxable income in order to maintain its qualifications as a REIT will
limit the ability of the Company to rely upon cash flow from operations to
finance its activities. The Company intends to make distributions to its
shareholders to comply with the 95% distribution requirement and to avoid any
nondeductible excise tax. It is possible that the Company could require
short-term borrowing proceeds to meet its REIT distribution requirements in the
future. There can be no assurance that the Company will be able to effect such
financing. Following CRSI's initial contribution of cash to the Company, the
Company's cash flow will consist primarily of distributions from the Operating
Partnership. See "Distribution Policy" and "--Tax Risks."
NO LIMITATION ON DEBT; ABILITY TO ISSUE BLANK CHECK PREFERRED STOCK
The Company's organizational documents do not contain any limitation on the
amount or percentage (of total capitalization) of indebtedness the Company may
incur, and the Board of Directors could alter or eliminate the Company's current
borrowing policy. If this policy were changed or eliminated, the Company could
become leveraged, resulting in debt service requirements, which could adversely
affect the Company's Cash Available for Distribution. The Company's Articles of
Incorporation authorize the Board of Directors to issue up to 500,000 shares of
Blank Check Preferred Stock and to establish certain preferences and rights of
any such shares issued. See "Capital Stock of the Company--Preferred Stock." The
issuance of shares of Blank Check Preferred Stock with preferential distribution
rights could diminish the Cash Available for Distribution to the holders of
Company Common Stock. In addition, the issuance of such shares could have the
effect of delaying or preventing a change in control of the Company even if a
change in control were in the shareholders' interest. See "--Board's Ability to
Change Policies."
"PENNY STOCK" RULES
Broker-dealer practices in connection with transactions in "penny stocks"
are regulated by certain penny stock rules adopted by the Commission. Penny
stocks generally are equity securities with a price of less than $6.00 (other
than securities registered on certain national securities exchanges or quoted on
the National Association of Securities Dealers Automated Quotation System). CRSI
believes that the penny stock rules will be applicable to the Company Common
Stock after the Distribution. The penny stock rules require a broker-dealer,
prior to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document that provides information about
penny stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and, if the broker-dealer is the sole market
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market, and monthly account statements showing the
market
14
<PAGE> 24
value of each penny stock held in the customer's account. In addition,
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally, those persons with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse), must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. Consequently, these requirements may have
the effect of reducing the level of trading activity, if any, in the secondary
market for a security subject to the penny stock rules and could result in loss
of liquidity for holders of Company Common Stock.
ABSENCE OF PRIOR PUBLIC MARKET FOR, AND POSSIBLE
VOLATILITY OF PRICE OF, THE COMPANY COMMON STOCK
There is currently no established public trading market nor has there been
any established public trading market for the Company Common Stock. The Company
Common Stock is expected to be traded on the OTC Bulletin Board, which is a
thin, illiquid market. There can be no assurance as to the prices at which
Company Common Stock will trade after the Distribution Date or even that an
orderly trading market for the Company Common Stock will develop or continue.
The price of securities of publicly traded corporations may fluctuate over a
wide range. Prices for Company Common Stock will be determined in the
marketplace and may be influenced by many factors, including the operating
performance of the Company, the depth and liquidity of the market for Company
Common Stock (i.e., the lack of an active market which may result in a discount
for illiquidity), investor perception of the Company and general economic and
market conditions. There can be no assurance that holders will be able to sell
the Company Common Stock at an acceptable (i.e., non-discounted) price or at
all.
TAX RISKS
Failure to Qualify as a REIT. The Company intends to operate as a REIT
under the Code, commencing with its initial taxable year ending December 31,
1997. The Company has not requested, and does not expect to request, a ruling
from the IRS or a tax opinion regarding its status as a REIT. Qualification as a
REIT involves the application of technical and complex provisions of the Code
for which there are only limited judicial or administrative interpretations. The
determination of various factual matters and circumstances not entirely within
the Company's control may affect its ability to qualify as a REIT. In addition,
no assurance can be given that legislation, regulations, administrative
interpretations or court decisions will not significantly change the rules
applicable to the Company with respect to its qualification as a REIT or the
Federal income tax consequences of such qualification.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to Federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates, which would effectively impose on the Company's
shareholders the "double taxation" that generally results from an investment in
a C corporation. Unless entitled to relief under certain Code provisions, the
Company also would be disqualified from treatment as a REIT for the four taxable
years following the year during which REIT qualification was lost. As a result,
the Cash Available for Distribution to the shareholders could be reduced or
eliminated for each of the years involved. Although the Company currently
intends to operate in a manner designed to qualify it as a REIT, it is possible
that future economic, market, legal, tax or other considerations may cause the
Board of Directors to revoke the REIT election.
REIT Minimum Distribution Requirements. In order to qualify as a REIT, the
Company generally will be required each year to distribute to its shareholders
at least 95% of its net taxable income (excluding any net capital gain). As a
REIT, the Company will be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
calendar year are less than the sum of (a) 85% of its ordinary income plus (b)
95% of its capital gain net income for that year plus (c) any such amounts not
distributed in prior years. The Company intends to make distributions to its
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. The Company's income will consist primarily of its
allocable share of the income of the Operating Partnership.
15
<PAGE> 25
APARTMENT INDUSTRY RISKS
Operating Risks. The Properties are subject to all operating risks common
to apartment projects in general. Such risks include competition from other
apartment developments; excessive building of comparable properties or increases
in unemployment in the areas in which communities are located, either of 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; the inability or unwillingness of
residents to pay rent increases; and future enactment of rent control laws or
other laws regulating multifamily housing, including present and possible future
laws relating to access by physically impaired persons. See "--Costs of
Compliance with Certain Laws." If any of the foregoing concerns materialize, the
Company's ability to make expected distributions to shareholders could be
adversely affected.
Investment in Single Industry. All of the current Properties are apartment
communities. The Company does not expect to seek to diversify its real estate
investments and will therefore be subject to risks inherent in investments in a
single industry.
Geographic Concentration. The Properties are located primarily in suburban
and rural areas in the Southeast and Midwest. Fifteen of the Properties are
located in Ohio, 15 of the Properties are located in Indiana and 12 of the
Properties are located in Florida. Significant adverse changes in the operating
results of any of the Properties, in economic conditions or in the market for
available rental housing in any of the Company's markets could have a material
adverse effect on rental revenues of any such Properties. A decrease in rental
revenues from the Properties could adversely affect the Company's ability to
make expected distributions to its shareholders.
Renovation and Capital Improvements Requirements. Apartment communities
require continuing renovation and capital improvements to remain competitive.
Certain lending arrangements with respect to some of the Properties also require
such renovations and improvements. While the Partnerships each will maintain
major maintenance and capital reserve funds to fund such renovations and
improvements, required expenditures could exceed the Company's expectations. If
that occurs, the incremental costs could adversely affect expected distributions
to shareholders. In addition, renovations and other capital improvements entail
certain risks, including environmental risks, construction cost overruns and
delays and unanticipated downturns in demand or unanticipated emergence of
competition in the affected market.
REAL ESTATE INVESTMENT RISKS
Value and Illiquidity of Real Estate. Real estate investments are
relatively illiquid. The Company's ability to vary its portfolio of apartment
communities in response to changes in economic and other conditions will
therefore be limited. In addition, certain significant expenditures associated
with each equity investment (such as mortgage payments, real estate taxes and
maintenance costs) are generally fixed, and therefore, not reduced when
circumstances cause a reduction in income from the investment. Moreover,
approximately one-third of the Properties are currently subject to mortgages
containing cross-default and cross-collateralization provisions such that the
sale of any one of these Properties is further limited.
Uninsured and Underinsured Losses. The Partnerships intend, and in many
instances are required, to maintain building casualty, public liability, crime
and business interruption insurance and various excess coverage policies on each
apartment community. The Manager believes the apartment communities' coverage is
of the type and amount, including coverage limits and deductibility provisions,
customarily carried on similar properties. However, there are certain types of
losses, generally of a catastrophic nature, such as earthquakes and floods, that
may be uninsurable or not economically insurable. Should an uninsured loss or a
loss in excess of insured limits occur, the Company could lose its investment in
the affected apartment community as well as the anticipated future revenues from
that apartment community.
Acquisition Risks. The Company's investment objectives are to achieve
long-term capital appreciation through increases in cash flows and fair market
values of the Properties, and to provide annual cash dividends to its holders of
Company Common Stock after regular quarterly cash dividends to holders of its
Class A
16
<PAGE> 26
Senior Preferred Stock (which, for the foreseeable future is expected to be and
remain CRSI); however, the Company Common Stock is subject to the dividend
preference of the Class A Senior Preferred Stock and there can be no assurance
that any dividends will ever be paid to the holders of the Company Common Stock.
The Company believes that these objectives can be accomplished through the
operation and management of, and selected capital improvements to, the
Properties, although the Company will be largely dependent upon the efforts and
decisions of CRSI and Manager in this regard. See "Certain Transactions;
Transactions with CRSI." While the Company has no present plans to acquire or
develop additional properties (except for the Additional Interests as provided
in the Subscription Agreement), the Company intends to evaluate, and has been
structured so that it may take advantage of, future opportunities to acquire
interests in additional properties. The Operating Partnership Agreement
contemplates the possible issuance of additional limited partner's interests in
the Operating Partnership. Partnership interests in the Operating Partnership
could further be made convertible into shares of Company Common Stock. The
Company may incur certain risks, including the expenditure of funds on, and the
devotion of management's time to, transactions that may not come to fruition.
Additional risks inherent in acquisitions (including acquisitions of the
Additional Interests under the Subscription Agreement) include risks that the
acquired properties will not achieve anticipated occupancy levels, that
judgments with respect to improvements to bring acquired properties to the
Company's standards will prove inaccurate and that the value of an Additional
Property may decline between the date of this Prospectus and the date at which
the Company acquires such Additional Property (although CRSI must represent to
the Company that, to the best of its knowledge, there has been no change to the
underlying Additional Property or its operations that would have a material
adverse effect on the value of the Additional Property). In addition, because
the Company anticipates that new acquisitions, if any, may be financed with
limited partners' interests that may be convertible into shares of Company
Common Stock, such acquisitions will have a dilutive effect on the ownership
percentage of partners of the Operating Partnership and of holders of Company
Common Stock. The Company also may hold temporary cash investments from time to
time pending investment or distribution to shareholders.
Development and Redevelopment Risks. The Partnerships may develop and
redevelop apartment communities when they believe that doing so is consistent
with their respective business strategies. While the Company's policies with
respect to these activities are currently intended to limit some of the risks
associated with those activities, continued project development will be subject
to a number of risks, including that construction and/or permanent financing may
not be available on favorable terms, construction costs of a property may exceed
original estimates, occupancy rates may not stabilize at anticipated levels,
permanent financing may not be available on completion of construction and
construction may not be completed on schedule. If any Partnership undertakes but
elects not to proceed with a development or redevelopment opportunity, the costs
associated therewith will ordinarily be charged against income for the current
period. There can be no assurance that, if undertaken, any such development
project will be completed or, if completed, that the costs of construction will
not exceed, by a material amount, projected costs. These activities are also
subject to risks relating to the inability to obtain, or delays in obtaining,
the necessary zoning, land-use, building, occupancy and other required
governmental permits and authorizations.
Except as provided in the Subscription Agreement with respect to the
Additional Interests, the Company has no present plans to acquire or develop
additional properties, however, the Company intends to evaluate, and has been
structured so that it may take advantage of, future opportunities to acquire
interests in additional properties. The Operating Partnership Agreement
contemplates the possible issuance of additional limited partners' interests in
the Operating Partnership. Partnership interests in the Operating Partnership
could further be made convertible into shares of Company Common Stock. While the
Company will not directly control or make capital financing, ownership or
management decisions affecting the Properties, the Company may withhold its
consent to the (i) mortgage refinancing of any Property prior to the maturity of
an outstanding mortgage loan secured by the affected Property (whether scheduled
or by virtue of acceleration), (ii) expansion and/or improvement of the
Properties or (iii) sale of such Properties, in whole or in part, except in
certain limited circumstances. See "Subscription Agreement--Consent of the
Company to Certain Transactions." Equity investments may be subject to existing
mortgage financing and other indebtedness which have priority over the equity
interests of the Company. In addition, because the Company anticipates
17
<PAGE> 27
that the development and redevelopment of apartment communities may be financed
with limited partners' interests which may be convertible into shares of Company
Common Stock, such financing may have a dilutive effect on the ownership
percentage of partners of the Operating Partnership and of holders of Company
Common Stock. See "Certain Transactions; Transactions with CRSI."
REAL ESTATE FINANCING RISKS
Each of the Properties is subject to a mortgage, which must be refinanced
in the future at or prior to its maturity. The average remaining term to
maturity of the mortgages is approximately 7 years with a weighted average
contractual interest rate of 8.6%. As a result, some of the Partnerships may be
subject to the risks normally associated with debt financing, including the risk
that the Partnership's cash flow will be insufficient to meet required payments
of principal and interest and the risk that the Partnership will not be able to
refinance that indebtedness on terms and at an interest rate as favorable as
those of the existing mortgage. If a Partnership incurs variable rate mortgage
indebtedness or a less favorable fixed interest rate or less favorable mortgage
terms, such changes could have an adverse effect on Distributable Funds from
Partnership Operations, OP Distributable Funds and, in turn, Cash Available for
Distribution which would negatively impact distributions to Company
shareholders. While the Company will not directly control or make capital
financing, ownership or management decisions affecting the Properties, the
Company may withhold its consent to the (i) mortgage refinancing, (ii) expansion
and/or improvement of the Properties or (iii) sale of such Properties, in whole
or in part, except in certain limited circumstances. See "Subscription
Agreement-- Consent of the Company to Certain Transactions."
In addition, if a Property is mortgaged to secure payment of indebtedness
and the Partnership is unable to make mortgage payments, the Property could be
foreclosed upon by, or otherwise transferred to, the mortgagee with a consequent
loss of income and asset value to the Company. As of the date of this
Prospectus, 22 of the Properties and 4 additional apartment communities not
included among the Properties or the Additional Properties (collectively, the
"PaineWebber Properties") are mortgaged pursuant to mortgages containing
cross-default and cross-collateralization provisions to secure payment of all
such first mortgage indebtedness owing by the Partnerships (and other entities)
that own the PaineWebber Properties. If a Partnership (or other entity) that
owns a PaineWebber Property is unable to make mortgage payments on such
PaineWebber Property, then all of the PaineWebber Properties could be foreclosed
upon by, or otherwise transferred to, the mortgagee with a consequent loss of
income and asset value to the Company.
POTENTIAL ENVIRONMENTAL LIABILITY
Under various Federal, state and local laws, ordinances and regulations, an
owner or operator of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on, under or in the
property. This liability may be imposed without regard to whether the owner or
operator knew of, or was responsible for, the presence of the hazardous or toxic
substances. Furthermore, a person that arranges for the disposal of a hazardous
substance at another property or transports a hazardous substance for disposal
or treatment at another property may be liable for the costs of removal or
remediation of hazardous substances at that property, regardless of whether that
person owns or operates that property. The costs of any such remediation or
removal may be substantial, and the presence of any such substance, or the
failure promptly to remediate any such substance, may adversely affect the
property owner's ability to sell or lease the property or to borrow using it as
collateral. Other Federal, state and local laws, ordinances and regulations
require abatement or removal of certain asbestos-containing materials in
connection with demolition or certain renovations or remodeling, impose certain
worker protection and notification requirements, and govern emissions of and
exposure to asbestos fibers in the air. Other Federal, state and local laws,
ordinances and regulations and the common law impose on owners and operators
certain requirements regarding conditions and activities that may affect human
health or the environment. These conditions and activities include, for example,
the presence of lead in drinking water and the presence of lead-containing paint
in occupied structures. Failure to comply with applicable requirements could
result in difficulty in the lease or sale of any affected property or the
imposition of monetary penalties, in addition to the costs required to achieve
compliance and potential liability to third parties. CRSI, the Manager, the
Company, the Operating
18
<PAGE> 28
Partnership or the affected Partnership, as the case may be, may be potentially
liable for such costs or claims in connection with the ownership and operation
of the apartment communities.
Phase I environmental site assessments have been completed within the last
36 months for more than one-half of the Properties and Additional Properties,
and no Phase II environmental site assessments have been conducted for the
Properties or the Additional Properties. None of the Phase I environmental site
assessments revealed any environmental contaminant or condition that CRSI
believes would have a material adverse effect on the Company, the Operating
Partnership, the Partnerships, the Properties or the Additional Properties.
Furthermore, CRSI is not aware of any such contamination or condition.
Nevertheless, it is possible that there exists material environmental
contamination of which CRSI is unaware.
No assurance can be given that (i) the assessments referred to above
revealed all potential environmental liabilities, (ii) future or amended laws,
ordinances or regulations, or more stringent interpretations or enforcement
policies of existing environmental requirements, will not impose any material
environmental liability, (iii) the environmental condition of the apartment
communities has not been and will not be affected by changes in the condition of
properties in the vicinity of the apartment communities or by the acts of third
parties unrelated to the Company, the Operating Partnership or a Partnership, or
(iv) future acquisitions of apartment communities will not impose any material
environmental liability. See "Business and Properties--Environmental Matters."
THE COMPANY'S LACK OF OPERATING HISTORY AND RELATIONSHIP WITH CRSI
The Company is a newly formed corporation. Accordingly, the Company does
not have any operating history as an independent public company or experience in
operating in accordance with the requirements for maintaining its qualification
as a REIT. The Company will rely on CRSI for day-to-day management and most
administrative services that the Company will require. Effective as of the
Distribution Date, CRSI and the Company will enter into several agreements for
purposes of governing certain of the ongoing relationships between the two
companies following the Distribution. These agreements were prepared while the
Company was owned by CRSI and consequently are not the result of arm's length
negotiations. Certain services to be provided by CRSI to the Company pursuant to
such agreements could be more expensive to the Company if CRSI ceases to provide
such services to the Company. It is anticipated that certain matters affecting
both CRSI and the Company will require approval of the Company's Board of
Directors. The non-Independent Directors will abstain from voting on any matters
that would provide a conflict of interest due to their positions as officers of
CRSI.
No arm's length negotiations were conducted in connection with the other
Initial Transactions or the terms of the Company's acquisition of Additional
Interests pursuant to the Subscription Agreement. The terms of the contribution
of the Interests to the Operating Partnership were determined by CRSI, who will
receive an economic benefit as a result of these contributions. This economic
benefit includes 100% of the shares of Class A Senior Preferred Stock, the terms
of which were set by CRSI. The Class A Senior Preferred Stock is entitled to
receive cumulative dividends of $1,620,000 per year prior to the payment of any
dividends with respect to Company Common Stock. Following obtaining requisite
consents from mortgage lenders, CRSI, in its sole discretion, may contribute the
Additional Interests to the Company in exchange for additional shares of Class A
Senior Preferred Stock. If CRSI contributes all of the Additional Interests to
the Company, aggregate annual dividends which will accrue on the Class A Senior
Preferred Stock will equal $1,980,000. Based on the dividend preference of the
Class A Senior Preferred Stock, there can be no assurance that any dividends
will ever be paid to the holders of Company Common Stock. See "Certain
Transactions; Transactions with CRSI."
So long as any Class A Senior Preferred Stock remains outstanding, the
Company may not, without the affirmative vote or consent of the holders of at
least a majority of the shares of Class A Senior Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting (voting
separately as a single class), consummate a "change of control transaction." A
"change of control transaction" is any transaction requiring approval of the
holders of the Company Common Stock and involving the sale of all or
substantially all of the assets of the Company or the merger or consolidation of
the Company with or into
19
<PAGE> 29
another corporation or entity or the acquisition by any person or entity
directly or indirectly of securities of the Company representing 50% or more of
the voting power of the Company's outstanding securities.
DEPENDENCE ON THE MANAGER AND CRSI
The Company is dependent on the efforts of the Manager, who presently
manages, and after the Distribution will continue to manage, the Properties (in
addition to other properties owned by third parties). At the conclusion of the
Initial Transactions and the Distribution, CRSI's interests in the stock of the
Company and in the Operating Partnership and the Partnerships will represent
approximately a 49% aggregate equity ownership interest in the Properties. CRSI
will own 100% of the Class A Senior Preferred Stock, entitling it to receive
cumulative dividends of $1,620,000 per year prior to the payment of any
dividends with respect to the Company Common Stock. The terms of the Class A
Senior Preferred Stock also provide a mechanism by which CRSI would be entitled
to appoint an additional director of the Company beginning whenever dividends on
the Class A Senior Preferred Stock have been in arrears for six or more
consecutive quarterly periods. See "Capital Stock of the Company--Preferred
Stock." In such case, the number of directors of the Company's Board of
Directors will be increased to account for the additional director and, if
necessary, to ensure that a majority of the Company's Board of Directors
continues to consist of Independent Directors. From and after the Distribution
Date, CRSI will also continue to own 7% of the Company Common Stock. CRSI will
hold a 40% limited partner's interest in the Operating Partnership and, directly
or indirectly through a wholly-owned subsidiary, between a 1% and 10% Managing
Interest in each of the Partnerships (a 21% interest in 2 limited liability
companies). Pursuant to the Subscription Agreement, CRSI will contribute the
Additional Interests in up to 11 Additional Properties to either the Company or
to the Company and the Operating Partnership (as set forth in the Subscription
Agreement) upon obtaining the consent of the mortgage lender or lenders for the
transfer of any such Additional Interests and a determination by CRSI, in its
sole discretion, that it is more feasible to maintain an economic interest in
the Additional Property and contribute the Additional Property to the Company
than to sell (or otherwise dispose of) the Additional Property, in exchange for
CRSI's receipt of additional shares of the Class A Senior Preferred Stock. If
CRSI contributes all of the Additional Interests to the Company, aggregate
cumulative annual dividends which will accrue on the Class A Senior Preferred
Stock will equal $1,980,000. See "Subscription Agreement--Contributions of
Additional Interests" and "The Formation--Contributions of Additional
Interests." Moreover, the Manager of each of the Properties (including the
Additional Properties) is CRSI or a wholly-owned subsidiary of CRSI. CRSI will
also initially provide (i) day-to-day executive management and most
administrative services to the Company including public reporting, insurance
procurement and administration, management information systems, tax planning,
compliance and return preparation, payroll and W-2 matters and accounting and
other financial services for a monthly services fee pursuant to a three-year
Corporate Services Agreement and (ii) day-to-day asset and partnership
management services to the Partnerships for monthly fees pursuant to their
respective Asset Management Agreements. See "Certain Transactions; Transactions
with CRSI--Corporate Services Agreement" and "Certain Transactions; Transactions
with CRSI--Asset Management Agreements." The loss of the services of CRSI or its
wholly-owned subsidiary could have a material adverse effect on the Company.
LIMITATIONS ON CHANGE IN CONTROL
Ownership Limit. The Company's Articles of Incorporation generally prohibit
any shareholder (except Bank of America National Trust and Savings Association
(on account of its currently existing and expected holdings of CRSI Stock at the
Distribution Record Date) and CRSI) from owning more than 9% of any class of the
Company's capital stock which may (i) discourage a change in control of the
Company, (ii) deter tender offers for Company Common Stock, which may otherwise
be attractive to the Company's shareholders, or (iii) limit the opportunity for
shareholders to receive a premium for their Company Common Stock that may
otherwise exist if an investor attempted to assemble a block of Company Common
Stock in excess of 9% of the outstanding Company Common Stock or to effect a
change in control of the Company. The Ownership Limit exists to enable the
Company to meet the REIT qualification requirement that not more than 50% in
value of its outstanding shares be owned by 5 or fewer individuals, while
providing the Company's Board of
20
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Directors the flexibility to allow an individual to own more than 9% of the
Company's outstanding shares so long as that ownership will not violate REIT
qualification requirements. See "Capital Stock of the Company."
Limitations on Control Share Acquisitions. Under the Ohio General
Corporation Law, unless an Ohio corporation's articles of incorporation or
regulations otherwise provide, any "control share acquisition" of an "issuing
public corporation" shall be made only with the prior authorization of its
shareholders in accordance with the Ohio control share acquisition statute,
section 1701.831 of the Ohio Revised Code. An Ohio corporation may, in the
alternative, include in its articles of incorporation or regulations
restrictions on transfer of its shares in connection with a "control share
acquisition," including procedures for obtaining the consent of shareholders or
directors. The Articles of Incorporation of the Company provide that the Ohio
control share acquisition statute does not apply to the Company so long as the
alternative shareholder consent procedures set forth in Article Seventh of the
Company's Articles of Incorporation are in effect. While Article Seventh,
Section A of the Company's Articles of Incorporation includes, to a large
extent, a provision similar to the Ohio control share acquisition statute and
Article Seventh, Section B sets forth procedures for obtaining shareholder
consent of "Control Share Acquisitions" consistent with the provisions of the
Ohio control share acquisition statute, the Articles of Incorporation establish
the right of the Company's Board of Directors to reject proposals that do not
meet certain standards set forth in Article Seventh, Section C. Article Seventh,
Section A defines a "Control Share Acquisition" as any acquisition, directly or
indirectly, of shares of the Company which, when added to all other shares of
the Company owned or controlled by the acquiror, would entitle the acquiror
alone or with others to exercise or direct the exercise of voting power in the
Company in the election of directors within any of the following ranges of
voting powers: (i) one-fifth or more but less than one-third, (ii) one-third or
more but less than a majority, and (iii) a majority or more. The limitations on
Control Share Acquisitions could have the effect of delaying or preventing a
change in control of the Company even if such change in control were in the
shareholders' interests. See "Capital Stock of the Company--Ohio Anti-Takeover
Provisions."
Limited Voting Rights of Class A Senior Preferred Stock. The Company's
Articles of Incorporation provide that so long as any Class A Senior Preferred
Stock remains outstanding, the Company will not, without the affirmative vote of
the holders of at least a majority of the shares, or the unanimous written
consent of the holders of the shares, of Class A Senior Preferred Stock
outstanding at the time, given in person or by proxy, either in writing or at a
meeting (voting separately as a single class), consummate a "change of control
transaction." A "change of control transaction" is any transaction requiring
approval of the holders of the Company Common Stock and involving the sale of
all or substantially all of the assets of the Company or the merger or
consolidation of the Company with or into another corporation or entity or the
acquisition by any person or entity directly or indirectly of securities of the
Company representing 50% or more of the voting power of any class of the
Company's outstanding voting securities. See "Capital Stock of the
Company--Preferred Stock." The restrictions set forth in the Articles of
Incorporation could have the effect of delaying or preventing a change in
control of the Company even if such change in control were in the shareholders'
interests.
Blank Check Preferred Stock. The Articles of Incorporation authorize the
Board of Directors to issue up to 500,000 shares of preferred stock and to
establish the preferences and rights of any shares issued (the "Blank Check
Preferred Stock"). See "Capital Stock of the Company--Preferred Stock." The
issuance of Blank Check Preferred Stock could have the effect of delaying or
preventing a change in control of the Company even if such change in control
were in the shareholders' interest.
Management Agreements. Twenty-four of the Management Agreements between the
Manager and certain of the Partnerships include provisions for termination fees.
Pursuant to these Management Agreements, a termination by the Partnership of the
Management Agreement without cause during the initial five year term will result
in a payment of a termination fee to the Manager in an amount equal to the
compensation due to the Manager under the unexpired portion of such initial term
of the Management Agreement. Under the balance of the Management Agreements, a
termination fee is payable for the unexpired portion of the then current term.
See "Certain Transactions; Transactions with CRSI--Management Agreements." The
termina-
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tion provisions set forth in these Management Agreements could have the effect
of delaying or preventing a change in the Manager.
Operating Partnership Agreement. The Operating Partnership Agreement
provides that, upon the termination of any Management Agreement for any reason
other than (i) the sale or other disposition of the related Property or
Additional Property or (ii) the termination by its terms of the Management
Agreement at the expiration of its then current term, the Company will be
required to pay to the Manager a termination fee in an amount equal to five
years fees, calculated based on the fees earned by the Manager with respect to
the related Property or Additional Property during the prior twelve-month
period. The termination fee to be paid under the Operating Partnership Agreement
would be reduced by any termination fee amount actually paid by a Partnership
pursuant to the terms of the terminated Management Agreement. See "Operating
Partnership Agreement--Termination of Management Agreements." In addition, the
Operating Partnership Agreement provides that the Company may not voluntarily
withdraw from the Operating Partnership or transfer or assign its general
partner's interest in the Operating Partnership without the consent of the
Limited Partner. Subject to applicable securities laws, a limited partner may
transfer its interests in the Operating Partnership without the consent of the
General Partner, although the transferee will not be admitted as a substitute
partner without the consent of the General Partner. The transfer restrictions
set forth in the Operating Partnership Agreement could have the effect of
delaying or preventing a change in control of the Operating Partnership or a
change in the Manager even if such change were in the partners' interest.
BOARD OF DIRECTORS' ABILITY TO CHANGE POLICIES
The principal policies of the Company, including its policies with respect
to financing, growth and investment, operations, debt capitalization and
distributions, will be determined by its Board of Directors. The Company's
current Board of Directors has adopted the Company's current policies discussed
herein and is comprised of three members, all of whom are CRSI Affiliates. On or
prior to the Distribution Date, CRSI (as sole shareholder of the Company at such
time) will replace one of the current directors with three Independent
Directors. While each of the nominees for Independent Director has reviewed the
principal policies of the Company and has indicated that he presently intends to
cause the Board of Directors to adhere to such policies, there can be no
assurance that the Board of Directors will not amend or revise the Company's
policies. The Board of Directors may amend or revise these and other policies
from time to time without a vote of the shareholders of the Company. See
"Policies and Objectives with Respect to Certain Activities."
POTENTIAL ADVERSE EFFECT ON THE VALUE OF COMPANY COMMON STOCK OF
FLUCTUATIONS IN INTEREST RATES OR EQUITY MARKETS
Assuming the development of an active market (as to which there can be no
assurance) for the Company Common Stock, the market price of equity securities
of a publicly traded REIT, such as the Company, is determined in part by the
attractiveness of the yield from distributions on those securities in relation
to prevailing interest rates. Accordingly, an increase in interest rates
generally may lead purchasers of Company Common Stock to demand a higher annual
yield, which could adversely affect the market price of Company Common Stock.
Moreover, the market value of Company Common Stock could be substantially and
adversely affected by changes in general securities market conditions or
fluctuations in the markets for equity securities, which could result in loss of
liquidity for holders.
EFFECT ON MARKET PRICE OF SHARES AVAILABLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales, or
the availability of Company Common Stock for future sale, by the Company will
have on the market price of the Company Common Stock. Sales of substantial
amounts of Company Common Stock (including shares issued on the exercise of
options which could be issued in the future), or the perception that such sales
could occur, could adversely affect prevailing market prices for the Company
Common Stock. See "Shares Available for Future Sale."
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FORWARD-LOOKING STATEMENTS
This Prospectus contains statements that constitute forward-looking
statements. Those statements appear in a number of places in this Prospectus and
include, without limitation, statements regarding the intent, belief or current
expectations of the Company, its directors or CRSI with respect to (i) the
declaration or payments of dividends and/or cash distributions; (ii) the
management or operation of the Properties and of real estate that could be
acquired in the future; (iii) the adequacy of reserves for renovation and
refurbishment; (iv) the Company's financing plans; (v) the Company's policies
regarding investments, dispositions, financings, conflicts of interest and other
matters; (vi) the Company's qualification and continued qualification as a REIT;
and (vii) trends affecting the Company's, the Operating Partnership's or any
Property's financial condition or results of operations.
Prospective investors are cautioned that any such forward-looking statement
is not a guarantee of future performance and involves risks and uncertainties,
and that actual results may differ materially from those in the forward-looking
statement as a result of various factors. The accompanying information contained
in this Prospectus, including without limitation the information set forth in
this "Risk Factors" portion of this Prospectus and the information under the
headings "The Distribution--Reasons for Effecting the Distribution,"
"Distribution Policy," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Policies and Objectives with Respect to
Certain Activities" and "Certain Federal Income Tax Considerations," identifies
important factors that could cause such differences. With respect to any such
forward-looking statement that includes a statement of its underlying
assumptions or bases, the Company cautions that, while it believes such
assumptions or bases to be reasonable and has formed them in good faith, assumed
facts or bases almost always vary from actual results, and the differences
between assumed facts or bases and actual results can be material depending on
the circumstances. When, in any forward-looking statement, the Company, CRSI or
their management, expresses an expectation or belief as to future results, that
expectation or belief is expressed in good faith and is believed to have a
reasonable basis at this time, but there can be no assurance that the stated
expectation or belief will result or be achieved or accomplished.
COSTS OF COMPLIANCE WITH CERTAIN LAWS
Americans with Disabilities Act. The Properties, the Additional Properties,
if any, and any newly developed, rehabilitated or acquired properties must
comply with Title III of the Americans with Disabilities Act (the "ADA") to the
extent that such properties are "public accommodations" and/or "commercial
facilities" as defined by the ADA. The ADA does not, however, consider
residential properties, such as apartment communities, to be public
accommodations or commercial facilities, except to the extent portions of such
facilities, such as leasing offices, are open to the public. Compliance with the
ADA requirements could require significant expenditures by the Partnerships. The
Manager believes that the Properties and the Additional Properties comply with
all present requirements under the ADA and applicable state laws. Noncompliance
with the ADA could result in the imposition of fines or an award of damages to
private litigants. If future required changes involve greater expenditures or
must be made on a more accelerated basis than the Company currently anticipates,
the Company's ability to make distributions, if any, to shareholders could be
adversely affected.
Fair Housing Amendments Act of 1988. The Fair Housing Amendments Act of
1988 (the "FHAA") requires apartment communities first occupied after March 13,
1990 to be accessible to the physically impaired. Noncompliance with the FHAA
could result in the imposition of fines or an award of damages to private
litigants. As of the date of this Prospectus, none of the Properties or
Additional Properties are subject to the FHAA, however, newly developed or
acquired properties, if any, may be subject to the FHAA.
Other Regulations. State and local rent control laws or similar
rent-limiting regulations, which may be enacted in the future in Ohio, Indiana
or Florida and/or in other jurisdictions in which the Properties (and the
Additional Properties, if acquired) are located, may limit the ability of the
Manager to increase rents and to recover increases in operating expenses and the
costs of capital improvements. As of the date of this Prospectus, no such state
or local rent control laws apply to the Properties.
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THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
As of the date of this Prospectus, CRSI, through its Affiliates, is engaged
in two distinct businesses: the real estate investment business in which it owns
and operates the Properties, and the real estate services business in which it
provides fee-based management and other services to multifamily apartment
communities and their residents.
CRSI has considered various alternative strategies with respect to its
investment in the Properties since the confirmation of the Chapter 11 Bankruptcy
Plan of Reorganization in August 1992. During its 1993, 1994 and 1995 fiscal
years, CRSI explored various opportunities and proposals to sell its interests
in the Properties. During these years the Properties were classified as assets
held for sale in CRSI's financial statements. During fiscal year 1995, CRSI
reconsidered the various alternatives relating to its investment in the
Properties. CRSI compared the offers to purchase the Properties it had received
as a result of its sales efforts to CRSI's opportunities for appreciation and
operating cash flow from continuing to hold the Properties. CRSI, with the
assistance of its professional advisors, also conducted a careful review of the
financial accounting analysis associated with each investment strategy. After
careful consideration, CRSI, through its Board of Directors, determined to
retain its investment in the Properties. Commencing January 1, 1996, based upon
management's decision to retain the Properties for investment, the operations,
including a provision for depreciation, of the Properties have been fully
consolidated in CRSI's Statements of Income. Further, the cash flows of the
Properties have been reclassified as Cash Flows Provided by Operating
Activities.
CRSI recognized that inclusion of the Properties in its consolidated
financial statement would: (i) tend to depress net income and, consequently
earnings per share, and (ii) make CRSI appear highly leveraged even though the
mortgage indebtedness on the Properties is without recourse to CRSI (especially
in light of the results of CRSI's "fresh start" accounting as a result of the
Chapter 11 Bankruptcy Plan of Reorganization in 1992, wherein CRSI's carrying
values for the Properties typically do not exceed the carrying value of
associated mortgage indebtedness). Most ratios and like measures used by
financial professionals and stock market analysts, as applied to CRSI, worsened
as a result of the consolidation of the Properties. In addition, CRSI believes
that inclusion of the Properties' results of operations in its consolidated
financial statements tends to make such financial statements unduly complicated
and confusing. As stated above, CRSI is involved in two separate real estate
related businesses, as an investor and as a service provider. CRSI believes the
inclusion of both businesses in one set of consolidated financial statements
tends to obscure the results of each, each of which businesses have
traditionally attracted different investor groups and experienced different
market valuation methods.
Accordingly, CRSI analyzed pro forma financial statements which accounted
for the Properties by the equity method of accounting. After further careful
review, consideration and analysis and input from investment bankers, industry
analysts, institutional and other large investors and its professional advisors,
CRSI determined that the Distribution could assist in its efforts to accomplish
the following objectives:
(1) To retain a portion of the economic benefits (both current cash flow
and future appreciation) of the Properties for CRSI and CRSI's
shareholders;
(2) To increase its net income and earnings per share;
(3) To remove nonrecourse mortgage indebtedness secured by the Properties
from CRSI's balance sheet;
(4) To improve its financial ratios (e.g., debt to equity, debt to total
market capitalization, operating margins, adjusted earnings before
interest, taxes, depreciation and amortization to revenues, return on
assets and return on equity);
(5) To allow each business (i.e., CRSI's real estate services business and
CRSI's real estate investment business) to more appropriately address
its specific requirements in a cost effective manner, including capital
requirements;
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(6) To enable investors to evaluate each of the two businesses
independently and, therefore, better understand and analyze each such
business and direct their investments accordingly;
(7) To provide analysts, investors and lenders with a clear basis on which
to evaluate the business and operations of each company;
(8) To enable CRSI to better and more efficiently pursue growth
opportunities in its business and to finance such growth through the
issuance of capital stock (or other equity securities) of CRSI (or an
Affiliate), or through the proceeds of indebtedness, as applicable; and
(9) To improve access to capital markets for CRSI and decrease CRSI's costs
of raising capital because separation of the two businesses will
enhance the ability of financial markets to appropriately evaluate and
value CRSI's real estate services business.
The foregoing statements constitute forward-looking statements. Prospective
investors are cautioned that any such forward-looking statement is not a
guarantee of future performance and involves risks and uncertainties. See "Risk
Factors--Forward-Looking Statements."
After a review of management's analysis and management's summaries of (a)
consultations with financial advisors to CRSI, and (b) general conversations
with industry observers, analysts and significant shareholders, the Board of
Directors of CRSI determined that the separation of CRSI into two separate,
publicly held companies would accomplish several important business objectives
and approved the Distribution in principle on February 20, 1997. The Board of
Directors met again on April 16, 1997 to review the Distribution and related
transactions and formally approved CRSI's execution and delivery of all
agreements incident to the Distribution and all related transactions as well as
CRSI's performance of the terms of all such agreements and documents, subject to
approval of CRSI's shareholders.
MANNER OF EFFECTING THE DISTRIBUTION
Pursuant to the Distribution, CRSI will distribute as a dividend to its
shareholders of record as of the Distribution Record Date ("Holders") one share
of Company Common Stock for each five shares of CRSI Stock then held. In
connection with the Distribution, CRSI will also pay a one-time, special cash
dividend in an amount equal to at least 25% of the Anticipated Dividend Value of
the Company Common Stock. Although the Anticipated Dividend Value will represent
CRSI's good faith estimate of the fair market value of the Company Common Stock
(and the portion of such value, up to the full amount, which will constitute a
taxable dividend to CRSI shareholders as of the Distribution Date), at the time
of declaration of the CRSI Cash Dividend, no assurances can be given that the
amount of the CRSI Cash Dividend will be equal to at least 25% of the actual
taxable dividend value to be indicated on the IRS Form 1099-DIV to be
distributed to each holder of CRSI Stock as of the Distribution Record Date. On
the Distribution Date, CRSI will deliver to Fifth Third Bank, as transfer agent
and registrar (the "Agent"), certificates evidencing 93% of the issued and
outstanding shares of Company Common Stock owned by CRSI, which will also
represent 93% of the issued and outstanding shares of Company Common Stock, and
checks in payment of each Holder's CRSI Cash Dividend. All shares of Company
Common Stock distributed will be fully paid, nonassessable and free of
preemptive rights.
CRSI will not issue to Holders certificates representing fractional shares
of Company Common Stock. Holders otherwise entitled to a fractional share of
Company Common Stock will instead receive one additional whole share of Company
Common Stock in lieu of such fractional share.
As a result of the Distribution, 93% of the issued and outstanding shares
of Company Common Stock will be distributed to Holders. The Distribution Record
Date will be August 4, 1997 and the Distribution Date will be September 30,
1997. It is presently anticipated that certificates representing Company Common
Stock will be mailed to Holders on or about the Distribution Date. After the
Distribution Date, Holders will hold their CRSI Stock as well as Company Common
Stock. The Distribution will not affect the number of, or the rights attaching
to, outstanding shares of CRSI Stock.
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No Holder will be required to pay any cash or other consideration to the
Company for the shares of Company Common Stock received in the Distribution nor,
assuming approval by CRSI's shareholders, will any action be required to be
taken by any Holder, including tendering stock certificates, in order to receive
shares of Company Common Stock. CRSI will account for the Distribution as a
dividend and will reduce its shareholders' equity by the net book value of the
Company Common Stock distributed.
IN ORDER TO BE ENTITLED TO RECEIVE THE DISTRIBUTION OF COMPANY COMMON
STOCK, A CRSI SHAREHOLDER RECEIVING THIS PROSPECTUS MUST BE A HOLDER OF CRSI
STOCK ON THE DISTRIBUTION RECORD DATE.
TRADING OF COMPANY COMMON STOCK
The Company Common Stock is expected to be traded on the OTC Bulletin
Board, which is a thin, illiquid market. The transfer agent and registrar for
the Company Common Stock is Fifth Third Bank.
No current public trading market for the Company Common Stock exists.
Broker-dealer practices in connection with transactions in "penny stocks" are
regulated by certain penny stock rules adopted by the Commission. Penny stocks
generally are equity securities with a price of less than $6.00 (other than
securities registered on certain national securities exchanges or quoted on the
National Association of Securities Dealers Automated Quotation System). CRSI
believes that the penny stock rules will be applicable to the Company Common
Stock. The penny stock rules require a broker-dealer, prior to a transaction in
a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document that provides information about penny stocks and the
nature and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and, if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the market, and
monthly account statements showing the market value of each penny stock held in
the customer's account. In addition, broker-dealers who sell such securities to
persons other than established customers and accredited investors (generally,
those persons with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse), must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. Consequently,
these requirements may have the effect of reducing the level of trading
activity, if any, in the secondary market for a security subject to the penny
stock rules and could result in loss of liquidity for holders of Company Common
Stock. The extent of the market for the Company Common Stock and the prices at
which the Company Common Stock may trade after the Distribution cannot be
predicted. See "Risk Factors--Absence of Prior Public Market for, and Possible
Volatility of Price of, the Company Common Stock."
The Company Common Stock distributed to Holders will be freely
transferable, except for Company Common Stock received by persons who may be
deemed to be Affiliates of the Company under the Securities Act. Persons who may
be deemed to be Affiliates of the Company after the Distribution generally
include individuals or entities that control, are controlled by or are under
common control with the Company and may include certain officers and directors
of the Company as well as principal shareholders of the Company. Persons who are
Affiliates of the Company will be permitted to sell their Company Common Stock
only pursuant to an effective registration statement under the Securities Act or
an exemption from the registration requirements of the Securities Act, such as
the exemptions provided by Section 4(1) of the Securities Act or Rule 144
thereunder. See "Capital Stock of the Company--Company Common Stock."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
General. The following is a summary of the material Federal income tax
consequences of the Distribution to the Holders. The Federal income tax
discussion set forth below is for general information only and may not apply to
particular categories of Holders subject to special treatment under the Code,
including without limitation, foreign Holders and Holders whose CRSI securities
were acquired pursuant to the exercise of an employee stock option or otherwise
as compensation. EACH HOLDER OF SHARES OF CRSI STOCK AND CRSI OPTIONS IS URGED
TO CONSULT HIS TAX ADVISOR AS TO THE
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SPECIFIC TAX CONSEQUENCES TO HIM OF THE DISTRIBUTION, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS. HOLDERS MAY
ALSO WANT TO CONSIDER CONSULTING THEIR TAX ADVISORS AS TO THE TAX CONSEQUENCES
OF MAKING A CHARITABLE CONTRIBUTION OF THE COMPANY COMMON STOCK RECEIVED
PURSUANT TO THE DISTRIBUTION.
Consequences of the Distribution to CRSI Shareholders. The Distribution and
the CRSI Cash Dividend will be taxable events. Each CRSI shareholder will be
required to recognize dividend income (to the extent of CRSI's current and
accumulated earnings and profits) on the receipt of the shares of Company Common
Stock in the Distribution in an amount up to the fair market value of the shares
of Company Common Stock received in the Distribution and on the receipt of the
CRSI Cash Dividend up to the amount received. To the extent the amount of the
distribution to a shareholder exceeds his allocable share of CRSI's current or
accumulated earnings and profits, such excess will be treated first as a
recovery of his basis in his CRSI Stock (which will reduce his basis in his CRSI
Stock) and then as taxable gain. In this regard, although CRSI did not have any
accumulated earnings and profits as of December 31, 1996, CRSI anticipates that
it will have sufficient current earnings and profits for its taxable year ending
December 31, 1997 to cause the entire value of the Company Common Stock and the
CRSI Cash Dividend to be taxed as a dividend. Although no assurances can be
given, CRSI anticipates that the fair market value of a share of Company Common
Stock as of the Distribution Date will be in the $.50 -- $2.00 range. The tax
basis of the shares of Company Common Stock received by a CRSI shareholder in
the Distribution will be the fair market value of such shares on the date the
Distribution is consummated and the holding period for such shares of Company
Common Stock will begin the day after the date the Distribution is consummated.
Following the completion of CRSI's 1997 taxable year, CRSI will send
shareholders a statement (on IRS Form 1099-DIV) as to CRSI's belief as to the
fair market value of the Company Common Stock as of the Distribution Date and
the portion (up to the full amount) of the Distribution and CRSI Cash Dividend
that constitutes a taxable dividend.
Federal Income Tax Consequences of Proposed Transaction to CRSI. In
anticipation of the Distribution, CRSI will cause subsidiaries that own the
Interests (and, other than the SPCs, Additional Interests, if and when
contributed) to distribute a portion of these Interests (or Additional
Interests) to CRSI, who will then contribute them to the Company. As a result
thereof, these subsidiaries will realize taxable gain in an amount equal to the
excess of the fair market value of the Interests transferred to CRSI (as
determined by CRSI) over the tax basis in such Interests at the time of their
distribution to CRSI (as determined by CRSI). To the extent that a subsidiary's
share of a Partnership's liabilities exceeds its tax basis in a distributed
Interest, the distributing subsidiary will also realize gain in an amount equal
to such excess. The recognition of this gain will be deferred until such time as
the Interests are no longer owned by members of CRSI's affiliated group. The
Distribution will be an event that triggers the recognition of this gain to
CRSI. CRSI believes that it has sufficient tax attributes (i.e., net operating
loss ("NOL") and passive activity loss ("PAL") carryforwards) to offset this
gain for regular tax purposes. CRSI also believes that the recognition of this
gain will cause it to incur an alternative minimum tax for its taxable year
ending December 31, 1997. Although not free from doubt, CRSI expects to take the
position that the amount of this alternative minimum tax liability will be
approximately $300,000. Since the Distribution will occur shortly after the
distribution of the Interests to CRSI and CRSI's distribution of the Interests
to the Company, which will give CRSI a "stepped up basis" in its Company Common
Stock, CRSI does not believe that it will recognize any further gain as a result
of the distribution of 93% of the Company Common Stock to its shareholders
pursuant to the Distribution. CRSI is likely to incur an additional alternative
minimum tax liability if it contributes Additional Interests to the Company
subsequent to the Distribution Date.
CERTAIN CONSEQUENCES OF THE DISTRIBUTION
After the Distribution, CRSI shareholders as of both the Distribution
Record Date and the Distribution Date will own two securities (shares of CRSI
Stock and shares of Company Common Stock) and will be able to increase or
decrease their respective holdings in either CRSI or the Company without
affecting their holdings in the other company. The Company will be an
independent, public company, owning an undivided
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<PAGE> 37
60% interest in the Operating Partnership as General Partner and a 79% Interest
in two of the Partnerships. If all of the Additional Interests are contributed
to the Company after the Distribution, the Company will also hold all of the
outstanding capital stock of the SPCs. The Company Common Stock is expected to
be traded on the OTC Bulletin Board, which is a thin, illiquid market.
REASON FOR FURNISHING THIS PROSPECTUS
This Prospectus is being prepared in order to provide information for CRSI
shareholders, each of whom will receive shares of Company Common Stock in the
Distribution. It is not to be construed as an inducement or encouragement to buy
or sell any securities of CRSI, the Company or any other corporation. The
information contained herein is provided as of the date of this Prospectus
unless otherwise indicated. Neither CRSI nor the Company will update the
information contained in this Prospectus to effect any changes that may occur
subsequent to the date hereof, except in the normal course of their respective
public disclosure practices; however, upon completion of the Distribution, CRSI
intends to file a Current Report on Form 8-K with respect to the Distribution.
THE COMPANY
GENERAL
Immediately following the Distribution, the Company will be the sole
General Partner of the Operating Partnership, and CRSI will be the sole Limited
Partner. The Operating Partnership will hold limited partner's interests in
approximately 62 limited partnerships and member's interests in 2 limited
liability companies (with the Company holding member's interests in 2 limited
liability companies). Each Partnership owns an apartment community (i.e., a
Property). The Managing Partner of each of the Partnerships will continue to be,
directly or indirectly, CRSI, and CRSI or a subsidiary of CRSI will continue to
be the Manager. See "Certain Transactions; Transactions with CRSI." In addition,
CRSI, in its sole discretion, upon obtaining mortgage lender consents with
respect to any Additional Property, may contribute the Additional Interests to
the Company or the Operating Partnership and the Company (as provided in the
Subscription Agreement). See "Subscription Agreement--Contribution of Additional
Interests."
The apartment communities are primarily located in suburban and rural areas
of the Southeast and Midwest. A typical apartment community has 77 units and is
composed of multiple one-story buildings containing apartment units offering
four basic floor plans with studio, one-bedroom, two-bedroom/one-bath and
two-bedroom/two-bath apartments. Approximately 96% of the apartment communities
comprising the Properties were constructed during the 1980s. The total number of
units in the Properties is approximately 5,100. As of December 31, 1996, the
average Property was 92% occupied, and the average rent collected per unit was
$400 per month. All of the apartment communities comprising the Additional
Properties were constructed during the 1980s, and the total number of units in
the Additional Properties is approximately 800. As of December 31, 1996, the
average Additional Property was 89% occupied, and the average rent collected per
unit was $365 per month. See "Business and Properties--Description of Properties
and Additional Properties."
The Company was formed by CRSI on April 4, 1997 to facilitate the
Distribution, to serve as General Partner of the Operating Partnership and to
create a separate publicly held company as a REIT investment opportunity for
CRSI's shareholders. See "The Distribution--Reasons for the Distribution." The
Company's headquarters will be located at The Huntington Center, 41 South High
Street, 24th Floor, Columbus, Ohio 43215.
INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objectives are to achieve long-term capital
appreciation through, among other things, increases in cash flow of the
Properties, to provide annual cash dividends to its holders of Company Common
Stock after quarterly cash dividends to its holders of Class A Senior Preferred
Stock (which, for the foreseeable future is expected to be and remain CRSI);
however, the Company Common Stock is subject to
28
<PAGE> 38
the dividend preference of the Class A Senior Preferred Stock and there can be
no assurance that any dividends will ever be paid to the holders of the Company
Common Stock. The Company intends to cause the Operating Partnership initially
to distribute quarterly all OP Distributable Funds. The portion of OP
Distributable Funds equal to the net income of the Operating Partnership will be
distributed to its partners in accordance with their respective percentage
interests in the Operating Partnership. Any remaining OP Distributable Funds,
i.e., those in excess of net income of the Operating Partnership will be
distributed (i) 100% to the General Partner if such distributions are
attributable to Partnership operations; provided, however, to the extent that
distributions are made to the General Partner as a result of the proviso in
clause (ii) below, an amount equal to such distribution shall be distributed to
the Limited Partner prior to any distributions being made to the General Partner
or (ii) pro rata to the partners in accordance with, and to the extent of, their
respective positive capital account balances if such distributions are
attributable to sales or refinancings of Properties or Additional Properties by
the Partnerships and thereafter to the Partners in accordance with their
respective percentage interests in the Company; provided, however, in no event
shall the sale or refinancing proceeds to be distributed to the General Partner
be less than the lesser of (x) the amount of taxable gain allocable to the
General Partner as a result of the event giving rise to such sale or refinancing
proceeds or (y) the amount necessary for the General Partner to meet its minimum
distribution requirements under Sections 857 and 4981 of the Code, as determined
by the General Partner in its reasonable discretion and taking into account the
capacity of the General Partner to borrow funds to satisfy such distribution
requirements. As General Partner of the Operating Partnership, the Company will
control the declaration and payment of any distributions by the Operating
Partnership but has agreed with CRSI (in the Operating Partnership Agreement),
as Limited Partner, not to unreasonably withhold or retain OP Distributable
Funds.
Pursuant to the Subscription Agreement, the Company may acquire Additional
Interests in up to 4 limited partnerships and 7 SPCs, upon CRSI's obtaining the
consent of the mortgage lender or lenders for such Additional Property for the
transfer of any such Additional Interest and a determination by CRSI, in its
sole discretion, that it is more feasible to maintain an economic interest in
and contribute the Additional Interest to the Company than to sell (or otherwise
dispose of) the Additional Property. If the Company acquires Additional
Interests in any of the limited partnerships, they will constitute a 60% limited
partner's interest. The Company will immediately contribute the Additional
Interests in the limited partnerships to the Operating Partnership, while the
CRSI Group will contribute an additional 40% limited partner's interest to the
Operating Partnership. If the Company acquires Additional Interests in any of
the SPCs, the Company will acquire and hold 100% of such SPC's issued and
outstanding capital stock. See "Subscription Agreement." Except as provided in
the Subscription Agreement with respect to the Additional Interests, the Company
has no present plans to acquire or develop additional properties, however, the
Company intends to evaluate, and has been structured so that it may take
advantage of, future opportunities to acquire interests in real estate. The
Operating Partnership Agreement contemplates the possible issuance of additional
limited partners' interests in the Operating Partnership. Partnership Interests
in the Operating Partnership could further be made convertible into shares of
Company Common Stock. Equity investments may be subject to existing mortgage
financing and other indebtedness which have priority over the equity interest of
the Company. The Company also may hold temporary cash investments from time to
time pending investment or distribution to shareholders. CRSI believes that an
ownership structure that includes the Operating Partnership will provide
flexibility to the Company (through conversion rights, and the ability to issue,
new classes of and other special terms of limited partners' interests) to
finance future acquisitions, if any, of additional real properties.
The declaration and payment of any distributions by the Company will be at
the discretion of the Company's Board of Directors and will depend on, among
other things, the Company's receipt of cash distributions from the Operating
Partnership, the Company's level of indebtedness, any contractual restrictions
and other factors considered relevant by the Board. As General Partner of the
Operating Partnership, the Company will control the declaration and payment of
any distributions by the Operating Partnership but has agreed with CRSI (in the
Operating Partnership Agreement), as Limited Partner, not to unreasonably
withhold or retain OP Distributable Funds. The Partnerships' cash distributions
of their respective Distributable Funds from Partnership Operations will be
determined, directly or indirectly, by CRSI (as Managing Partner) pursuant to
the terms of each Partnership's governing documents in light of certain cash
needs,
29
<PAGE> 39
including requirements for investing and financing activities and other
anticipated cash needs, but CRSI has agreed with the Company (in the Operating
Partnership Agreement) not to unreasonably withhold or retain Distributable
Funds from Partnership Operations. See "Distribution Policy."
The Company believes its investment objectives can be accomplished through
the enhanced operation and management of, and selected capital improvements to,
the Properties, although the Company will be initially dependent upon the
efforts and decisions of CRSI and the Manager in this regard. See "Certain
Transactions; Transactions with CRSI." While the Company will not directly
control or make capital financing, ownership or management decisions affecting
the Properties, the Company may withhold its consent to the (i) mortgage
refinancing, (ii) expansion and/or improvement of the Properties or (iii) sale
of such Properties, in whole or in part, except in certain limited
circumstances. See "Subscription Agreement-- Consent of the Company to Certain
Transactions."
DISTRIBUTION POLICY
In order to qualify as a REIT, the Company generally will be required each
year to distribute to its shareholders at least 95% of its net taxable income
(excluding any net capital gain). As a REIT, the Company will be subject to a 4%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of (a) 85% of
its ordinary income plus (b) 95% of its net capital gain income for that year
plus (c) any such amounts not distributed in prior years. The Company intends to
make distributions to its shareholders to comply with the 95% distribution
requirement and to avoid the nondeductible excise tax.
The Company intends to make regular annual cash distributions to holders of
Company Common Stock initially equal to $0.16 per share ($.04 per share on
account of the three months ending December 31, 1997). The Company intends to
maintain its initial dividend rate for its first full fiscal year (i.e., the
1998 calendar year) following the completion of the Distribution, unless actual
results of operations, economic conditions or other factors differ from the
assumptions used in its estimate. The Company anticipates that, for the
foreseeable future, its Cash Available for Distribution will exceed its net
taxable income as well as its REIT taxable income for Federal income tax
purposes.
The Company intends to make regular quarterly distributions to holders of
Class A Senior Preferred Stock initially equal to $90 per share ($360 per share
on an annual basis). Following receipt of the requisite consents from mortgage
lenders, CRSI, in its sole discretion, may contribute the Additional Interests
to the Company in exchange for additional shares of Class A Senior Preferred
Stock. If CRSI contributes all of the Additional Interests to the Company,
aggregate annual dividends which will accrue on the Class A Senior Preferred
Stock will equal $1,980,000. The declaration and payment of any distributions by
the Company will be at the discretion of the Company's Board of Directors and
will depend on, among other things, the Company's receipt of cash distributions
from the Operating Partnership, the Company's level of indebtedness, any
contractual restrictions and other factors considered relevant by the Company's
Board of Directors; however, the Company Common Stock is subject to the dividend
preference of the Class A Senior Preferred Stock and there can be no assurance
that any dividends will ever be paid to the holders of the Company Common Stock.
See "Risk Factors--Forward-Looking Statements."
The Company intends to cause the Operating Partnership initially to
distribute quarterly all OP Distributable Funds. The portion of OP Distributable
Funds equal to the net income of the Operating Partnership will be distributed
to the partners in accordance with their respective percentage interests in the
Operating Partnership. Any remaining OP Distributable Funds, i.e., those in
excess of net income of the Operating Partnership, will be distributed (i) 100%
to the General Partner if such distributions are attributable to Partnership
operations; provided, however, to the extent that distributions are made to the
General Partner as a result of the provision in clause (ii) below, an amount
equal to such distribution shall be distributed to the Limited Partner prior to
any distributions being made to the General Partner or (ii) pro rata to the
partners in accordance with, and to the extent of, their respective positive
capital account balances if such distributions are attributable to sales or
refinancings of Properties or Additional Properties by the Partnerships and
thereafter to the Partners in accordance with their respective percentage
interests in the Company; provided, however, in no event shall the sale or
refinancing proceeds to be distributed to the
30
<PAGE> 40
General Partner be less than the lesser of (x) the amount of taxable gain
allocable to the General Partner as a result of the event giving rise to such
sale or refinancing proceeds or (y) the amount necessary for the General Partner
to meet its minimum distribution requirements under Sections 857 and 4981 of the
Code, as determined by the General Partner in its reasonable discretion and
taking into account the capacity of the General Partner to borrow funds to
satisfy such distribution requirements. As General Partner of the Operating
Partnership, the Company will control the declaration and payment of any
distributions by the Operating Partnership but has agreed with CRSI (in the
Operating Partnership Agreement), as Limited Partner, not to unreasonably
withhold or retain OP Distributable Funds.
Distributions by the Partnerships will be determined by CRSI's authorized
officers on behalf of CRSI, in CRSI's capacity as Managing Partner of the
Partnerships, pursuant to the terms of the Partnership governing documents, and
will be dependent on a number of factors, including the amount of each such
Partnership's Distributable Funds from Partnership Operations, the Partnership's
financial condition, mortgage refinancing needs, any decision by the Managing
Partner to reinvest funds rather than distributing such funds, the Partnership's
capital expenditures and any other factor the Managing Partner believes is
relevant, but CRSI has agreed with the Company (in the Operating Partnership
Agreement) not to unreasonably withhold or retain Distributable Funds from
Partnership Operations. Moreover, CRSI, as Managing Partner of the Partnerships,
may establish reserves for certain of the Properties from time to time which
would result in decreasing Distributable Funds from Partnership Operations.
CRSI, as Managing Partner of the Partnerships, is generally entitled to
receive from 1% to 10% of the Distributable Funds from Partnership Operations
and either 30% or its percentage interest (generally 1% to 10%) of cash flow
from refinancings of the Partnerships. Upon a sale or liquidation of the
Partnerships, CRSI is entitled to receive its capital account balance (which
will generally equal 1% to 10% of the proceeds, but which may exceed such amount
in certain instances in which Distributable Funds from Partnership Operations
were distributed 1% to the general partner and 99% to the limited partner while
profits from Partnership Operations were allocated 9% to 10% to the general
partner and 90% to 91% to the limited partner).
Profits and losses of the Partnerships from operations or losses on the
sale of a Property are generally allocated from 1% to 10% to the general partner
and from 90% to 99% to the limited partner, except to the extent the law
requires a different allocation. Gain on sale of a Property is generally
allocated first to any partner who has been allocated cumulative losses in
excess of cumulative profits, second to any partner who has received cumulative
distributions in excess of cumulative profit allocations and thereafter from 1%
to 10% to the general partner and from 90% to 99% to the limited partner.
Allocations of taxable income or loss may vary from allocations of profits,
gains and losses for capital account purposes since Section 704(c) of the Code
requires that tax allocations take into account the variation between the fair
market value and tax basis of any property contributed by a partner to a
partnership.
For Federal income tax purposes, distributions paid to REIT shareholders
may consist of ordinary income, capital gains, nontaxable returns of capital or
a combination thereof. Aggregate distributions for the 12 months following the
closing of the Distribution are expected to be greater than 95% of the Company's
REIT taxable income. There will be no estimated minimum distribution required
for the Company to maintain REIT status, based on the Company's estimated
revenues less expenses for the 12 months ending December 31, 1997. Distributions
in excess of earnings and profits generally will be treated as nontaxable return
of capital and, therefore, will result in a reduction of a shareholder's basis
in the Company Common Stock, to the extent thereof, and thereafter as taxable
gain. Those distributions will have the effect of deferring taxation until the
sale of the shareholder's Company Common Stock. The Company will provide its
shareholders an annual statement (on IRS Form 1099-DIV) as to its designation of
the taxability of distributions.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Combined Balance Sheet is
presented as if both the transfer of the Lexreit Properties Group and the
Distribution had occurred on December 31, 1996. The following unaudited Pro
Forma Condensed Combined Statement of Operations for the year ended Decem-
31
<PAGE> 41
ber 31, 1996, is presented as if both the transfer of the Lexreit Properties
Group and the Distribution had occurred as of January 1, 1996, and excludes
historical extraordinary gains and losses on debt extinguishments in accordance
with Commission Regulation S-X. Such pro forma information is based upon the
historical balance sheet and statement of operations of Lexreit Properties
Group. The unaudited Pro Forma Condensed Combined financial statements of the
Company should be read in conjunction with all of the financial statements
presented elsewhere in this Prospectus. In management's opinion, all adjustments
necessary to reflect the effects of both the transfer of the Lexreit Properties
Group and the Distribution have been made.
The unaudited Pro Forma Condensed Combined Balance Sheet and Statement of
Operations of the Company are not necessarily indicative of what the actual
financial position or results of operations would have been assuming the
transfer of the Lexreit Properties Group and the Distribution had both occurred
at the dates indicated above, nor do they purport to represent the future
financial position or results of operations of the Company.
32
<PAGE> 42
LEXREIT PROPERTIES, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1996
(000S)
<TABLE>
<CAPTION>
LEXREIT LEXREIT
PROPERTIES, INC. PROPERTIES PRO FORMA LEXREIT
HISTORICAL GROUP ADJUSTMENTS PROPERTIES, INC.
(NOTE 1) (NOTE 1) (NOTE 2) PRO FORMA
---------------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Assets:
Operating Real Estate, net............... $ 97,821 $ 97,821
Cash..................................... $ 1 2,110 $ 999(a) 3,110
Funds Held in Escrow..................... 4,367 4,367
Accounts Receivable, net of allowance of
$820................................... 529 529
Prepaids and Other....................... 2,428 600(b) 3,028
---- ------- ------- -------
Total Assets............................. $ 1 $ 107,255 $ 1,599 $108,855
==== ======= ======= =======
Liabilities and Shareholders' Equity:
Liabilities:
Non-Recourse Mortgages on Real
Estate.............................. $ 93,043 $ 93,043
Accounts Payable and Other............. 1,010 $ 600(b) 1,610
Accrued Interest....................... 729 729
Accrued Real Estate Taxes.............. 1,036 1,036
Other Liabilities...................... 1,318 1,318
---- ------- ------- -------
Total Liabilities........................ 97,136 600 97,736
Minority Interest........................ 4,594(c) 4,594
Shareholders' Equity:
Class A senior preferred stock, $1,000
stated value, 7,500 shares
authorized, 4,500 shares issued and
outstanding with an aggregate
liquidation preference of
$13,500,000......................... 4,500(c) 4,500
Blank check preferred stock, no par
value, 500,000 authorized, no shares
issued or outstanding............... -- --
Common stock, no par value, 2,500,000
shares authorized, 838,000 shares
outstanding......................... --(c) --
Additional paid-in capital............. $ 1 2,024(a)(c) 2,025
Investment by Cardinal Realty Services,
Inc................................. 10,119 (10,119) (c) --
---- ------- ------- -------
Total Shareholders' Equity............... 1 10,119 (3,595) 6,525
---- ------- ------- -------
Total Liabilities and Shareholders'
Equity................................. $ 1 $ 107,255 $ 1,599 $108,855
==== ======= ======= =======
</TABLE>
33
<PAGE> 43
LEXREIT PROPERTIES, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
AS OF DECEMBER 31, 1996
(000S, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
LEXREIT PRO FORMA LEXREIT
PROPERTIES GROUP ADJUSTMENTS PROPERTIES, INC.
(NOTE 1) (NOTE 2) PRO FORMA
---------------- ----------- ----------------
<S> <C> <C> <C>
Revenues:
Rental................................................ $ 24,367 $ -- $ 24,367
Other................................................. 781 781
------ ------ ------
25,148 -- 25,148
------ ------ ------
Operating Expenses:
Administration........................................ 3,687 149 (C) 3,836
Utilities............................................. 1,316 -- 1,316
Maintenance and Repairs............................... 2,824 -- 2,824
Taxes and Insurance................................... 2,945 11 (C) 2,956
------ ------ ------
10,772 160 10,932
------ ------ ------
Net Operating Income.................................. 14,376 (160) 14,216
Other Expenses:
Interest.............................................. 8,736 (160)(D) 8,576
Other Maintenance..................................... 1,481 114 (C) 1,595
Depreciation.......................................... 2,754 -- 2,754
Amortization.......................................... 109 120 (B) 229
General and Administrative............................ -- 557 (A) 557
Other................................................. 459 246 (C) 705
------ ------ ------
13,539 877 14,416
------ ------ ------
Income (Loss) Before Minority Interest................ 837 (1,037) (200)
Minority Interest..................................... -- (217)(E) (217)
------ ------ ------
Net Income (Loss) (4)................................. 837 (1,254) (417)
Preferred Stock Distributions......................... -- (1,620)(F) (1,620)
------ ------ ------
Net Income (Loss) Attributable to Common Shares....... $ 837 $(2,874) $ (2,037)
====== ====== ======
Average Number of Shares Outstanding.................. 837(G)
======
Net (Loss) per Common Share........................... ($ 2.43)
======
</TABLE>
34
<PAGE> 44
LEXREIT PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1996
(000S)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying pro forma condensed combined balance sheet and statement
of operations includes assets, liabilities and equity of Lexreit Properties,
Inc. (the "Company") and its combined interests in the Operating Partnership and
the Partnerships. The historical balance sheet of the Company is presented as of
the date of inception as if the Company was formed and funded on December 31,
1996. The column Lexreit Properties Group on the accompanying condensed combined
balance sheet and statement of operations as of and for the year ended December
31, 1996, includes the financial position and results of operations of the
Properties.
The interests of Lexreit Properties Group have been combined and a minority
interest recognized as a result of the Company's control over the Properties.
NOTE 2 -- PRO FORMA ADJUSTMENTS -- CONDENSED COMBINED BALANCE SHEET
Pro forma adjustments are as follows:
(a) Reflects a cash contribution by Cardinal Realty Services, Inc. (CRSI) to the
Company to fund working capital requirements.
(b) Reflects the estimated accounting ($250), legal ($250), filing and other
fees ($100), associated with the transfer of Lexreit Properties Group and
the Distribution. These costs are capitalized as organizational costs and
amortized over five years.
(c) Reflects as minority interest CRSI's retained investments in the Operating
Partnership and the Partnerships, (representing the carryover historical
basis of CRSI's investments), along with the preferred ($1,000 stated value)
and common (no par value) stock issued by the Company as a result of the
transfer of Lexreit Properties Group and the Distribution. The following
table sets forth this pro forma adjustment:
<TABLE>
<S> <C>
Minority interest of Cardinal....................... $ 4,594
Preferred stock issued.............................. 4,500
Common stock issued................................. --
Additional Paid-In Capital.......................... 1,025
-------
Net adjustment to CRSI's Investment................. $10,119
=======
</TABLE>
35
<PAGE> 45
LEXREIT PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(000S)
NOTE 3 -- PRO FORMA ADJUSTMENTS -- CONDENSED COMBINED STATEMENT OF OPERATIONS
Pro forma adjustments are as follows:
(A) Represents the estimated general and administrative expenses which would
have been incurred by the Company had it been operating as a public company
during the year. Estimates include:
<TABLE>
<S> <C>
Directors' fees and related meeting expenses...................... $ 80
Directors' and officers' insurance premiums....................... 35
Legal and accounting fees......................................... 40
Administrative services provided pursuant to contractual
arrangement with CRSI........................................... 350*
Transfer agent fees............................................... 7
Annual report preparation......................................... 25
Other............................................................. 20
----
$557
====
</TABLE>
* Represents a service fee expense to be incurred pursuant to a Corporate
Services Agreement with CRSI under which CRSI will provide various services
including: accounting; financial reporting and regulatory compliance;
insurance administration; banking relations and cash management; information
systems; assorted shareholder services; and miscellaneous supplies and
facility charges.
(B) Represents the amortization of the organizational costs of Lexreit
Properties, Inc. The amortization period is five years.
(C) Represents the incremental difference between actual costs allocated to
Lexreit Properties Group from CRSI and the fees to be charged to the
Properties transferred to Lexreit Properties, Inc. in accordance with the
management and other agreements between the Properties and CRSI.
(D) Represents the elimination of Lexreit Properties Group interest expense to
CRSI which will not continue in Lexreit Properties, Inc.
(E) Represents the income allocated to the approximate 45% minority interest
retained by CRSI in the properties transferred to the Company. This minority
interest represents CRSI's Managing Partner interests in the Partnerships,
and the Limited Partner interest in the Operating Partnership.
(F) Represents the 12.0% dividend on the liquidation preference ($13,500,000) of
the preferred stock.
(G) Represents the number of CRSI shares outstanding as of December 31, 1996
converted to Company shares based on one Company share for every five CRSI
shares, plus shares of Company Common Stock issued to CRSI.
<TABLE>
<S> <C>
Calculation:
CRSI Common Stock outstanding @ 12/31/96...................... 3,892,600
Conversion Ratio (/ 5)........................................ 778,520
Adjusted for 7% CRSI holdings (/ 93%)......................... 837,118
</TABLE>
Actual shares of Company Common Stock outstanding will differ based on any
changes to CRSI shares outstanding from 12/31/96 to the Distribution Date.
NOTE 4 -- INCOME TAXES
The Company intends to elect to be taxed as a Real Estate Investment Trust
under the Internal Revenue Code (Code) and as a result will generally not be
subject to federal income taxes to the extent it distributes its taxable income
as defined in the Code to its shareholders and satisfies certain other
requirements. The Company may be subject to various state income and/or
franchise taxes; such taxes, if any, are not expected to be material.
36
<PAGE> 46
CAPITALIZATION
The following table sets forth the capitalization of the Company as of the
date of this prospectus and of the Company on a pro forma basis assuming the
completion of the Distribution. The information set forth in the following table
should be read in conjunction with the Combined Financial Statements and notes
thereto, the Unaudited Pro Forma Condensed Combined Financial Statements and
Notes thereto included elsewhere in this prospectus and the discussion set forth
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
<TABLE>
<CAPTION>
DISTRIBUTION DATE
----------------------
000S OMITTED
COMPANY COMPANY
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Mortgage Notes Payable................................ $ -- $93,043
Shareholders' Equity
Preferred Stock:
-- Class A Senior Preferred, $1 stated value,
7,500 shares authorized, 4,500 outstanding,
with an aggregate liquidation preference of
$13,500........................................ -- 4,500
-- Blank check preferred, no par value, 500,000
shares authorized none issued.................. -- --
Common Stock 2,500,000 shares authorized, no par
value, 100 and 1,067,000 shares outstanding at
April 4, 1997 and Distribution Date,
respectively................................... -- --
Additional Paid-in Capital....................... 1 2,025
--- --------
Total Capitalization........................ $ 1 $99,568
=== ========
</TABLE>
37
<PAGE> 47
SELECTED FINANCIAL DATA
The following table presents financial data on a pro forma basis for the
Company, and on a historical basis for the Lexreit Properties Group. The
information set forth below should be read in conjunction with "Unaudited Pro
Forma Condensed Combined Financial Statements", "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Combined
Historical Financial Statements and notes thereto included elsewhere in this
prospectus. The Historical Statements of Operations Data set forth below for
each of the three years in the period ended December 31, 1996 and the Balance
Sheet Data at December 31, 1996 and 1995 are derived from, and are qualified by
reference to, the audited combined financial statements included elsewhere in
this prospectus. The Pro Forma 1996 Statement of Operations Data and Balance
Sheet Data is derived from the Condensed Combined Pro Forma Financial Statements
and Notes thereto included elsewhere in this prospectus. The Balance Sheet Data
at December 31, 1994, 1993 and 1992 are derived from unaudited combined
financial statements of Lexreit Properties Group not included in this
prospectus. The Statement of Operations Data for the period ended December 31,
1992 and for the year ended December 31, 1993 are derived from unaudited
combined financial statements of Lexreit Properties Group not included in this
prospectus.
The historical financial information of Lexreit Properties Group and the
Company's Pro Forma financial information may not be indicative of the Company's
future performance and does not necessarily reflect what the financial position
and results of operations of the Company would have been had the Company
operated as a separate, stand-alone entity during the periods presented.
SELECTED FINANCIAL AND OPERATING DATA
(000S OMITTED, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------ PRO FORMA
1992(1) 1993 1994 1995 1996 1996
-------- -------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Rental and Other Revenues................. $ 6,684 $ 21,621 $ 22,646 $ 23,593 $ 25,148 $ 25,148
Operating Expenses........................ 2,900 9,268 9,724 10,493 10,772 10,932
-------- -------- -------- -------- -------- --------
Net Operating Income.................. 3,784 12,353 12,922 13,100 14,376 14,216
-------- -------- -------- -------- -------- --------
Interest Expense.......................... 2,208 7,190 7,922 7,684 8,605 8,576
Other Maintenance......................... 434 1,329 1,531 2,349 1,481 1,595
Depreciation and Amortization (2)......... -- -- -- -- 2,863 2,983
General and Administrative................ -- -- -- -- -- 557
Other Costs............................... 559 622 1,139 897 590 705
-------- -------- -------- -------- -------- --------
3,201 9,141 10,592 10,930 13,539 14,416
-------- -------- -------- -------- -------- --------
Less: Amount credited to carrying value of
real estate(2).......................... (583) (3,212) (2,330) (2,170) -- --
Income/(loss) before Extraordinary Item,
Taxes and Minority Interest............. -- -- -- -- 837 (200)
-------- -------- -------- -------- -------- --------
Extraordinary gain/(loss) (4)............. -- 1,859 2,029 219 (2,475) --
Minority Interest......................... -- -- -- -- -- (217)
-------- -------- -------- -------- -------- --------
Net Income/(loss) before Income Taxes..... -- 1,859 2,029 219 (1,638) (417)
Income Tax Provision/(Benefit)(3)......... -- 907 803 85 (639) --
-------- -------- -------- -------- -------- --------
Net Income/(loss)......................... $ -- $ 952 $ 1,226 $ 134 $ (999) (417)
======== ======== ======== ======== ========
--------
Preferred Stock Distributions............. (1,620)
--------
Net Income/(loss) attributable to common
shares.................................. $ (2,037)
--------
Net (loss) per common share(6)............ ($ 2.43)
========
</TABLE>
38
<PAGE> 48
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------------ PRO FORMA
1992(1) 1993 1994 1995 1996 1996
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Capital Expenditures (2).................. N/A N/A N/A N/A $ 373 $ 373
======== ======== ======== ======== ======== ========
Funds from Operations (5)................. $ 583 $ 3,212 $ 2,330 $ 2,170 $ 3,590 $ 2,554
======== ======== ======== ======== ======== ========
Number of Properties...................... 64 64 64 65 66 66
======== ======== ======== ======== ======== ========
Number of Apartment Units................. 4,987 4,987 4,987 5,047 5,118 5,118
======== ======== ======== ======== ======== ========
BALANCE SHEET DATA
Land and Buildings........................ $105,130 $101,924 $ 99,598 $ 98,775 $ 97,821 $ 97,821
Operating Cash............................ 2,000 3,025 2,310 1,681 2,110 3,110
Funds held in Escrow...................... 3,017 2,623 4,049 3,824 4,367 4,367
Receivables............................... 656 532 543 516 529 529
Other Assets.............................. 677 612 1,245 1,254 2,428 3,028
-------- -------- -------- -------- -------- --------
Total Assets....................... $111,480 $108,716 $107,745 $106,050 $107,255 $108,855
======== ======== ======== ======== ======== ========
Mortgage Debt............................. $ 89,790 $ 86,260 $ 86,356 $ 89,742 $ 93,043 $ 93,043
Other Liabilities......................... 13,168 12,129 9,992 4,648 4,093 4,693
Investment by CRSI........................ 8,522 10,327 11,397 11,660 10,119 N/A
Minority Interest......................... 4,594
Shareholders' Equity...................... 6,525
-------- -------- -------- -------- -------- --------
Total Liabilities and Equity.............. $111,480 $108,716 $107,745 $106,050 $107,255 $108,855
======== ======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) CRSI applied "Fresh Start" accounting upon its emergence from Chapter 11
bankruptcy on September 11, 1992. Fresh Start accounting was also applied to
the Properties wholly-owned by CRSI at that time. Therefore, the operations
for 1992 includes only the period from September 11, 1992 to December 31,
1992. In addition, as a result of applying Fresh Start accounting the non
recourse mortgages on the Properties were adjusted to the estimated value of
the collateral as of September 11, 1992.
(2) During 1995 and prior years, CRSI had attempted to market and sell the
Properties and classified the Properties as Held for Sale. While the
Properties were held for sale, the results of operations from the Properties
were credited to the carrying value of the real estate and no revenues,
operating expenses or depreciation were included in the statements of
income. Due to this policy from 1992 through 1995 all expenditures were
capitalized. Commencing January 1, 1996 a capitalization program was
implemented to capitalize major improvements to the Properties.
(3) The income tax provision represents Lexreit Properties Group's share of
CRSI's income tax provision which is intended to approximate the provision
that would have been reported had Lexreit Properties Group filed separate
tax returns, and it does not affect the net investment by CRSI. All tax
provisions relate to the extraordinary gains or losses in 1993, 1994 and
1995. In 1996, the tax provision includes a provision of approximately
$326,000 related to operating income.
(4) The extraordinary gains and losses from the Properties are attributable to
the refinancing of Property mortgages. Such gains and losses were not
applied to the asset values but were reported as income or loss in the
period incurred.
(5) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), Funds From Operations (FFO) represents net income/(loss) before
minority interest, excluding depreciation on real estate, extraordinary
gains or losses and including income credited to carrying value of real
estate. See Note 2. In addition, the Company will review the capitalization
program for the Properties as compared with other REITs.
(6) Pro Forma Net Income Per Common Share equals Pro Forma Net Income divided by
the 837,000 shares of Company Common Stock outstanding on a pro forma basis
estimated based upon the CRSI shares
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<PAGE> 49
outstanding at December 31, 1996 converted based on one Company share for
every five CRSI shares, plus shares of Company Common Stock issued to CRSI.
<TABLE>
<S> <C>
Calculation:
CRSI Common Stock outstanding @ 12/31/96...................... 3,892,600
Conversion Ratio (/ 5)........................................ 778,520
Adjusted for 7% CRSI holdings (/ 93%)......................... 837,118
</TABLE>
Actual shares of Company Common Stock outstanding will differ based on any
changes to CRSI shares outstanding from 12/31/96 to the Distribution Date.
40
<PAGE> 50
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Summary
Combined Pro Forma Financial Data, Selected Financial Information and the
Lexreit Properties Group's Combined Financial Statements and Notes thereto
appearing elsewhere in this Prospectus.
RESULTS OF OPERATIONS
Comparison of Results of Operations for the Years Ended December 31, 1996 and
1995
Rental Revenues increased $1.4 million, or 5.9%, in 1996 as compared to
1995. The increase was primarily due to the increase in average rent collected
per unit per month from $381 in 1995 to $400 in 1996. In addition, approximately
$131,000 of the increase was due to the acquisition of a Property by CRSI in
August 1996 and the inclusion of such Property in the Lexreit Properties Group.
The average economic occupancy of the Properties was 92.6% in 1996 as compared
to 92.1% in 1995. Economic occupancy is defined as the amount of revenue
collected from residents as a percentage of the revenue a Property could
generate if full rents for all units were collected.
Other Revenues increased approximately $204,000, or 35%, in 1996 as
compared to 1995. The increase was due to an approximately $61,000 increase in
interest income and an approximately $126,000 increase from forfeited security
deposits. The interest income increase was derived from the increase in funds
held in escrow as a result of refinancing transactions and the benefits derived
from the new cash management banking relationships established in August 1995.
Administration Expenses decreased approximately $512,000, or 12.2%, in 1996
as compared to 1995. Approximately $415,000 of the decrease was due to payroll
expenses for maintenance employees charged to administration expenses in 1995,
which expenses were charged to maintenance expenses in 1996. This decrease is
offset by a corresponding increase in maintenance and repair expenses.
Utility Expenses increased approximately $92,000, or 7.5%, primarily due to
general increases in electricity and water expenses.
Maintenance and Repair Expenses increased approximately $683,000, or 31.9%,
due primarily to approximately $415,000 of payroll expenses charged to
administration expenses in prior years. In addition, grounds maintenance and
repair contract costs increased related to work associated with the maintenance
escrow funds established in connection with refinancings of Properties'
indebtedness.
Taxes and Insurance Expenses in 1996 remained comparable to 1995 expense
levels.
Interest Expense increased approximately $922,000 in 1996 as compared to
1995. The increase principally was due to the difference between the recording
of interest expense based upon an effective interest rate applied to the "Fresh
Start" carrying value of debt in 1995 as compared to the contractual rate of
interest on the refinanced mortgages recorded in 1996. The interest recorded in
1996 reflects the contractual interest rate of the mortgages due to the
significant number of mortgages refinanced in 1995 and 1996. As mortgages are
refinanced, the carrying value of debt is restated to the contractual balance.
See Note 4 to the Notes to Combined Financial Statements.
Interest Expense -- General Partner relates to interest charged by CRSI to
the Partnerships on advances made by CRSI to the Partnerships principally
related to debt refinancing transactions. This expense is eliminated on the
consolidated statements of CRSI and will cease to accrue upon contribution of
the Interests to the Company and the Operating Partnership.
Other Maintenance Expenses decreased approximately $868,000, or 36.9%, in
1996 as compared to 1995. Approximately $373,000 of the decrease was due to a
capitalization program implemented in 1996. The
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<PAGE> 51
program requires the capitalization of major building exterior maintenance. In
prior years all items were capitalized during the period the assets were
classified as "Held for Sale." The balance of the decline was due to a decrease
in expenditures related to Properties refinanced in 1994 and 1995.
Other Expenses decreased approximately $359,000 in 1996 as compared to
1995. These expenses reflect adjustments to prior year tax and interest expense
as well as administrative and tax preparation fees charged to the Properties by
CRSI (which charges will continue under the Asset Management Agreements). Other
non operating expenses are subject to fluctuation from year to year.
Income Excluding Depreciation was approximately $3.7 million in 1996 as
compared to income credited to the carrying value of real estate or $2.2 million
in 1995. The 1996 extraordinary charge of $2.5 million was a result of mortgage
debt refinancing on certain Properties. See Note 4 to Notes to Combined
Financial Statements. The extraordinary gain of $219,130 recognized in 1995 was
due to debt forgiveness generated from debt refinancing of mortgages on
Properties.
Comparison of Results of Operations for the Years Ended December 31, 1995 and
1994
Rental Revenues increased approximately $891,000, or 4.0%, in 1995 as
compared to 1994. The increase was due to the increase in average rent per unit
per month from $370 in 1994 to $381 in 1995. The average economic occupancy of
the Properties was 92.1% in 1995 as compared to 93.5% in 1994. In addition,
$188,800 of the increase was due to the acquisition of a Property by CRSI in
March 1995.
Other Revenues increased approximately $56,000, or 10.7%, in 1995 as
compared to 1994. The increase primarily was due to an increase in interest
income derived from escrow funds established with restructuring and refinancing
activities.
Administration Expenses increased approximately $370,000, or 9.6%, in 1995
as compared to 1994. Approximately $230,000 of the increase was attributable to
increased salary expense for additional maintenance work funded from escrows
established in refinancing transactions.
Utility Expenses increased approximately $50,000 in 1995 as compared to
1994 due to general increases in utility rates.
Maintenance and Repair Expenses increased approximately $216,000, or 11.2%,
in 1995 as compared to 1994. Maintenance expenditures increased as funding
became available due to escrows established with debt refinancing and
restructuring transactions.
Taxes and Insurance Expenses increased approximately $133,000, or 4.7%, in
1995 as compared to 1994. The increase is primarily related to a health
insurance program implemented in 1995 for Partnership employees.
Interest Expense decreased approximately $238,000 in 1995 as compared to
1994. Interest expense was affected by bankruptcy proceedings involving certain
Properties in 1994, which caused fluctuations in interest expense. Interest
expense on under collateralized loans on Properties in the Chapter 11 bankruptcy
proceedings was recorded based upon cash paid to the lender without regard to
contractual or effective interest rates.
Interest Expense -- General Partner relates to interest charged on advances
made by CRSI to the Partnerships. The interest increased as CRSI made new
advances, which were primarily related to debt restructuring transactions.
Other Maintenance Expenses increased approximately $818,000 in 1995 as
compared to 1994. The increase reflects the increase in maintenance activity
related to the maintenance escrows established with the refinancing and
restructuring transactions in 1995 and 1994.
42
<PAGE> 52
Other Expenses decreased approximately $269,000 in 1995 as compared to
1994. The decrease relates to Chapter 11 expenses incurred in 1994 due to
Properties in bankruptcy. All Property bankruptcy proceedings were completed in
early 1995.
Income Credited to Carrying Value of Real Estate was approximately $2.2
million in 1995 as compared to approximately $2.3 million in 1994. The
extraordinary gain of approximately $219,000 in 1995 and $2.0 million in 1994
was recognized in connection with debt forgiveness generated from debt
refinancing of mortgages on the Properties.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion regarding liquidity and capital resources should
be read in conjunction with the Lexreit Properties Group's Combined Balance
Sheets as of December 31, 1996 and 1995 and the Combined Statements of Cash
Flows for the years ended December 31, 1996, 1995 and 1994.
Prior to the Distribution Date, the operations and cash flow of the Company
is reflected in the Combined Financial Statements of the Lexreit Properties
Group. After the Distribution Date the Company will be entitled to its allocable
share of the income and cash flow of the Properties comprising the Lexreit
Properties Group. The Company's financial statements after the Distribution Date
will be comprised of the Properties included in the Lexreit Properties Group
with a minority interest held by CRSI. See "Distribution Policy."
The principal source of liquidity for the Company will be cash
distributions received from the Operating Partnership and a $1,000,000 initial
capital contribution from CRSI. The Company will maintain a relatively illiquid
cash position. The Company has no current line of credit and has no current
intention of securing a line of credit. Because the Company intends to elect
REIT status, it must distribute 95% of its REIT taxable income in order to
maintain its qualifications as a REIT, which will limit the ability of the
Company to rely upon cash flow from operations to finance its activities. It is
possible that the Company could require short term borrowing proceeds to meet
its REIT distribution requirements.
The cash flow from operations of the Properties improved significantly from
1994 to 1996, principally as a result of improved Property performance and the
refinancing of loans secured by the Properties with more favorable economic
terms. Property debt has been refinanced and all Property Chapter 11 bankruptcy
cases have been closed. Although there can be no assurances, the Company
anticipates receiving adequate distributions to meet its liquidity needs.
FINANCING AND DEBT RESTRUCTURING OF THE PROPERTIES
In 1996, CRSI completed the refinancing of mortgages on 28 Properties. The
majority of the new mortgages have 10 year maturities with 25 to 30 year
amortization schedules and an approximate 8.8% fixed interest rate. Twenty-two
of the 28 Property mortgages refinanced in 1996 were part of a 26 property
portfolio that contains cross-collateral and cross-default provisions. All of
the mortgage loans are without recourse to CRSI, the Company and the Operating
Partnership.
As of December 31, 1996, $90.5 million of the contractual mortgage balances
on the Properties have fixed rate financing. The average remaining term to
maturity is approximately 7 years with a weighted average contractual interest
rate of 8.6%. There are approximately $1.5 million of subordinated cash flow
mortgages on 7 Properties. The majority of the subordinated debt requires 100%
of the excess cash flow of the applicable Property to be applied to the
outstanding principal balance.
FUNDS FROM OPERATIONS
As defined by the National Association of Real Estate Investment Trusts
("NAREIT") Funds From Operations ("FFO") represents net income/(loss) (computed
in accordance with generally accepted accounting principles, consistently
applied) before minority interests excluding gains (or losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization (excluding amortization of deferred financing cost), and after
adjustment for unconsolidated partnerships and joint
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<PAGE> 53
ventures. The FFO of the Lexreit Properties Group was $2.3 million in 1994, $2.2
million in 1995 and $3.6 million in 1996. The improvement in FFO is principally
due to improvements in net operating income of the Properties which increased
from $12.9 million in 1994 to $14.4 million in 1996.
BUSINESS AND PROPERTIES
DESCRIPTION OF PROPERTIES AND ADDITIONAL PROPERTIES
The Company will be the General Partner of the Operating Partnership and
will own an undivided 60% economic interest in the Operating Partnership. The
Operating Partnership, in turn, will own limited partner's or member's interests
(representing undivided 90% to 99% economic ownership interests in the
Partnerships that own the Properties). See "Distribution Policy." The Properties
and the Additional Properties are primarily located in the lower Midwestern and
the Southeastern regions of the United States. A typical apartment community has
77 units and is composed of multiple one-story buildings containing apartment
units offering four basic floor plans with studio, one-bedroom,
two-bedroom/one-bath and two-bedroom/two-bath apartments. Approximately 96% of
the apartment communities comprising the Properties were constructed during the
1980s, with the oldest Property having been constructed in 1980. All of the
Additional Properties were constructed during the 1980s, with the oldest
Additional Property having been constructed in 1985. The total number of units
in the Properties is approximately 5,100 while the total number of units in the
Additional Properties is approximately 800. As of December 31, 1996, the average
Property was 92% occupied, and the average Additional Property was 89% occupied.
Gross rents for the Properties range from $354 per month per unit to $858 per
month per unit. As of December 31, 1996, the average rent collected per unit in
the Properties was $400 per month. No Property accounted for more than 10% of
the aggregate gross revenues of all of the Properties in 1996, and no Property
had a book value of more than 10% of the total assets of all of the Properties.
Gross rents for the Additional Properties range from $348 per month per unit to
$541 per month per unit. As of December 31, 1996, the average rent collected per
unit in the Additional Properties was $365.
For specific information regarding rents, operating expenses, net operating
incomes, debt balances and capital expenditures with respect to each Property
and each Additional Property, see the Summary of Properties and Additional
Properties filed as Exhibit 99.1 to the Registration Statement of which this
Prospectus is a part.
EXECUTIVE OFFICERS; CONTRACTS FOR SERVICES WITH MANAGER AND CRSI
The Company will initially have two Executive Officers, who will be the
President and the Treasurer, each serving as such pursuant to the terms of the
Corporate Services Agreement. See "Certain Transactions; Transactions with
CRSI--Corporate Services Agreement." The Executive Officers, together with other
CRSI employees performing services on CRSI's behalf under the Corporate Services
Agreement, will perform various management, administrative, accounting, public
reporting, and, possibly, acquisition, development and redevelopment functions
which will principally relate to investor relations, performance of duties as
General Partner of the Operating Partnership and exercise of rights as limited
partner or similar equity owner of the Partnerships but may also include review,
analysis, negotiation and consummation of acquisitions or similar transactions
involving additional apartment communities or other residential real property or
investments therein. See "Operating Partnership Agreement." The Operating
Partnership will not have any employees. Most operating services will be
provided to each of the Partnerships by the Manager pursuant to the terms of the
Management Agreements. In addition, CRSI will provide day-to-day management and
certain administrative, accounting, financial reporting and regulatory
compliance, insurance administration, banking relations and cash management,
information systems, and assorted shareholder services to the Partnerships
pursuant to the terms of the Asset Management Agreements. See "Certain
Transactions; Transactions with CRSI--Management Agreements," "Certain
Transactions; Transactions with CRSI--Corporate Services Agreement" and "Certain
Transactions; Transactions with CRSI--Asset Management Agreements."
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<PAGE> 54
ENVIRONMENTAL MATTERS
Under various Federal, state and local laws, ordinances and regulations, an
owner or operator of real estate may be liable for the costs of removal or
remediation of certain hazardous or toxic substances on, under or in the
property. This liability may be imposed without regard to whether the owner or
operator knew of, or was responsible for, the presence of the hazardous or toxic
substances. Furthermore, a person that arranges for the disposal of a hazardous
substance at another property or transports a hazardous substance for disposal
or treatment at another property may be liable for the costs of removal or
remediation of hazardous substances at that property, regardless of whether or
not that person owns or operates that property. The costs of any such
remediation or removal may be substantial, and the presence of any such
substance, or the failure promptly to remediate any such substance, may
adversely affect the property owner's ability to sell or lease the property or
to borrow using it as collateral. Other Federal, state and local laws,
ordinances and regulations require abatement or removal of certain
asbestos-containing materials in connection with demolition or certain
renovations or remodeling, impose certain worker protection and notification
requirements, and govern emissions of and exposure to asbestos fibers in the
air. Other Federal, state and local laws, ordinances and regulations and the
common law impose on owners and operators certain requirements regarding
conditions and activities that may affect human health or the environment. These
conditions and activities include, for example, the presence of lead in drinking
water, the presence of lead-containing paint in occupied structures, and the
ownership or operation of underground storage tanks. Failure to comply with
applicable requirements could result in difficulty in the lease or sale of any
affected property or the imposition of monetary penalties, in addition to the
costs required to achieve compliance and potential liability to third parties.
The Company, the Operating Partnership or the affected Partnership, as the case
may be, may be potentially liable for such costs or claims in connection with
the ownership and operation of the Properties. See "Risk Factors--Potential
Environmental Liability."
Phase I environmental site assessments have been completed within the last
36 months for more than one-half of the Properties and the Additional
Properties, and no Phase II environmental site assessments have been conducted
for the Properties or the Additional Properties. None of the Phase I
environmental site assessments revealed any environmental contaminant or
condition that CRSI believes would have a material adverse effect on the
Company, the Operating Partnership, or any of the Partnerships, the Properties
or the Additional Properties. Nevertheless, it is possible that there exists
material environmental contamination of which CRSI is unaware.
No assurance can be given that (i) the assessments described above revealed
all potential environmental liabilities; (ii) future or amended laws, ordinances
or regulations, or more stringent interpretations or enforcement policies of
existing environmental requirements, will not impose any material environmental
liability; or (iii) the environmental condition of the Properties has not been
and will not be affected by changes in the condition of properties in the
vicinity of the Properties or by the acts of third parties unrelated to the
Company, the Operating Partnership, the Partnerships, the Properties or the
Additional Properties.
COMPETITION
Each of the Properties is located in an area that includes other apartment
communities. The occupancy and rental rates of any Property, any Additional
Property or any apartment community acquired in the future could be materially
and adversely affected by the number of competitive apartment communities in its
market area. See "Risk Factors--Apartment Industry Risks."
LEGAL PROCEEDINGS
The Company is not currently involved in any material litigation nor, to
the Company's knowledge, is any material litigation currently threatened against
the Company, the Operating Partnership, the Partnerships or the Properties.
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<PAGE> 55
POLICIES AND OBJECTIVES WITH RESPECT
TO CERTAIN ACTIVITIES
The Company's current investment objectives and policies set forth in
"Policies and Objectives With Respect to Certain Activities--Investment
Policies" and the other matters discussed below have been established by the
Board of Directors of the Company and may be amended or revised from time to
time at the discretion of the Board of Directors without a vote of the
shareholders of the Company, except that changes in certain policies with
respect to conflicts of interest must be consistent with legal requirements. The
Company's current Board of Directors is comprised of three members, each of whom
is a CRSI Affiliate. On or prior to the Distribution Date, CRSI, in its capacity
at such time as the sole shareholder of the Company, will replace one of the
current directors with three Independent Directors. While each of the
Independent Directors has reviewed the principal policies of the Company and the
Board of Directors of the Company presently intends to implement such policies,
there can be no assurance that the Board of Directors will not amend or revise
these policies.
INVESTMENT POLICIES
The Company's investment objectives are to achieve long-term capital
appreciation through increases in cash flow of the Properties and to provide
annual cash dividends to the holders of its Company Common Stock after regular
quarterly cash dividends to the holders of its Class A Senior Preferred Stock
(which, for the foreseeable future is expected to be and remain CRSI); however,
the Company Common Stock is subject to the dividend preference of the Class A
Senior Preferred Stock and there can be no assurance that any dividends will
ever be paid to the holders of the Company Common Stock. The Company intends to
cause the Operating Partnership initially to make quarterly distributions of all
OP Distributable Funds. The Company believes that these objectives can be
accomplished through the enhanced operation and management of, and selected
capital improvements to, the Properties, although the Company will be largely
dependent upon the efforts and decisions of CRSI and Manager in this regard. See
"Certain Transactions; Transactions with CRSI." While the Company will not
directly control or make capital financing, ownership or management decisions
affecting the Properties, the Company may withhold its consent to the mortgage
refinancing, expansion and/or improvement of the Properties or sale of such
Properties, in whole or in part, except in certain limited circumstances. See
"Subscription Agreement--Consent of the Company to Certain Transactions,"
"Distribution Policy" and "Risk Factors--Real Estate Financing Risks."
While the Company has no present plans to acquire or develop additional
properties (except as provided in the Subscription Agreement), the Company
intends to evaluate, and has been structured so that it may take advantage of,
future opportunities to acquire additional apartment communities. The Operating
Partnership Agreement contemplates the possible issuance of additional limited
partners' interests in the Operating Partnership. Partnership interests in the
Operating Partnership could further be made convertible into shares of Company
Common Stock. Equity investments may be subject to existing mortgage financing
and other indebtedness which have priority over the equity interest of the
Company. The Company also may hold temporary cash investments from time to time
pending investment or distribution to shareholders.
Immediately prior to the Distribution Date, when CRSI contributed Interests
in the Partnerships to the Company, as described above under "Initial
Transactions," there were 11 Additional Properties, 7 of which are owned by
SPCs, all of the issued and outstanding capital stock of which is owned by CRSI,
and 4 of which are owned by limited partnerships, with CRSI as the general
partner, that were not transferred, because each required the consent of a
mortgage lender or lenders. A list of the Additional Properties is set forth on
Exhibit 99.2 to the Company's Registration Statement on Form S-11, of which this
Prospectus forms a part. CRSI will evaluate each Additional Property to
determine whether it is more feasible to maintain an economic interest in the
Additional Property and contribute the Additional Property to the Company than
to sell (or otherwise dispose of) the Additional Property. If CRSI determines to
contribute an Additional Property to the Company, CRSI will continue to use its
reasonable best efforts to obtain the required mortgage lender consent or
consents and, upon obtaining the consent of the mortgage lender or lenders for
the transfer of any Additional Interests, (i) with respect to SPC-owned
Additional Properties, 100% of the capital stock of each SPC owning an
Additional Property will be contributed to the Company by CRSI, and (ii) with
46
<PAGE> 56
respect to partnership-owned Additional Properties, a 60% limited partner's
interest in each of the partnerships owning such Additional Property will be
contributed to the Company by CRSI, in any case, in exchange for shares of Class
A Senior Preferred Stock in a stated amount equal to the Value of the Additional
Interest being contributed. As capital contributions, the Company will
contribute 60% of the Additional Interest in each of the partnerships owning the
partnership-owned Additional Properties to the Operating Partnership, and the
CRSI Group will contribute 40% of the Additional Interest in each of such
partnerships to the Operating Partnership. At the time of any additional
contribution as described in this paragraph, CRSI will provide to the Company a
representation and warranty that, to the best of CRSI's knowledge, there has
been no change to the underlying Additional Property or its operations that
would have a material adverse effect on the Value of the Additional Property.
FINANCING
The Company does not initially intend to obtain any financing from lenders
or other third parties.
POLICIES WITH RESPECT TO CERTAIN OTHER ACTIVITIES
The Company has authority to sell capital shares or other securities and to
repurchase or otherwise reacquire its shares or any other securities, and may
engage in such activities in the future. The Company has authority to issue
additional shares of Class A Senior Preferred Stock to CRSI in connection with
the contribution by CRSI of Additional Interests to the Company as provided in
the Subscription Agreement. The Company has not issued Company Common Stock or
any other securities to date, except to CRSI in connection with the formation of
the Company. The Company has no outstanding loans to other entities or persons,
including its officers and directors, and does not currently intend to make
loans to other entities. The Company has not engaged, and does not currently
intend to engage, in trading, underwriting or agency distribution or sale of
securities of other issuers, and has not invested, and does not currently intend
to invest, in the securities of other issuers for the purpose of exercising
control. The Company intends to make investments in such a way that it will not
be treated as an investment company under the Investment Company Act of 1940.
The Company intends to make investments at all times in a manner consistent
with the requirements of the Code in order for the Company to qualify as a REIT
unless, because of changing circumstances or changes in the Code, in Treasury
Regulations or in the interpretations of either, the Company's Board of
Directors determines that it is no longer in the best interests of the Company
and its shareholders to qualify as a REIT.
CONFLICTS OF INTEREST POLICY
The Company's Articles of Incorporation require that a majority of the
Company's Board of Directors consist of persons who are not officers or other
employees of the Company, CRSI or persons (or members of firms) who directly or
indirectly receive substantial fee income from the Company ("Independent
Directors"). Determinations to be made on behalf of the Company with respect to
relationships or opportunities that represent a conflict of interest for any
Company officer or director as such will be subject to the approval of the
Independent Directors. The directors who are CRSI Affiliates will abstain from
voting on any matters that would present a conflict of interest due to their
being officers of CRSI.
Neither the Company's governing instruments nor Company policy prohibit any
Company director, officer, security holder or Affiliate from having a pecuniary
interest in any investment to be acquired or disposed of by the Company or in
any transaction to which the Company is a party or in which it has an interest.
THE FORMATION
Initial Transactions. The principal transactions in connection with the
formation of the Company as a REIT and the acquisition of the Interests by the
Company and the Operating Partnership are as follows:
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<PAGE> 57
- The Company was formed as an Ohio corporation and a wholly-owned
subsidiary of CRSI on April 4, 1997. One hundred shares of Company Common
Stock were issued to CRSI for $1,000.
- On or before the Distribution Date, CRSI will contribute additional cash
in the amount of $999,000 together with 60% of the Interests in each of
the Partnerships (79% in the case of two limited liability companies) to
the Company and will receive 100% of the Class A Senior Preferred Stock
and up to 1,066,900 additional shares of Company Common Stock,
constituting 100% of the outstanding Company Common Stock.
- On or before the Distribution Date, the Company and CRSI will form the
Operating Partnership as an Ohio limited partnership, with the Company as
the General Partner with a 60% economic interest and CRSI as the Limited
Partner with a 40% economic interest in the Operating Partnership. As
capital contributions, the Company will contribute 60% of the Interests
in each of the Partnerships (excluding two limited liability companies in
which the Company will retain a 79% member's interest) to the Operating
Partnership, and the CRSI Group will contribute the remaining 40%
Interest in each of the Partnerships (excluding two limited liability
companies in which the CRSI Group will retain a 21% member's interest) to
the Operating Partnership.
By effecting the Initial Transactions and the Distribution, CRSI seeks to
accomplish the following objectives:
(1) To retain a portion of economic benefits (both current cash flow and
future appreciation) of the Properties for CRSI and CRSI's
shareholders;
(2) To increase its net income and earnings per share;
(3) To remove nonrecourse mortgage indebtedness secured by the Properties
from CRSI's balance sheet;
(4) To improve its financial ratios (e.g., debt to equity, debt to total
market capitalization, operating margins, adjusted earnings before
interest, taxes, depreciation and amortization to revenues, return on
assets and return on equity);
(5) To allow each business (i.e., CRSI's real estate services business and
CRSI's real estate investment business) to more appropriately address
its specific requirements in a cost effective manner, including capital
requirements;
(6) To enable investors to evaluate each of the two businesses
independently and, therefore, better understand and analyze each such
business and direct their investments accordingly;
(7) To provide analysts, investors and lenders with a clear basis on which
to evaluate the business and operations of each company;
(8) To enable CRSI to better and more efficiently pursue growth
opportunities in its business and to finance such growth through the
issuance of capital stock (or other equity securities) of CRSI (or
Affiliate), or through the proceeds of indebtedness, as applicable; and
(9) To improve access to capital markets for CRSI and decrease CRSI's costs
of raising capital because separation of the two businesses will
enhance the ability of financial markets to appropriately evaluate and
value CRSI's real estate services business.
Contributions of Additional Interests. Immediately prior to the
Distribution Date, when CRSI will contribute an Interest in each of the
Partnerships (in most cases, 60%, but in the case of two limited liability
companies, 79%) to the Company, as described above under "Initial Transactions,"
there will be 11 Additional Properties, 7 of which are owned by SPCs, all of the
issued and outstanding capital stock of which is owned by CRSI, and 4 of which
are owned by limited partnerships, with CRSI as the general partner, the
interests in which will not have been transferred because each such transfer
requires the consent of a mortgage lender or lenders. A list of the Additional
Properties is set forth on Exhibit 99.2 to the Company's Registration Statement
on Form S-11, of which this Prospectus forms a part. CRSI will evaluate each
Additional Property
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to determine whether it is more feasible to maintain an economic interest in the
Additional Property and contribute the Additional Property to the Company than
to sell (or otherwise dispose of) the Additional Property. If CRSI determines to
contribute an Additional Property to the Company, CRSI will continue to use its
reasonable best efforts to obtain the required lender consent or consents and,
upon obtaining the consent of the lender or lenders for the transfer of any
Additional Interests, (i) with respect to SPC-owned Additional Properties, 100%
of the capital stock of each SPC owning an Additional Property will be
contributed to the Company by CRSI, and (ii) with respect to partnership-owned
Additional Properties, a 60% limited partner's interest in each of the
partnerships owning such Additional Property will be contributed to the Company
by CRSI, in any case, in exchange for shares of Class A Senior Preferred Stock
in an amount equal to the Value of the Additional Interest. As capital
contributions, the Company will contribute 60% of the Additional Interest in
each of the partnerships owning the partnership-owned Additional Properties to
the Operating Partnership, and the CRSI Group will contribute 40% of the
Additional Interest in each of such partnerships to the Operating Partnership.
At the time of any additional contribution as described in this paragraph, CRSI
will provide to the Company a representation and warranty that, to the best of
CRSI's knowledge, there has been no change to the underlying Additional Property
or its operations that would have a material adverse effect on the value of the
Additional Property.
MANAGEMENT
COMPANY DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company currently consists of three members,
each of whom is a CRSI Affiliate. On or prior to consummation of the
Distribution, the Company will replace one of the current directors with three
Independent Directors. Thereafter, directors of the Company will be elected at
each annual meeting of shareholders and will serve until their successors are
elected and qualified.
Each of the Company's officers will be elected and serve at the discretion
of the Board of Directors of the Company until his successor is duly chosen and
qualified. The Board of Directors may increase the number of officers of the
Company in the future if circumstances warrant.
The following table sets forth certain information concerning the
individuals who are the current and proposed directors and the officers of the
Company. The President and the Treasurer shall serve as such pursuant to the
terms of the Corporate Services Agreement. See "Certain Transactions;
Transactions with CRSI--Corporate Services Agreement."
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------- ------ -----------------------
<S> <C> <C>
John B. Bartling, Jr. 39 Director and President
Paul R. Selid 34 Director and Secretary
Mark D. Thompson 39 Director and Treasurer
Richard Lerner 31 Director Nominee
Craig Lipka 37 Director Nominee
Jack A. Staph 51 Director Nominee
</TABLE>
The following is a biographical summary of the business experience of the
current and proposed directors and officers of the Company.
John B. Bartling, Jr. Mr. Bartling has been President and Chief Executive
Officer of CRSI since December 1995. From April 1993 until December 1995, Mr.
Bartling was a Director in the Real Estate Products Group of CS First Boston, an
investment banking firm ("CS First Boston"), and he was an executive officer of
NHP, Inc., a company specializing in the development, ownership and management
of real estate assets, from June 1987 to April 1993. He also served as Executive
Vice President of NHP Real Estate Corp., NHP Capital Corp. and NHP Servicing
Inc., wholly owned subsidiaries of NHP, Inc., from 1991 to April 1993.
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Paul R. Selid. Mr. Selid has been Senior Vice President of CRSI since April
1996. Prior to that time, Mr. Selid was Vice President of Acquisitions of NHP,
Inc. since December 1994. Mr. Selid also served as Vice President of Asset
Management and Underwriting of NHP, Inc. from September 1992 to December 1994.
Mr. Selid previously served as Vice President of Finance of Hall Financial
Group, Inc. from January 1990 to September 1992. Mr. Selid will be replaced as a
director of the Company upon approval by the CRSI shareholders of the
Distribution.
Mark D. Thompson. Mr. Thompson has been Chief Financial Officer and
Executive Vice President of CRSI since October 31, 1996. Prior to that time, Mr.
Thompson was Executive Vice President of Corporate Acquisitions of CRSI since
April 1996. Mr. Thompson was a partner in the law firm of McDonald, Hopkins,
Burke & Haber from January 1995 to April 1996 and was a partner from October
1992 to December 1994, and an associate from January 1985 to October 1992, in
the law firm of Benesch, Friedlander, Coplan & Aronoff LLP.
Richard Lerner. Mr. Lerner has been Senior Vice President of DAIWA
Securities, a full service global securities firm, since May 1996. For five
years prior to that, Mr. Lerner was Director of Commercial Mortgage for CS First
Boston.
Craig Lipka. Mr. Lipka has been Managing Director of Soss, Cotton & Lipka,
a hedge fund, since April 1996. For five years prior to that, Mr. Lipka was
Managing Director of Mortgage Products Group for CS First Boston.
Jack A. Staph. Mr. Staph has been the Senior Vice President, Secretary and
General Counsel of Revco D.S., Inc. ("Revco") since December 1986 and served as
a member of the interim office of the President of Revco from June 1992 to July
1992. Mr. Staph was continuously employed as a member of Revco's in-house legal
staff for more than ten years prior to June 1986.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Regulations provide that the Board of Directors may establish
one or more committees of the Board of Directors in the future if circumstances
warrant. The Board of Directors currently intends to establish an audit
committee and a nominating committee.
Audit Committee. The Audit Committee will consist of three Independent
Directors. The Audit Committee will make recommendations concerning the
engagement of independent public accountants, review with the independent public
accountants the plans and results of the audit engagement, approve professional
services provided by the independent public accountants, review the independence
of the independent public accountants, consider the range of audit and nonaudit
fees, review CRSI's performance under the Corporate Services Agreement, review
the adequacy of the Company's internal accounting controls and review major
accounting or reporting changes contemplated or made.
Nominating Committee. The Nominating Committee will consist of two
Independent Directors and one CRSI Affiliate director. The primary function of
the Nominating Committee will be to advise the Company's Board of Directors as
to nominees for election to the Board of Directors.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Ohio Revised Code provides, with certain limited exceptions, that a
director may be held liable in damages for his act or omission as a director
only if it is proved by clear and convincing evidence that he undertook the act
or omission with deliberate intent to cause injury to the corporation or with
reckless disregard for its best interest.
The Ohio Revised Code authorizes Ohio corporations to indemnify officers
and directors from liability if the officer or director acted in good faith and
in a manner reasonably believed by the officer or director to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal actions, if the officer or director had no reason to believe his action
was unlawful. In the case of an action by or on behalf of a
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corporation, indemnification may not be made (i) if the person seeking
indemnification is adjudged liable for negligence or misconduct, unless the
court in which such action was brought determines such person is fairly and
reasonably entitled to indemnification or (ii) if liability asserted against
such person concerns certain unlawful distributions. The indemnification
provisions of the Ohio Revised Code require indemnification if a director or
officer has been successful on the merits or otherwise in defense of any action,
suit or proceeding that he was a party to by reason of the fact that he is or
was a director or officer of the corporation. The indemnification authorized
under Ohio law is not exclusive and is in addition to any other rights granted
to officers and directors under the articles of incorporation or regulations of
the corporation or any agreement between officers and directors and the
corporation. A corporation may purchase and maintain insurance or furnish
similar protection on behalf of any officer or director against any liability
asserted against him and incurred by him in his capacity, or arising out of the
status, as an officer or director, whether or not the corporation would have the
power to indemnify him against such liability under the Ohio Revised Code.
The Company's Regulations provide for the indemnification of directors and
officers of the Company to the maximum extent permitted by Ohio law as
authorized by the Board of Directors of the Company, and for the advancement of
expenses incurred in connection with the defense of any action, suit or
proceeding that he was a party to by reason of the fact that he is or was a
director of the Company upon the receipt of an undertaking to repay such amount
unless it is ultimately determined that the director is entitled to
indemnification.
The Company plans to obtain and maintain an insurance policy which will
insure the officers and directors of the Company against claims arising out of
alleged wrongful acts by such persons in their respective capacities as officers
and directors of the Company.
EXECUTIVE COMPENSATION
The Company does not intend to pay its Executive Officers an annual salary
for services performed as Executive Officers. The Executive Officers, together
with other CRSI employees performing services on CRSI's behalf under the
Corporate Services Agreement, will perform, pursuant to the terms of the
Corporate Services Agreement, various management, administrative, accounting,
public reporting and, possibly, acquisition, development and redevelopment
functions which will principally relate to investor relations, performance of
duties as General Partner of the Operating Partnership and exercise of rights as
limited partner or similar owner of the Partnerships but may also include
review, analysis, negotiation and consummation of acquisitions or similar
transactions involving additional apartment communities or other residential
real property or investments therein. See "Certain Transactions; Transactions
with CRSI--Corporate Services Agreement." The Executive Officers will each also
serve as directors of the Company and shall be compensated for their services as
directors, as set forth below.
COMPENSATION OF DIRECTORS
The Company intends to pay each of its directors an annual fee of $10,000
and a fee of $500 for each directors' meeting and $250 for each committee
meeting attended; provided, however, that the additional fees for attendance at
directors' meetings and committee meetings shall not exceed $2,500 per director
for the one year period commencing on the date of this Prospectus.
CONFLICTS OF INTEREST
It is anticipated that certain matters affecting both CRSI and the Company
will require approval of the Company's Board of Directors. The non-Independent
Directors will abstain from voting on any matters that would provide a conflict
of interest due to their positions as officers of CRSI.
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CERTAIN TRANSACTIONS; TRANSACTIONS WITH CRSI
INITIAL TRANSACTIONS
The principal transactions in connection with the Formation of the Company
as a REIT and the acquisition of the Interests by the Company and the Operating
Partnership are as follows:
- The Company was formed as an Ohio corporation and a wholly-owned
subsidiary of CRSI on April 4, 1997. One hundred shares of Company Common
Stock were issued to CRSI for $1,000.
- On or before the Distribution Date, CRSI will contribute additional cash
in the amount of $999,000 together with 60% of the Interests in each of
the Partnerships (79% in the case of two limited liability companies) to
the Company and will receive 100% of the Class A Senior Preferred Stock
and up to 1,066,900 additional shares of Company Common Stock,
constituting 100% of the outstanding Company Common Stock.
- On or before the Distribution Date, the Company and CRSI will form the
Operating Partnership as an Ohio limited partnership, with the Company as
the General Partner with a 60% economic interest and CRSI as the Limited
Partner with a 40% economic interest in the Operating Partnership. As
capital contributions, the Company will contribute 60% of the Interests
in each of the Partnerships (excluding two limited liability companies in
which the Company will retain a 79% member's interest) to the Operating
Partnership, and the CRSI Group will contribute the remaining 40% of the
Interests in each of the Partnerships (excluding two limited liability
companies in which the CRSI Group will retain a 21% member's interest) to
the Operating Partnership.
See "The Formation" for a further discussion of the benefits to, and value
received by, CRSI in connection with the Initial Transactions.
CONTRIBUTIONS OF ADDITIONAL INTERESTS
Immediately prior to the Distribution Date, when CRSI will contribute an
Interest in each of the Partnerships (in most cases, 60%, but in the case of two
limited liability companies, 79%) to the Company, as described above under
"Initial Transactions," there will be 11 Additional Properties, 7 of which are
owned by SPCs, all of the issued and outstanding capital stock of which is owned
by CRSI, and 4 of which are owned by limited partnerships, with CRSI as the
general partner, that will not have been transferred because such transfer
requires the consent of a mortgage lender or lenders. A list of the Additional
Properties is set forth on Exhibit 99.2 to the Company's Registration Statement
on Form S-11, of which this Prospectus forms a part. CRSI will evaluate each
Additional Property to determine whether it is more feasible to maintain its
economic interest in the Additional Property and contribute the Additional
Property to the Company or to sell (or otherwise dispose of) the Additional
Property. If CRSI determines to contribute an Additional Property to the
Company, CRSI will continue to use its reasonable best efforts to obtain the
required lender consent or consents and, upon obtaining the consent of the
lender or lenders for the transfer of any Additional Property, will contribute
to the Company (i) with respect to SPC-owned Additional Properties, 100% of the
capital stock of each SPC owning an Additional Property, and (ii) with respect
to partnership-owned Additional Properties, 60% of the limited partner's
interest in each of the partnerships owning such Additional Property, in each
case, in exchange for shares of Class A Senior Preferred Stock in an amount
equal to the Value of the Additional Interest being contributed. As capital
contributions, the Company will contribute the full amount of the limited
partner's interest it receives in each of the partnerships owning the
partnership-owned Additional Properties to the Operating Partnership, and the
CRSI Group will contribute the remaining 40% of the limited partner's interest
in each of such partnerships to the Operating Partnership. At the time of any
additional contribution as described in this paragraph, CRSI will provide to the
Company a representation and warranty that, to the best of CRSI's knowledge,
there has been no change to the underlying Additional Property or its operations
that would have a material adverse effect on the value of the Additional
Property.
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AGREEMENTS BETWEEN THE COMPANY AND CRSI
On or prior to the Distribution Date, the Company and CRSI, directly or
through Affiliates, will enter into certain agreements, described below, which
will govern their ongoing relationships. These agreements were structured while
the Company was owned by CRSI and consequently are not the result of arm's
length negotiations between independent parties. In each case, the terms of
these agreements have been reviewed by the nominees to serve as the Company's
Independent Directors. The following summaries of such agreements, and the
descriptions of certain provisions thereof set forth elsewhere in this
Prospectus, are qualified in their entirety by reference to each such agreement
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
MANAGEMENT AGREEMENTS
The Manager. As of the date of this Prospectus, either Lexford Properties,
Inc., a Texas corporation and wholly-owned subsidiary of CRSI, or CRSI
(collectively, the "Manager"), oversees the day-to-day operations of each
Property pursuant to a management agreement, which has been entered into between
the Manager and an individual Partnership (individually, a "Management
Agreement," and collectively, the "Management Agreements").
The Management Agreements. As of the date of this Prospectus, each
Partnership has entered into a Management Agreement with the Manager for an
initial term of five years. Approximately two-thirds of the Management
Agreements were entered into in 1992 and the remaining one-third were entered
into in 1996. At the expiration of the five-year term, the Management Agreement
will renew automatically for a period of one year, unless either party provides
a written notice to the other party of its intention to terminate the Management
Agreement 30 days prior to expiration of the current term. The Management
Agreement may be terminated by either party without cause at any time upon 30
days written notice. Under 24 of the Management Agreements, any such termination
by the Partnership without cause during the initial five year term shall result
in a payment of a termination fee to the Manager in an amount equal to the
compensation due to the Manager under the unexpired portion of such initial term
of the Management Agreement, such termination fee to be calculated by
multiplying the compensation earned for the first month of such initial term by
the number of months remaining in such initial term. Under the balance of the
Management Agreements, a termination fee is payable for the unexpired portion of
the then current term. The Operating Partnership Agreement provides further that
any termination of a Management Agreement, other than for reasons of (i) sale or
other disposition of the related Property or Additional Property or (ii)
termination at the expiration of the Management Agreement's then current term,
shall result in payment by the Company to the Manager of a termination fee in an
amount equal to five years fees (based upon the full amount of fees earned by
Manager on account of the immediately preceding twelve full months), less any
termination fee amount paid by a Partnership (or by a limited partnership owning
an Additional Property) pursuant to the terms of the Management Agreement. See
"Operating Partnership Agreement--Termination of Management Agreements." In
addition, each party will have the right to terminate the Management Agreement
without penalty upon the occurrence of certain specified events, including a
breach by the other party of any provision contained in the Management Agreement
which remains uncured for 30 days after written notice of such breach.
After the Distribution Date, the Manager will continue to manage and
operate the Properties as the agent of each of the Partnerships in accordance
with the terms of the appropriate Management Agreement. Specifically, the
Manager (or its affiliate, as the case may be) will perform such services and
activities relating to the operations of the Properties as are customarily
provided by operators of comparable apartment properties, including:
(i) employing, discharging and supervising all on-site employees or
contractors required for operation of the Property;
(ii) implementing and maintaining a computer system for the Property;
(iii) ensuring compliance with applicable laws with respect to the
Property;
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(iv) obtaining necessary licenses and permits for operation of the
Property;
(v) making ordinary course contracts for utilities and supplies and
for vendor arrangements for the Property;
(vi) making necessary alterations and repairs and completing routine
maintenance for the Property;
(vii) keeping bank accounts and making deposits and disbursements for
salaries (including fringe benefits and employee benefits), debts,
expenditures and fees (e.g., mortgage payments) with respect to the
Property;
(viii) coordinating the plans of tenants for moving their personal
effects into the Property or out of it, with a view toward scheduling such
movements so that there shall be a minimum of inconvenience to other
tenants;
(ix) maintaining business-like relations with tenants whose service
requests shall be received, considered and recorded in systematic fashion
in order to show the action taken with respect to each;
(x) using its best efforts to (A) collect all monthly rents due from
tenants and rent from users or lessees of other non-dwelling facilities on
the Property, if any; (B) request, demand, collect, receive and receipt for
any and all charges or rents which become due to the Partnership; and (C)
take such legal action, at the Partnership's expense, as may be necessary
or desirable to evict tenants delinquent in payment of monthly rental
charges, to cancel leases and to collect charges such as rent, security
deposits and late fees;
(xi) using its best efforts at all times to operate and maintain the
Property according to the highest standards achievable consistent with the
operation of comparable quality units;
(xii) advertising when necessary, at the Partnership's expense, the
availability for rental of the apartments and display "for rent" or other
similar signs upon the Property; and
(xiii) signing, renewing and canceling tenant leases for the Property,
in compliance with standards established by the Partnership to bona fide
individuals, for monthly rentals established from time to time by the
Partnership based on the Manager's recommendations.
Pursuant to the Management Agreement, the Manager is required to submit to
the Partnership for approval a budget for each fiscal year, containing a
schedule of monthly rents and management expenditures, including employee
compensation. The Manager's expenses (excluding expenses for taxes, insurance
and utilities) may not exceed budgeted amounts for the period in question by
more than 10% unless consented to by the Partnership. In addition, the Manager
will be responsible for preparing for the Partnership monthly income and expense
statements with respect to the Property and cash balances for accounts. Within
45 days of each fiscal year end, the Manager is required to provide to the
Partnership a fiscal year end income and expense statement and results of
operations with respect to the Property.
Management Agreement Fees. Monthly payments by the Partnership to the
Manager under the Management Agreement consist of the following: (a) a
management fee; (b) a bookkeeping fee; (c) a performance fee; and (d) a
reimbursement payment for employee salaries. All of the monthly payments are
payable to the Manager on or before the last day of each month and shall be
deducted by the Manager from the collected rental receipts. The Management
Agreement provides that fees for certain additional services requested of the
Manager by the Partnership shall be agreed upon by the parties. In addition, the
Manager may require that the Partnership provide an apartment to any Property
employee on a discounted basis.
The monthly management fee is equal to 5% of the "Gross Receipts of the
Property." "Gross Receipts of the Property" consist of the entire amount of all
receipts, determined on a cash basis, from tenant rentals collected pursuant to
tenant leases for each month (excluding tenant security deposits).
The bookkeeping fee is approximately $335 per month, subject in certain
cases to annual cost of living adjustments. The bookkeeping fee compensates the
Manager for its bookkeeping, recording of receipts and
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disbursements, check writing and bank account reconciliations, preparation of
monthly statements of cash receipts and disbursements and other required
bookkeeping functions under the Management Agreement.
The performance fee payable to the Manager is an amount equal to $2 per
apartment for each month in which the Manager collects not less than 96% of the
potential gross revenue by the end of such month. Potential gross revenue is
defined under certain of the Management Agreements as total rents payable on
account of occupied units and in the balance of the Management Agreements as
total rents payable on account of all rentable units (whether rented or not,
i.e., "economic occupancy"). In addition, the Partnership must make monthly
reimbursements of employee compensation paid by the Manager to the property
employees during such month.
Expenses. Pursuant to the Management Agreement, the Partnership will also
pay all costs and expenses of maintaining and operating the Property.
Ancillary Services. The Manager also provides ancillary services to the
Properties, including replacement parts, laundry services and maintenance
supplies. The Manager has established a "Preferred Vendor" program that features
discounts with major appliance, home repair and supply vendors at a cost of $3
per unit per year for participation in the Preferred Vendor program. The program
will allow the Partnerships to benefit from volume purchasing by paying
discounted prices for high-quality goods. The Manager receives a rebate for
every purchase made through the Preferred Vendor program, as well as a share of
revenues generated from residents' use of laundry equipment.
The Manager receives compensation for services rendered and a reimbursement
of expenses. The Manager also offers leased apartment furnishings through
agreements with national companies, and receives a rebate on furniture packages
leased by residents. On a very limited basis, the Manager offers
telecommunications and cable television services to residents.
CORPORATE SERVICES AGREEMENT
CRSI and the Company will enter into a Corporate Services Agreement
effective as of the Distribution Date pursuant to which CRSI will provide to the
Company certain services for a period of three years following the Distribution.
The Corporate Services Agreement shall renew automatically for sequential one-
year periods unless either party shall provide written notice to the other, six
months prior to the expiration of the then current term, of its desire to
terminate the Corporate Services Agreement. Payment by the Company for the
provision of services during the initial three-year term will be $350,000 per
year, payable in equal monthly installments.
The initial services to be provided to the Company by CRSI include
day-to-day executive management and most administrative services to the Company
including accounting, financial reporting and regulatory compliance, insurance
administration, banking relations and cash management, information systems, and
assorted shareholder services, and, if necessary, will provide payroll, W-2 and
other financial services. Further, the Company does not intend to pay its
Executive Officers an annual salary for services performed as Executive
Officers. The Executive Officers, together with other CRSI employees performing
services on CRSI's behalf under the Corporate Services Agreement, will perform,
pursuant to the terms of the Corporate Services Agreement, various management,
administrative, accounting, public reporting and, possibly, acquisition,
development and redevelopment functions which will principally relate to
investor relations, performance of duties as General Partner of the Operating
Partnership and exercise of rights as limited partner or similar owner of the
Partnerships. In addition, services to be provided under the Corporate Services
Agreement may also include review, analysis, negotiation and consummation of
acquisitions or similar transactions involving additional apartment communities
or other residential real property or investments therein. See "Policies and
Objectives with Respect to Certain Activities--Investment Policies."
ASSET MANAGEMENT AGREEMENTS
CRSI and each Partnership (or, each entity owning an Additional Property,
if acquired) will enter into an Asset Management Agreement pursuant to which
CRSI will provide to the Properties and/or the Additional
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Properties day-to-day management services for a period of three years. The Asset
Management Agreements shall renew automatically for sequential one-year periods
unless and until either of the parties shall provide written notice to the
other, six months prior to the expiration of the then current term, of its
desire to terminate the Asset Management Agreement. The services to be provided
by CRSI under each Asset Management Agreement include: (i) preparation and
distribution of reports to the Company regarding operations, finances,
management and all other matters that could have an affect on its Interests in
the Properties and the Additional Properties; (ii) allocation and distribution
of funds to partners or members in accordance with the terms of the partnership
governing documents; (iii) supervision of the preparation, and review and
distribution, of partnership (or, in the case of the SPCs, if applicable,
corporate) tax returns to the Company; and (iv) participation in, and
supervision of professionals involved in, examination of governmental filings.
Payment by each of the Partnerships for the provision of day-to-day management
services during the initial three-year term will be paid to CRSI monthly in the
form of (a) an asset management fee in an amount equal to 1% of the gross
monthly revenues collected by such Partnership (or entity owning an Additional
Property, if acquired); (b) a real estate tax appeals fee, when applicable, in
an amount equal to 40% of first year savings plus a monthly maintenance fee of
$100 per Property or Additional Property; (c) a loan negotiation fee in an
amount equal to 1% of the face amount of any new or refinanced loan with respect
to a Property or Additional Property; (d) a real estate commission fee in an
amount equal to 6% of the sales price (inclusive of any fees payable to outside
brokers retained by the seller) of any Property or Additional Property; (e) a
payroll processing fee in an amount equal to $43 per Property per month; (f) a
W-2 preparation and distribution fee in an amount equal to $1.50 per employee
per year; (g) an insurance administration fee in an amount equal to $12 per unit
per year; and (h) an audit preparation fee in an amount equal to $1,000 per year
for applicable Properties.
In addition, as further consideration for its services under the Asset
Management Agreement, each Partnership (or entity owning an Additional Property)
will authorize CRSI to retain custody and control of its cash on hand and invest
such funds in the Partnership's name in demand or overnight commercial paper
facilities (a "CP Facility"). CRSI will covenant to make all such funds
immediately available to the Partnership as needed and will be entitled to
retain interest accruing on such funds under the CP Facility.
TAX INDEMNIFICATION AGREEMENT
The Company and CRSI will enter into a Tax Indemnity Agreement (the "Tax
Indemnification Agreement") effective as of the Distribution Date pursuant to
which CRSI will indemnify the Company against any tax liability of (i) the
Company or any of its subsidiaries for all taxable periods ending on or before
the Distribution Date (and, with respect to subsidiaries contributed by CRSI to
the Company after the Distribution Date, for all taxable periods ending on or
before the date any such subsidiary is contributed to the Company), and (ii)
CRSI or any of CRSI's subsidiaries (other than the Company or any of its
subsidiaries) for any period ending on or before, or including, the Distribution
Date.
OPERATING PARTNERSHIP AGREEMENT
The following summary of the Operating Partnership Agreement, and the
descriptions of certain provisions thereof set forth elsewhere in this
Prospectus, is qualified in its entirety by reference to the Operating
Partnership Agreement, which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
MANAGEMENT
The Operating Partnership will be an Ohio limited partnership. Pursuant to
the Operating Partnership Agreement, the Company, as the General Partner with a
60% economic interest in the Operating Partnership, will have full, exclusive
and complete responsibility in the management and control of the Operating
Partnership. CRSI, as the Limited Partner with a 40% economic interest in the
Operating Partnership, will have no authority to transact business for, or to
participate in the management, activities or decisions of, the Operating
Partnership; provided, however, that any decision for the Operating Partnership
(i) to issue
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additional limited partner's interests in the Operating Partnership; (ii) to
change the General Partner, including a voluntary withdrawal, transfer or
assignment by the General Partner of its general partner's interest; (iii) to
make a general assignment for the benefit of creditors or appoint or acquiesce
in the appointment of a custodian, receiver or trustee; (iv) to institute any
proceeding for bankruptcy; (v) to agree to or consummate a merger or
consolidation of the Operating Partnership with any other entity; (vi) to take
title to any property other than in the name of the Operating Partnership; or
(vii) to be dissolved, would require the consent of the Limited Partner.
The Operating Partnership has been formed to own the Interests and to own
all other interests in real estate properties that may be acquired in the future
by the Company (unless otherwise specified in the Subscription Agreement). See
"Subscription Agreement--Contributions of Additional Interests." Accordingly,
the income and expenses of the Company that will be reflected in the financial
information to be provided to the shareholders will include the income and
expenses of the Operating Partnership, adjusted (on a pro forma basis) to deduct
the allocation of the Limited Partner.
TRANSFERABILITY OF INTERESTS
The Company may not voluntarily withdraw as General Partner from the
Operating Partnership or transfer or assign its general partner's interest in
the Operating Partnership without the consent of the Limited Partner. Subject to
applicable securities laws, a limited partner may transfer its interests in the
Operating Partnership without the consent of the General Partner, although the
transferee will not be admitted as a substitute partner without the consent of
the General Partner.
CAPITAL CONTRIBUTIONS
The Company will contribute to the Operating Partnership all of the
Interests transferred to it by CRSI (with the exception of a 79% Interest in 2
of the Partnerships which are limited liability companies) as its initial
capital contribution. The CRSI Group will contribute to the Operating
Partnership the remaining portion of its Interests in the Partnerships (with the
exception of a 21% Interest in 2 of the Partnerships) as its initial capital
contribution. If additional limited partner's interests are contributed by CRSI
to the Company following the Distribution Date, it is anticipated that 60% of
such Additional Interests will be contributed to the Company which will in turn
contribute such Additional Interests to the Operating Partnership, and 40% of
such Additional Interests will be contributed by the CRSI Group to the Operating
Partnership.
The Operating Partnership Agreement provides that if the Operating
Partnership requires additional funds at any time or from time to time in excess
of funds available to the Operating Partnership from capital contributions, the
Operating Partnership may seek to obtain such funds from a lender or other third
party.
TAX MATTERS; PROFITS AND LOSSES
Pursuant to the Operating Partnership Agreement, the Company will be the
tax matters partner of the Operating Partnership and, as such, will have
authority to make tax elections under the Code on behalf of the Operating
Partnership.
Profit and loss of the Operating Partnership will generally be allocated
among the partners in accordance with their respective percentage interests in
the Operating Partnership, except as otherwise required by the tax law
(including, but not limited to Code Section 704(c)).
OPERATIONS
The Operating Partnership Agreement requires that the Operating Partnership
be operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT and to avoid any Federal income tax liability.
The Operating Partnership Agreement provides that the provisions of the
Operating Partnership Agreement described in the preceding paragraph, among
others, may not be amended, modified, revoked or rescinded without the prior
written consent of the Limited Partner. See "--Management."
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<PAGE> 67
TERMINATION OF MANAGEMENT AGREEMENTS
The Operating Partnership Agreement provides that, upon the termination of
any Management Agreement for any reason other than (i) the sale or other
disposition of the related Property or Additional Property or (ii) the
termination by its terms of the Management Agreement at the expiration of its
then current term, the Company will be required to pay to the Manager a
termination fee in an amount equal to five years fees, calculated based on the
fees earned by the Manager with respect to the related Property or Additional
Property during the prior twelve-month period. The termination fee to be paid
under the Operating Partnership Agreement shall be reduced by the amount of any
termination fee required to be paid by a Partnership (or by a limited
partnership owning an Additional Property) pursuant to the terms of the
terminated Management Agreement.
DISTRIBUTIONS
The Operating Partnership Agreement provides that the Operating Partnership
will make cash distributions quarterly, in amounts equal to all OP Distributable
Funds. As of the date of this Prospectus, the Company does not anticipate the
need to establish reserves and, therefore, intends to cause the Operating
Partnership to distribute all OP Distributable Funds on a quarterly basis for
the foreseeable future. The portion of OP Distributable Funds equal to the
Modified Net Income of the Operating Partnership will be distributed to the
partners in accordance with their respective percentage interests in the
Operating Partnership. Any remaining OP Distributable Funds, i.e., those in
excess of Modified Net Income of the Operating Partnership, will be distributed
(i) 100% to the General Partner if such distributions are attributable to
Partnership operations; provided, however, to the extent that distributions are
made to the General Partner as a result of the proviso in clause (ii) below, an
equivalent amount of distributions shall be made to the Limited Partner pursuant
to this clause (i) prior to any distributions being made to the General Partner
pursuant to this clause (i) or (ii) pro rata to the Partners in accordance with,
and to the extent of, their respective positive capital account balances if such
distributions are attributable to sales or refinancings of Properties or
Additional Properties by the Partnerships until no Partner has a positive
capital account balance and thereafter to the Partners in accordance with their
respective percentage interests in the Company; provided, however, in no event
shall the sale or refinancing proceeds to be distributed to the General Partner
be less than the lesser of (x) the amount of taxable gain allocable to the
General Partner as a result of the event giving rise to such sale or refinancing
proceeds or (y) the amount necessary for the General Partner to meet its minimum
distribution requirements under Sections 857 and 4981 of the Code, as determined
by the General Partner in its reasonable discretion and taking into account the
capacity of the General Partner to borrow funds to satisfy such distribution
requirements. As General Partner of the Operating Partnership, the Company will
control the declaration and payment of any distributions by the Operating
Partnership but has agreed with CRSI (in the Operating Partnership Agreement),
as Limited Partner, not to unreasonably withhold or retain OP Distributable
Funds.
Distributions by the Partnerships will be determined by CRSI's authorized
officers on behalf of CRSI, through CRSI's Managing Interest in the
Partnerships. CRSI, as Managing Partner of each of the Partnerships, has agreed
(in the Operating Partnership Agreement) not to unreasonably withhold or retain
Distributable Funds from Partnership Operations. Distributions by the
Partnerships will be dependent on a number of factors, including the amount of
each such Partnership's Distributable Funds from Partnership Operations, the
Partnership's financial condition, any decision by the Managing Partner to
reinvest funds rather than distributing such funds, the Partnership's capital
expenditures and any other factor the Managing Partner believes is relevant.
CRSI, as Managing Partner of the Partnerships, may establish reserves for
certain of the Properties from time to time which would have the impact of
decreasing the actual amount of distributions from the Operating Partnership to
the Company and, in turn, from the Company to the holders of Company Common
Stock or even its Preferred Stock.
Upon liquidation of the Operating Partnership, after payment of, or
adequate provision for, debts and obligations of the Operating Partnership,
including any partner loans, any remaining assets of the Operating Partnership
will be distributed to all partners with positive capital accounts in accordance
with their respective positive capital account balances.
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<PAGE> 68
AMENDMENTS
Amendments to the Operating Partnership Agreement (e.g., changes in the
business conducted) require the consent of the Limited Partner, with certain
limited exceptions, and certain amendments to the Operating Partnership
Agreement (e.g., modification of the partners' rights to receive allocations and
distributions and alteration of the transfer rights, contribution requirements
and indemnification provisions of the Operating Partnership Agreement) require
the consent of each adversely affected partner.
TERM
The Operating Partnership will continue until December 31, 2037, or until
sooner dissolved on (i) the bankruptcy, insolvency, dissolution, liquidation or
withdrawal of the Company (unless the Limited Partner elects to continue the
Operating Partnership); (ii) the sale or other disposition of all or
substantially all the assets of the Operating Partnership; or (iii) the
redemption of all of the interests in the Operating Partnership.
SUBSCRIPTION AGREEMENT
GENERAL
A Subscription Agreement has been entered into between the Company and
CRSI, in substantially the form filed as Exhibit 3.3 to the Company's Form S-11,
of which this Prospectus forms a part, for the subscription by CRSI of the
Company Common Stock and Class A Senior Preferred Stock in exchange for the
contribution of capital to be made by CRSI to the Company. See "The Formation"
for a detailed description of the contribution of capital and the distribution
of capital stock. In addition to the terms of the Class A Senior Preferred Stock
set forth in the Company's Articles of Incorporation, the Subscription Agreement
provides that additional shares of Class A Senior Preferred Stock shall be
issued to CRSI upon CRSI's contribution of Additional Interests, if any, to the
Company. See "--Contributions of Additional Interests."
CONSENT OF THE COMPANY TO CERTAIN TRANSACTIONS
While the Company will not directly control or make capital financing,
ownership or management decisions affecting the Properties, the Subscription
Agreement provides that the Company may withhold its consent to the (i) mortgage
refinancing of any Property prior to the maturity of an outstanding mortgage
loan secured by the affected Property (whether scheduled or by virtue of
acceleration), (ii) expansion and/or improvement of the Properties or (iii) sale
of such Properties, in whole or in part, except in the event that the maturity
of a mortgage loan secured by the affected Property is accelerated for any
reason.
CONTRIBUTIONS OF ADDITIONAL INTERESTS
In the event of any contribution by CRSI of Additional Interests, as
described in "The Formation--Additional Contributions of Interests," the Company
will issue to CRSI, additional shares of Class A Senior Preferred Stock in an
amount equal to the dollar amount of the Value of the Additional Interests so
contributed to the Company.
DISTRIBUTIONS OF NET PROCEEDS
To the extent that the Company elects to distribute all or any portion of
the "net proceeds" it receives as a result of each sale, or change of control
of, a Property or an Additional Property, it must first distribute such net
proceeds to the payment of all accumulated and unpaid dividends with respect to
the Class A Senior Preferred Stock to the holders of Class A Senior Preferred
Stock. Except to the extent necessary for the Company to satisfy its REIT
distribution requirement and maintain its status as a REIT, any remaining net
proceeds distributed by the Company must be distributed 75% to the holders of
Class A Senior Preferred Stock, with the remaining 25% of the net proceeds
available for distribution to the holders of Company Common Stock. The "net
proceeds" available for distribution to shareholders shall be determined by
decreasing the gross sales amount by an amount equal to (i) the mortgage debt
amount attributable to the
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<PAGE> 69
Property or the Additional Property at the time of sale of the Property or
Additional Property, (ii) amounts allocated or distributable to the Managing
Partner and the Limited Partner (and other partners, if any, at such time) of
the Operating Partnership plus (iii) expenses for such sale or change of
control, and shall be paid subject to amounts reasonably reserved by the
Company's Board of Directors, at its sole discretion, for a specified business
purpose. The amount of such distribution of net proceeds will reduce, on a
dollar for dollar basis, the liquidation preference of the Class A Senior
Preferred Stock.
FORFEITURES
In the event that any shares of Company Common Stock are forfeited or do
not vest, as described below under "1997 Performance Equity Plan of CRSI" and
"Shares Issued and Outstanding," the Subscription Agreement provides that CRSI
will forfeit the number of shares of Company Common Stock held by CRSI necessary
to prevent CRSI from holding greater than 7% of the shares then issued and
outstanding. At any such time as shares of Company Common Stock are forfeited,
the forfeited shares will be returned to the Company and cancelled. So long as
the shares to be forfeited are not forfeited as of any record date for the
distribution of dividends by the Company, any dividends that have been declared
by the Company with respect to such shares net of any applicable taxes, together
with any accumulated net earnings from the investment of such dividends, will be
forfeited to the Company at such time as the shares of Company Common Stock are
forfeited.
1997 PERFORMANCE EQUITY PLAN OF CRSI
The 1997 Performance Equity Plan of CRSI (the "Performance Plan")
authorizes, subject to the approval of the CRSI shareholders, the grant of
318,000 shares of CRSI Stock in restricted stock awards to certain executive
officers and non-employee directors in CRSI. As a result of the Distribution,
and subject to the further approval of CRSI's shareholders of the Performance
Plan at CRSI's annual shareholders' meeting at which the Distribution will also
be considered, 63,600 shares of Company Common Stock will be issued on account
of CRSI Stock to be issued under the Performance Plan. Company Common Stock
issued with respect to the Performance Plan shares of CRSI Stock are subject to
forfeiture back to the Company under the terms of the Performance Plan as
described below.
The Performance Plan provides that the restricted stock awards will vest
upon the attainment of certain performance targets. The performance targets for
each year covered by the Plan (1997, 1998 and 1999) are based on growth in
adjusted earnings before interest, taxes, depreciation and amortization
("adjusted EBITDA") per share and share price (the adjusted EBITDA per share and
share price measures, as defined under the Performance Plan, take into account
Company adjusted EBITDA and the value of Company Common Stock).
Any shares of CRSI Stock which remain non-vested after the end of the
three-year program will be forfeited to CRSI and any shares of Company Common
Stock which remain non-vested at such time will be forfeited to the Company. All
shares forfeited will be cancelled by the respective issuer. Nonvested shares
awarded under the Performance Plan are also subject to forfeiture under the
terms of the Performance Plan if an employee terminates employment under certain
circumstances, or if a non-employee director of CRSI ceases to be a director.
In the event that shares of Company Common Stock are forfeited and
subsequently cancelled by the Company as required by the terms of the
Performance Plan, CRSI will be required to forfeit shares of Company Common
Stock in the amount necessary to ensure that its ownership of shares of Company
Common Stock does not exceed seven percent (7%) of the total issued and
outstanding shares of Company Common Stock. Any shares forfeited by CRSI in
accordance with this provision will be cancelled by the Company.
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<PAGE> 70
PRINCIPAL SHAREHOLDERS OF THE COMPANY
The following table sets forth certain projected information regarding the
beneficial ownership of Company Common Stock by each director and proposed
director of the Company, by the officers of the Company, by all directors,
officers and proposed directors and officers of the Company as a group, and by
each person who is expected to be the beneficial owner of 5% or more of the
outstanding Company Common Stock immediately following the completion of the
Distribution. The table is based on an estimated total of 1,067,000 shares of
Company Common Stock to be issued and outstanding following the Distribution,
which, in turn, is based on an estimate of the number of shares of CRSI Stock
outstanding on the Distribution Record Date and gives pro forma effect to the
completion of the Initial Transactions and the Distribution. Actual amounts may
differ based upon the number of shares of CRSI Stock which may be issued between
the date of this Prospectus and the Distribution Record Date (under various
employment agreements or other compensation plans, and/or upon the exercise of
currently exercisable stock options), the number of shares that are subject to
risk of forfeiture, and the distribution of whole shares of the Company Common
Stock in lieu of fractional shares. See "Shares Issued and Outstanding."
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OWNERSHIP
NAME AND ADDRESS COMPANY OF THE COMPANY AFTER
OF BENEFICIAL OWNER(1) COMMON STOCK DISTRIBUTION
- ------------------------------------------------------------- ------------ --------------------
<S> <C> <C>
Bank of America National Trust
and Savings Association
333 South Hope Street
Los Angeles, California 90071.............................. 102,786 9.6%
Cardinal Realty Services, Inc.
6954 Americana Parkway
Reynoldsburg, Ohio 43068................................... 74,689 7.0%
John B. Bartling, Jr.
6954 Americana Parkway
Reynoldsburg, Ohio 43068................................... 13,588 1.3%
Mark D. Thompson
6954 Americana Parkway
Reynoldsburg, Ohio 43068................................... 6,637 *
Paul R. Selid
6954 Americana Parkway
Reynoldsburg, Ohio 43068................................... 3,875 *
Craig Lipka
The Huntington Center
41 South High Street, 24th Floor
Columbus, Ohio 43215....................................... None --
Richard Lerner
The Huntington Center
41 South High Street, 24th Floor
Columbus, Ohio 43215....................................... None --
Jack A. Staph
The Huntington Center
41 South High Street, 24th Floor
Columbus, Ohio 43215....................................... None --
All directors, proposed directors and officers of the Company
as a group (6 people)...................................... 24,100 2.3%
</TABLE>
- ---------------
* Less than 1%.
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<PAGE> 71
SHARES ISSUED AND OUTSTANDING
Following the Distribution, the Company expects approximately 1,067,000
shares of Company Common Stock to be issued and outstanding, based on the
maximum number of shares of CRSI Stock expected to be outstanding on the
Distribution Date (including 112,062 shares of CRSI Stock issuable upon exercise
of outstanding stock options). The actual amounts, however, may differ as
described below, due to the following factors:
(i) 318,000 shares of restricted CRSI Stock (subject to forfeiture if
performance targets are not achieved) will be issued pursuant to the
Performance Plan. See "1997 Performance Equity Plan of CRSI." The
Performance Plan will not be effective, however, if approval of the plan is
not obtained by CRSI from the CRSI shareholders at CRSI's annual meeting of
shareholders at which CRSI's shareholders will also vote upon the
Distribution. The maximum number of shares of CRSI Stock that could be
outstanding as of the Distribution Date would then decrease by 318,000,
which would decrease the number of shares of Company Common Stock to be
issued pursuant to the Distribution by 63,600. In addition, the number of
shares projected to be held by Messrs. Bartling and Thompson (as set forth
in "Principal Shareholders of the Company") would decrease by 14,400, or
1.4%, and 9,600, or .9%, respectively;
(ii) Under the merger agreement pursuant to which CRSI acquired
Lexford Properties, Inc. ("Lexford"), 450,000 shares of CRSI Stock held by
former Lexford shareholders are subject to forfeiture in the event CRSI's
combined property management operations do not achieve certain
profitability criteria. The contingent shares will cease to be subject to
risk of forfeiture if and when specified increases in the profitability of
CRSI's property management operations are achieved during the three fiscal
years following the merger (i.e., on or before the end of CRSI's 1999
fiscal year). If, during the specified period, profit from property
management operations increases $1.8 million or more in any single year
from 1995 levels, the former Lexford shareholders would own 150,000 of the
contingent shares free of contingencies, and if the increase is $4.0
million or more in any single year from 1995 levels, the former Lexford
shareholders would own the entire 450,000 shares of CRSI Stock free from
any risk of forfeiture. As a result, 90,000 shares of Company Common Stock
expected to be issued in the Distribution will be subject to forfeiture;
and
(iii) Certain shares of CRSI Stock that have been issued (A) pursuant
to certain agreements or compensation arrangements with individual officers
or directors of CRSI, or (B) as bonuses or grants of restricted stock, may
be subject to risk of forfeiture or vesting conditions. Such vesting
requirements typically involve the continuing service of the CRSI director
or officer holding the restricted stock, in certain cases coupled with CRSI
market capitalization targets. The aggregate number of shares of CRSI Stock
expected to be outstanding and to remain subject to such risks of
forfeiture or vesting conditions (in addition to those shares described in
subparagraphs (i) and (ii) above) as of the Distribution Date is 63,000,
which could have an effect on an aggregate of 12,600 shares of Company
Common Stock expected to be issued pursuant to the Distribution.
In the event that any shares of Company Common Stock are forfeited or do
not vest, as described in subparagraphs (i), (ii) and (iii) above, the forfeited
shares will be returned to the Company. So long as the shares to be forfeited
are not forfeited as of any record date for the distribution of dividends by the
Company, any dividends that have been declared by the Company with respect to
such shares, together with any accumulated net earnings from the investment of
such dividends, will be forfeited to the Company at such time as the shares of
Company Common Stock are forfeited.
In order to avoid a "reconsolidation" of CRSI and the Company, the
Subscription Agreement provides that CRSI will forfeit the number of shares of
Company Common Stock held by CRSI necessary to prevent CRSI from holding greater
than 7% of the shares then issued and outstanding. The shares of Company Common
Stock to be forfeited by CRSI will be returned to the Company, together with any
declared dividends with respect to such forfeited shares, and any accumulated
net earnings relating to such dividends, in the same manner as set forth in the
immediately preceding paragraph.
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<PAGE> 72
CAPITAL STOCK OF THE COMPANY
GENERAL
The Company was formed as an Ohio corporation on the filing of its original
articles of incorporation on April 4, 1997. The Company's original articles of
incorporation will be amended upon the filing of the Amended and Restated
Articles of Incorporation (the "Articles of Incorporation"), which will be filed
with the Ohio Secretary of State's office as soon as practicable after obtaining
shareholder approval of the Distribution. The Company's Articles of
Incorporation authorize the issuance of up to 2,500,000 shares of no par value
Company Common Stock, 7,500 shares of Class A Senior Preferred Stock and 500,000
shares of no par value Preferred Stock (the "Blank Check Preferred Stock").
Currently, one hundred shares of Company Common Stock are issued and
outstanding. Immediately after consummation of the capital contribution to the
Company by CRSI, approximately 4,500 shares of Class A Senior Preferred Stock
will be issued and outstanding and up to 1,067,000 shares of Company Common
Stock will be issued and outstanding. If all of the Additional Interests are
contributed by CRSI to the Company, a maximum of 1,000 additional shares of
Class A Senior Preferred Stock will be issued to CRSI.
There is no established trading market for the Company Common Stock. The
Company Common Stock is initially expected to be traded on the OTC Bulletin
Board, which is a thin, illiquid market.
Fifth Third Bank will act as transfer agent and registrar for the Company
Common Stock.
The following description of the Company Common Stock, Preferred Stock and
of certain provisions of the Company's Articles of Incorporation is a summary of
and is qualified in its entirety by reference to the Articles of Incorporation,
a copy of which is filed as an exhibit to the Registration Statement of which
this Prospectus is a part. See "Available Information."
COMPANY COMMON STOCK
Subject to the preferences of the Preferred Stock, the holders of the
Company Common Stock are entitled to receive ratably such dividends, when, as
and if declared by the Board of Directors of the Company, out of funds legally
available therefor. The holders of Company Common Stock, upon any liquidation,
dissolution or winding-up of the Company, are entitled to share ratably in any
assets remaining after payment in full of all liabilities of the Company and all
preferences of the holders of any outstanding Preferred Stock. The Company
Common Stock possesses ordinary voting rights, each share entitling the holder
thereof to one vote. The holders of Company Common Stock do not have preemptive
rights. As of the date of this Prospectus, the holders of Company Common Stock
have cumulative voting rights in the election of directors, however, these
rights will be eliminated pursuant to the Ohio General Corporation Law upon the
filing of the Company's Amended and Restated Articles of Incorporation as
described above in this Section under "-- General." All of the Company Common
Stock now outstanding is, and when issued to the shareholders of CRSI as of the
Distribution Date in the manner described in this Prospectus will be, fully paid
and nonassessable.
PREFERRED STOCK
Class A Senior Preferred Stock to be Held by CRSI. CRSI will be the sole
holder of the 4,500 shares of Class A Senior Preferred Stock to be issued and
outstanding from and after the Distribution Date and will be entitled to receive
ratably, when, and as declared by the Board of Directors of the Company, out of
funds legally available therefor, cumulative preferential cash dividends of
$1,620,000 (or $360 per share) per year, payable quarterly on each January 15,
April 15, July 15 and October 15, or, if any such date is not a business day, on
the next succeeding business day, to holders of record at the close of business
on the first day of each January, April, July or October. Dividends on shares of
Class A Senior Preferred Stock will accrue whether or not there are funds
legally available for the payment of such dividends and whether or not such
dividends are declared. Accrued but unpaid dividends on shares of Class A Senior
Preferred Stock will cumulate as of the dividend payment date on which they
first become payable, but no interest will accrue on accumulated but unpaid
dividends on shares of Class A Senior Preferred Stock.
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<PAGE> 73
Whenever dividends on the Class A Senior Preferred Stock have been in
arrears for six or more consecutive quarterly periods, the holders of Class A
Senior Preferred Stock will be entitled to vote for the election of one
additional director of the Company at a special meeting called by the holders of
record of at least 10% of the Class A Senior Preferred Stock or at the next
annual meeting of shareholders, and at each subsequent annual meeting until all
dividends accumulated on such Class A Senior Preferred Stock for the past
dividend periods and the current dividend period have been fully paid or
declared and a sum sufficient for the payment thereof has been set aside for
payment. In such event, the number of directors comprising the Company's Board
of Directors shall be increased to accommodate the additional director and, if
necessary in order to maintain a majority of Independent Directors in accordance
with Article Tenth of the Articles of Incorporation.
So long as any Class A Senior Preferred Stock remains outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least a majority of the shares of Class A Senior Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting (voting
separately as a single class), consummate a "change of control transaction." A
"change of control transaction" is any transaction requiring approval of the
holders of the Company Common Stock and involving the sale of all or
substantially all of the assets of the Company or the merger or consolidation of
the Company with or into another corporation or entity or the acquisition by any
person or entity directly or indirectly of securities of the Company
representing 50% or more of the voting power of any class of the Company's
outstanding voting securities.
So long as any Class A Senior Preferred Stock remains outstanding, the
Company will not, without the affirmative vote or consent of the holders of at
least a majority of the shares of Class A Senior Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting (voting
separately as a single class), (i) authorize or create or increase the
authorized or issued amount of, any class or series of capital stock ranking
senior to or on a parity with the Class A Senior Preferred Stock with respect to
payment of dividends or the distribution of assets upon liquidation, dissolution
or winding up, or (ii) amend, alter or repeal the provisions of the Company's
Articles of Incorporation, whether by merger, consolidation or otherwise, so as
to materially and adversely affect any right, preference, privilege or voting
power of the Class A Senior Preferred Stock or the holders thereof; provided,
however, that any increase in the amount of the authorized Class A Senior
Preferred Stock or the creation or issuance of any other class or series of
Preferred Stock, in each case ranking junior to the Class A Senior Preferred
Stock, will not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers. The shares of Class A Senior Preferred
Stock issued to CRSI will be fully paid and nonassessable.
The holders of Class A Senior Preferred Stock shall have no other voting
rights, unless otherwise expressly required by the Ohio General Corporation Law
or the Company's Articles of Incorporation as described herein, in which event
each share of Class A Senior Preferred Stock shall be entitled to one vote.
The holders of Class A Senior Preferred Stock, upon any liquidation,
dissolution or winding-up of the Company, are entitled to be paid out of the
assets of the Company legally available for distribution to its shareholders a
liquidation preference of $3,000 per share (subject to any adjustments upon
redemption of shares of the Class A Senior Preferred Stock), plus an amount
equal to any accrued and unpaid dividends thereon to the date of payment, before
any distribution of assets is made to the holders of Company Common Stock.
At any time, and from time to time, the Company will have the right to
redeem, in whole or in part, the outstanding shares of Class A Senior Preferred
Stock, on not less than 30 days, nor more than 60 days, prior notice, for a
redemption price equal to the liquidation preference (initially, $3,000 per
share) as of the record date for redemption. The redemption price shall be paid
in cash out of the assets of the Company legally available for distribution.
Dividends will cease to accrue on the shares of Class A Senior Preferred Stock
to be redeemed as of and on the date fixed for their redemption; provided,
however, that if the shares of Class A Senior Preferred Stock are not redeemed
on such date, dividends will continue to accrue. Any shares of Class A Senior
Preferred Stock redeemed by the Company shall be retired and cancelled promptly
after the acquisition of the shares.
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<PAGE> 74
If fewer than all of the outstanding shares of Class A Senior Preferred
Stock are to be called for redemption, the shares to be called will be selected
by the Company from outstanding shares of Class A Senior Preferred Stock not
previously called or redeemed by lot or pro rata (as nearly as may be) or by any
other method determined by the Company's Board of Directors, in its sole
discretion, to be equitable.
The stated value of the shares of Class A Senior Preferred Stock is $1,000
per share, or $4,500,000 in the aggregate, which is less than the historical
book value of the Interests initially contributed to the Company by the CRSI
Group, and which CRSI believes is substantially less than the fair market value
of those Interests. The liquidation preference of $3,000 per share, or
$13,500,000 in the aggregate, is based on a multiple of three times the stated
value, which liquidation preference CRSI believes, based in part upon historical
Distributable Funds from Partnership Operations, to be a more accurate
reflection of the fair market value of the Interests than is the book value of
the Interests. The amount of the expected annual distributions of $1,620,000 is
determined by reference to the liquidation preference (with a coupon rate of
12%), and the prices to be paid to holders of the Class A Senior Preferred Stock
for any redemptions or upon liquidation will equal 100% of the liquidation
preference amount.
If CRSI contributes all of the Additional Interests to the Company, the
Company will issue a total of 1,000 additional shares of Class A Senior
Preferred Stock to CRSI, resulting in an aggregate of 5,500 issued and
outstanding shares of Class A Senior Preferred Stock in a total stated amount of
$5,500,000 and a total liquidation preference of $16,500,000 and entitled to
cumulative annual dividends of $1,980,000.
For additional terms of the Class A Senior Preferred Stock, see
"Subscription Agreement."
Blank Check Preferred Stock. The Articles of Incorporation also authorize
the Board of Directors to provide for the issuance of 500,000 shares of
preferred stock in one or more series, to establish the number of shares in each
series and to fix the designation, powers, preferences and rights of each such
series and the qualifications, limitations or restrictions thereof. The issuance
of such Blank Check Preferred Stock could have the effect of delaying or
preventing a change in control of the Company. The Board of Directors has no
present plans to issue any Blank Check Preferred Stock.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares. Specifically,
not more than 50% in value of the Company's outstanding shares may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year (other than the
first year of the Company's existence) or during a proportionate part of a
shorter taxable year, and the Company must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year (other than that first year)
or during a proportionate part of a shorter taxable year. See "Federal Income
Tax Considerations--Requirements for Qualification."
Because the Company expects to qualify as a REIT, the Articles of
Incorporation limit the acquisition of shares of the Company's capital stock
(the "Ownership Limit"). The Ownership Limit provides that, subject to certain
exceptions set forth in the Company's Articles of Incorporation, no person may
own, or be deemed to own, by vote or value, by virtue of the applicable
attribution provisions of the Code, more than 9% of any class of the outstanding
shares of the Company. The Board of Directors may, but is not required to, waive
the Ownership Limit if it determines that greater ownership will not jeopardize
the Company's status as a REIT. As a condition of that waiver, the Board of
Directors may require opinions of counsel satisfactory to it and undertakings or
representations from the applicant with respect to preserving the REIT status of
the Company.
If any purported transfer of capital shares of the Company or any other
event would otherwise result in any person or entity violating the Ownership
Limit or would cause the Company to be beneficially owned by fewer than 100
persons, that transfer will be void and of no force or effect as to the number
of shares in excess of the Ownership Limit, and the purported transferee (the
"Prohibited Transferee") will acquire no right or interest (or, in the case of
any event other than a purported transfer, the person or entity holding record
title to shares in excess of the Ownership Limit (the "Prohibited Owner") will
cease to own any right or interest) in
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the excess shares. In addition, if any purported transfer of shares of the
Company or any other event would cause the Company to become "closely held"
under the Code or otherwise to fail to qualify as a REIT under the Code, that
transfer will be void and of no force or effect as to the number of shares in
excess of the number that could have been transferred without that result, and
the Prohibited Transferee will acquire no right or interest (or, in the case of
any event other than a transfer, the Prohibited Owner will cease to own any
right or interest) in the excess shares. Also, if any purported transfer of
shares of the Company or any other event would otherwise cause the Company to
own, or be deemed to own by virtue of the applicable attribution provisions of
the Code, 10% or more, by vote or value, of the ownership interests in any
lessee or in any sublessee, that transfer or event will be void and of no force
or effect as to the number of shares in excess of the number that could have
been transferred or affected by that event without that result, and the
Prohibited Transferee will acquire no right or interest (or, in the case of any
event other than a transfer, the Prohibited Owner will cease to own any right or
interest) in the excess shares.
Any excess shares arising from a prohibited transfer described above will
be transferred automatically to a trust, the beneficiary of which will be a
qualified charitable organization selected by the Company (the "Beneficiary").
The trustee of the trust, who will be designated by the Company and be
unaffiliated with the Company and any Prohibited Owner, will be empowered to
sell the excess shares to a qualified person or entity and to distribute to the
applicable Prohibited Transferee an amount equal to the lesser of the price paid
by the Prohibited Transferee for those excess shares or the sale proceeds
received for those shares by the trust. The trustee will be empowered to sell
any excess shares resulting from any event other than a transfer, or from a
transfer for no consideration, to a qualified person or entity and distribute to
the applicable Prohibited Owner an amount equal to the lesser of the fair market
value of those excess shares on the date of the triggering event or the sale
proceeds received by the trust for those excess shares. Prior to a sale of any
excess shares by the trust, the trustee will be entitled to receive, in trust
for the benefit of the Beneficiary, all dividends and other distributions paid
by the Company with respect to those shares, and also will be entitled to
exercise all voting rights with respect to those shares.
All certificates representing shares of the Company will bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as may be required by
the Code or Treasury Regulations) of the outstanding shares of the Company must
file no later than January 30 of each year a written notice with the Company
containing the information specified in the Articles of Incorporation. In
addition, each shareholder will be required, upon demand, to disclose to the
Company in writing such information as the Company may request in order to
determine the effect, if any, of that shareholder's actual and constructive
ownership on the Company's status as a REIT and to ensure compliance with the
Ownership Limit.
The Ownership Limit may have the effect of precluding an acquisition of
control of the Company without approval of the Board of Directors.
OHIO ANTI-TAKEOVER PROVISIONS
The Company has elected not to be subject to Ohio's "Control Share
Acquisition" Act (Section 1701.831 of the Ohio Revised Code), in light of the
substantial share transfer restrictions included in the Company's Articles of
Incorporation. Section 1707.041 of the Ohio Revised Code, which regulates
certain "control bids" for Ohio corporations, does not contain an election
provision and remains applicable to the Company.
Under the Ohio General Corporation Law, unless an Ohio corporation's
articles or regulations otherwise provide, any "control share acquisition" of an
"issuing public corporation" shall be made only with the prior authorization of
its shareholders in accordance with the Ohio control share acquisition statute,
Section 1701.831 of the Ohio Revised Code. An Ohio corporation may, in the
alternative, include in its articles of incorporation or regulations
restrictions on transfer of its shares in connection with a "control share
acquisition," including procedures for obtaining the consent of shareholders or
directors. The Articles of Incorporation of the Company provide that the Ohio
control share acquisition statute does not apply to the
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Company so long as the alternative shareholder consent procedures set forth in
Article Seventh of the Company's Articles of Incorporation are in effect.
Article Seventh, Section A of the Company's Articles of Incorporation
includes, to a large extent, a provision similar to the Ohio control share
acquisition statute. Article Seventh, Section B sets forth procedures for
obtaining shareholder consent of "Control Share Acquisitions" consistent with
the provisions of the Ohio control share acquisition statute, subject to the
right of the Company's Board of Directors to reject proposals that do not meet
certain standards set forth in Article Seventh, Section C. Article Seventh,
Section A defines a "Control Share Acquisition" as any acquisition, directly or
indirectly, of shares of the Company which, when added to all other shares of
the Company owned or controlled by the acquiror, would entitle the acquiror
alone or with others to exercise or direct the exercise of voting power in the
Company in the election of directors within any of the following ranges of
voting powers: (i) one-fifth or more but less than one-third, (ii) one-third or
more but less than a majority, and (iii) a majority or more. A bank, broker,
nominee, trustee, or other person who acquires shares in the ordinary course of
business for the benefit of others in good faith and not for the purpose of
circumventing Article Seventh, Section A shall, however, be deemed to have
voting power only of shares in respect of which such person would be able to
exercise or direct the exercise of votes without further instruction from others
at a meeting of shareholders called under Article Seventh, Section C.
Article Seventh, Section B requires that a person proposing to make a
Control Share Acquisition deliver a notice to the Company describing, among
other things, the terms of the proposed acquisition and reasonable evidence that
the proposed Control Share Acquisition would not be contrary to law and that the
person who gave the notice has the financial capacity to make such acquisition.
The directors of the Company would be required to call and hold, within 50 days
after receipt of the notice, a special meeting of shareholders to vote on the
proposed Control Share Acquisition. However, the directors would have no
obligation to call such a meeting if they had determined that (i) the notice was
not given in good faith, (ii) the proposed Control Share Acquisition would not
be in the best interests of the Company and its shareholders or (iii) the
proposed Control Share Acquisition could not be consummated for financial or
legal reasons. The notice to shareholders of the special meeting must include or
be accompanied by both the notice submitted to the Company by the person
proposing to make the Control Share Acquisition and a statement by the Company
of its position or recommendation with respect to such acquisition or a
statement that no position or recommendation is being taken or made.
A Control Share Acquisition must be approved by the affirmative vote of
both (i) a majority of the outstanding voting power of the Company and (ii) a
majority of that portion of such voting power excluding any "interested shares"
(that is, shares held by the acquiring person, executive officers of the
Company, employees of the Company who are also directors, and persons or groups
who acquire shares of the Company after public announcement of a Control Share
Acquisition in transactions aggregating consideration of more than $250,000 or
0.5% of the voting power of the Company Common Stock). Each certificate for the
new Company Common Stock will contain a legend stating that such shares are
subject to the provisions of Article Seventh. Article Seventh, Section F also
provides that the issuance or transfer of any shares in violation of Article
Seventh will be null and void. In the event the Company is not permitted to
treat an issuance or transfer of shares in violation of Article Seventh as null
and void, then Article Seventh, Section F, provides that shares acquired in
violation of Article Seventh will be treated as the equivalent of treasury
shares of the Company and, as such, will not be entitled to exercise any
shareholder rights or receive dividends.
Any change of control transaction is additionally subject to the approval
of at least a majority of the shares of Class A Senior Preferred Stock
outstanding at the time. See "Capital Stock of the Company--Preferred Stock."
In addition, the Articles of Incorporation authorize the Board of Directors
to provide for the issuance of shares of Blank Check Preferred Stock in one or
more series, to establish the number of shares in each series and to fix the
designation, powers, preferences and rights (including voting rights, if any) of
each such series and the qualifications, limitations or restrictions thereof.
The issuance of such Blank Check Preferred Stock could have the effect of
delaying or preventing a change in control of the Company.
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SHARES AVAILABLE FOR FUTURE SALE
On the completion of the Distribution, the Company expects to have up to
1,067,000 shares of Company Common Stock outstanding. All of the Company Common
Stock distributed in the Distribution will be freely tradeable, by persons other
than Affiliates of the Company, without restriction under the Securities Act.
Persons who are Affiliates of the Company will be permitted to sell their
Company Common Stock only pursuant to an effective registration statement under
the Securities Act or an exemption from the registration requirements of the
Securities Act, such as the exemptions provided by Section 4(1) of the
Securities Act or Rule 144 thereunder. It is not expected that Rule 144 will be
available for the sale of Company Common Stock by Affiliates of the Company
until at least 90 days after the Company Common Stock becomes subject to the
periodic reporting requirements of the Exchange Act. All of the outstanding
shares of Preferred Stock will be "restricted" securities within the meaning of
Rule 144 under the Securities Act and may not be sold under the Securities Act
except pursuant to an effective registration statement or unless an exemption
from registration is available.
Prior to the date of this Prospectus, there has been no public market for
the Company Common Stock. Trading of Company Common Stock is expected to
commence following the completion of the Distribution on the OTC Bulletin Board,
which is a thin, illiquid market. There can be no assurance as to the prices at
which Company Common Stock will trade after the Distribution Date or even that
an orderly trading market for the Company Common Stock will develop or continue.
No prediction can be made as to the effect, if any, that future sales of shares
or the availability of shares for future sale will have on the market price
prevailing from time to time. Sales of substantial amounts of Company Common
Stock (including shares issued on the exercise of options which could be granted
in the future), or the perception that such sales could occur, could adversely
affect the market price of Company Common Stock. See "Risk Factors--Absence of
Prior Public Market for, and Possible Volatility of Price of, the Company Common
Stock."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the Federal income tax considerations
that materially affect a prospective shareholder who is a U.S. citizen or
resident or a tax-exempt organization (including tax qualified pension plans and
individual retirement accounts). The discussion is general in nature and not
exhaustive of all possible tax considerations, nor does the discussion give a
description of any state, local, or foreign tax considerations. The discussion
does not address all aspects of Federal income tax law that may be relevant to a
prospective shareholder of the Company in light of his or her particular
circumstances or to certain types of shareholders (including insurance
companies, financial institutions or broker-dealers, and (except to the limited
extent discussed herein) foreign corporations and persons who are not citizens
or resident of the United States) subject to special treatment under the Federal
income tax laws.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING
AND EACH PROSPECTIVE SHAREHOLDER OF THE COMPANY IS ADVISED TO CONSULT WITH HIS
OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF
THE OWNERSHIP AND SALE OF COMPANY COMMON STOCK IN AN ENTITY ELECTING TO BE TAXED
AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF
SUCH OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN APPLICABLE TAX
LAWS.
GENERAL
The Company expects that it will be organized and will operate in such a
manner so as to qualify for taxation as a REIT under Sections 856 through 860 of
the Code commencing with its taxable year ending December 31, 1997, and the
Company intends to operate in such a manner in the future. No assurance can be
given, however, that the Company will operate in a manner so as to qualify or
remain qualified as a REIT. In this regard, the Company has not requested, and
does not expect to request, a ruling from the IRS or a tax opinion regarding its
status as a REIT.
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The discussion herein is based upon the Code, as currently in effect,
applicable Treasury Regulations adopted thereunder, reported judicial decisions,
and IRS rulings, all as of the date hereof and certain factual representations
and assumptions made by the Company concerning the organization and proposed
operation of the Company. There can be no assurance, however, that the legal
authorities on which this discussion is based will not change, perhaps
retroactively, that the Company's representations and factual assumptions
underlying this discussion will be accurate, or that there will not be a change
in circumstances of the Company that would affect this discussion. Accordingly,
there can be no assurance that the IRS will not challenge the REIT status of the
Company.
TAXATION OF THE COMPANY AS A REIT
If the Company qualifies for taxation as a REIT and distributes to its
shareholders at least 95% of its REIT taxable income, it generally will not be
subject to Federal corporate income tax on the portion of its ordinary income or
capital gain that is timely distributed to its shareholders. This treatment
substantially eliminates the "double taxation" (at the corporate and shareholder
levels) that generally results from an investment in a corporation. If the
Company were to fail to qualify as a REIT, it would be taxed at rates applicable
to corporations on all of its income, whether or not distributed to its
shareholders. Even if the Company qualifies as a REIT, it may be subject to
Federal income or excise tax as follows:
(i) The Company will be taxed at regular corporate rates on REIT
taxable income and net capital gains not distributed to its shareholders;
(ii) Under certain circumstances, the Company may be subject to the
"alternative minimum tax" on its items of tax preference, if any;
(iii) If the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property,
other than foreclosure property, held primarily for sale to customers in
the ordinary course of business), such net income will be subject to a 100%
tax;
(iv) If the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), and has nonetheless
maintained its qualification as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the net income
attributable to the greater of the amount by which the Company fails the
75% or 95% test, multiplied by a fraction intended to reflect the Company's
profitability;
(v) If the Company should fail to distribute during each calendar year
at least the sum of (A) 85% of its REIT ordinary income for such year, (B)
95% of its REIT capital gain net income for such year and (C) any
undistributed taxable income from prior years, it would be subject to a 4%
excise tax on the excess of such required distribution over the amounts
actually distributed;
(vi) If the Company has (A) net income from the sale or other
disposition of "foreclosure property" (which is, in general, property
acquired by the Company by foreclosure or otherwise on default on a loan
secured by the property) which is held primarily for sale to customers in
the ordinary course of business or (B) other nonqualifying income from
foreclosure property, it will be subject to tax on such income at the
highest corporate rate (currently 35%); and
(vii) If the Company acquires assets from a C corporation (i.e.,
generally a corporation subject to tax at the corporate level) in a
transaction in which the basis of the acquired assets in the Company's
hands are determined by reference to the basis of the assets (or any other
property) in the hands of the C corporation, and the Company recognizes net
gain on the disposition of such assets in any taxable year during the
10-year period (the "Restriction Period") beginning on the date on which
such assets were acquired by the Company then, pursuant to guidelines
issued by the IRS, the excess of the fair market value of such property at
the beginning of the applicable Restriction Period over the Company's
adjusted basis in such property as of the beginning of such Restriction
Period will be subject to a tax at the highest regular corporate rate.
Because the fair market value of the assets contributed to the Company by
CRSI will equal the tax basis of such assets at such time, these rules will
not apply to the assets acquired by the Company from CRSI prior to the
Distribution Date.
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REQUIREMENTS FOR QUALIFICATION AS A REIT
General. The Code defines a REIT as a corporation, trust or association:
(i) which is managed by one or more trustees or directors;
(ii) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(iii) which would be taxable as a domestic corporation but for
Sections 856 through 859 of the Code;
(iv) which is neither a financial institution nor an insurance company
subject to certain provisions of the Code;
(v) which has the calendar year as its taxable year;
(vi) the beneficial ownership of which is held by 100 or more persons;
(vii) during the last half of each taxable year not more than 50% in
value of the outstanding shares of which is owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain
exempt entities);
(viii) which makes an election to be a REIT (or made such an election
in a previous taxable year that is still valid) and satisfies all relevant
filing and other administrative requirements that must be met in order to
maintain REIT status; and
(ix) which meets certain income and asset tests, described below.
Conditions (i) through (v), inclusive, must be met during the entire taxable
year and condition (vi) must be met during at least 335 days of a taxable year
of 12 months, or during a proportionate part of a taxable year of less than 12
months. However, conditions (vi) and (vii) will not apply until after the first
taxable year for which an election is made to be taxed as a REIT.
The Company's taxable year will be the calendar year. Following the
consummation of the Distribution, the Company will have satisfied the share
ownership requirements set forth in (vi) and (vii) above (respectively, the "100
shareholder requirement" and "five or fewer requirement"). In order to ensure
continuing compliance with the share ownership requirements, the Company has
placed certain restrictions on the transfer of its Company Common Stock to
prevent further concentration of share ownership. See "Capital Stock of the
Company--Restrictions on Transfer." Moreover, to evidence compliance with these
requirements, the Company must maintain records which disclose the actual
ownership of its outstanding Company Common Stock. In fulfilling its obligation
to maintain these records, the Company must, and will, demand written statements
each year from the record holders of designated percentages of its Company
Common Stock disclosing the actual owners of such Company Common Stock. A list
of those persons failing or refusing to comply with such demand must be
maintained as a part of the Company's records. A shareholder failing or refusing
to comply with the Company's written demand must submit with his or her tax
return a similar statement and certain other information.
Asset Tests. In order for the Company to maintain its qualification as a
REIT, at the close of each quarter of its taxable year, it must satisfy three
tests relating to the nature of its assets:
(i) At least 75% of the value of the Company's total assets must be
represented by any combination of interests in real property, interests in
mortgages on real property, shares in other REITs, cash, cash items, and
certain government securities.
(ii) Not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class.
(iii) Of the investments included in the 25% asset class, the value of
any one issuer's securities owned by the Company may not exceed 5% of the
value of the Company's total assets, and the Company
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may not own more than 10% of any one issuer's outstanding voting securities
(excluding securities of a qualified REIT subsidiary (as defined in the
Code) or another REIT).
Where the Company owns an Interest in a Partnership, it will be treated for
purposes of the asset tests as owning a proportionate part of the Partnership's
assets. See "--Tax Aspects of the Company's Investment in the
Partnerships--General." Likewise, although the Company does not currently have
any subsidiaries, if the Additional Interests are contributed to the Company,
the SPCs will be wholly-owned subsidiaries. Code Section 856(i) provides that a
corporation which is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities and items of income, deduction
and credit of a "qualified REIT subsidiary" shall be treated as assets,
liabilities and such items (as the case may be) of the real estate investment
trust. Thus, in applying the requirements described herein, the Company's SPCs,
as "qualified REIT subsidiaries," will be ignored, and all assets, liabilities
and items of income, deduction and credit of such SPCs will be treated as
assets, liabilities and items of the Company. The Company's investment in the
Properties through its indirect Interests in the Partnerships (through its
general partner's interest in the Operating Partnership) and through its capital
stock in the SPCs, if and when contributed, will constitute investments in real
property for purposes of the 75% asset test. As such, the Company expects that
more than 75% of the value of its assets will be of the type needed to meet the
75% of assets test.
The Company does not expect to hold any securities representing more than
10% of any one issuer's voting securities (except, (i) in the case of a
qualified REIT subsidiary, and (ii) if and when contributed, the SPCs) nor does
the Company expect to hold securities of any one issuer exceeding 5% of the
value of the Company's gross assets.
If the Company inadvertently fails one or more of the asset tests at the
end of a calendar quarter, such a failure would not cause it to lose its REIT
status, provided that (i) it satisfied all of the asset tests at the close of a
preceding calendar quarter, and (ii) the discrepancy between the values of the
Company's assets and the standards imposed by the asset test either did not
exist immediately after the acquisition of any particular asset or was not
wholly or partly caused by such an acquisition. If the condition described in
clause (ii) of the preceding sentence was not satisfied, the Company could still
avoid disqualification by eliminating any discrepancy within 30 days after the
close of the calendar quarter in which it arose.
Income Tests. In order for the Company to maintain its qualification as a
REIT, it must satisfy three separate percentage tests relating to the source of
its gross income in each taxable year. For purposes of these income tests, where
the Company invests in a partnership, the Company will be treated as receiving
its proportionate share of the gross income of the partnership, and such gross
income will retain the same character in the hands of the Company as it had in
the hands of the partnership. See "--Tax Aspects of the Company's Investment in
the Partnerships--General."
(i) The 75% Test. At least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from specified real estate sources, including "rents from
real property" and interest and certain other income earned from mortgages
on real property, gain from the sale of real property or mortgages (other
than in prohibited transactions) or income from qualified types of
temporary investments.
(ii) The 95% Test. At least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from the same items which qualify under the 75% income test
or from dividends, interest and gain from the sale or disposition of stock
or securities, or from any combination of the foregoing.
(iii) The 30% Test. Less than 30% of the Company's gross income
(including gross income from prohibited transactions) for each taxable year
must be derived from a gain in connection with the sale or other
disposition of stock or securities held for less than one year, property in
a prohibited transaction and real property held for less than four years
(other than involuntary conversions and foreclosure property).
Rents received by the Company will qualify as "rents from real property"
for purposes of the 75% and 95% income tests if the following requirements are
met:
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(i) The amount of rent received must generally not be based in whole
or in part on the income or profits derived by any person from such
property. However, amounts received or accrued generally will not be
excluded from the term "rents from real property" solely by reason of being
based on a fixed percentage or percentages of receipts or sales, or if they
are based on the net income or profits of the tenant and the tenant derives
substantially all of its income with respect to such property from the
leasing or subleasing of substantially all of such property and such tenant
receives from subtenants only amounts which would be treated as rents from
real property if received directly by the Company.
(ii) Rents must not be received from a tenant in which the Company or
a direct or indirect owner of 10% or more of the Company, owns directly or
constructively a 10% or greater interest in the assets or net profits of
such tenant (a "Related Party Tenant").
(iii) The Company must not operate or manage its property or furnish
or render directly services to its tenants unless such services are of a
type that a tax-exempt organization can provide its tenants without causing
its rental income to be unrelated business taxable income under the Code
("Qualifying Services"). If such services are not Qualifying Services, such
services must be rendered by an "independent contractor" (as defined in
Section 856 of the Code) that is adequately compensated and from whom the
Company derives no income. Receipts for services furnished (whether or not
rendered by an independent contractor) that are not customarily provided to
tenants of properties of a similar class in the geographic market in which
the Company's property is located ("Noncustomary Services") will not
qualify as rents from real property.
(iv) Rent attributable to personal property leased in connection with
a lease of real property will not qualify as "rents from real property" if
such rent is greater than 15% of the total rent received under the lease.
None of the Partnerships currently charge rent for any property that is
based in whole or in part on the income or profits of any person (except by
reason of being based on a percentage of receipts or sales), nor does CRSI
intend, through its Managing Interests, to cause the Partnerships to do so in
the future. Except for an insignificant amount, none of the Partnerships
currently lease personal property to their tenants, nor does CRSI intend,
through its Managing Interests, to cause the Partnerships to do so in the future
(except for an insignificant amount). The Company does not now, nor does CRSI
intend through its Managing Interests to cause the Partnerships to own, directly
or indirectly, 10% or more of any tenant. Although the Company will be deemed to
provide certain management services through Manager, an entity that will not
qualify as an independent contractor under the REIT rules, the Company believes
that these services are usual and customary management services provided by
landlords in the geographic areas in which the Company owns property, that such
services are not primarily for the convenience of its residents and that such
services will qualify as customary services. To the extent the provision of
services would constitute Noncustomary Services, the Company will hire
independent contractors (as defined in Section 856 of the Code), from which the
Company derives no income, to perform such services.
Based on the foregoing, the rents should qualify as "rents from real
property" for purposes of the 75% and 95% income tests. As described above, the
foregoing conclusions as to the qualification of the Company to be taxed as a
REIT are based upon an analysis of all the facts and circumstances and upon
rulings and judicial decisions involving situations that are considered to be
analogous, as well as representations by the Company and the Partnerships and
assumptions that are described above. Accordingly, there cannot be complete
assurance that the IRS will not assert successfully a contrary position and,
therefore, prevent the Company from qualifying for taxation as a REIT.
If the sum of the income realized by the Company (whether directly or
through its interest in the Partnerships) which does not satisfy the
requirements of the 75% and the 95% gross income tests (collectively,
"Non-Qualifying Income"), exceeds 5% of the Company's gross income for any
taxable year, the Company's status as a REIT would be jeopardized. The Company
believes that the amount of its Non-Qualifying Income will not exceed 5% of the
Company's annual gross income for any taxable year.
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If the Company fails to satisfy one or both of the 75% or 95% income tests
for any taxable year, it may still qualify as a REIT in such year if (i) it
attaches a schedule of the source and nature of each item of its gross income to
its federal income tax return for such year; (ii) the inclusion of any incorrect
information in its return was not due to fraud with intent to evade tax; and
(iii) the Company's failure to meet such tests is due to reasonable cause and
not due to willful neglect. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. Even if these relief provisions apply, the Company will still be
subject to a tax imposed with respect to the excess net income. See "--Taxation
of the Company as a REIT." No such relief is available for violations of the 30%
income test.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends) to
its shareholders in an amount at least equal to (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and excluding net capital gain); and (ii) 95% of the net income (after
tax), if any, from foreclosure property, minus (B) the sum of certain items of
noncash income. In addition, if the Company disposes of any asset during its
Restriction Period, the Company will be required to distribute at least 95% of
the built-in gain (after tax), if any, recognized on the disposition of such
asset. Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before the Company timely files its
tax return for such year and if paid on or before the first regular dividend
payment after such declaration. To the extent that the Company does not
distribute all of its net capital gain or distributes at least 95%, but less
than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax
on the undistributed amount at regular capital gains and ordinary corporate tax
rates. Moreover, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year; (ii)
95% of its REIT net capital gain income for such year; and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% excise tax on the excess of such required distribution over the amounts
actually distributed.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements. In this regard, CRSI, as Managing Partner of
the Partnerships, has agreed to take such steps as may be necessary to cause the
Partnerships to distribute to its partners or members an amount sufficient to
permit the Company to meet these distribution requirements. It is possible that
the Company, from time to time, may not have sufficient cash or other liquid
assets to meet the 95% distribution requirement due primarily to the expenditure
of cash for nondeductible expenses such as principal amortization or capital
expenditures. In the event that such timing differences occur, the Company may
find it necessary to cause the Operating Partnership to arrange for borrowings
or liquidate some of its investments in order to meet the annual distribution
requirement. In order to avoid any problem with the 95% distribution
requirement, the Company will closely monitor the relationship between its REIT
taxable income and cash flow and, if necessary, will seek to borrow funds (or
cause the Operating Partnership to seek to borrow funds) in order to satisfy the
distribution requirements.
If the Company fails to satisfy the 95% distribution requirement as a
result of an adjustment to the Company's tax return by the IRS, the Company may
be permitted to remedy such a failure by paying a "deficiency dividend" (plus
applicable interest and penalties) within a specified time.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, the Company would be
subject to tax (including any applicable corporate alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to shareholders in
any year in which the Company fails to qualify would not be deductible by the
Company, nor would they be required to be made. In such event, to the extent of
current and accumulated earnings and profits, all distributions to shareholders
would be taxable to them as ordinary income, and, subject to certain limitations
of the Code, corporate distributees may be eligible for the dividends received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also would be ineligible for qualification as a REIT for the four
taxable years following the year during which qualification was lost. It is not
possible to state whether in all circumstances the Company would be entitled to
such statutory relief.
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FUTURE TAX LEGISLATION
On March 20, 1997, the "Real Estate Investment Trust Tax Simplification Act
of 1997" (the "REITSA") was introduced in the House Ways and Means Committee.
The REITSA, if enacted, will make substantive changes in the tax treatment of
REITs as described in this Prospectus. However, there can be no assurance that
(i) REITSA will be enacted, or, (ii) if enacted, that material changes will not
be made prior to REITSA's enactment. Although there are several changes proposed
by REITSA, the three that are most applicable to the Company are discussed
below.
One of the most important substantive changes included within REITSA
involves the required minimum distribution of a REIT's net taxable income.
Current law requires that 95% of REIT taxable income (excluding any net capital
gain) be distributed, but if adopted in its present form, REITSA would require
only 90%.
Another important substantive change included within REITSA is a provision
that would allow a REIT to perform de minimis services other than "Qualified
Services" for a tenant without causing all of the income from the property in
which the tenant rented space to become tainted as not constituting "rents from
real property." De minimis services would be those that do not exceed 1% of the
gross income from the property. Services not directly invoiced would be deemed
to have generated income equal to 150% of the direct cost of the service.
Finally, to the extent that a REIT retains capital gains, it pays tax on
such amounts. Under current law, the shareholders include distributions of such
capital gains (even though taxed to the REIT in an earlier year) in their
income. As such, an element of double taxation exists, since both the REIT and
the shareholder pay taxes on the same capital gains. If adopted in its present
form, REITSA will change the result described by allowing shareholders of REITs
to claim a credit for capital gains taxes paid by the REIT.
TAX ASPECTS OF THE COMPANY'S INVESTMENT IN THE PARTNERSHIPS
General. The Company will hold indirect Interests in the Partnerships
through its general partner's interest in the Operating Partnership. In general,
a partnership is not subject to Federal income tax. Rather, each partner
includes in the partner's taxable income or loss its allocable share of the
partnership's items of income, gain, loss, deduction and credit, without regard
to whether the partner receives a distribution from the partnership. The
Company, through its general partner's interest in the Operating Partnership,
will include its proportionate share of the foregoing items of the Partnerships
for purposes of the various REIT income tests and in the computation of its REIT
taxable income. See "--Requirements for Qualification as a REIT--Income Tests."
Any resultant increase in the Company's REIT taxable income will increase its
distribution requirements (see "--Requirements for Qualification as a
REIT--Annual Distribution Requirements"), but will not be subject to Federal
income tax in the hands of the Company provided that such income is distributed
by the Company to its shareholders. Moreover, for purposes of the REIT asset
tests (see "--Requirements for Qualification as a REIT--Asset Tests"), the
Company, through its general partner's interest in the Operating Partnership,
will include its proportionate share of assets held by the Partnerships.
Entity Classification. Since each of the Partnerships claimed partnership
classification for periods prior to the effective date of Treasury Regulation
Section 301.7701-3, and since the Operating Partnership will be formed after the
effective date of Treasury Regulation Section 301.7701-3, the Operating
Partnership and each of the Partnerships will be properly classified as
partnerships for Federal income tax purposes for taxable periods beginning on
and after January 1, 1997 unless the Operating Partnership or any such
Partnership affirmatively elects to be classified as an association taxable as a
corporation, an election which could preclude the Company from satisfying
certain of the REIT requirements. The Company will not cause the Operating
Partnership to elect to be classified as an association taxable as a
corporation. CRSI has advised the Company that it will not, directly or
indirectly, cause the Managing Partner of each of the Partnerships to elect to
cause such Partnership to be classified as associations taxable as corporations.
Basis in Operating Partnership Interest. The Company's adjusted tax basis
in its general partner's interest in the Operating Partnership generally (i)
will initially be equal to the fair market value of the Interests that it
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contributes to the Operating Partnership at the time CRSI contributes such
Interests to the Company; (ii) will be increased by (A) its allocable share of
the Operating Partnership's income and (B) its allocable share of indebtedness
of the Operating Partnership; and (iii) will be reduced, but not below zero, by
the Company's allocable share of (A) the Operating Partnership's loss and (B)
the amount of cash distributed to the Company and by constructive distributions
resulting from a reduction in the Company's share of indebtedness of the
Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss would reduce the adjusted tax basis of the Company's Interest
in the Operating Partnership below zero, the recognition of such loss will
generally be deferred until such time as the recognition of such loss would not
reduce the Company's adjusted tax basis below zero. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share of
the indebtedness of the Operating Partnership (such decrease being considered a
constructive cash distribution to the partners), would reduce the Company's
adjusted tax basis below zero, such distributions (including such constructive
distributions) constitute taxable income to the Company. Such distributions and
constructive distributions normally will be characterized as capital gain, and,
if the Company's Interest in the Operating Partnership has been held for longer
than the long-term capital gain holding period (currently one year), the
distributions and constructive distributions will constitute long-term capital
gain.
Tax Allocations With Respect to Contributed Property. Pursuant to Section
704(c) of the Code, income, gain, loss and deduction attributable to appreciated
or depreciated property that is contributed to a partnership in exchange for an
interest in the partnership must be allocated for federal income tax purposes in
a manner that the contributor is charged with, or benefits from, the unrealized
gain or loss associated with the property at the time of contribution. The
amount of such unrealized gain or loss is generally equal to the difference
between the fair market value of the contributed property at the time of
contribution and the adjusted tax basis of such property at such time. The
Operating Partnership Agreement requires allocations of income, gain, loss and
deduction attributable to contributed property to be made in a manner that is
consistent with Section 704(c) of the Code.
Sale of the Properties. Generally, any gain realized by a partnership on
the sale of assets held by the partnership for more than one year will be
long-term capital gain. However, under REIT rules, the Company's share of any
gain realized by a Partnership on the sale of any property held as inventory or
other property held primarily for sale to customers in the ordinary course of a
trade or business ("dealer property") will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. See "--Taxation of
the Company as a REIT." Under existing law, whether property is dealer property
is a question of fact that depends on all the facts and circumstances with
respect to the particular transaction. A safe harbor to avoid classification as
a prohibited transaction exists as to real estate assets held for the production
of rental income by a REIT for at least four years where in any taxable year the
REIT has made no more than seven sales of property, or, in the alternative, the
aggregate of the adjusted bases of all properties sold does not exceed 10% of
the adjusted bases of all of the REIT's properties during the year and the
expenditures includable in a property's basis made during the four-year period
prior to disposition do not exceed 30% of the property's net sale price. The
Company, the Operating Partnership and the Partnerships will attempt to comply
with the terms of the safe-harbor provisions of the Code. No assurance can be
given, however, that the Company, the Operating Partnership or the Partnerships
can comply with the safe-harbor provisions of the Code or avoid owning property
that may be characterized as dealer property.
TAXATION OF TAXABLE DOMESTIC SHAREHOLDERS
As long as the Company qualifies as a REIT, distributions made to the
Company's taxable shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such shareholders as ordinary income. In general, the Company's
current or accumulated earnings and profits would be allocated first to
distributions on the Preferred Stock and then to the Company Common Stock.
Domestic shareholders generally are shareholders who are (i) citizens or
residents of the United States; (ii) corporations, partnerships or other
entities created in or organized under the laws of the
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United States or any political subdivision thereof; or (iii) estates or trusts
the income of which is subject to United States federal income taxation
regardless of its source. Corporate shareholders will not be entitled to the
dividends received deduction. Any dividend declared by the Company in October,
November or December of any year payable to a shareholder of record on a
specific date in any such month shall be treated as both paid by the Company and
received by the shareholder on December 31 of such year, provided that the
dividend is actually paid by the Company during January of the following
calendar year.
Distributions that are designated as capital gain dividends will be taxed
as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the shareholder has held its Company Common Stock.
Distributions in excess of current and accumulated earnings and profits
will not be taxable to a shareholder to the extent that they do not exceed the
adjusted basis of the shareholder's Company Common Stock, but rather will reduce
the adjusted basis of such shares. To the extent that such distributions exceed
the adjusted basis of a shareholder's Company Common Stock, they will be
included in income as long-term capital gain assuming the shares are a capital
asset in the hands of the shareholder and have been held for more than one year.
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company. In general, a shareholder
will realize capital gain or loss on the disposition of Company Common Stock
equal to the difference between (a) the sales price for such shares and (b) the
adjusted tax basis of such shares. Gain or loss realized upon the sale or
exchange of Company Common Stock by a shareholder who has held such Company
Common Stock for more than one year (after applying certain holding period
rules) will be treated as long-term gain or loss, respectively, and otherwise
will be treated as short-term capital gain or loss. However, losses incurred
upon a sale or exchange of Company Common Stock by a shareholder who has held
such shares for six months or less (after applying certain holding period rules)
will be deemed a long-term capital loss to the extent of any capital gain
dividends received by the selling shareholder with respect to such Company
Common Stock.
Distributions from the Company and gain from the disposition of shares will
not be treated as passive activity income. Distributions from the Company (to
the extent they do not constitute a return of capital) will generally be treated
as investment income for purposes of the investment interest limitation. Gain
from the disposition of shares and capital gain dividends will not be treated as
investment income unless the taxpayer elects to have the gain taxed at ordinary
income rates.
Backup Withholding. The Company will report to its domestic shareholders
and the IRS the amount of dividends paid during each calendar year, and the
amount of tax withheld, if any, with respect thereto. Under the backup
withholding rules, a shareholder may be subject to backup withholding at the
rate of 31% with respect to dividends paid unless such shareholder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. A
shareholder who does not provide the Company with its correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be creditable against the shareholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions made to any shareholders who fail to
certify their nonforeign status to the Company.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Tax-exempt entities, including qualified employee pension and
profit-sharing trusts, individual retirement accounts and certain funded welfare
plan arrangements ("Exempt Organizations"), generally are exempt from federal
income taxation. However, they are subject to taxation on their unrelated
business taxable income ("UBTI"). While many investments in real estate generate
UBTI, the IRS has issued a published ruling that dividend distributions by a
REIT to an exempt employee pension trust do not constitute UBTI, provided that
the shares of the REIT are not otherwise used in an unrelated trade or business
of the exempt
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employee pension trust. Based on that ruling and on the intention of the Company
to invest its assets in a manner that will avoid the recognition of UBTI by the
Company, amounts distributed by the Company to Exempt Organizations generally
should not constitute UBTI. However, if an Exempt Organization finances its
acquisition of the Company Common Stock with debt, a portion of its income from
the Company will constitute UBTI pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefits associations,
supplemental unemployment benefit trusts, and qualified group legal services
plans that are exempt from taxation under paragraphs (7), (9), (17), and (20),
respectively, of Code section 501(c) are subject to different UBTI rules, which
generally will require them to characterize distributions from the Company as
UBTI. In addition, a pension trust that owns more than 10% of the Company is
required to treat a percentage of the dividends from the Company as UBTI (the
"UBTI Percentage") in certain circumstances. The UBTI Percentage is the gross
income derived from an unrelated trade or business (determined as if the Company
were a pension trust) divided by the gross income of the Company for the year in
which the dividends are paid. The UBTI rule applies only if (i) the UBTI
Percentage is at least 5%; (ii) the Company qualifies as a REIT by reason of the
modification of the 5/50 Rule that allows the beneficiaries of the pension trust
to be treated as holding shares of the Company in proportion to their actuarial
interests in the pension trust; and (iii) either (A) one pension trust owns more
than 25% of the value of the Company's stock or (B) a group of pension trusts
individually holding more than 10% of the value of the Company's stock
collectively own more than 50% of the value of the Company's stock.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing Federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Non-U.S. Shareholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
NON-U.S. SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE
THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN
INVESTMENT IN THE COMPANY COMMON STOCK, INCLUDING ANY REPORTING REQUIREMENTS.
It is currently anticipated that the Company will qualify as a
"domestically controlled REIT" (i.e., a REIT in which at all times during a
specified testing period less than 50% of the value of the shares is owned
directly or indirectly by Non-U.S. Shareholders) and therefore gain from the
sale of Company Common Stock by a Non-U.S. Shareholder would not be subject to
United States taxation unless such gain is treated as "effectively connected"
with the Non-U.S. Shareholder's United States trade or business.
Distributions that are not attributable to gain from the sale or exchange
by the Company of United States real property interests (and are not designated
as capital gain dividends) will be treated as dividends of ordinary income to
the extent that they are made out of current or accumulated earnings and profits
of the Company. Such distributions generally will be subject to a United States
withholding tax equal to 30% of the gross amount of the distribution, subject to
reduction or elimination under an applicable tax treaty. However, if dividends
from the investment in the shares are treated as "effectively connected" with
the Non-U.S. Shareholder's conduct of a United States trade or business, such
dividends will be subject to regular U.S. income taxation (foreign corporations
may also be subject to the 30% branch profits tax). The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of any
such dividends made to a Non-U.S. Shareholder unless: (i) a lower treaty rate
applies and the Non-U.S. Shareholder files certain information evidencing its
entitlement to such lower treaty rate; or (ii) the Non-U.S. Shareholder files an
IRS Form 4224 with the Company claiming that the distribution is "effectively
connected" income. Distributions which exceed current and accumulated earnings
and profits of the Company will not be taxable to the extent that they do not
exceed the adjusted basis of a shareholder's shares but, rather, will reduce
(but not below zero) the adjusted basis of such shares. To the extent that such
distributions exceed the adjusted basis of a Non-U.S. Shareholder's shares, they
generally will give rise to United States tax liability if the Non-U.S.
Shareholder would otherwise be subject to tax on gain from the sale or
disposition of his or her shares in the Company, as described above. If it
cannot be determined at the time a distribution is made whether or not such
distribution will be in excess of current and accumulated earnings and profits,
the distributions will be
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subject to withholding at the same rate as dividends. However, amounts thus
withheld are refundable if it is subsequently determined that such distribution
was, in fact, in excess of current and accumulated earnings and profits of the
Company.
Distributions by the Company to a Non-U.S. Shareholder that are
attributable to gain from sales or exchanges by the Company of a United States
real property interest are subject to income and withholding tax under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, these distributions, if any, that are treated as gain
recognized from the sale of a United States real property interest, are taxed as
income "effectively connected" with a United States business. Non-U.S.
Shareholders would thus be taxed at the normal capital gain rates applicable to
U.S. shareholders (subject to the applicable alternative minimum tax and a
special alternative minimum tax for nonresident alien individuals). Also,
distributions subject to FIRPTA may be subject to a 30% branch profits tax in
the hands of a foreign corporate shareholder not entitled to treaty exemption.
The Company is required by applicable Treasury Regulations to withhold 35% of
any distribution that could be designated by the Company as a capital gains
dividend. This amount is creditable against the Non-U.S. Shareholder's FIRPTA
tax liability. A refund may be available if the amount exceeds the Non-U.S.
Shareholder's federal tax liability.
OTHER TAX CONSIDERATIONS
State, Local and Other Taxes. The Company or its shareholders or both may
be subject to state, local or other taxation in various state, local or other
jurisdictions, including those in which they transact business or reside. The
tax treatment in such jurisdictions may differ from Federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult with their own tax advisors regarding the effect of state, local and
other tax laws on an investment in the Company Common Stock.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit sharing, retirement, welfare or other
employee benefit plan ("Plan") subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), should consider the fiduciary
standards under ERISA in the context of the Plan's particular circumstances
before authorizing an investment of a portion of the Plan's assets in the
Company Common Stock. Accordingly, any such fiduciary should consider (i)
whether the investment satisfies the diversification requirements of Section
404(a)(1)(C) of ERISA; (ii) whether the investment is in accordance with the
documents and instruments governing the Plan as required by Section 404(a)(1)(D)
of ERISA; and (iii) whether the investment is prudent under ERISA. In addition
to the imposition of general fiduciary standards of investment prudence and
diversification, ERISA, and the corresponding provisions of the Code, prohibit a
wide range of transactions involving the assets of the Plan and persons who have
certain specified relationships to the Plan ("parties in interest" within the
meaning of ERISA, "disqualified persons" within the meaning of the Code). Thus,
a Plan fiduciary considering an investment in the Company Common Stock also
should consider whether the acquisition (or receipt in connection with the
Distribution) or the continued holding of the Company Common Stock might
constitute or give rise to a direct or indirect prohibited transaction.
The Department of Labor (the "DOL") has issued final regulations (the "DOL
Regulations") as to what constitutes assets of an employee benefit plan under
ERISA. Under the DOL Regulations, if a Plan acquires an equity interest in an
entity, which interest is neither a "publicly offered security" nor a security
issued by an investment company registered under the Investment Company Act of
1940, as amended, the Plan's assets would include, for purposes of the fiduciary
responsibility provisions of ERISA, both the equity interest and an undivided
interest in each of the entity's underlying assets unless certain specified
exceptions apply. The DOL Regulations define a publicly offered security as a
security that is "widely held," "freely transferable," and either part of a
class of securities registered under the Exchange Act, or sold pursuant to an
effective registration statement under the Securities Act (provided the
securities are registered under the Exchange Act within 120 days after the end
of the fiscal year of the issuer during which the public offering occurred). The
Company Common Stock is being sold in an offering registered under the
Securities Act and will be registered under the Exchange Act.
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The DOL Regulations provide that a security is "widely held" only if it is
part of a class of securities that is owned by 100 or more investors independent
of the issuer and of one another. A security will not fail to be "widely held"
because the number of independent investors falls below 100 subsequent to the
initial public offering as a result of events beyond the issuer's control. The
Company expects the Company Common Stock to be "widely held" on completion of
the Distribution.
The DOL Regulations provide that whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. The DOL Regulations further provide that when
a security is part of an offering in which the minimum investment is $10,000 or
less, as is the case with the Distribution, certain restrictions ordinarily will
not, alone or in combination, affect the finding that those securities are
"freely transferable." The Company believes that the restrictions imposed under
its Articles of Incorporation on the transfer of the Company Common Stock are
limited to the restrictions on transfer generally permitted under the DOL
Regulations and are not likely to result in the failure of the Company Common
Stock to be "freely transferable." See "Shares Available for Future Sale." The
DOL Regulations only establish a presumption in favor of the finding of free
transferability, and, therefore, no assurance can be given that the DOL and the
U.S. Treasury Department will not reach a contrary conclusion.
Assuming that the Company Common Stock will be "widely held" and are
"freely transferable," the Company believes that the Company Common Stock will
be publicly offered securities for purposes of the Regulations and that the
assets of the Company will not be deemed to be "plan assets" of any Plan that
invests in the Company. THE DISCUSSION IN THIS SECTION IS NOT INTENDED AS A
SUBSTITUTE FOR CAREFUL ERISA PLANNING AND INDIVIDUAL CONSULTATION WITH AN ERISA
ADVISOR, AND EACH HOLDER OF SHARES OF CRSI STOCK AND CRSI OPTIONS IS URGED TO
CONSULT HIS ERISA ADVISOR AS TO THE SPECIFIC ERISA CONSEQUENCES TO HIM OF THE
DISTRIBUTION.
EXPERTS
The combined financial statements of the Lexreit Properties Group at
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, and the balance sheet of Lexreit Properties, Inc. at April
24, 1997, appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the Company Common Stock offered hereby will be passed upon
for the Company by Benesch, Friedlander, Coplan & Aronoff LLP, Cleveland, Ohio.
H. Jeffrey Schwartz, a director of CRSI, is a partner in Benesch, Friedlander,
Coplan & Aronoff LLP.
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GLOSSARY
Unless otherwise indicated or the context otherwise requires, the following
capitalized terms have the meanings set forth below for purposes of this
Prospectus:
"Additional Interests" means the issued and outstanding capital stock and
the limited partner's interests, respectively, in the SPCs and the Partnerships
which own the Additional Properties.
"Additional Properties" means the 11 apartment communities set forth on
Exhibit 99.2 to the Company's Registration Statement on Form S-11 of which this
prospectus forms a part.
"Affiliate" of any person means (i) any person who directly or indirectly
controls or is controlled by or is under common control with that person, (ii)
any other person who owns, beneficially, directly or indirectly, 5% or more of
the outstanding capital stock, shares or equity interests of that person, or
(iii) any officer, director, employee, partner or trustee of that person or any
person controlling, controlled by or under common control with that person
(excluding trustees and persons serving in similar capacities who are not
otherwise an Affiliate of that person). The term "person" means and includes
individuals, corporations, general and limited partnerships, limited liability
companies, stock companies or associations, joint ventures, associations,
companies, trusts, banks, trust companies, land trusts, business trusts or other
entities and governments and agencies and political subdivisions thereof. For
purposes of this definition, "control" (including the correlative meanings of
the terms "controlled by" and "under common control with"), as used with respect
to any person, means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of that person,
through the ownership of voting securities, partnership interests or other
equity interests.
"Agent" means Fifth Third Bank.
"Anticipated Dividend Value" means the anticipated taxable dividend value
of the Company Common Stock expected to be indicated on the IRS Form 1099-DIV
distributed to each Holder.
"Articles of Incorporation" means the Amended and Restated Articles of
Incorporation of the Company to be filed as soon as practicable following
approval of the Distribution by holders of CRSI Stock.
"Asset Management Agreements" means those certain Asset Management
Agreements to be entered into between CRSI and each of the Partnerships whereby
CRSI will provide to the Properties and/or the Additional Properties day-to-day
management services for a period of three years following the Distribution.
"Blank Check Preferred Stock" means the shares of preferred stock, without
par value, of the Company, 500,000 of which are currently authorized by the
Articles of Incorporation but unissued.
"Board of Directors" means the Board of Directors of either the Company or
CRSI, as the case may be.
"Cash Available for Distribution" means cash distributions paid from the
Operating Partnership to the Company and other income, if any, of the Company
after payments owing in respect of indebtedness of the Company and provisions
for selling, general and administrative expenses.
"Class A Senior Preferred Stock" means the shares of Class A Senior
Preferred Stock, with a stated value of $1,000 per share, of the Company to be
issued to CRSI on or prior to the Distribution Date.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Commission" means the United States Securities and Exchange Commission.
"Company" means Lexreit Properties, Inc., an Ohio corporation.
"Company Common Stock" means the common stock, without par value, of the
Company.
"Corporate Services Agreement" means that certain Corporate Services
Agreement to be entered into between CRSI and the Company whereby CRSI will
provide to the Company certain administrative services for a period of three
years following the Distribution.
"CRSI" means Cardinal Realty Services, Inc., an Ohio corporation.
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"CRSI Cash Dividend" means the special, one-time cash dividend to be paid
on the Distribution Date in an amount equal to at least 25% of the anticipated
dividend value of the Company Common Stock expected to be indicated on the IRS
Form 1099-DIV distributed to each holder of record of CRSI Stock as of the
Distribution Record Date.
"CRSI Group" means CRSI and its wholly-owned subsidiaries.
"CRSI Options" means options to acquire shares of CRSI Stock outstanding as
of the Distribution Record Date.
"CRSI Stock" means the common stock, without par value, of CRSI.
"Distributable Funds from Partnership Operations" means (i) net income
(loss) (computed in accordance with generally accepted accounting principles),
excluding gains (losses) from debt restructuring and sales of property
(including furniture and equipment), plus (ii) real estate related depreciation
and amortization reduced by (iii) debt service requirements and major
maintenance and capital reserves for the Partnerships.
"Distribution" means the distribution of 93% of the outstanding shares of
Company Common Stock in the form of a dividend by CRSI to holders of CRSI Stock
as of the close of business on the Distribution Record Date.
"Distribution Date" means the date that the Distribution will be effected.
"Distribution Record Date" means the record date for the Distribution set
by the Board of Directors of CRSI, which, subject to approval by CRSI
Shareholders of the Distribution at CRSI's annual shareholders meeting currently
expected to be held in late July, is August 4, 1997.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
"Executive Officers" means the Chief Executive Officer and Chief Financial
Officer of the Company, each of whom (i) are employees of CRSI as of the date of
this Prospectus and (ii) will serve in such capacities pursuant to the terms of
the Corporate Services Agreement.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"General Partner" means the general partner of the Operating Partnership.
"Holders" means the shareholders of record of CRSI Stock as of the
Distribution Record Date.
"Independent Director" means a person who is (i) independent of management
of the Company or CRSI, (ii) not employed by or an officer of the Company or
CRSI, (iii) not an "affiliate" (as defined in Rule 405 under the Securities Act)
of the Company or CRSI of any subsidiary of the Company or CRSI, and (iv) not a
person who acts on a regular basis as an individual or representative of an
organization serving as a professional advisor, legal counsel or consultant to
management if, in the opinion of the Board of Directors, the relationship is
material to the Company or CRSI, that person or the organization represented.
"Initial Transactions" means the principal transactions in connection with
the formation of the Company as a REIT and the acquisition of the Interests by
the Company and the Operating Partnership.
"Interests" means the limited partner's interests in the limited
partnerships and member's interests in the limited liability companies that
comprise the Partnerships that own the Properties.
"IRS" means the United States Internal Revenue Service.
"Lexreit Properties Group" means collectively, the Properties.
"Limited Partner" means the limited partner of the Operating Partnership.
"Manager" means CRSI, or Lexford Properties, Inc., a Texas corporation and
wholly-owned subsidiary of CRSI.
81
<PAGE> 91
"Managing Interests" means CRSI's (or its successor's, as the case may be)
direct or indirect general partner's or managing member's interest in each of
the Partnerships.
"Managing Partner" means CRSI or its successor, as the case may be, as the
general partner or managing member of each of the Partnerships.
"Operating Partnership" means Cardinal Properties L.P., an Ohio limited
partnership.
"OP Distributable Funds" means all Distributable Funds from Partnership
Operations actually received from the Partnerships, as well as all net proceeds
of sales and refinancings actually received from the Partnerships.
"Ownership Limit" means the beneficial ownership of 9% of the outstanding
Company Common Stock.
"Partner" means the General Partner or Limited Partner.
"Partnerships" means the various limited partnerships and limited liability
companies that own the Properties.
"Preferred Stock" means the Class A Senior Preferred Stock and the Blank
Check Preferred Stock of the Company.
"Properties" means the 66 apartment communities set forth on Exhibit 99.1
to the Company's Registration Statement on Form S-11, of which this Prospectus
forms a part.
"REIT" means a real estate investment trust as defined pursuant to Sections
856 through 860 of the Code.
"REIT requirements" means the requirements for qualifying as a REIT under
the Code and the Treasury Regulations.
"Regulations" means the Regulations of the Company.
"Rule 144" means the rule adopted by the Commission that permits holders of
restricted securities and affiliates of an issuer of securities, pursuant to
certain conditions and subject to certain restrictions, to sell publicly their
securities of the issuer without registration under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
"SPCs" means, collectively, seven special purpose corporations that each
directly owns an apartment community constituting certain of the Additional
Properties.
"Subscription Agreement" means that certain Subscription Agreement to be
entered into between CRSI and the Company whereby CRSI will make a capital
contribution to the Company of $999,000 in cash together with 60% of its limited
partner's interests in each of 62 limited partnerships and 60% of its member's
interests in 2 limited liability companies, in exchange for the issuance to it
of up to 1,049,900 additional shares of Company Common Stock and up to 5,500
shares of Class A Senior Preferred Stock.
"Total Market Capitalization" means the aggregate market value of the
Company's outstanding Company Common Stock.
"Treasury Regulations" means the Income Tax Regulations promulgated under
the Code.
"UBTI" means unrelated business taxable income as defined in Section 512(a)
of the Code.
"Value" means the dollar value of each Additional Interest which may be
contributed to the Company derived from the historical cost of the underlying
Additional Property determined in accordance with generally accepted accounting
principles, as is set forth on Exhibit 99.2 to the Company's Registration
Statement on Form S-11, of which this Prospectus forms a part.
82
<PAGE> 92
LEXREIT PROPERTIES GROUP
AND
LEXREIT PROPERTIES, INC.
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
LEXREIT PROPERTIES GROUP
Audited Financial Information -- Certain Real Estate Properties Owned by
Cardinal Realty Services, Inc.
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Combined Balance Sheets at December 31, 1996 and 1995..................... F-3
Combined Statements of Operations for the years ended
December 31, 1996, 1995 and 1994........................................ F-4
Combined Statements of Changes in Cardinal Realty Services, Inc.'s
Investment for the years ended December 31, 1996, 1995 and 1994......... F-5
Combined Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994........................................ F-6
Notes to Combined Financial Statements.................................... F-7 -- F-11
Combined Financial Statement Schedules:
Schedule II -- Valuation and Qualifying Accounts..................... F-12
Schedule III -- Real Estate and Accumulated Depreciation............. F-13 -- F-17
</TABLE>
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules or because the information required is included in the combined
financial statements or notes thereafter.
LEXREIT PROPERTIES, INC.
<TABLE>
<S> <C>
Audited Balance Sheet
Report of Independent Auditors........................................... F-18
Balance Sheet at April 24, 1997.......................................... F-19
Notes to Balance Sheet................................................... F-20
</TABLE>
F-1
<PAGE> 93
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors of Cardinal Realty Services, Inc.
We have audited the accompanying combined balance sheets of Lexreit
Properties Group, as described in Note 1, as of December 31, 1996 and 1995 and
the related combined statements of operations, changes in Cardinal Realty
Services, Inc.'s investment, and cash flows for each of the three years in the
period ended December 31, 1996. Our audits also included the financial statement
schedules listed in the accompanying index. These financial statements and
schedules are the responsibility of Cardinal Realty Services, Inc. management.
Our responsibility is to express an opinion on these combined financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above,
present fairly, in all material respects, the combined financial position of
Lexreit Properties Group, as described in Note 1, at December 31, 1996 and 1995,
and the combined results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
April 24, 1997
F-2
<PAGE> 94
LEXREIT PROPERTIES GROUP
(CERTAIN REAL ESTATE PROPERTIES OWNED BY CARDINAL REALTY SERVICES, INC.)
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Operating Real Estate: (Notes 3 and 4):
Land........................................................... $ 15,377,001 $ 15,271,201
Building, Improvements and Equipment........................... 85,197,886 83,503,304
------------ ------------
100,574,887 98,774,505
Accumulated Depreciation....................................... (2,753,761) --
------------ ------------
97,821,126 98,774,505
Cash............................................................. 2,110,376 1,680,692
Accounts Receivable, net of allowance of $820,402 and $763,725 at
December 31, 1996 and December 31, 1995, respectively.......... 528,680 516,285
Funds Held in Escrow (Note 2).................................... 4,366,568 3,824,752
Prepaids and Other (Note 2)...................................... 2,428,072 1,254,107
------------ ------------
$107,254,822 $106,050,341
============ ============
LIABILITIES AND EQUITY
Non Recourse Mortgages on Real Estate (Notes 3 and 4)............ $ 93,042,484 $ 85,804,854
Mortgages on Real Estate Held by CRSI (Notes 3 and 4)............ -- 3,937,433
Accounts Payable................................................. 1,010,197 1,704,645
Accrued Interest and Real Estate Taxes........................... 1,764,322 1,491,194
Other Liabilities (Note 5)....................................... 1,318,500 1,451,813
------------ ------------
Total Liabilities...................................... 97,135,503 94,389,939
------------ ------------
Commitments and Contingencies (Note 6)
Investment by CRSI............................................. 10,119,319 11,660,402
------------ ------------
$107,254,822 $106,050,341
============ ============
</TABLE>
See Notes to Combined Financial Statements.
F-3
<PAGE> 95
LEXREIT PROPERTIES GROUP
(CERTAIN REAL ESTATE PROPERTIES OWNED BY CARDINAL REALTY SERVICES, INC.)
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Rental Revenues.................................... $24,366,663 $23,016,215 $22,124,960
Other Revenues..................................... 781,245 576,859 521,287
----------- ----------- -----------
25,147,908 23,593,074 22,646,247
----------- ----------- -----------
Operating Expenses:
Administration..................................... 3,686,437 4,199,285 3,829,685
Utilities.......................................... 1,316,341 1,224,638 1,174,066
Maintenance and Repairs............................ 2,824,409 2,141,726 1,925,683
Taxes and Insurance................................ 2,945,171 2,927,066 2,794,247
----------- ----------- -----------
10,772,358 10,492,715 9,723,681
----------- ----------- -----------
Net Operating Income................................. 14,375,550 13,100,359 12,922,566
Other Expenses:
Interest........................................... 8,605,537 7,683,659 7,922,165
Interest -- General Partner........................ 130,335 79,521 51,418
Other Maintenance (Note 1)......................... 1,481,039 2,348,782 1,530,932
Depreciation....................................... 2,753,761 -- --
Amortization....................................... 109,496 -- --
Other.............................................. 458,882 817,816 1,087,075
----------- ----------- -----------
13,539,050 10,929,778 10,591,590
----------- ----------- -----------
Less: amount credited to carrying value of real
estate
(Note 1)........................................... -- (2,170,581) (2,330,976)
----------- ----------- -----------
Income before Extraordinary Item and Income Taxes.... 836,500 -- --
----------- ----------- -----------
Extraordinary Item................................... (2,475,279) 219,130 2,028,841
----------- ----------- -----------
Income/(Loss) before Income Taxes.................... (1,638,779) 219,130 2,028,841
Income tax provision (benefit) (Note 7):
Continuing operations.............................. 326,235 -- --
Extraordinary item................................. (965,359) 85,022 803,421
----------- ----------- -----------
(639,124) 85,022 803,421
----------- ----------- -----------
Net Income/(Loss).................................... $ (999,655) $ 134,108 $ 1,225,420
=========== =========== ===========
</TABLE>
See Notes to Combined Financial Statements.
F-4
<PAGE> 96
LEXREIT PROPERTIES GROUP
(CERTAIN REAL ESTATE PROPERTIES OWNED BY CARDINAL REALTY SERVICES, INC.)
COMBINED STATEMENTS OF CHANGES IN CARDINAL REALTY
SERVICES, INC.'S INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
TOTAL
-----------
<S> <C>
Balance, January 1, 1994....................................................... $10,272,891
Return of investment......................................................... (1,036,041)
Net Income................................................................... 2,028,841
-----------
Balance, December 31, 1994..................................................... 11,265,691
Additional investment........................................................ 175,581
Net Income................................................................... 219,130
-----------
Balance, December 31, 1995..................................................... 11,660,402
Equity in Property Acquired.................................................. 182,235
Net Loss..................................................................... (1,638,779)
Return of investment......................................................... (84,539)
-----------
Balance, December 31, 1996..................................................... $10,119,319
===========
</TABLE>
See Notes to Combined Financial Statements.
F-5
<PAGE> 97
LEXREIT PROPERTIES GROUP
(CERTAIN REAL ESTATE PROPERTIES OWNED BY CARDINAL REALTY SERVICES, INC.)
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Operating Activities:
Cash received from rental activities............ $ 25,187,629 $ 23,563,884 $ 22,781,251
Cash paid on rental activities.................. (13,923,240) (14,334,294) (14,758,202)
Interest paid on mortgages...................... (8,160,262) (7,572,400) (7,415,057)
------------ ------------ ------------
Cash provided by Operating Activities... 3,104,127 1,657,190 607,992
------------ ------------ ------------
Investing Activities:
Funding of escrows.............................. (541,816) (40,310) (1,161,747)
Capitalized refinancing costs................... (1,308,414) (244,721) (340,539)
Capital expenditures............................ (373,819) -- --
------------ ------------ ------------
Cash (used in) Investing Activities..... (2,224,049) (285,031) (1,502,286)
------------ ------------ ------------
Financing Activities:
Proceeds from Mortgage debt..................... 39,020,448 11,940,000 18,297,033
Repayment of Mortgages.......................... (34,115,015) (11,235,183) (16,473,336)
Repayment of Mortgage held by CRSI.............. (3,937,433) -- (693,403)
Payments on Mortgages -- principal
amortization................................. (1,488,041) (2,599,639) (600,247)
(Distributions to)/advances from owner.......... 69,647 (30,575) (426,916)
------------ ------------ ------------
Cash provided by (used in) Financing
Activities............................ (450,394) (1,925,397) 103,131
------------ ------------ ------------
Increase/(decrease) in cash....................... 429,684 (553,238) (791,163)
------------ ------------ ------------
Cash at beginning of year......................... 1,680,692 2,233,930 3,025,093
------------ ------------ ------------
Cash at end of year............................... $ 2,110,376 $ 1,680,692 $ 2,233,930
============ ============ ============
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net Income/(Loss) before income taxes (Note
1)........................................... $ (1,638,779) $ 219,130 $ 2,028,841
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and Amortization................... 2,863,257 -- --
Extraordinary (gains) or losses................. 2,475,279 (219,130) (2,028,841)
Operating income applied to assets carrying
value during period assets were classified as
Held for Sale................................ -- 2,170,581 2,330,976
Changes in operating assets and liabilities:
Accounts receivable........................ (12,395) 26,336 (10,899)
Other assets............................... 24,953 140,252 (309,332)
Accounts payable and accrued expenses...... (608,188) (679,979) (1,402,753)
------------ ------------ ------------
Cash provided by Operating Activities... $ 3,104,127 $ 1,657,190 $ 607,992
============ ============ ============
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1996, all interest incurred was expensed. In 1995 and 1994, the interest
incurred on the Properties was capitalized as the Properties were Held for Sale.
(See Note 1).
In 1996, CRSI acquired a Property by purchasing the limited partnership
interests for $17,500 and a non recourse mortgage of $1.2 million.
In 1995, CRSI purchased a Property financed in part with an approximately
$920,000 non recourse mortgage on the Property.
See Notes to Combined Financial Statements.
F-6
<PAGE> 98
LEXREIT PROPERTIES GROUP
(CERTAIN REAL ESTATE PROPERTIES OWNED BY CARDINAL REALTY SERVICES, INC.)
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
NOTE 1: BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Lexreit Properties Group (the "Group") is a group of properties which are
wholly-owned by Cardinal Realty Services, Inc. ("CRSI") (through limited
partnerships or limited liability companies, collectively, the "Partnerships").
The accompanying financial statements include an aggregate of 66 apartment
communities with approximately 5,118 rental units (collectively the
"Properties"). The Properties are located in the midwest and southeast United
States, with the heaviest concentrations in Ohio, Florida, Georgia, and Indiana.
The typical property averages 77 rental units which are located in multiple
single story buildings with studio, one and two bedroom apartments. The Group's
income consists of the income of the Partnerships. The Group is not dependent
for distributions from any particular Property. Geographic distribution of the
Properties also minimizes the Group's exposure to local economic conditions.
CRSI is contemplating a registration of shares of common stock of its
wholly-owned subsidiary, Lexreit Properties, Inc. (the "Company"), which would
be distributed to CRSI's current shareholders. Lexreit Properties, Inc. was
incorporated on April 4, 1997 and began business on April 24, 1997. Under the
contemplated transactions, CRSI will complete certain transactions (the "Initial
Transactions") including the contribution of certain partnership and limited
liability company member interests (collectively, the "Partnership Interests")
in exchange for common and preferred stock of the Company and the formation of
an operating partnership that will be controlled by the Company and will hold
the Partnership interests.
BASIS OF PRESENTATION
The combined financial statements reflect the results of operations,
financial position, changes in CRSI's investment and cash flows of the
Properties in which the Company will have a majority interest after the transfer
of the Partnership Interests from CRSI and its consolidated subsidiaries and
have been prepared as if the Group had operated as an independent stand-alone
entity for all periods presented. The Company had engaged in various
transactions with CRSI and its affiliates that are characteristic of companies
under common control. The financial statements of the Properties are presented
on the same basis as the Properties were reported in the consolidated financial
statements of CRSI.
During 1995 and prior years, CRSI had attempted to market and sell the
Properties and classified the Properties as Held for Sale. While the Properties
were Held for Sale, the results of operations from the Properties were credited
to the carrying value of the real estate and no revenues, operating expenses or
depreciation were included in the consolidated statements of income of CRSI.
Only extraordinary gains or losses from debt refinancing or restructuring
activities were reflected in the statements of operations. The 1995 and 1994
revenue and expenses are presented in the accompanying combined statement of
operations on a gross basis with a corresponding credit to the carrying value of
the real estate to facilitate comparability between periods. This presentation
does not impact net income or equity. Commencing January 1, 1996, based on
CRSI's decision to retain an ownership position in the Properties, the
operations, including a provision for depreciation, of the Properties were fully
consolidated in CRSI's statements of income.
NOTE 2: SUMMARY OF ACCOUNTING POLICIES
FRESH START ACCOUNTING
CRSI adopted a method of accounting referred to as fresh start ("Fresh
Start") reporting as of September 11, 1992 (the "Effective Date") as a result of
CRSI's judicial plan of reorganization (the "Plan of Reorganization"). CRSI
prepared financial statements on the basis that a new reporting entity was
created with assets and liabilities recorded at their estimated fair values as
of the Effective Date. At the Effective
F-7
<PAGE> 99
LEXREIT PROPERTIES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Date, to the extent the non-recourse debt on certain Properties exceeded the
estimated fair value of the asset, CRSI reduced the contractual amount of the
related non-recourse first mortgage debt by the amounts of the deficiency (the
"Mortgage Deficiencies"). The contractual mortgage balance, net of any
applicable Mortgage Deficiency, is referred to as the "Carrying Value" of the
mortgage. Interest expense is recorded at an effective interest rate based upon
the Fresh Start carrying value of the mortgage. The combined financial
statements of the Group are presented under the same Fresh Start basis as
recorded by CRSI.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of all the
Properties in which a majority interest will be transferred to the Company by
CRSI. Any gross profit realized by CRSI from the Properties has been eliminated
in the combined statements of the Group.
CASH
Operating cash as of December 31, 1996 and 1995, is held in separate
property bank accounts with all cash combined for investing and disbursing
purposes for all Properties wholly owned by CRSI.
FUNDS HELD IN ESCROW
The amounts classified as Funds Held in Escrow at December 31, 1996 and
1995 is comprised of the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Improvement and Maintenance Funds.......................... $2,189,676 $1,619,599
Resident Security Deposits................................. 846,758 840,599
Real Estate Taxes and Insurance............................ 1,330,134 1,364,554
---------- ----------
$4,366,568 $3,824,752
========== ==========
</TABLE>
PREPAIDS AND OTHER ASSETS
Prepaids and Other Assets as of December 31, 1996 and 1995 is comprised of
the following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Capitalized Refinancing Costs.............................. $1,829,341 $ 630,423
Prepaid Insurance and Other................................ 598,731 623,684
---------- ----------
$2,428,072 $1,254,107
========== ==========
</TABLE>
The capitalized refinancing costs consist of loan origination costs
capitalized and are being amortized straight-line over the maturity period of
the new mortgages, typically seven to ten years.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of FASB Statement No.
107, Disclosure About Fair Value of Financial Instruments. The fair value of
Cash and Funds Held in Escrow is equal to their respective carrying amounts.
F-8
<PAGE> 100
LEXREIT PROPERTIES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
As further described in Note 3, the Company's mortgages are summarized at
December 31, as follows:
<TABLE>
<CAPTION>
1996 1995
---------------- ----------------
<S> <C> <C>
Carrying Value................................... $93.0 million $89.7 million
Contractual balances............................. $98.3 million $97.6 million
Interest rates................................... 7.0% -- 9.5% 7.0% -- 10.93%
Amount of mortgages with fixed rates............. $90.4 million $72.7 million
</TABLE>
In addition, mortgages with a contractual value of $3.8 million had matured
as of December 31, 1996 (See Note 3). Management of CRSI believes that using
CRSI's incremental borrowing rate to estimate fair value of the mortgages at
December 31, 1996 and 1995, is not appropriate and, because of excessive costs,
considers estimates of fair value to otherwise be impracticable.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
LONG-LIVED ASSETS -- FASB STATEMENT NO. 121
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, ("FASB 121") which requires impairment
losses to be recorded on long-lived assets used in operations, when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. FASB 121
became effective beginning fiscal year 1996. Management of CRSI is not aware of
any indicator that would result in any significant impairment loss related to
the Properties.
REVENUE RECOGNITION
Revenues from rental of apartment units at the Properties are recognized
ratably over the term of the related operating leases, which are generally for a
period of one year or less.
MAINTENANCE EXPENSE
The Group records as operating expense maintenance and repairs relating to
periodic and customary repairs of the units between tenant move outs and move
ins, including cleaning and maintenance salaries. Other Maintenance represents
external repairs and upkeep to the units of the Properties.
OPERATING REAL ESTATE
The Group's operating real estate acquired prior to the Effective Date are
recorded using Fresh Start reporting, as described above. Assets acquired
subsequent to the Effective Date are recorded at cost. Depreciation is computed
using the straight-line method over their estimated remaining useful lives.
Expenditures for significant renovations and improvements which improve and/or
extend the useful life of fixed assets are capitalized. Maintenance and repairs
are expensed as incurred.
NOTE 3: NON RECOURSE MORTGAGES
In connection with Fresh Start reporting as further described in Note 2,
mortgages on real estate assets have been restated to their estimated fair value
as of the Effective Date. The contractual principal balances of the mortgages on
Real Estate Assets exceed the carrying values by $5.3 million and $7.9 million
at
F-9
<PAGE> 101
LEXREIT PROPERTIES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1996 and 1995, respectively. The mortgages are non-recourse and are
collateralized by real estate properties and are payable over periods through
2006. At December 31, 1996 contractual interest rates ranged from 7.0% to 9.5%
with fixed rates on approximately $90.5 million of the outstanding contractual
mortgage balances. Interest expense is recorded using the effective interest
method based upon the carrying value of the mortgage debt. The weighted average
effective interest rate was 9.0% at December 31, 1996. The weighted average
contractual interest rate and term to maturity on the mortgages on Real Estate
Assets, excluding matured loans, was 8.6% and 7 years at December 31, 1996.
Annual debt service requirement was $9.7 million at December 31, 1996. In
addition, seven Properties have secondary mortgage debt totaling $1.5 million
that requires the application of all excess cash flow from operations to be
applied to the outstanding principal on such debt. The range of interest rates
and related carrying amounts of mortgages payable at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
CONTRACTUAL CONTRACTUAL CARRYING
RATE BALANCE VALUE
- --------------- ----------- -----------
<S> <C> <C>
Less than 8.0% $10,304,926 $ 9,068,294
8.0% -- 9.0% 85,652,119 82,184,810
More than 9.0% 2,379,101 1,789,380
----------- -----------
$98,336,146 $93,042,484
=========== ===========
</TABLE>
At December 31, 1996, three Properties had mortgage loans which had matured
with an aggregate contractual value of $3.8 million, which are expected to be
extended or refinanced.
The mortgages on 22 Properties that were refinanced in 1996 were part of a
portfolio of refinanced mortgages on 26 apartment communities wholly owned by
CRSI. These mortgages secured by the respective Properties are cross
collateralized and cross defaulted; however, all of the mortgage loans are
without recourse to the Group. Additionally, all assets of the Group are pledged
as security for certain corporate term debt of CRSI pursuant to an agreement
with the Provident Bank.
Minimum estimated repayment requirements of mortgages for the next five
years based upon the contractual principal balances, are as follows:
<TABLE>
<CAPTION>
CONTRACTUAL
AMOUNTS
-----------
<S> <C>
Matured Loans......................................... $ 3,782,228
1997............................................. 2,297,514
1998............................................. 3,983,969
1999............................................. 2,865,992
2000............................................. 4,603,027
2001............................................. 16,348,300
Thereafter....................................... 64,455,116
-----------
$98,336,146
===========
</TABLE>
NOTE 4: REFINANCED MORTGAGE DEBT
In 1996, CRSI refinanced the mortgage and related interest debt on 28
Properties. Mortgage and related interest debt with a contractual balance of
$38.0 million and a Carrying Value of $37.4 million was refinanced with new
carrying value and contractual mortgage debt of $39.0 million. The new mortgages
carry a weighted average fixed interest rate of 8.8%, 25 to 30 year amortization
and typically, a 10 year maturity. Annual debt service requirements decreased
from $4.1 million to $3.7 million. In these transactions, cash flow secondary
mortgages ("B Notes") on three properties were refinanced. These "B Notes"
required 100% of excess cash flow from operations of the properties to be
applied to the principal outstanding on the B Notes. In 1996 the excess cash
flow applied to the B Notes on these three properties amounted to approximately
$44,000. The Properties incurred loan origination costs of $1.3 million which
have been capitalized and are being amortized
F-10
<PAGE> 102
LEXREIT PROPERTIES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
over the maturity term of the new mortgages. CRSI provided net funding of $1.6
million to complete these transactions.
A fourth quarter 1996 extraordinary non-cash charge of $2.4 million
resulted from mortgage debt refinancing on certain of the above Properties. The
repayment of the existing mortgage at the contractual balance was possible due
to the improvements in performance resulting in the increased value of certain
Properties to levels in excess of the Carrying Value established on the
Effective Date. The charge arose from those mortgages repaid from refinance
proceeds at the contractual balance which exceeded the Carrying Value of the
mortgage. (Note 2).
In 1995 and 1994, CRSI completed modification or refinancing transactions
on Properties which resulted in an extraordinary gain on discharge of
indebtedness on the Properties, of approximately $219,000 and $2.0 million,
respectively.
NOTE 5: OTHER LIABILITIES
Other Liabilities at December 31, 1996 and 1995 includes approximately
$824,000 and $799,000, respectively, of liabilities for residents' security
deposits. The remaining Other Liabilities of the Properties at December 31, 1996
and 1995 consists principally of general operating accruals of the Properties.
NOTE 6: COMMITMENTS AND CONTINGENCIES
LITIGATION
The Properties are involved in various legal actions arising out of the
normal course of its business. Management of CRSI, based upon knowledge of facts
and the advice of counsel, believes potential exposure to loss from legal
actions has been adequately reserved in the financial statements and should not
result in a material adverse effect on the Properties' combined financial
position.
NOTE 7: INCOME TAXES
The Group has historically been included in the consolidated federal income
tax return of CRSI. The income tax provision reflected in the accompanying
combined statement of operations represents the Group's share of CRSI's income
tax provision which is intended to approximate the provision that would have
been reported had the Group filed separate tax returns, and it does not affect
the net Investment by CRSI. No deferred tax assets or liabilities have been
recorded on the balance sheets of the Group since the Company intends to elect
REIT status and generally will not be subject to corporate income taxes.
Effective as of the Distribution Date (which is the date when the
contemplated transaction referenced to in Note 1 is expected to occur), the
Company and CRSI will enter into a tax indemnity agreement whereby CRSI will
indemnify the Company against any tax liability of CRSI or any of CRSI's
subsidiaries (other than the Company) for any period ending on or before, or
including, the Distribution Date.
NOTE 8: RELATED PARTY TRANSACTIONS
The Group relies on CRSI to provide most administrative services required
in the operation and administration of the Group. An affiliate of CRSI is under
contract to manage the properties on behalf of each of the Partnerships. In
addition, each of the Properties share overhead costs, including the cost of
certain personnel and equipment with other partnerships under common management.
Included in these financial statements is an allocation of actual costs to the
Group of these operational and administrative services provided by CRSI. The
allocation is based predominantly on the ratio of the Properties to the total
properties in the portfolio serviced by CRSI. Included in Accounts Receivable is
approximately $270,000 and $250,000 at December 31, 1996 and 1995, respectively,
due for insurance proceeds CRSI received on behalf of certain of the Properties
in late 1996 from the settlement of certain termite litigation.
F-11
<PAGE> 103
SCHEDULE II
LEXREIT PROPERTIES GROUP
(CERTAIN REAL ESTATE PROPERTIES OWNED BY CARDINAL REALTY SERVICES, INC.)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ALLOWANCE FOR
DOUBTFUL
ACCOUNTS
--------------------
1996 1995
-------- --------
<S> <C> <C>
Balance at Beginning of Period......................................... $763,725 $419,075
Add: Charged to Expense................................................ 452,936 414,337
Less: Account Charge Offs.............................................. (396,259) (69,687)
-------- --------
Balance at End of Period............................................... $820,402 $763,725
======== ========
</TABLE>
F-12
<PAGE> 104
SCHEDULE III
LEXREIT PROPERTIES GROUP
(CERTAIN REAL ESTATE PROPERTIES OWNED BY CARDINAL REALTY SERVICES, INC.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
- -------------------------------------------------------------------------------------------------------------------------------
ENCUMBRANCES INITIAL COST COSTS CAPITALIZED
-------------------------- TO THE COMPANY SUBSEQUENT TO
DESCRIPTION -- AT --------------------------- ACQUISITION
(ALL GARDEN APARTMENTS) AT STATED BUILDINGS ------------------------
- -------------------------------------- CONTRACTUAL CARRYING AND CARRYING
PROPERTY NAME STATE VALUE VALUE LAND IMPROVEMENTS IMPROVEMENTS COSTS
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
ACADIA COURT II IN $ 1,886,146 $ 1,886,146 $ 398,032 $ 1,668,862 $ 1,470 $0
AMESBURY I OH 1,257,832 1,257,832 136,179 1,133,012 3,030 0
APPLEGATE APTS II IN 1,265,575 1,265,575 163,470 1,815,278 10,705 0
APPLERIDGE I OH 1,061,450 1,061,450 214,233 912,594 7,200 0
ARAGON WOODS IN 1,150,600 1,150,600 298,431 1,248,762 0 0
ASHFORD HILLS OH 1,606,595 1,307,867 359,522 1,260,948 2,100 0
BEL AIRE II FL 1,198,276 436,040 81,451 287,059 0 0
CEDARGATE II KY 1,032,435 1,032,435 123,475 966,198 0 0
CEDARHILL TN 1,487,500 1,487,500 235,269 1,331,238 0 0
CEDARWOOD II KY 1,020,000 1,020,000 173,648 913,048 3,011 0
CEDARWOOD III KY 888,760 888,760 122,917 966,624 23,740 0
CENTRE LAKE I, II & III FL 4,952,458 4,952,458 1,210,778 3,116,732 6,239 0
CHERRY GLEN I IN 1,396,026 1,396,026 203,862 1,465,002 0 0
CHERRY GLENN II IN 1,143,198 1,143,198 4,343 1,731,393 1,660 0
CHERRY TREE APT MD 2,217,868 2,217,868 623,153 2,711,201 2,988 0
CLEARWATER APTS OH 1,061,450 1,061,450 132,478 1,045,131 13,839 0
DARTMOUTH PLACE II OH 897,388 897,388 114,393 1,135,027 2,970 0
DOGWOOD GLEN I IN 1,792,218 1,792,218 248,246 1,427,201 21,107 0
GARDEN COURT MI 2,185,573 2,185,573 127,573 2,247,404 1,856 0
GARDEN TERRACE I FL 621,464 621,464 89,123 801,137 39,180 0
GLENVIEW AL 1,734,783 1,734,783 178,221 1,784,904 0 0
GLENWOOD VILLAGE GA 1,534,803 890,683 156,445 1,000,148 0 0
HARVEST GROVE I OH 1,400,534 1,400,534 225,001 1,276,072 0 0
HAYFIELD PARK KY 1,615,000 1,615,000 341,799 1,680,717 11,524 0
HEATHMOORE I MI 1,601,847 1,601,847 128,605 1,329,672 0 0
HIDDEN ACRES FL 1,686,279 1,686,279 388,349 1,136,083 685 0
HOLLY SANDS II FL 1,062,500 1,062,500 231,970 943,482 39,715 0
HUNTER GLEN IL 1,051,233 1,051,233 256,720 1,461,719 0 0
INDIAN LAKE I & II GA 4,711,452 4,711,452 898,265 5,262,660 4,481 0
KINGS COLONY GA 2,107,287 1,517,566 237,393 1,723,165 0 0
LAKESHORE I GA 1,265,576 1,265,576 45,846 995,214 (60) 0
LAUREL GLEN GA 1,742,500 1,742,500 265,974 1,627,699 0 0
LINDENDALE APTS OH 1,439,828 1,439,828 188,724 1,717,434 0 0
MARABOU MILLS III IN 1,205,060 1,205,060 75,122 1,099,183 0 0
MARABOU MILLS IN 1,468,322 1,468,322 179,704 1,570,450 4,203 0
MARSHLANDING II GA 982,213 934,175 28,851 918,445 2,778 0
MEADOWOOD II IN 760,434 760,434 61,771 1,193,299 463 0
MERRIFIELD MD 2,127,341 2,127,341 210,294 2,271,824 2,546 0
MIGUEL PLACE FL 1,504,500 1,504,500 237,234 1,125,414 0 0
MONTROSE SQUARE OH 1,759,807 1,759,807 568,914 2,184,937 0 0
NEWBERRY II MI 1,331,331 738,819 91,315 715,532 0 0
OAK GARDENS FL 2,756,106 1,865,016 582,419 1,758,597 484 0
</TABLE>
F-13
<PAGE> 105
SCHEDULE III (CONTINUED)
LEXREIT PROPERTIES GROUP
(CERTAIN REAL ESTATE PROPERTIES OWNED BY CARDINAL REALTY SERVICES, INC.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
- -------------------------------------------------------------------------------------------------------------------------------
ENCUMBRANCES INITIAL COST COSTS CAPITALIZED
-------------------------- TO THE COMPANY SUBSEQUENT TO
DESCRIPTION -- AT --------------------------- ACQUISITION
(ALL GARDEN APARTMENTS) AT STATED BUILDINGS ------------------------
- -------------------------------------- CONTRACTUAL CARRYING AND CARRYING
PROPERTY NAME STATE VALUE VALUE LAND IMPROVEMENTS IMPROVEMENTS COSTS
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
PICKERINGTON MEADOWS OH 1,186,165 1,186,165 150,000 1,200,000 0 0
RAVENWOOD SC 1,718,721 1,718,721 169,601 1,507,589 0 0
RED DEER II OH 1,261,013 1,261,013 235,173 1,474,820 0 0
RIDGEWOOD IN 1,223,260 1,223,260 100,301 1,320,200 0 0
RIDGEWOOD II & III IN 1,393,574 1,393,574 100,795 1,564,956 0 0
RIVER GLEN II OH 1,184,132 1,184,132 178,568 1,230,268 0 0
ROSEWOOD COMMONS II IN 1,318,698 1,318,698 121,194 1,172,776 201 0
SHERBROOK PA 1,397,504 1,397,504 355,188 1,492,285 8,400 0
SKY PINES II FL 920,741 920,741 266,498 676,283 50,450 0
SPICEWOOD APT IN 1,036,385 1,036,385 90,619 1,025,442 2,927 0
SPRINGBROOK SC 1,742,965 1,742,965 120,467 1,762,353 32,645 0
SUFFOLK GROVE II OH 1,096,137 1,096,137 154,263 1,248,211 2,085 0
SUNSET WAY I FL 1,685,131 1,685,131 621,326 1,353,585 0 0
SUNSET WAY II FL 2,719,585 2,144,007 649,409 1,678,049 0 0
THE WILLOWS I OH 601,932 601,932 157,611 761,576 14,736 0
THE WILLOWS III OH 884,000 884,000 44,602 871,216 6,054 0
THYMEWOOD II FL 1,729,672 838,033 429,480 731,592 0 0
VALLEYBROOK GA 1,586,737 1,586,737 129,440 1,353,762 0 0
WILLOW LAKE SC 2,099,515 2,099,515 188,704 1,738,232 0 0
WILLOWOOD II IN 1,065,380 1,065,380 149,671 1,310,162 21,600 0
WILLOWOOD II OH 957,792 957,792 35,657 622,170 0 0
WINDWOOD I FL 606,231 606,231 24,569 457,382 27,495 0
WINTHROP COURT II OH 760,000 760,000 145,906 825,115 300 0
WOODLANDS II PA 1,189,328 1,189,328 118,447 1,346,599 (249) 0
--
----------- ----------- ----------- ----------- ---------
$98,336,146 $93,042,484 $15,377,001 $91,685,124 $374,558 $0
=========== =========== =========== =========== ========= ==
</TABLE>
F-14
<PAGE> 106
SCHEDULE III (CONTINUED)
LEXREIT PROPERTIES GROUP
(CERTAIN REAL ESTATE PROPERTIES OWNED BY CARDINAL REALTY SERVICES, INC.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
- ---------------------------------------------------------------------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED
AT CLOSE OF PERIOD, LIFE ON WHICH
DECEMBER 31, 1996 DEPRECIATION
NOTES (1) AND (2) IN LATEST
DESCRIPTION -- ----------------------------------------- INCOME
(ALL GARDEN APARTMENTS) BUILDINGS STATEMENT IS
- ---------------------------- AND ACCUMULATED DATE OF DATE COMPUTED
PROPERTY NAME STATE LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED NOTE(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
ACADIA COURT II IN $ 398,032 $ 1,602,171 $ 2,000,203 $ 52,800 06/06/86 N/A N/A
AMESBURY I OH 136,179 1,021,288 1,157,467 34,000 02/17/86 N/A N/A
APPLEGATE APTS II IN 163,470 1,823,186 1,986,656 58,500 06/01/87 N/A N/A
APPLERIDGE I OH 214,233 717,454 931,687 25,824 01/01/87 N/A N/A
ARAGON WOODS IN 298,431 1,171,393 1,469,824 37,800 12/26/86 N/A N/A
ASHFORD HILLS OH 359,522 927,802 1,287,324 30,577 06/23/86 N/A N/A
BEL AIRE II FL 81,451 395,381 476,832 13,229 01/01/86 N/A N/A
CEDARGATE II KY 123,475 867,384 990,859 28,500 06/01/86 N/A N/A
CEDARHILL TN 235,269 1,225,967 1,461,236 40,300 05/30/86 N/A N/A
CEDARWOOD II KY 173,648 885,104 1,058,752 29,600 01/01/86 N/A N/A
CEDARWOOD III KY 122,917 988,875 1,111,792 33,400 05/20/86 N/A N/A
CENTRE LAKE I, II &
III FL 1,210,778 3,109,169 4,319,947 102,700 06/01/86 N/A N/A
CHERRY GLEN I IN 203,862 1,450,193 1,654,055 47,500 07/10/86 N/A N/A
CHERRY GLENN II IN 4,343 1,682,732 1,687,075 54,000 04/01/87 N/A N/A
CHERRY TREE APT MD 623,153 2,428,672 3,051,825 79,300 09/01/86 N/A N/A
CLEARWATER APTS OH 132,478 966,579 1,099,057 31,900 11/01/86 N/A N/A
DARTMOUTH PLACE II OH 114,393 1,082,021 1,196,414 35,700 07/18/86 N/A N/A
DOGWOOD GLEN I IN 248,246 1,305,749 1,553,995 43,746 07/18/86 N/A N/A
GARDEN COURT MI 127,573 2,161,190 2,288,763 67,000 04/22/88 N/A N/A
GARDEN TERRACE I FL 89,123 839,083 928,206 33,900 09/01/81 N/A N/A
GLENVIEW AL 178,221 1,596,313 1,774,534 52,200 08/01/86 N/A N/A
GLENWOOD VILLAGE GA 156,445 656,472 812,917 21,216 12/01/86 N/A N/A
HARVEST GROVE I OH 225,001 1,157,494 1,382,495 37,700 09/08/86 N/A N/A
HAYFIELD PARK KY 341,799 1,516,918 1,858,717 50,200 07/17/86 N/A N/A
HEATHMOORE I MI 128,605 1,190,421 1,319,026 38,900 07/31/86 N/A N/A
HIDDEN ACRES FL 388,349 437,395 825,744 14,041 01/01/87 N/A N/A
HOLLY SANDS II FL 231,970 962,067 1,194,037 33,100 06/01/86 N/A N/A
HUNTER GLEN IL 256,720 1,314,349 1,571,069 42,100 03/01/87 N/A N/A
INDIAN LAKE I & II GA 898,265 4,878,142 5,776,407 154,600 08/11/87 N/A N/A
KINGS COLONY GA 237,393 1,226,496 1,463,889 38,424 11/15/87 N/A N/A
LAKESHORE I GA 45,846 893,969 939,815 29,300 06/20/86 N/A N/A
LAUREL GLEN GA 265,974 1,625,191 1,891,165 53,600 04/04/86 N/A N/A
LINDENDALE APTS OH 188,724 1,632,869 1,821,593 52,300 03/01/87 N/A N/A
MARABOU MILLS III IN 75,122 1,097,431 1,172,553 34,400 12/01/87 N/A N/A
</TABLE>
F-15
<PAGE> 107
SCHEDULE III (CONTINUED)
LEXREIT PROPERTIES GROUP
(CERTAIN REAL ESTATE PROPERTIES OWNED BY CARDINAL REALTY SERVICES, INC.)
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
- ---------------------------------------------------------------------------------------------------------------------------------
GROSS AMOUNT AT WHICH CARRIED
AT CLOSE OF PERIOD, LIFE ON WHICH
DECEMBER 31, 1996 DEPRECIATION
NOTES (1) AND (2) IN LATEST
DESCRIPTION -- ----------------------------------------- INCOME
(ALL GARDEN APARTMENTS) BUILDINGS STATEMENT IS
- ---------------------------- AND ACCUMULATED DATE OF DATE COMPUTED
PROPERTY NAME STATE LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTRUCTION ACQUIRED NOTE(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
MARABOU MILLS IN 179,704 1,572,233 1,751,937 51,700 06/23/86 N/A N/A
MARSHLANDING II GA 28,851 882,456 911,307 28,595 12/31/86 N/A N/A
MEADOWOOD II IN 61,771 1,040,637 1,102,408 34,200 05/30/86 N/A N/A
MERRIFIELD MD 210,294 2,198,381 2,408,675 68,900 01/11/88 N/A N/A
MIGUEL PLACE FL 237,234 1,083,604 1,320,838 34,200 10/01/87 N/A N/A
MONTROSE SQUARE OH 568,914 2,160,316 2,729,230 72,000 01/01/87 N/A N/A
NEWBERRY II MI 91,315 626,087 717,402 20,204 12/26/86 N/A N/A
OAK GARDENS FL 582,419 1,249,586 1,832,005 39,063 01/01/88 N/A N/A
PICKERINGTON MEADOWS OH 150,000 1,198,151 1,348,151 39,900 N/A 03/29/95 N/A
RAVENWOOD SC 169,601 1,505,266 1,674,867 48,100 05/07/87 N/A N/A
RED DEER II OH 235,173 1,380,894 1,616,067 43,700 08/01/87 N/A N/A
RIDGEWOOD IN 100,301 1,320,199 1,420,500 18,336 N/A 08/10/96 N/A
RIDGEWOOD II & III IN 100,795 1,415,338 1,516,133 46,900 03/01/86 N/A N/A
RIVER GLEN II OH 178,568 1,196,259 1,374,827 37,600 11/01/87 N/A N/A
ROSEWOOD COMMONS II IN 121,194 1,171,170 1,292,364 37,300 06/01/87 N/A N/A
SHERBROOK PA 355,188 1,436,005 1,791,193 46,700 12/20/86 N/A N/A
SKY PINES II FL 266,498 725,691 992,189 25,800 06/01/86 N/A N/A
SPICEWOOD APT IN 90,619 983,867 1,074,486 32,700 03/16/86 N/A N/A
SPRINGBROOK SC 120,467 1,725,155 1,845,622 58,000 06/13/86 N/A N/A
SUFFOLK GROVE II OH 154,263 1,191,012 1,345,275 38,000 06/01/87 N/A N/A
SUNSET WAY I FL 621,326 1,351,499 1,972,825 42,800 08/01/87 N/A N/A
SUNSET WAY II FL 649,409 1,475,311 2,124,720 45,703 04/27/88 N/A N/A
THE WILLOWS I OH 157,611 754,543 912,154 27,500 01/01/87 N/A N/A
THE WILLOWS III OH 44,602 839,952 884,554 26,900 07/01/87 N/A N/A
THYMEWOOD II FL 429,480 362,932 792,412 12,118 01/01/86 N/A N/A
VALLEYBROOK GA 129,440 1,351,676 1,481,116 43,900 10/15/86 N/A N/A
WILLOW LAKE SC 188,704 1,754,417 1,943,121 56,785 12/12/86 N/A N/A
WILLOWOOD II IN 149,671 1,222,104 1,371,775 39,700 06/01/87 N/A N/A
WILLOWOOD II OH 35,657 596,607 632,264 19,500 08/01/86 N/A N/A
WINDWOOD I FL 24,569 484,172 508,741 16,100 05/01/88 N/A N/A
WINTHROP COURT II OH 145,906 823,536 969,442 27,400 02/25/86 N/A N/A
WOODLANDS II PA 118,447 1,281,910 1,400,357 41,100 03/01/87 N/A N/A
----------- ----------- ------------ ----------
$15,377,001 $85,197,886 $100,574,887 $2,753,761
=========== =========== ============ ==========
</TABLE>
F-16
<PAGE> 108
LEXREIT PROPERTIES GROUP
(CERTAIN REAL ESTATE OWNED BY CARDINAL REALTY SERVICES, INC.)
NOTES TO SCHEDULE III
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Note (1) Schedule III Reconciliation:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance as of beginning of year................. $ 98,774,505 $103,323,133 $103,323,133(4)
Additions during the year
Acquisitions of Property................... 1,420,500 1,344,500 --
Costs Capitalized.......................... 379,882 -- --
Deductions during the period:
Other (4).................................. -- (867,044) --
Application of Income from the Effective
Date through December 31, 1995 upon full
consolidation from "Held for Sale"
classification........................... -- (5,026,084) N/A
----------- ----------- -----------
Balance at close of period...................... 100,574,887 98,774,505 103,323,133
----------- ----------- -----------
Other
Furniture and Fixtures........................ -- 2,403,126 2,398,183
Application of Income from the Effective Date
through December 31, 1995 upon full
consolidation from "Held for Sale"
classification............................. -- (2,403,126) N/A
----------- ----------- -----------
100,574,887 98,774,505 105,721,316
----------- ----------- -----------
Income for the Period from the Effective Date to
December 31, 1994............................. N/A N/A (6,125,673)
----------- ----------- -----------
Balance, Operating Real Estate Assets, December
31, 1996, 1995 & 1994, respectively........... $100,574,887 $ 98,774,505 $ 99,595,643
=========== =========== ===========
</TABLE>
- ---------------
Note (2) Tax basis of assets:
The tax basis for federal income tax purposes in the real estate was
approximately $54,800,000 at December 31, 1996.
Note (3) Depreciation:
No depreciation has been provided for the period September 11, 1992
(Effective Date) to December 31, 1995 as the assets were "Held for
Sale". (See Notes 1 and 2 to Combined Financial Statements).
Note (4) Correction of interest recorded in prior years; such interest was
capitalized during the period the Properties were classified as "Held
for Sale" and therefore has no impact on equity.
F-17
<PAGE> 109
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Lexreit Properties, Inc.
We have audited the accompanying balance sheet of Lexreit Properties, Inc.
as of April 24, 1997. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Lexreit Properties, Inc. at April
24, 1997, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Columbus, Ohio
April 24, 1997
F-18
<PAGE> 110
LEXREIT PROPERTIES, INC.
BALANCE SHEET
APRIL 24, 1997
<TABLE>
<S> <C>
ASSETS
Cash................................................................................ $1,000
------
Total assets...................................................................... $1,000
======
SHAREHOLDERS' EQUITY
Preferred stock:
Class A Senior, $1,000 face value, 7,500 shares
authorized, none outstanding
Blank Check, no par value, 500,000 shares
authorized, none outstanding
Common stock with no par value, 2.5 million shares
authorized, 100 shares outstanding
Additional paid in capital.......................................................... $1,000
------
Total shareholders' equity........................................................ $1,000
======
</TABLE>
F-19
<PAGE> 111
LEXREIT PROPERTIES, INC.
NOTES TO BALANCE SHEET
APRIL 24, 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Lexreit Properties, Inc. (the "Company") was formed as an Ohio corporation
on April 4, 1997, commenced operations on April 24, 1997, and will succeed to
the business of 66 apartment properties currently controlled by Cardinal Realty
Services Inc. ("CRSI"). Upon completion of the contemplated transaction, the
Company will control and hold 60% of the interests of Cardinal Properties L.P.
(the "Operating Partnership"). The Operating Partnership will own substantially
all interests of the properties.
The Company intends to qualify and will elect to be taxed as a real estate
investment trust ("REIT") for Federal income tax purposes for the taxable year
ended December 31, 1997. To maintain qualification as a REIT, the Company must
distribute to shareholders at least 95% of REIT taxable income.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2 -- COMMITMENTS AND CONTINGENCIES
After the transaction is consummated, the Company expects to make quarterly
distributions to its shareholders. Due to the Company's structure as described
in Note 1, the Company's ability to make such quarterly distributions will
depend upon cash the Company expects to receive from the operations of the
Operating Partnership. The Company believes that its ability, as a general
partner, to directly control the Operating Partnership partially mitigates the
risks associated with such ownership structure.
NOTE 3 -- TRANSACTIONS WITH RELATED PARTIES
Cardinal Realty Services Inc. ("CRSI") will provide certain services to the
Company, including public reporting, procurement of insurance, management
information, tax services, accounting and other financial services. In addition,
an affiliate of CRSI will provide property management services to the Properties
in which the Company will have controlling interests at the completion of the
contemplated transaction.
NOTE 4 -- OFFERING COSTS
Legal and other fees have been and will be incurred related to the planned
offering described in Note 1. CRSI will pay such costs and be reimbursed by the
Company should sufficient funds become available. The Company will record such
amounts at that time.
F-20
<PAGE> 112
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE DISTRIBUTION COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL,
OR A SOLICITATION OF AN OFFER TO BUY, THE COMPANY COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
SUMMARY
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................ 1
SUMMARY COMBINED PRO FORMA
FINANCIAL DATA.......................... 12
RISK FACTORS.............................. 14
THE DISTRIBUTION.......................... 24
THE COMPANY............................... 28
DISTRIBUTION POLICY....................... 30
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS.................... 31
CAPITALIZATION............................ 37
SELECTED FINANCIAL DATA................... 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................. 41
BUSINESS AND PROPERTIES................... 44
POLICIES AND OBJECTIVES WITH RESPECT TO
CERTAIN ACTIVITIES...................... 46
THE FORMATION............................. 47
MANAGEMENT................................ 49
CERTAIN TRANSACTIONS; TRANSACTIONS WITH
CRSI.................................... 52
OPERATING PARTNERSHIP AGREEMENT........... 56
SUBSCRIPTION AGREEMENT.................... 60
1997 PERFORMANCE EQUITY PLAN OF CRSI...... 61
PRINCIPAL SHAREHOLDERS OF THE COMPANY..... 61
SHARES ISSUED AND OUTSTANDING............. 62
CAPITAL STOCK OF THE COMPANY.............. 63
SHARES AVAILABLE FOR FUTURE SALE.......... 68
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS.......................... 69
ERISA CONSIDERATIONS...................... 79
EXPERTS................................... 80
LEGAL MATTERS............................. 80
GLOSSARY.................................. 81
</TABLE>
======================================================
======================================================
UP TO 992,300 COMMON SHARES
[LEXREIT LOGO]
COMPANY COMMON STOCK
------------------------
PROSPECTUS
June , 1997
------------------------
======================================================
<PAGE> 113
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities offered hereby. Except for the SEC
registration fee all amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee.......................................................... $451.05
*Accounting fees and expenses.................................................
*Legal fees and expenses......................................................
*Blue Sky fees and expenses (including counsel fees)..........................
*Printing and engraving expenses..............................................
*Miscellaneous expenses.......................................................
-------
Total......................................................................... $
=======
</TABLE>
- ---------------
*To be completed by amendment
ITEM 31. SALES TO SPECIAL PARTIES
On April 4, 1997, following the incorporation and in connection with the
organization of the Registrant, one hundred shares of the Registrant's Company
Common Stock were issued to Cardinal Realty Services, Inc. for $1,000 in cash.
This transaction was effected in reliance on the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933, as amended.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
On April 4, 1997, following the incorporation and in connection with the
organization of the Registrant, one hundred shares of the Registrant's Company
Common Stock were issued to Cardinal Realty Services, Inc. for $1,000 in cash.
This transaction was effected in reliance on the exemption from registration
afforded by Section 4(2) of the Act.
The Registrant will enter into a Subscription Agreement as of May 15, 1997
to issue a total of up to 1,049,900 additional shares of Company Common Stock
and up to 5,500 shares of Class A Senior Preferred Stock to Cardinal Realty
Services, Inc. upon the capital contribution by Cardinal Realty Services, Inc.
to the Company of $999,000 in cash together with 60% of its limited partner's
interests in each of 62 limited partnerships and 60% of its member's interests
in 2 limited liability companies. These transactions will be effected pursuant
to Section 4(2) of the Act.
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Ohio Revised Code (the "Code") authorizes Ohio corporations to
indemnify officers and directors from liability if the officer or director acted
in good faith and in a manner reasonably believed by the officer or director to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal actions, if the officer or director had no reason to believe his
action was unlawful. In the case of an action by or on behalf of a corporation,
indemnification may not be made (i) if the person seeking indemnification is
adjudged liable for negligence or misconduct, unless the court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnification or (ii) if liability asserted against such person concerns
certain unlawful distributions. The indemnification provisions of the Ohio Code
require indemnification if a director or officer has been successful on the
merits or otherwise in defense of any action, suit or proceeding that he was a
party to by reason of the fact that he is or was a director or officer of the
corporation. The indemnification authorized under Ohio law is not exclusive and
is in addition to any other rights granted to officers and directors under the
articles of incorporation or regulations of the corporation or any agreement
between officers and directors and the corporation. A corporation may purchase
and maintain insurance or furnish similar protection on behalf of any officer or
director against any liability asserted against him and
II-1
<PAGE> 114
incurred by him in his capacity, or arising out of the status, as an officer or
director, whether or not the corporation would have the power to indemnify him
against such liability under the Ohio Code.
The Registrant's Regulations provide for the indemnification of directors
and officers of the Registrant to the maximum extent permitted by Ohio law as
authorized by the Board of Directors of the Registrant, and for the advancement
of expenses incurred in connection with the defense of any action, suit or
proceeding that he was a party to by reason of the fact that he is or was a
director of the Registrant upon the receipt of an undertaking to repay such
amount unless it is ultimately determined that the director is entitled to
indemnification.
The Registrant is seeking to obtain an insurance policy which will insure
the officers and directors of the Registrant from any claim arising out of an
alleged wrongful act by such persons in their respective capacities as officers
and directors of the Registrant.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
See page F-1 of the Prospectus for a list of the financial statements
included as part of the Prospectus.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ------------------------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the Company
3.2 Regulations of the Company
3.3 Subscription Agreement
*4.1 Specimen Share Certificate
5.1 Opinion of Benesch, Friedlander, Coplan & Aronoff LLP regarding the legality of the
Company Common Stock being registered
10.1 Forms of Management Agreements of each of the Partnerships with Lexford Properties,
Inc. or CRSI (a successor by merger to Cardinal Apartment Management Group, Inc.),
as the case may be
10.2 Form of Corporate Services Agreement between the Company and CRSI
10.3 Form of Asset Management Agreement between CRSI and each Partnership
10.4 Form of Operating Partnership Agreement
10.5 Form of Tax Indemnification Agreement
11.1 Statement regarding Computation of Per Share Earnings
12.1 Statement regarding Computation of Ratios
23.1 Consent of Ernst & Young (included at page II-5)
23.2 Consent of Benesch, Friedlander, Coplan & Aronoff LLP (included in its opinion to be
filed as Exhibit 5.1)
23.3 Proposed Director Consents
24.1 Power of Attorney (included at page II-4)
99.1 Summary of Properties and Additional Properties
99.2 Valuation of Additional Properties
</TABLE>
- ---------------
*To be filed by Amendment
II-2
<PAGE> 115
ITEM 36. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933, as amended, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933, as amended, shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 116
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS AMENDMENT NO. 1 TO
FORM S-11 REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF COLUMBUS, STATE OF OHIO, ON THE 20TH
DAY OF MAY, 1997.
LEXREIT PROPERTIES, INC.
By: /s/ MARK D. THOMPSON
------------------------------------
Mark D. Thompson
Treasurer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John B. Bartling, Jr. and Mark D. Thompson, or
any of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement on Form S-11 (including post-effective amendments), and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact, agent or their substitutes may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON THE 1ST DAY
OF MAY, 1997 IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- -----------------------------------------------------
<S> <C> <C>
/s/ JOHN B. BARTLING, JR. President and Director May 1, 1997
- ---------------------------------------- (Principal Executive Officer)
John B. Bartling, Jr.
/s/ MARK D. THOMPSON Treasurer and Director May 1, 1997
- ---------------------------------------- (Principal Financial and Accounting
Mark D. Thompson Officer)
/s/ PAUL R. SELID Director May 1, 1997
- ----------------------------------------
Paul R. Selid
</TABLE>
II-4
<PAGE> 117
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated April 24, 1997, in Amendment No. 1 to the
Registration Statement (Form S-11) and related Prospectus of Lexreit Properties,
Inc. for the registration of 992,300 shares of its Common Stock.
/s/ ERNST & YOUNG LLP
------------------------------------
Ernst & Young LLP
Columbus, Ohio
May 19, 1997
II-5
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
LEXREIT PROPERTIES, INC.
FIRST. The name of the corporation is Lexreit Properties, Inc. (the
"Corporation").
SECOND. The principal office of the Corporation in the State of Ohio is
to be located in the City of Columbus, Franklin County.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be formed under Sections 1701.01 to 1701.98,
inclusive, of the Ohio Revised Code.
FOURTH. A. GENERAL AUTHORIZATION. The total number of shares for all
classes of stock which the Corporation shall have authority to issue is
3,007,500, of which 2,500,000 of said shares shall be designated as Common
Shares, without par value (the "Common Shares"), 7,500 of said shares shall be
designated as Class A Senior Preferred Stock, without par value (the "Class A
Senior Preferred Stock"), and 500,000 of said shares shall be designated as
Preferred Shares, without par value (the "Preferred Shares").
B. EXPRESS TERMS OF THE CLASS A SENIOR PREFERRED STOCK.
---------------------------------------------------
The Class A Senior Preferred Stock shall have the following express
terms:
1. DIVIDENDS.
a. The holders of shares of Class A Senior Preferred
Stock, in preference to the holders of Common Shares and of
any other class of shares ranking junior to the Class A Senior
Preferred Stock, shall be entitled to receive out of any funds
legally available therefor, when and as declared by the Board
of Directors, dividends in cash in an amount per share of
Class A Senior Preferred Stock equal to $360 per annum. Such
dividends shall accrue and be senior from and after the date
of original issuance of the shares of Class A Senior Preferred
Stock. Any dividend payment made on the Class A Senior
Preferred Stock shall first be credited against the earliest
accrued but unpaid dividends on such Class A Senior Preferred
Stock.
b. Dividends with respect to the Class A Senior
Preferred Stock are payable quarterly in arrears on the
fifteenth day of each January, April, July and October, or, if
such day is not a business day, on the next succeeding
business day (each, a "Preferred Dividend Payment Date"). Such
dividend and any dividend payable on the Class A Senior
Preferred Stock for any partial dividend period are computed
on the basis of a 360-day year consisting of twelve 30-day
months. Dividends payable on the Class A Senior Preferred
Stock for each full dividend period are computed by dividing
the annual dividend rate by four. Dividends are payable to
<PAGE> 2
holders of record as they appear in the stock records of the
Corporation at the close of business on the applicable record
date, which is the first day of the calendar month in which
the applicable Preferred Dividend Payment Date falls or such
other date designated by the Board of Directors of the
Corporation for the payment of dividends that is no more than
thirty (30) nor less than ten (10) days prior to such
Preferred Dividend Payment Date (each, a "Preferred Dividend
Record Date").
c. No dividends on shares of Class A Senior Preferred
Stock will be declared by the Board of Directors of the
Corporation or paid or set apart for payment by the
Corporation at such time as, and to the extent that, the terms
and provisions of any agreement of the Corporation, including
any agreement relating to its indebtedness, or any provisions
of these Amended and Restated Articles of Incorporation
prohibit such declaration, payment or setting apart
for payment or provide that such declaration, payment
or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or
payment would be restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Class A
Senior Preferred Stock accrue whether or not the Corporation
has earnings, whether or not there are funds legally
available for the payment of such dividends and whether or
not such dividends are declared. Holders of the Class A
Senior Preferred Stock are not entitled to any dividends
(except for liquidating dividends as described below) in
excess of full senior dividends as described above.
d. If any shares of Class A Senior Preferred Stock
are outstanding, no dividends will be declared or paid or set
apart for payment on the Common Shares of the Corporation, or
any other class or series of capital stock of the Corporation
ranking junior, as to dividends, to the Class A Senior
Preferred Stock, unless full dividends have been or
contemporaneously are declared and paid (or declared and a sum
sufficient for the payment thereof set apart for such payment)
on the Class A Senior Preferred Stock for all past dividend
periods and the then current dividend period. No interest, or
sum of money in lieu of interest, is payable in respect of any
dividend payment or payments on Class A Senior Preferred Stock
which may be in arrears.
e. Except as provided in the immediately preceding
paragraph, unless full dividends on the Class A Senior
Preferred Stock have been or contemporaneously are declared
and paid (or declared and a sum sufficient for the payment
thereof set apart for payment) for all past dividend periods
and the then current dividend period, no dividends will be
declared or paid or set aside for payment, and no other
distribution or dividend will be declared or made, upon the
Common Shares or any other class or series of capital stock of
the Corporation ranking junior, as to dividends, to the Class
A Senior Preferred Stock, upon liquidation, dissolution or
winding up, or be redeemed, purchased or otherwise acquired
for any consideration.
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<PAGE> 3
2. LIQUIDATION.
a. (1) In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs
of the Corporation, the holders of Class A Senior
Preferred Stock shall be entitled to receive in full
out of the assets of the Corporation, including its
capital, before any amount shall be paid or
distributed among the holders of the Common Shares or
any other shares ranking junior to the Class A Senior
Preferred Stock, a liquidation preference equal to
the sum of $3,000 per share of Class A Senior
Preferred Stock (subject to adjustment as the result
of any Distribution of Net Proceeds (as defined
below)), plus an amount equal to all dividends
accrued and unpaid thereon to the date of payment of
the amount due pursuant to such liquidation,
dissolution or winding up of the affairs of the
Corporation. If the legally available assets of the
Corporation are insufficient to permit the payment
upon all outstanding Class A Senior Preferred Stock
of the full preferential amount to which they are
entitled, then such assets shall be distributed
ratably upon all outstanding shares of Class A Senior
Preferred Stock in proportion to the full
preferential amount to which each such share is
entitled.
(2) After payment to the holders of Class A
Senior Preferred Stock of the full preferential
amounts as set forth above, the holders of Class A
Senior Preferred Stock, as such, shall have no right
or claim to any of the remaining assets of the
Corporation.
b. If liquidating distributions have been made in
full to all holders of shares of Class A Senior Preferred
Stock, the remaining assets of the Corporation will be
distributed to the holders of the Preferred Shares, if any, in
accordance with the respective seniority and preferences of
each class and series thereof then outstanding and then to the
Common Shares.
c. The merger or consolidation of the Corporation
into or with any other Corporation, the merger of any other
Corporation into it, or the sale, lease or conveyance of all
or substantially all of the assets of the Corporation, shall
not be deemed to be a dissolution, liquidation or winding up
for purposes of this Section.
3. OPTIONAL REDEMPTION. At any time, and from time to time,
the Corporation will have the right to redeem, in whole or in part, the
outstanding shares of Class A Senior Preferred Stock for a redemption
price equal to the liquidation preference of $3,000 per share, together
with any accrued and unpaid dividends thereon to the redemption date,
without interest. The redemption price shall be paid in cash out of the
assets of the Corporation legally available for distribution.
-3-
<PAGE> 4
4. PROCEDURE FOR REDEMPTION.
a. With respect to any redemption of fewer than all
the outstanding shares of Class A Senior Preferred Stock, the
number of shares to be redeemed shall be determined by the
Board of Directors and the shares to be redeemed shall be
selected by lot or pro rata as may be determined by the Board
of Directors, or by any other method determined by the Board
of Directors, in its sole discretion, to be equitable.
b. In the event the Corporation shall redeem shares
of Class A Senior Preferred Stock, notice of such redemption
shall be given by first class mail, postage prepaid, mailed
not less than 30 calendar days nor more than 60 calendar days
prior to the redemption, to each holder of record of the
shares to be redeemed at such holder's address as the same
appears on the stock register of the Corporation; provided,
however, that the failure to give such notice or any defect
therein shall not affect the validity of the redemption of any
shares of Class A Senior Preferred Stock to be redeemed,
except as to the holder to whom the Corporation has failed to
give said notice or except as to the holder whose notice was
defective. Each such notice shall state: (i) the date of
redemption; (ii) the total number of shares of Class A Senior
Preferred Stock to be redeemed and the number of shares of
Class A Senior Preferred Stock to be redeemed from such
holder; (iii) the redemption price; (iv) the place or places
where certificates for such shares are to be surrendered for
payment of the redemption price; and (v) that dividends on the
shares to be redeemed will cease to accrue upon such
redemption.
c. Notice having been mailed as aforesaid, from and
after the redemption date (unless default shall be made by the
Corporation in providing money for the payment of the
redemption price of the shares called for redemption),
dividends on the shares of Class A Senior Preferred Stock so
called for redemption shall cease to accrue; provided,
however, that if the shares are not redeemed on such date,
dividends will continue to accrue. Said shares shall no longer
be deemed to be outstanding and shall have the status of
authorized but unissued shares of Class A Senior Preferred
Stock and all rights of the holders thereof as shareholders of
the Corporation (except the right to receive from the
Corporation the redemption price) shall cease. Upon surrender
in accordance with said notice of the certificates for any
shares so redeemed (properly endorsed or assigned for
transfer, if the Board of Directors shall so require and the
notice shall so state), such shares shall be redeemed by the
Corporation at the redemption price as provided above. If
fewer than all the shares represented by any such certificate
are redeemed, a new certificate shall be issued representing
the unredeemed shares without cost to the holder thereof.
d. On the date of any redemption being made pursuant
to Section 3 above which is specified in a notice given
pursuant to Section 4(b) above, the Corporation shall, and at
any time after such notice shall have been mailed and before
the date of redemption the Corporation may, deposit for the
benefit of the holders of shares of
-4-
<PAGE> 5
Class A Senior Preferred Stock to be redeemed the funds
necessary for such redemption, including the amount necessary
to pay all cumulative and unpaid dividends and accrued and
unpaid dividends from the immediately preceding Preferred
Dividend Payment Date to the date of redemption, with a bank
or trust company selected by the Board of Directors and having
a capital and surplus of at least $50,000,000. Any moneys so
deposited by the Corporation and unclaimed at the end of six
years from the date designated for such redemption shall
revert to the general funds of the Corporation. After such
reversion, any such bank or trust company shall, upon demand,
pay over to the Corporation such unclaimed amounts and
thereupon such bank or trust company shall be relieved of all
responsibility in respect thereof and any holder of shares of
Class A Senior Preferred Stock to be redeemed shall look only
to the Corporation for the payment of the redemption price
plus all cumulative and unpaid dividends and accrued and
unpaid dividends from the immediately preceding Preferred
Dividend Payment Date to the date of redemption.
5. VOTING.
a. Holders of the Class A Senior Preferred Stock do
not have any voting rights, except as set forth below. With
respect to any matter in which the Class A Senior Preferred
Stock is entitled to vote, including any action by written
consent, each share of Class A Senior Preferred Stock is
entitled to one vote. The holders of each share of the Class A
Senior Preferred Stock may separately designate a proxy for
the vote to which that share of Class A Senior Preferred Stock
is entitled.
b. Whenever dividends on any shares of the Class A
Senior Preferred Stock have been in arrears for six or more
consecutive quarterly periods, the holders of such shares of
Class A Senior Preferred Stock, voting separately as a class,
will be entitled to vote for the election of one additional
director of the Corporation at a special meeting called by the
holders of record of at least 10% of the Class A Senior
Preferred Stock, or at the next annual meeting of shareholders
of the Corporation, and to vote for the election of a director
to continue to hold the additional director position (or to
replace the existing additional director) at each subsequent
annual meeting, until all dividends accumulated on such shares
of the Class A Senior Preferred Stock for the past dividend
periods and the current dividend period have been fully paid
(or declared and a sum sufficient for the payment thereof has
been set aside for payment). In such event, the number of
members of the entire Board of Directors of the Corporation
will be increased by the addition of such director and, if
necessary, in order to maintain a majority of Independent
Directors in accordance with Article TENTH below. In the event
that, as a result of the provisions of the immediately
preceding sentence, a vacancy or vacancies arise in the Board
of Directors, the Board of Directors is authorized to fill
such vacancy or vacancies until the next meeting of
shareholders of the Corporation at which directors are
elected. Each of such directors will be elected to serve until
the earlier of (i) the election and qualification of such
director's successor or (ii) payment of the dividend arrearage
to the holders of Class A Senior Preferred Stock (or the
declaration of such dividend
-5-
<PAGE> 6
payments, with a sum sufficient for the payment thereof having
been set aside for payment).
c. So long as any shares of the Class A Senior
Preferred Stock remain outstanding, the Corporation will not,
without the affirmative vote or consent of the holders of at
least a majority of the shares of the Class A Senior Preferred
Stock outstanding at the time, given in person or by proxy,
either in writing or at a meeting (voting separately as a
class), (i) authorize or create, or increase the authorized or
issued amount of, any class or series of capital stock ranking
senior to or on a parity with the Class A Senior Preferred
Stock with respect to payment of dividends or the distribution
of assets upon liquidation, dissolution or winding up; (ii)
amend, alter or repeal the provisions of these Amended and
Restated Articles of Incorporation, or of the Subscription
Agreement, dated _______________, 1997, by and between the
corporation and CRSI (the "Subscription Agreement"), whether
by merger, consolidation or otherwise, so as to materially and
adversely affect any right, preference, privilege or voting
power of the Class A Senior Preferred Stock or the holders
thereof; provided, however, that any increase in the amount of
the authorized Class A Senior Preferred Stock or the creation
or issuance of any other class or series of Preferred Shares,
in each case ranking junior to the Class A Senior Preferred
Stock, will not be deemed to materially and adversely affect
such rights, preferences, privileges or voting powers.
d. So long as any shares of Class A Senior Preferred
Stock remain outstanding, the Corporation will not, without
the affirmative vote or consent of the holders of at least a
majority of the shares of Class A Senior Preferred Stock
outstanding at the time, given in person or by proxy, either
in writing or at a meeting (voting separately as a class),
consummate a "change of control transaction." A "change of
control transaction" is any transaction requiring approval of
the holder of the Corporation's outstanding Common Shares and
involving the sale of all or substantially all of the assets
of the Corporation or the merger or consolidation of the
Corporation with or into another corporation or entity or a
Control Share Acquisition as defined in Article SEVENTH,
Section 1.b.(i)(c) of these Amended and Restated Articles of
Incorporation.
e. The foregoing voting provisions will not apply if,
at or prior to the time when the act with respect to which
such vote would otherwise be required is effected, all
outstanding shares of the Class A Senior Preferred Stock have
been redeemed or called for redemption, upon proper notice,
and sufficient funds have been deposited in trust to effect
any such redemption.
C. EXPRESS TERMS OF THE PREFERRED SHARES.
1. GENERAL. The Preferred Shares may be issued from time to
time in one or more series. All Preferred Shares shall be of equal rank
and shall be identical, except in respect of the matters that may be
fixed by the Corporation's Board of Directors as hereinafter provided,
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and each share of each series shall be identical with all other shares
of such series, except that in the case of any series on which
dividends are cumulative the dates from which dividends are cumulative
may vary to reflect differences in the date of issue. Subject to the
provisions of this Section C, which provisions shall apply to all
Preferred Shares, the Board of Directors of the Corporation hereby is
authorized to cause such shares to be issued in one or more series and
with respect to each such series prior to the issuance thereof to fix:
a. The designation of the series which may be by
distinguishing number, letter and/or title.
b. The number of shares of the series, which number
the directors may (except where otherwise provided in the
creation of the series) increase or decrease (but not below
the number of shares thereof then outstanding).
c. The dividend or distribution rate of the series.
d. The dates at which dividends or distributions, if
declared, shall be payable and the dates from which dividends
or distributions shall be cumulative.
e. The redemption rights and price or prices, if any,
for shares of the series.
f. The terms and amount of any sinking fund provided
for the purchase or redemption of shares of the series.
g. The amounts payable on shares of the series in the
event of any voluntary or involuntary liquidation, dissolution
or winding up of the affairs of the Corporation.
h. Whether the shares of the series shall be
convertible into shares of any other class or series of the
Corporation, and, if so, the specification of such other class
or series, the conversion price or prices, any adjustments
thereof, the date or dates as of which such shares shall be
convertible, and other terms and conditions upon which such
conversion may be made.
i. Restrictions on the issuance of shares of the same
series or of any other class or series.
The Corporation's Board of Directors is authorized to adopt
from time to time amendments to these Amended and Restated Articles of
Incorporation fixing, with respect to each such series, the matters
described in clauses (a) to (i), inclusive, of this Section C.1.
2. DIVIDEND PREFERENCE. The holders of outstanding Preferred
Shares shall be entitled to receive dividends, in preference to the
holders of Common Shares when, as and if declared by the Board of
Directors of the Corporation from funds legally available therefor
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<PAGE> 8
in cash at the rate for such series fixed in accordance with the
provisions of Section C.1. and no more, payable on the dates fixed for
such series. Such dividends shall be cumulative, in the case of shares
of each particular series, from and after the date or dates fixed with
respect to such series. No dividends may be paid upon or declared or
set apart for any of the Preferred Shares for any dividend period
unless:
a. as to each series of Preferred Shares entitled to
cumulative dividends, dividends for all past dividend periods
shall have been paid or shall have been declared and a sum
sufficient for the payment thereof set apart; and
b. as to all series of Preferred Shares, dividends
for the current dividend period shall have been paid or be or
have been declared and a sum sufficient for the payment
thereof set apart ratably in accordance with the amounts which
would be payable as dividends on the shares of the respective
series for the current dividend period if all dividends for
the current dividend period were declared and paid in full.
No dividend in respect of past dividend periods shall be paid
upon or declared and set apart for payment on any of the Preferred
Shares entitled to cumulative dividends unless there shall be or have
been declared and set apart for payment on all outstanding Preferred
Shares entitled to cumulative dividends, dividends for past dividend
periods ratably in accordance with the amounts which would be payable
on the shares of the series entitled to cumulative dividends if all
dividends due for all past dividend periods were declared and paid in
full.
3. LIQUIDATION PREFERENCE.
a. In the event of any liquidation, dissolution or
winding up of the Corporation, whether voluntary or
involuntary, holders of the Preferred Shares shall be entitled
to be paid first out of the assets of the Corporation
available for distribution to holders of the Corporation's
capital shares of all classes, whether such assets are capital
surplus, or earnings, before any sums shall be paid or any
assets distributed among the holders of Common Shares, pro
rata to the extent available. The Preferred Shares shall
receive the amounts fixed with respect to shares of such
series in accordance with Section C.1., plus an amount equal
to all dividends accrued and unpaid thereon to the date of
payment of the amount due pursuant to such liquidation,
dissolution or winding up of the affairs of the Corporation.
Such amounts shall be tendered to the holders of the Preferred
Shares with respect to such liquidation, dissolution or
winding up, before any sums shall be paid or any assets
distributed among the holders of the Common Shares. In case
the net assets of the Corporation legally available therefor
are insufficient to permit the payment upon all outstanding
Preferred Shares of the full preferential amount to which they
are respectively entitled, then such net assets shall be
distributed ratably upon outstanding Preferred Shares in
proportion to the full preferential amount to which each such
share is entitled. After such payment shall have been made in
full to the holders of the Preferred Shares or funds necessary
for such payment shall have been set aside by the Corporation
in trust for the account of holders of the Preferred Shares so
as to be
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available for such payment, holders of the Preferred Shares
shall be entitled to no further participation in the
distribution of the assets of the Corporation and the
remaining assets available for distribution shall be
distributed in accordance with Section D below.
b. Whenever the distribution provided for herein and
fixed in accordance with Section C.1. shall be paid in
property other than cash, the value of such distribution shall
be the fair market value of such property as determined in
good faith by the Board of Directors of the Corporation.
4. RESTRICTIONS AND LIMITATIONS.
a. NO AMENDMENT OF AMENDED AND RESTATED ARTICLES OF
INCORPORATION. The Corporation shall not amend its Amended
and Restated Articles of Incorporation without the approval
by vote or written consent by the holders of at least a
majority of the then outstanding Preferred Shares, each
Preferred Share to be entitled to one vote in each instance,
if such amendment would change any of the rights,
preferences, privileges or limitations provided for herein
for the benefit of any Preferred Share. Without limiting the
generality of the immediately preceding sentence, the
Corporation will not amend its Amended and Restated Articles
of Incorporation without the approval by the holders of at
least two-thirds of the then outstanding Preferred Shares if
such amendment would:
(1) ALTERATION OF SENIORITY RIGHTS. Change
the relative seniority rights of the holders of
Preferred Shares as to the payment of dividends in
relation to the holders of any other capital shares
of the Corporation; or
(2) REDUCTION OF LIQUIDATION PREFERENCES.
Reduce the amount payable to the holders of Preferred
Shares upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, or
change the relative seniority of the liquidation
preferences of the holders of Preferred Shares to the
rights upon liquidation of the holders of any other
capital shares of the Corporation or change the
dividend rights of the holders of Preferred Shares;
or
(3) CANCELLATION OF CONVERSION OR REDEMPTION
RIGHTS. Cancel or modify the conversion rights or
redemption rights, if any, of the holders of
Preferred Shares.
b. RESTRICTIONS ON TRANSFER. The Preferred Shares are
subject to the restrictions on transfer set forth in Section E
of this Article FOURTH as well as the restrictions set forth
in Article SEVENTH.
c. CONTROL SHARE ACQUISITION RESTRICTIONS. The
Preferred Shares are subject to the restrictions on transfer
set forth with respect to those shares in Article SEVENTH
hereof.
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<PAGE> 10
D. EXPRESS TERMS OF COMMON SHARES. Each Common Share shall have one
vote upon all matters to be voted on by the holders of Common Shares. Each
Common Share shall be entitled to participate equally in all dividends payable
with respect to the Common Shares and until such time as the Corporation
determines to terminate its status as a REIT (as defined below), the Corporation
shall declare and pay such dividends as may be required under the Code (as
defined below) to qualify for treatment as, and to maintain the Corporation's
status as, a REIT. Each Common Share shall be entitled to share ratably, subject
to the rights and preferences of any series of Preferred Shares, in all assets
of the Corporation in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation, or upon any
distribution of the assets of the Corporation. The Common Shares are subject to
the restrictions on transfer set forth in Section E of this Article FOURTH and
Article SEVENTH hereof.
E. RESTRICTIONS ON TRANSFER OF PREFERRED SHARES AND COMMON
SHARES.
1. RESTRICTIONS ON TRANSFER.
a. DEFINITIONS. For purposes of this Section E of
this Article FOURTH, the following terms shall have the
following meanings set forth below:
"Affiliate", when used in reference to a Person, means (i) any
Person who directly or indirectly controls or is controlled by
or is under common control with that Person, (ii) any other
Person who owns, beneficially, directly or indirectly, 5% or
more of the outstanding capital stock, shares or equity
interests of that Person, or (iii) any officer, director,
employee, partner or trustee of that Person or any Person
controlling, controlled by or under common control with that
Person (excluding trustees and persons serving in similar
capacities who are not otherwise an Affiliate of that Person).
For purposes of this definition, "control" (including the
correlative meanings of the terms "controlled by" and "under
common control with"), as used with respect to any Person,
means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies
of that Person, through the ownership of voting securities,
partnership interests or other equity interests.
"BofA" shall mean Bank of America National Trust and Savings
Association.
"Beneficial Ownership" shall mean ownership of Equity Shares
by a Person who would be treated as an owner of such Equity
Shares either directly or indirectly through the application
of Section 544 of the Code (as defined below), as modified by
Section 856(h)(1)(B) of the Code, and any comparable successor
provisions thereto. The terms "Beneficial Owner,"
"Beneficially Owns," and "Beneficially Owned" shall have
correlative meanings.
"Beneficiary" shall mean, with respect to any Trust, one or
more organizations described in each of Section 170(b)(1)(A)
(other than clause (vii) or (viii) thereof) and Section
170(c)(2) of the Code that are named by the Corporation as the
beneficiary
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<PAGE> 11
or beneficiaries of such Trust, in accordance with Section
E.2.a. of this Article FOURTH.
"Board of Directors" shall mean the Board of Directors of the
Corporation.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
"Code of Regulations" shall mean the Regulations of the
Corporation, as amended from time to time.
"Constructive Ownership" shall mean ownership of Equity Shares
by a Person who would be treated as an owner of such Equity
Shares either directly or indirectly through the application
of Section 318 of the Code, and any comparable successor
provisions thereto, as modified by Section 856(d)(5) of the
Code. The terms "Constructive Owner," "Constructively Owns,"
and "Constructively Owned" shall have correlative meanings.
"CRSI" shall mean Cardinal Realty Services, Inc., an Ohio
corporation.
"Distribution" shall mean CRSI's distribution to its
shareholders of 92% of the Corporation's issued and
outstanding Common Shares owned by CRSI.
"Equity Shares" shall mean Common Shares, shares of Class A
Senior Preferred Stock and Preferred Shares of the
Corporation. The term "Equity Shares" shall include all
Preferred Shares, shares of Class A Senior Preferred Stock and
Common Shares of the Corporation that are held as
Shares-in-Trust in accordance with this Section E of this
Article FOURTH.
"Market Price" on any date shall mean the average of the
Closing Price for the five consecutive Trading Days ending on
such date. The "Closing Price" on any date shall mean the last
sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal
consolidated transaction reporting system with respect to
securities listed on the principal national securities
exchange on which those Equity Shares are listed or admitted
to trading or, if those Equity Shares are not listed or
admitted to trading on any national securities exchange, the
last quoted price, or if not so quoted, the average of the
high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers,
Inc. Automated Quotation System or, if such system is no
longer in use, the principal other automated quotations system
that may then be in use or, if the shares of Equity Shares are
not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional
market maker making a market in those Equity Shares selected
by the Board of Directors.
"Non-Transfer Event" shall mean an event other than a
purported Transfer that would cause any Person to Beneficially
Own or Constructively Own Equity Shares in excess of the
Ownership Limit, including, but not limited to, the issuance,
granting of any
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<PAGE> 12
option or entering into of any agreement for the sale,
transfer or other disposition of Equity Shares or the sale,
transfer, assignment or other disposition of any securities or
rights convertible into or exchangeable for Equity Shares.
"Ownership Limit" shall mean 9% of the number of outstanding
shares of any class of Equity Shares.
"Permitted Transferee" shall mean any Person designated as a
Permitted Transferee in accordance with this Section E of this
Article FOURTH.
"Person" shall mean an individual, corporation, partnership,
estate, trust (including a trust qualified under Section
401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside for or to be used exclusively for the
purposes described in Section 642(c) of the Code, association,
private foundation within the meaning of Section 509(a) of the
Code, joint stock company or other entity and also includes a
"group" as that term is used for purposes of Section 13(d)(3)
of the Securities Exchange Act of 1934, as amended.
"Prohibited Owner" shall mean, with respect to any purported
Transfer or Non-Transfer Event, any Person who, but for this
Section E of this Article FOURTH, would own record title to
Equity Shares.
"REIT" shall mean a real estate investment trust under Section
856 of the Code.
"Restriction Termination Date" shall mean the first day after
the date of the Distribution on which the Board of Directors
determines that it is no longer in the best interests of the
Corporation to attempt to, or continue to, qualify as a REIT.
"Shares-in-Trust" shall mean any Equity Shares designated as
Shares-in-Trust pursuant to this Section E of this Article
FOURTH.
"Trading Day" shall mean a day on which the principal national
securities exchange on which the applicable Equity Shares are
listed or admitted to trading is open for the transaction of
business or, if those Equity Shares are not listed or admitted
to trading on any national securities exchange, shall mean any
day other than a Saturday, a Sunday or a day on which banking
institutions in the State of New York are authorized or
obligated by law or executive order to close.
"Transfer" (as a noun) shall mean any sale, transfer, gift,
assignment, devise or other disposition of Equity Shares,
whether voluntary or involuntary, whether of record,
constructively or beneficially and whether by operation of law
or otherwise. "Transfer" (as a verb) shall have the
correlative meaning.
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<PAGE> 13
"Trust" shall mean any separate trust created pursuant to this
Section E of this Article FOURTH for the exclusive benefit of
any Beneficiary.
"Trustee" shall mean any Person or entity unaffiliated with
both the Corporation and any Prohibited Owner, such Trustee to
be designated by the Corporation to act as trustee of any
Trust, or any successor trustee thereof.
B. RESTRICTION ON TRANSFERS AND NON-TRANSFER
EVENT.
(1) Except as set forth in Section E.1.g. of
this Article FOURTH, from the date of the
Distribution to the Restriction Termination Date, (i)
no Person shall Beneficially Own or Constructively
Own outstanding Equity Shares in excess of the
Ownership Limit, but any Transfer or Non-Transfer
Event that, if effective, would result in any Person
Beneficially Owning or Constructively Owning
outstanding Equity Shares in excess of the Ownership
Limit shall be void AB INITIO as to the Transfer or
Non-Transfer Event affecting that number of Equity
Shares which would be otherwise Beneficially Owned or
Constructively Owned by such Person in excess of the
Ownership Limit and the intended transferee shall
acquire no rights in such excess Equity Shares.
(2) Except as set forth in Section E.1.g. of
this Article FOURTH, from the date of the
Distribution to the Restriction Termination Date, any
Transfer or Non-Transfer Event that, if effective,
would result in any class of Equity Shares being
beneficially owned by fewer than 100 Persons
(determined without reference to any rules of
attribution) shall be void AB INITIO as to the
Transfer or Non-Transfer Event affecting that number
of shares which would be otherwise beneficially owned
(determined without reference to any rules of
attribution) by the transferee, and the intended
transferee shall acquire no rights in such Equity
Shares.
(3) From the date of the Distribution to the
Restriction Termination Date, any Transfer of or
Non-Transfer Event affecting Equity Shares that, if
effective, would result in the Corporation being
"closely held" within the meaning of Section 856(h)
of the Code shall be void AB INITIO as to the
Transfer of or Non-Transfer Event affecting that
number of Equity Shares which would cause the
Corporation to be "closely held" within the meaning
of Section 856(h) of the Code, and the intended
transferee shall acquire no rights in such Equity
Shares.
(4) From the date of the Distribution to the
Restriction Termination Date, any Transfer of or
Non-Transfer Event affecting Equity Shares that, if
effective, would cause the Corporation to
Constructively Own 10% or more of the ownership
interests in a tenant of the real property of the
Corporation or of any direct or indirect subsidiary
of the Corporation (a
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"Subsidiary"), within the meaning of Section
856(d)(2)(B) of the Code, shall be void AB INITIO as
to the Transfer of or Non-Transfer Event affecting
that number of Equity Shares which would cause the
Corporation to Constructively Own 10% or more of the
ownership interests in a tenant of the Corporation's
or of a Subsidiary's real property, within the
meaning of Section 856(d)(2)(B) of the Code, and the
intended transferee shall acquire no rights in such
excess Equity Shares.
C. TRANSFER TO TRUST.
(1) If, notwithstanding the other provisions
contained in this Section E, at any time after the
Distribution and prior to the Restriction Termination
Date there is a purported Transfer or Non-Transfer
Event such that any Person would either Beneficially
Own or Constructively Own Equity Shares in excess of
the Ownership Limit, then, (i) except as set forth in
Section E.1. of this Article FOURTH, the purported
transferee shall acquire no right or interest (or, in
the case of a Non-Transfer Event, the Person holding
record title to the Equity Shares Beneficially Owned
or Constructively Owned by such Beneficial Owner or
Constructive Owner, shall cease to own any right or
interest) in such number of Equity Shares which would
cause such Beneficial Owner or Constructive Owner to
Beneficially Own or Constructively Own Equity Shares
in excess of the Ownership Limit, (ii) such number of
Equity Shares in excess of the Ownership Limit
(rounded up to the nearest whole share) shall be
designated Shares-in-Trust and, in accordance with
this Section E, transferred automatically by
operation of the terms of this Article FOURTH,
Section E.1.c. to a Trust to be held in accordance
with this Section E, and (iii) the Prohibited Owner
shall submit such number of Equity Shares to the
Corporation for registration in the name of the
Trustee. Such transfer to a Trust and the designation
of shares as Shares-in-Trust shall be effective as of
the close of business on the business day prior to
the date of the Transfer or Non-Transfer Event, as
the case may be.
(2) If, notwithstanding the other provisions
contained in this Section E at any time after the
Distribution and prior to the Restriction Termination
Date, there is a purported Transfer or Non-Transfer
Event that, if effective, would (i) result in any
class of the Equity Shares being beneficially owned
by fewer than 100 Persons (determined without
reference to any rules of attribution), (ii) result
in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code, or (iii) cause
the Corporation to Constructively Own 10% or more of
the ownership interest in a tenant of the
Corporation's or of a Subsidiary's real property,
within the meaning of Section 856(d)(2)(B) of the
Code, then (x) the purported transferee shall not
acquire any right or interest for, in the case of a
Non-Transfer Event, the Person holding record title
to the Equity Shares with respect to which such
Non-Transfer Event occurred, shall cease to own any
right or interest in such
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<PAGE> 15
number of Equity Shares, the ownership of which by
such purported transferee or record holder would (A)
result in any class of Equity Shares being
beneficially owned by fewer than 100 Persons
(determined without reference to any rules of
attribution), (B) result in the Corporation being
"closely held" within the meaning of Section 856(h)
of the Code, or (C) cause the Corporation to
Constructively Own 10% or more of the ownership
interests in a tenant of the Corporation's or of a
Subsidiary's real property, within the meaning of
Section 856(d)(2)(B) of the Code, (y) such number of
Equity Shares (rounded up to the nearest whole share)
shall be designated Shares-in-Trust and, in
accordance with this Section E, transferred
automatically by operation of the terms of this
Article FOURTH, Section E.1.c.(2) to a Trust to be
held in accordance with this Section E, and (z) the
Prohibited Owner shall submit such number of Equity
Shares to the Corporation for registration in the
name of the Trustee. Such transfer to a Trust and the
designation of shares as Shares-in-Trust shall be
effective as of the close of business on the business
day prior to the date of the Transfer or Non-Transfer
Event, as the case may be.
d. REMEDIES FOR BREACH. If the Corporation, or its
designee, shall at any time determine in good faith that a
Transfer or Non-Transfer Event has taken place in violation of
this Section E or that a Person intends to acquire or has
attempted to acquire Beneficial Ownership or Constructive
Ownership of any Equity Shares in violation of this Section E,
the Corporation shall take such action as it considers
advisable to refuse to give effect to or to prevent such
Transfer or Non-Transfer Event or acquisition, including, but
not limited to, refusing to give effect to such Transfer on
the books of the Corporation or instituting proceedings to
enjoin such Transfer or Non-Transfer Event or acquisition.
e. NOTICE OF RESTRICTED TRANSFER. Any Person who
acquires or attempts to acquire Equity Shares in violation of
this Section E, or any Person who owned Equity Shares that
were transferred to a Trust pursuant to this Section E, shall
immediately give written notice to the Corporation of such
event and shall provide to the Corporation such other
information as the Corporation may request in order to
determine the effect, if any, of such event on the
Corporation's status as a REIT.
f. OWNERS REQUIRED TO PROVIDE INFORMATION. From the
date of the Distribution to the Restriction Termination Date:
(1) Every Beneficial Owner or Constructive
Owner of more than 5%, or such lower percentage as is
specified pursuant to regulations issued under the
Code, of the outstanding shares of any class of
shares of the Corporation shall, within 30 days after
January 1 of each year, provide to the Corporation a
written statement or affidavit stating the name and
address of such Beneficial Owner or Constructive
Owner, the number of Equity Shares
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Beneficially Owned or Constructively Owned, and a
description of how such shares are held.
(2) Each Person who is a Beneficial Owner or
Constructive Owner of Equity Shares and each Person
(including the shareholder of record) who is holding
Equity Shares for a Beneficial Owner or Constructive
Owner shall provide to the Corporation a written
statement or affidavit stating such information as
the Corporation may request in order to determine the
Corporation's status as a REIT or to ensure
compliance with the Ownership Limit as applicable.
g. EXCEPTIONS. The Ownership Limit shall not apply to
all Equity Shares owned by CRSI now or in the future and shall
not be subject to the provisions of this Section E, Article
FOURTH. The Ownership Limit shall not apply to Common Shares
received by BofA as a result of the Distribution for so long
as BofA or any of its Affiliates continue to own such Common
Shares. The Ownership Limit shall not apply to the acquisition
of Equity Shares by an underwriter that participates in a
public offering of such shares for a period of 90 days
following the purchase by such underwriter of such shares. In
addition, the Board of Directors upon receipt of a ruling from
the Internal Revenue Service or an opinion of counsel, in
either case to the effect that the Corporation's status as a
REIT would not be jeopardized thereby, may allow a Person to
own a certain amount in excess of the Ownership Limit if (i)
the Board of Directors obtains such representations and
undertakings from such Person as are reasonably necessary to
ascertain that no Person's Beneficial Ownership or
Constructive Ownership of Equity Shares could result in the
Corporation (a) losing its REIT status for federal income tax
purposes, or (b) being "related" to any tenant or lessee under
the REIT rules of the Code, and (ii) such Person agrees in
writing that any violation or attempted violation that could
cause such a result will cause a transfer to a Trust of Equity
Shares pursuant to this Section E.
2. SHARES-IN-TRUST.
a. TRUST. Any Equity Shares transferred to a Trust
and designated Shares-in-Trust pursuant to this Section E
shall be held for the exclusive benefit of the Beneficiary.
The Corporation shall name a Beneficiary for each Trust within
five days after the Corporation first has actual notice of the
existence thereof. Any transfer to a Trust, and designation of
Equity Shares as Shares-in-Trust, shall be effective as of the
close of business on the business day prior to the date of the
Transfer or Non-Transfer Event that results in the transfer
to the Trust. Shares-in-Trust shall continue to constitute
issued and outstanding Equity Shares of the Corporation and
shall be entitled to the same rights and privileges as are all
other issued and outstanding Equity Shares of the same class
and series. When transferred to a Permitted Transferee in
accordance with this Section E, such Shares-in-Trust shall
cease to be designated as Shares-in-Trust.
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b. DIVIDEND RIGHTS. The Trust, as record holder of
Shares-in-Trust, shall be entitled to receive all dividends
and distributions declared by the Board of Directors on such
Shares-in-Trust and shall hold such dividends and
distributions in trust for the benefit of the Beneficiary. The
Prohibited Owner with respect to Shares-in-Trust shall repay
to the Trust the amount of any dividends or distributions
received by it that (i) are attributable to those
Shares-in-Trust and (ii) the record date of which was on or
after the date that such shares became Shares-in-Trust. The
Corporation may take any measures that it determines
reasonably necessary to recover the amount of any such
dividend or distribution paid to a Prohibited Owner,
including, if necessary, withholding any portion of future
dividends or distributions payable on Equity Shares
Beneficially Owned or Constructively Owned by the Person who,
but for the provisions of this Section E, would Constructively
Own or Beneficially Own the Shares-in-Trust; and, as soon as
reasonably practicable following the Corporation's receipt or
withholding thereof, shall pay over to the Trust for the
benefit of the Beneficiary the dividends so received or
withheld, as the case may be.
c. RIGHTS UPON LIQUIDATION. In the event of any
voluntary or involuntary liquidation, dissolution or winding
up of, or any distribution of the assets of, the Corporation,
each holder of Shares-in-Trust shall be entitled to receive,
ratably with each other holder of Equity Shares of the same
class or series, that portion of the assets of the Corporation
which is available for distribution to the holders of such
class and series of Equity Shares. The Trust shall distribute
to the Prohibited Owner the amounts received upon such
liquidation, dissolution, or winding up, or distribution,
PROVIDED, HOWEVER, that the Prohibited Owner shall not be
entitled to receive amounts pursuant to this Section E in
excess of, in the case of a purported Transfer in which the
Prohibited Owner gave value for Equity Shares and which
Transfer resulted in the transfer of the shares to the Trust,
the price per share, if any, such Prohibited Owner paid for
the Equity Shares and, in the case of a Non-Transfer Event or
Transfer in which the Prohibited Owner did not give value for
such shares (E.G., if the shares were received through a gift
or devise) and which Non-Transfer Event or Transfer, as the
case may be, resulted in the transfer of shares to the Trust,
the price per share equal to the Market Price on the date of
such Non-Transfer Event or Transfer. Any remaining amount in
such Trust shall be distributed to the Beneficiary.
d. VOTING RIGHTS. The Trustee shall be entitled to
vote all Shares-in-Trust. Any vote by a Prohibited Owner as a
holder of Equity Shares prior to the discovery by the
Corporation that the Equity Shares are Shares-in-Trust shall
so far as is practicable under applicable law, be rescinded
and shall be void AB INITIO with respect to such
Shares-in-Trust and the Prohibited Owner shall be deemed to
have given, as of the close of business on the business day
prior to the date of the Transfer or Non-Transfer Event that
results in the transfer to the Trust of Equity Shares pursuant
to this Section E, an irrevocable proxy to the Trustee to vote
the Shares-in-Trust in the manner in which the Trustee, in
its sole and absolute discretion, considers advisable.
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e. DESIGNATION OF PERMITTED TRANSFEREE. The Trustee
shall have the exclusive and absolute right to designate a
Permitted Transferee of any Shares-in-Trust. In an orderly
fashion so as not to materially adversely affect the Market
Price of the Shares-in-Trust, the Trustee shall designate a
Person as Permitted Transferee, so long as (i) the Permitted
Transferee so designated purchases for valuable consideration
(whether in a public or private sale) the Shares-in-Trust and
(ii) the Permitted Transferee so designated can acquire such
Shares-in-Trust without such acquisition resulting in a
transfer to a Trust and the redesignation of such Equity
Shares as Shares-in-Trust. Upon the designation by the Trustee
of a Permitted Transferee, the Trustee shall (i) cause to be
transferred to the Permitted Transferee that number of
Shares-in-Trust acquired by the Permitted Transferee, (ii)
cause to be recorded on the books of the Corporation that the
Permitted Transferee is the holder of record of such number of
Equity Shares, (iii) cause the Shares-in-Trust to be canceled,
and (iv) distribute to the Beneficiary any and all amounts
held by the Trustee with respect to the Shares-in-Trust after
making any payment to the Prohibited Owner required under
Sections E.2.(c) and E.2.(f) of this Article FOURTH.
f. COMPENSATION TO RECORD HOLDER OF EQUITY SHARES
THAT BECOME SHARES-IN-TRUST. Any Prohibited Owner shall be
entitled (following designation of Equity Shares proposed or
purported to be held by that Prohibited Owner as Shares-
in-Trust and subsequent designation of a Permitted Transferee
or the Trustee's acceptance of an offer to purchase such
shares) to receive from the Trustee following the sale or
other disposition of such Shares-in-Trust the lesser of (i) in
the case of (a) a purported Transfer in which the Prohibited
Owner gave value for Equity Shares and which Transfer resulted
in the transfer of the shares to the Trust, the price per
share, if any, such Prohibited Owner paid for the Equity
Shares, or (b) a Non-Transfer Event or Transfer in which the
Prohibited Owner did not give value for such shares (E.G., if
the shares were received through a gift or devise) and which
Non-Transfer Event or Transfer, as the case may be, resulted
in the transfer of shares to the Trust, the price per share
equal to the Market Price on the date of such Non-Transfer
Event or Transfer, and (ii) the price per share received by
the Trustee from the sale or other disposition of such
Shares-in-Trust. Any amounts received by the Trustee in
respect of such Shares-in-Trust and in excess of such amounts
to be paid to the Prohibited Owner shall be distributed to the
Beneficiary. Each Beneficiary and Prohibited Owner waive any
and all claims that they may have against the Trustee and the
Trust arising out of the disposition of Shares-in-Trust,
except for claims arising out of the gross negligence or
willful misconduct of, or any failure to make payments in
accordance with this Section E, by such Trustee or the
Corporation.
g. PURCHASE RIGHT IN SHARES-IN-TRUST. Shares-in-Trust
shall be considered to have been offered for sale to the
Corporation, or its designee, on the date of the event that
created such Shares-in-Trust status at a price per share equal
to the lesser of (i) the price per share in the event that
created such Shares-in-Trust status (or, in the case of a
devise, gift or Non-Transfer Event, the Market Price at the
time of such
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devise, gift or Non-Transfer Event) and (ii) the Market Price
on the date the Corporation, or its designee, accepts such
offer. The Corporation shall have the right to accept such
offer during the period from the date of the event which
created such Shares-in-Trust until ninety (90) days following
the date the Corporation receives notice of such event.
3. REMEDIES NOT LIMITED. Subject to Section E.1.g., nothing
contained in this Section E shall limit the authority of the
Corporation to take such other action as it deems necessary or
advisable to protect the Corporation from actions taken by any
Prohibited Owner prior to the discovery by the Corporation that the
Equity Shares are Shares-in-Trust and the interests of its shareholders
by preservation of the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit.
4. AMBIGUITY. In the case of an ambiguity in the application
of any of the provisions of Section E of this Article FOURTH, including
any definition contained in Section E.1. of this Article FOURTH, the
Board of Directors shall have the power to determine the application of
the provisions of this Section E with respect to any situation based on
the facts known to it.
5. LEGEND. Each certificate for Equity Shares shall bear the
following legend:
"The Common Shares or Preferred Shares represented by this certificate
are subject to restrictions on transfer for the purpose of the
Corporation's maintenance of its status as a real estate investment
trust under the Internal Revenue Code of 1986, as amended (the "Code").
No person may (i) Beneficially Own or Constructively Own Common Shares
in excess of 9% of the number of outstanding Common Shares, (ii)
Beneficially Own or Constructively Own shares of any class or series of
Preferred Shares in excess of 9% of the number of outstanding shares of
that class or series of Preferred Shares, (iii) Beneficially Own Equity
Shares that would result in the Equity Shares being beneficially owned
by fewer than 100 persons (determined without reference to any rules of
attribution), (iv) Beneficially Own Equity Shares that would result in
the Corporation being "closely held" under Section 856(h) of the Code
or (v) Constructively Own Equity Shares that would cause the
Corporation to Constructively Own 10% or more of the ownership interest
in a tenant of the Corporation's or of a Subsidiary's real property,
within the meaning of Section 856(d)(2)(B) of the Code. Each holder of
Equity Shares is required to furnish to the Corporation such
information as the Corporation may request pursuant to Section E.1.f.
of Article FOURTH of the Corporation's Amended and Restated Articles of
Incorporation. Any Person who attempts to Beneficially Own or
Constructively Own Equity Shares in excess of the above limitations
must immediately notify the Corporation in writing. If those
restrictions are violated, the Equity Shares represented hereby in
excess of those limitations will be transferred automatically by
operation of the Corporation's Amended and Restated Articles of
Incorporation to a Trust and will be designated Shares-in-Trust. All
capitalized terms in this legend have the meanings defined in Article
FOURTH of the Corporation's Amended and Restated Articles of
Incorporation, as they may be amended from time to time. Upon written
request delivered to the Secretary of the Corporation at its principal
place of business,
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the Corporation will mail to the holder of this Certificate a copy of
Article FOURTH without charge within five (5) days after receipt of
written request therefor.
6. SEVERABILITY. If any provision of this Article FOURTH or
any application of any such provision is determined to be invalid by
any Federal or state court having jurisdiction over the issues, the
validity of the remaining provisions shall not be affected, and other
applications of such provision shall be affected only to the extent
necessary to comply with the determination of such court.
7. ANTIDILUTION. If at any time during which there are issued
and outstanding Shares-in-Trust, the Corporation (i) declares a stock
dividend on any class or series of Equity Shares into a greater or
fewer number of shares, (ii) splits or combines its Common Shares or
Preferred Shares, or (iii) otherwise engages in a transaction resulting
in a recapitalization of the issued and outstanding Common Shares or
Preferred Shares into a greater or fewer number of shares, then the
number of shares of each class of Shares-in-Trust then held in trust
for any Beneficiary shall automatically be increased or decreased so
that the number of shares of each class of Shares-in-Trust for such
Beneficiary shall equal the number of shares of each class of
Shares-in-Trust that would have been held in trust if the Transfer(s)
or other event(s) resulting in the conversion of Common Shares or
Preferred Shares into Shares-in-Trust had occurred immediately
following the transaction(s) referred to in clauses (i), (ii) or (iii),
above, giving full effect to such transaction(s) therein described.
FIFTH. No holder of shares of the Corporation shall have any preemptive
right to subscribe for or to purchase any shares of the Corporation of any class
whether such shares or such class be now or hereafter authorized.
SIXTH. The Corporation may from time to time, pursuant to authorization
by the Directors and without action by the shareholders, purchase or otherwise
acquire shares of the Corporation of any class or classes in such manner, upon
such terms and in such amounts as the Directors shall determine; subject,
however, to such limitation or restriction, if any, as is contained in these
Amended and Restated Articles of Incorporation of the Corporation, including the
express terms of any class of shares of the Corporation outstanding, at the time
of the purchase or acquisition in question.
SEVENTH. In addition to the provisions of Article FOURTH of these
Amended and Restated Articles of Incorporation, the acquisition and transfer of,
and the right of any Person to acquire or transfer, shares of the Corporation
shall be subject to the following restrictions:
A. CONTROL SHARE ACQUISITION RESTRICTIONS. Except as otherwise provided
in this Article SEVENTH, no Person shall make a Control Share Acquisition
without the prior authorization of the Corporation's shareholders in accordance
with the provisions of this Article SEVENTH.
1. DEFINITIONS. For purposes of this Article SEVENTH, the
following terms shall have the meanings set forth below:
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a. "Person" includes, without limitation, an
individual, a corporation (whether nonprofit or for profit), a
partnership, a limited liability company, an unincorporated
society or association, and two or more Persons having a joint
or common interest, including, without limitation, two or more
Persons having any understanding, relationship, agreement or
other arrangement with respect to acquiring, holding, voting
or disposing of any shares of the Corporation entitled to vote
in the election of directors.
b. (1) "Control Share Acquisition" means the
acquisition, directly or indirectly, by any Person,
of shares of the Corporation that, when added to all
other shares of the Corporation in respect of which
such Person may exercise or direct the exercise of
voting power as provided in this Section A.1.b.,
would entitle such Person, immediately after such
acquisition, directly or indirectly, alone or with
others, to exercise or direct the exercise of the
voting power of the Corporation in the election of
Directors within any of the following ranges of such
voting power:
(a) One-fifth or more but less than
one-third of such voting power;
(b) One-third or more but less than
a majority of such voting power; or
(c) A majority or more of such
voting power.
A bank, broker, nominee, trustee, or other Person who
acquires shares in the ordinary course of business
for the benefit of others in good faith and not for
the purpose of circumventing this Article SEVENTH
shall, however, be deemed to have voting power only
of shares in respect of which such Person would be
able, without further instructions from others, to
exercise or direct the exercise of votes at a meeting
of shareholders called under this Article SEVENTH.
For purposes of this Article SEVENTH, the acquisition
of securities immediately convertible into shares of
the Corporation with voting power in the election of
Directors shall be treated as an acquisition of such
shares.
(2) The acquisition of any shares of the
Corporation does not constitute a Control Share
Acquisition for the purpose of this Article SEVENTH,
if the acquisition was or is consummated in, results
from, or is the consequence of any of the following
circumstances:
(a) By underwriters in good faith
and not for the purpose of circumventing
this Article SEVENTH, in connection with an
offering of the securities of the
Corporation to the public;
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(b) By bequest or inheritance, by
operation of law upon the death of an
individual, or by any other transfer without
valuable consideration, including a gift,
that is made in good faith and not for the
purpose of circumventing this Article
SEVENTH;
(c) Pursuant to the satisfaction of
a pledge or other security interest created
in good faith and not for the purpose of
circumventing this Article SEVENTH; or
(d) Pursuant to a merger or
consolidation adopted, or a combination or
majority share acquisition authorized, by
shareholder vote in compliance with the
provisions of these Amended and Restated
Articles of Incorporation and Section
1701.78, or Section 1701.83, of the Ohio
Revised Code, if the Corporation is the
surviving or new corporation in the merger
or consolidation or is the acquiring
corporation in the combination or majority
share acquisition and if the vote of
shareholders of the surviving, new, or
acquiring corporation is required by the
provisions of Section 1701.78 or 1701.83 of
the Ohio Revised Code.
The acquisition by any Person of shares of
the Corporation in a manner described under this
Section A.1.b.(2) shall be deemed to be a Control
Share Acquisition authorized pursuant to this Article
SEVENTH, within the range of voting power under
Section A.1.b.(1)(a), (b) or (c) of this Article
SEVENTH, that such Person is entitled to exercise
after such acquisition, provided that, in the case of
an acquisition in a manner described under Section
A.1.b.(2)(b) or (c), the transferor of shares to such
Person had previously obtained any authorization of
shareholders required under this Article SEVENTH in
connection with such transferor's acquisition of
shares of the Corporation.
(3) The acquisition of shares of the
Corporation in good faith and not for the purpose of
circumventing this Article SEVENTH, from any Person
whose (a) Control Share Acquisition had previously
been authorized by shareholders in compliance with
this Article SEVENTH or (b) previous acquisition of
shares would have constituted a Control Share
Acquisition but for Section A.1.b.(2), does not
constitute a Control Share Acquisition for the
purpose of this Article SEVENTH unless such
acquisition entitles the Person making such
acquisition, directly or indirectly, alone or with
others, to exercise or direct the exercise of voting
power of the Corporation in the election of Directors
in excess of the range of such voting power
authorized pursuant to this Article SEVENTH, or
deemed to be so authorized under Section A.1.b.(2).
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<PAGE> 23
c. "Interested Shares" means shares of the
Corporation with respect to which any of the following Persons
may exercise or direct the exercise of the voting power in the
election of Directors:
(1) any Person whose Notice prompted the
calling of the meeting of shareholders;
(2) any officer of the Corporation elected
or appointed by the Directors of the Corporation; or
(3) any employee of the Corporation who is
also a Director of the Corporation.
d. "Interested Shares" also means any shares of the
Corporation acquired, directly or indirectly, by any Person
from the holder or holders thereof for a valuable
consideration during the period beginning with the date of the
first public disclosure of a proposed Control Share
Acquisition of the Corporation or any proposed merger,
consolidation, or other transaction that would result in a
change in control of the Corporation or all or substantially
all of its assets and ending on the date of any special
meeting of the Corporation's shareholders held thereafter
pursuant to this Article SEVENTH, for the purpose of voting on
a Control Share Acquisition proposed by any Person if either
of the following applies:
(1) The aggregate consideration paid or
given by the Person who acquired the shares, and any
other persons acting in concert with him, for all
such shares exceeds two hundred fifty thousand
dollars; or
(2) The number of shares acquired by the
Person who acquired the shares, and any other persons
acting in concert with him, exceeds one-half of one
percent of the outstanding shares of the Corporation
entitled to vote in the election of Directors.
B. PROCEDURE. In order to obtain authorization of a Control Share
Acquisition by the Corporation's shareholders, a Person who proposes to make a
Control Share Acquisition shall deliver to the Corporation at its principal
executive office a notice (the "Notice") that sets forth all of the following
information:
1. The identity of the Person who is giving the Notice;
2. A statement that the Notice is given pursuant to this
Article SEVENTH;
3. The number and class of shares of the Corporation owned,
directly or indirectly, by the Person who gives the Notice;
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4. The range of voting power, described in this Article
SEVENTH, Section A.1.b.(1) under which the proposed Control Share
Acquisition would, if consummated, fall;
5. A description in reasonable detail of the terms of the
proposed Control Share Acquisition; and
6. Reasonable evidence that the proposed Control Share
Acquisition, if consummated, would not be contrary to law and that the
Person who is giving the Notice has the financial capacity to make the
proposed Control Share Acquisition.
C. CALL OF SPECIAL MEETING OF SHAREHOLDERS. The Directors of the
Corporation shall, within twenty (20) days after receipt of such Notice by the
Corporation, call a special meeting of shareholders to be held not later than
fifty (50) days after receipt of the Notice by the Corporation, unless the
Person who delivered the Notice agrees to a later date, to consider the proposed
Control Share Acquisition; provided that the Directors shall have no obligation
to call such meeting (and the proposed Control Share Acquisition need not be
submitted to a vote of shareholders) if the Directors make a determination
within twenty (20) days after receipt of the Notice (i) that the Notice was not
given in good faith, (ii) that the proposed Control Share Acquisition would not
be in the best interests of the Corporation and its shareholders or (iii) that
the proposed Control Share Acquisition could not be consummated for financial or
legal reasons. If called, the Directors may adjourn such special meeting if,
prior to such special meeting, the Corporation has received a Notice from any
other Person and the Directors have determined that the Control Share
Acquisition proposed by such other Person or a proposed merger, consolidation or
sale of assets of the Corporation should be presented to shareholders
contemporaneously with the proposed Control Share Acquisition at an adjourned
meeting or at a special meeting held at a later date.
D. NOTICE OF SPECIAL MEETING. The Corporation shall, as promptly as
reasonably practicable, give notice of such special meeting, if called, to all
shareholders of record as of the record date set forth for such meeting whether
or not entitled to vote thereat. Such notice shall include or be accompanied by
a copy of the Notice and by a statement of the Corporation, authorized by the
Directors, of its position or recommendation, or that it is taking no position
or making no recommendation, with respect to the proposed Control Share
Acquisition.
E. REQUIREMENTS FOR APPROVAL. The Person who delivered the Notice in
respect of which a special meeting of shareholders is called by the Directors
may make the proposed Control Share Acquisition if both of the following occur:
(i) the shareholders of the Corporation who hold shares of the Corporation
entitling them to vote in the election of Directors authorize such acquisition
at the special meeting, at which a quorum is present, by the affirmative vote of
a majority of the voting power of all outstanding shares of the Corporation
entitled to vote in the election of Directors and of a majority of the portion
of such voting power excluding the voting power of Interested Shares; and (ii)
such acquisition is consummated, in accordance with the terms so authorized, not
later than three hundred sixty (360) days following shareholder authorization of
the Control Share Acquisition. A quorum shall be deemed to be present at such
special meeting if at least a majority of the voting power of the Corporation in
the election of Directors, and a majority of the
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portion of such voting power excluding the voting power of Interested Shares,
are represented at such special meeting in person or by proxy.
F. VIOLATION OF RESTRICTION. Any transaction or other event which
would, directly or indirectly, result in a Control Share Acquisition by any
Person in violation of this Article SEVENTH, shall be valid only with respect to
such number of shares as does not result in a violation of this Article SEVENTH,
and such acquisition or transfer shall be null and void AB INITIO with respect
to the remainder of such shares (any such remainder of shares being hereinafter
called "Excess Shares"). Until the Excess Shares are transferred to a Person, if
any, whose acquisition thereof will not be null and void, the purported
transferor (the "Purported Transferor") of the Excess Shares shall continue to
own the Excess Shares and have all rights (including all voting rights and all
rights to any dividends or other distributions) incident to ownership of such
Excess Shares, unless the Purported Transferor and the purported transferee (the
"Purported Transferee") may be deemed to have become one and the same Person.
If (i) the last clause of the first sentence in the foregoing paragraph
(that is, the clause declaring certain attempted acquisitions or transfers to be
null and void AB INITIO) is determined to be invalid or unenforceable or (ii) if
the Purported Transferor and Purported Transferee may be deemed to have become
one and the same Person, the Purported Transferee and any successor who holds
Excess Shares shall (i) be conclusively deemed to have acted as an agent on
behalf of the Corporation in acquiring the Excess Shares and to hold such Excess
Shares on behalf of the Corporation and (ii) deliver to the Corporation
forthwith upon demand of the Corporation, all certificates for such Excess
Shares duly endorsed for transfer and cancellation. As the equivalent of
treasury securities for such purposes, the Excess Shares shall not be entitled
to any voting rights, shall not be considered to be outstanding for quorum or
voting purposes, and shall not be entitled to participate in any dividends,
interest or other distribution. Any person who receives dividends, interest or
any other distribution with respect to Excess Shares shall hold the same as
agent for the Corporation and, following a permitted transfer, for the
transferee thereof. Notwithstanding the foregoing, any holder of Excess Shares
may transfer the same (together with any distributions thereon) to any Person,
who following such transfer, would not own shares in violation of this Article
SEVENTH (a "permitted transfer"). Upon such permitted transfer, the Corporation
shall pay or distribute to the transferee any distributions on the Excess Shares
not previously paid or distributed.
G. PROXIES. No proxy appointed for or in connection with the
shareholder authorization of a Control Share Acquisition pursuant to this
Article SEVENTH is valid if it provides that it is irrevocable. No such proxy is
valid unless it is sought, appointed, and received both:
A. In accordance with all applicable requirements of law; and
B. Separate and apart from the sale or purchase, contract or
tender for sale or purchase, or request or invitation for tender for
sale or purchase, of shares of the Corporation.
H. REVOCABILITY OF PROXIES. Proxies appointed for or in connection
with the shareholder authorization of a Control Share Acquisition pursuant
to this Article SEVENTH, shall
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<PAGE> 26
be revocable at all times prior to the obtaining of such shareholder
authorization, whether or not coupled with an interest.
I. LEGEND ON SHARE CERTIFICATES.
Each certificate representing shares of the Corporation's capital stock
shall contain the following legend: "Transfer of the shares represented by this
Certificate is subject to the restrictions and other provisions of Article
SEVENTH of the Corporation's Amended and Restated Articles of Incorporation as
the same may be in effect from time to time. Upon written request delivered to
the Secretary of the Corporation at its principal place of business, the
Corporation will mail to the holder of this Certificate a copy of such Article
SEVENTH without charge within five (5) days after receipt of written request
therefor. By accepting this Certificate, the holder hereof acknowledges that it
is accepting same subject to the provisions of said Article SEVENTH as the same
may be in effect from time to time and covenants with the Corporation and each
shareholder thereof from time to time to comply with the provisions of said
Article SEVENTH as the same may be in effect from time to time."
EIGHTH. The provisions of Section 1701.831 of the Ohio Revised Code, as
amended from time to time, or any successor provision or provisions to said
sections, shall not apply with respect to any particular Control Share
Acquisition, as such is defined in said Section, regarding this Corporation so
long as Article SEVENTH of these Amended and Restated Articles of Incorporation,
as such Amended and Restated Articles of Incorporation may be amended from time
to time, remains an Article of these Amended and Restated Articles of
Incorporation and remains substantially in full force and effect, disregarding
any renumbering of such Article SEVENTH resulting from any amendment of these
Amended and Restated Articles of Incorporation.
NINTH. Except as otherwise provided in Article SEVENTH, notwithstanding
any provision of the Ohio Revised Code now or hereafter in force requiring for
any purpose the vote, consent, waiver or release of the holders of shares
entitling them to exercise two-thirds, or any other proportion, of the voting
power of the Corporation or of any class or classes of shares thereof, such
action may be taken by the vote, consent, waiver or release of the holders of
shares entitling them to exercise a majority of the voting power of the
Corporation or of such class or classes. The foregoing shall not apply to
shareholder action taken under Chapter 1704 of the Ohio Revised Code, as such
Chapter may be amended from time to time.
TENTH. At all times following the consummation of the Distribution (as
defined in Article FOURTH), at least a majority of the members of the Board of
Directors shall, except as may result from a vacancy or vacancies therein, be
Independent Directors. An "Independent Director" shall mean a person who is not
an employee, officer, director or partner, or a former employee, officer,
director or partner, of the Corporation or CRSI, or any of their Affiliates or
successors and is not related by blood or marriage to any such person, and who
has not received, and is not a member or employee of a firm or other business
that has received, from the Corporation or CRSI, or any of their Affiliates, in
any year within the five (5) years immediately preceding or any year during his
incumbency as a director, fees or other income in excess of 1% of the gross
income, for any applicable year, of such
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firm or business. "Affiliate" of any person or entity means any other person or
entity which, directly or indirectly, controls or is controlled by or under
common control with such person or entity (excluding any trustee under, or any
committee with responsibility for administering, any employee benefit plan under
which such person, or any wholly-owned subsidiary of such person may have
liability. A person or entity shall be deemed to be "controlled by" any other
person or entity if such other person or entity possesses, directly or
indirectly, power to direct or cause the direction of the management and
policies of such person or entity whether through the ownership of voting
securities, by contract or otherwise.
ELEVENTH. A director of the Corporation shall not be disqualified by
his office from dealing or contracting with the Corporation either as a seller,
purchaser or otherwise, nor shall any contract or transaction be void or
voidable with respect to the Corporation for the reason that it is between the
Corporation and one or more of its directors or officers, or between the
Corporation and any other person in which one or more of its directors or any
officers are directors, trustees, or officers, or have a financial or personal
interest, or for the reason that one or more interested directors or officers
participate in or vote at the meeting of the directors or a committee thereof
which authorizes such contract or transaction, if in any such case (a) the
material facts as to his or their relationship or interests and as to the
contract or transaction are disclosed or are known to the directors or the
committee and the directors or committee, in good faith reasonably justified by
such facts, authorize the contract or transaction by the affirmative vote of a
majority of the disinterested directors, even though the disinterested directors
constitute less than a quorum; or (b) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the shareholders entitled to vote thereon and the contract or
transaction is specifically approved at a meeting of the shareholders held for
such purpose by the affirmative vote of the holders of shares entitling them to
exercise a majority of the voting power of the Corporation held by persons not
interested in the contract or transaction; or (c) the contract or transaction is
fair as to the Corporation as of the time it is authorized or approved by the
directors, a committee thereof, or the shareholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the directors, or a committee thereof which authorizes the contract or
transaction.
TWELFTH. No person who is serving or has served as a director of the
Corporation shall be personally liable to the Corporation or any of its
shareholders for monetary damages for breach of any fiduciary duty of such
person as a director by reason of any act or omission of such person as a
director, but the foregoing provision shall not eliminate or limit the liability
of any person (a) for any breach of such person's duty of loyalty as a director
to the Corporation or its shareholders, (b) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, (c)
under Section 1701.95 of the Ohio Revised Code, (d) for any transaction from
which such person derived any improper personal benefit, or (e) to the extent
that such liability may not be limited or eliminated by virtue of Section
1701.13 of the Ohio Revised Code or any successor section or statute. Any repeal
or modification of this Article TWELFTH by the shareholders of the Corporation
shall be prospective only, and shall not adversely affect any limitation on the
personal liability of a director of the Corporation existing at the time of such
repeal or modification.
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THIRTEENTH. These Amended and Restated Articles of Incorporation may be
amended at any time by a vote of the majority of the directors, without
shareholder approval, to the extent permitted by law.
FOURTEENTH. No holder of shares of the Corporation shall have the right
to cumulatively vote any shares of the Corporation of any class whether such
shares or such class be now or hereafter authorized in the election of directors
of the Corporation.
FIFTEENTH. If any provision (or portion thereof) of these Amended and
Restated Articles of Incorporation shall be found to be invalid, prohibited, or
unenforceable for any reason, the remaining provisions (or portions thereof) of
these Amended and Restated Articles of Incorporation shall remain in full force
and effect, and shall be construed as if such invalid, prohibited, or
unenforceable provision had been stricken herefrom or otherwise rendered
inapplicable, it being the intent of the Corporation and its shareholders that
each such remaining provision (or portion thereof) of these Amended and Restated
Articles of Incorporation remain, to the fullest extent permitted by law,
applicable and enforceable as to all shareholders, notwithstanding any such
finding.
SIXTEENTH. These Amended and Restated Articles of Incorporation take
the place of and supersede the existing Articles of Incorporation and all
amendments thereto.
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<PAGE> 1
Exhibit 3.2
REGULATIONS
OF
LEXREIT PROPERTIES, INC.
ARTICLE I
---------
MEETINGS OF SHAREHOLDERS
------------------------
Section 1. PLACE OF MEETING. Meetings of the shareholders may be held
either within or without the State of Ohio.
Section 2. ANNUAL MEETING. The annual meeting of the shareholders,
whereat the shareholders shall elect a Board of Directors, and transact such
other business as may properly be brought before the meeting, shall be held on
such date and time as shall be determined by resolution of the Board of
Directors.
Section 3. SPECIAL MEETINGS. Special meetings of the shareholders, for
any purpose or purposes, other than those regulated by statute or by the
Articles of Incorporation, may be called at any time by the Chairman of the
Board, President, or a majority of the Board of Directors, with or without a
meeting, or the holders of not less than one-half of all the shares issued and
outstanding and entitled to vote at the particular meeting, upon written request
delivered to the President or Secretary of the Corporation. Such request shall
state the purpose or purposes of the proposed meeting. Upon receipt of any such
request, it shall be the duty of the President or Secretary to call a special
meeting of the shareholders to be held at such time, not less than seven (7) nor
more than sixty (60) days thereafter, as the President or Secretary may fix. If
the President or Secretary shall neglect to issue such call, the person or
persons making the request may issue the call.
Section 4. NOTICE OF MEETINGS. Written notice of the annual or any
special meeting of shareholders, stating the place, the date and hour of the
meeting and, in the case of special meetings, the general nature of the business
to be transacted thereat, shall be served upon or mailed, postage prepaid, not
less than seven (7) nor more than sixty (60) days before such meeting, unless a
greater period of notice is required by statute in a particular case, to each
shareholder entitled to notice thereof being of record on the date fixed as a
record date, or, if no record date be fixed, then of record ten (10) days next
preceding the date of the meeting, at such address as appears on the transfer
books of the Corporation.
Section 5. NOTICE TO JOINT SHAREHOLDERS. All notices with respect to
any shares to which persons are jointly entitled may be given to that one of
such persons who is named first upon the transfer books of the Corporation and
notice so given shall be sufficient notice to all the holders of such shares.
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<PAGE> 2
Section 6. BUSINESS AT SPECIAL MEETINGS. No business other than that
specified in the call therefor shall be considered at any special meeting.
Section 7. QUORUM. The holders of a majority of the issued and
outstanding shares entitled to vote, present in person or represented by proxy,
shall be requisite to constitute a quorum at all meetings of the shareholders,
except as otherwise provided by statute or by the Articles of Incorporation or
by these Regulations. If, however, any meeting of shareholders cannot be
organized because a quorum is not present, the holders of a majority of the
stock entitled to vote thereat, present in person or by proxy, shall have power,
except as otherwise provided by statute, to adjourn the meeting to such time and
place as they may determine. At any adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted if the meeting had been as originally called.
Section 8. REQUISITE VOTE. When a quorum is present or represented at
any meeting, the vote of the holders of a majority of the stock having voting
powers, present in person or represented by proxy, shall decide any question
brought before such meeting, unless the question is one upon which, by express
provision of the statutes or of the Articles of Incorporation or of these
Regulations, a different vote is required, in which case such express provisions
shall govern and control the decision of such question.
Section 9. VOTING RIGHTS. Except to the extent that the voting rights
of the shares of any class are increased, limited, or denied by the express
terms of such shares, each outstanding share regardless of class shall entitle
the holder thereof to one vote on each matter properly submitted to the
shareholders for their vote, consent, waiver, release, or other action. The
candidates receiving the highest number of votes, up to the number of directors
to be elected, shall be elected. Upon demand made by a shareholder at any
election of directors before the voting begins, the election shall be by ballot.
Section 10. PROXIES. Any shareholder entitled to vote at a
shareholders' meeting may be represented by proxy or proxies appointed by an
instrument in writing signed by such shareholder, or by his duly authorized
attorney, and submitted to the Secretary at or before such meeting.
Section 11. LIST OF SHAREHOLDERS. The officer or agent having charge of
the transfer books for shares of the Corporation shall make, at least five (5)
days before each meeting of shareholders, a complete list of the shareholders
entitled to vote at the meeting (being shareholders of record on the date fixed
as a record date, or if no record date be fixed, then of record ten (10) days
next preceding the date of the meeting), arranged in alphabetical order, with
the address of and the number of shares held by each, which list shall be kept
on file at the registered office of the Corporation and shall be subject to
inspection by any shareholder at any time during usual business hours. Such list
shall also be produced and kept open at the time and place of the meeting and
shall be subject to the inspection of any shareholder during the whole time of
the meeting.
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Section 12. ORGANIZATION. All meetings of the shareholders after
organization shall be presided over by the Chairman of the Board or the
President. In the absence of the Chairman of the Board and the President, any
Vice-President shall preside and shall have all the powers herein conferred upon
the President when acting as presiding officer of the meeting. The Secretary of
the Corporation shall act as secretary of all meetings of the shareholders but,
in the absence of the Secretary at any meeting of the shareholders, the
presiding officer may appoint any person to act as secretary of the meeting.
Section 13. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Board of Directors may appoint inspectors of election, who
need not be shareholders, to act at such meeting or any adjournment thereof. If
inspectors of election are not so appointed, the Chairman of any such meeting
may and, on the request of any shareholder or his proxy, shall make such
appointment at the meeting. The inspectors of election shall do all such acts as
may be proper to conduct the election or vote with fairness to all shareholders,
and shall make a written report of any matter determined by them and execute a
certificate of any fact found by them, if requested by the Chairman of the
meeting or any shareholder or his proxy. If there be three or more inspectors of
election, the decision, act or certificate of a majority shall be effective in
all respects as the decision, act or certificate of all.
Section 14. INFORMAL ACTION BY SHAREHOLDERS. Any action required to be
taken at a meeting of the shareholders may be taken without a meeting, if a
consent in writing setting forth the action so taken is signed by all of the
shareholders who would be entitled to vote at a meeting for such purpose, and
filed with the Secretary of the Corporation.
ARTICLE II
----------
DIRECTORS
---------
Section 1. NUMBER, QUALIFICATIONS AND TERM. The number of directors
which shall constitute the whole Board of Directors (sometimes hereinafter
referred to as the "Board") shall not be less than three nor more than
twenty-one (except that, where all shares of the Corporation are owned of record
by one or two shareholders, the number of directors may be less than three but
not less than the number of shareholders), as may be fixed from time to time by
resolution of the Board of Directors. No reduction in the number of directors
shall have the effect of removing any director from the Board prior to the
expiration of his term of office. Directors shall be natural persons of full age
and need not be shareholders in the Corporation. If the Corporation's Board of
Directors is not classified into classes as described in Section 2 below, each
director shall be elected to serve for a term of not more than one year but he
shall continue to serve until his successor is elected and qualified.
Section 2. CLASSES. If the Corporation's Board of Directors consists of
six (6) or more members, by resolution of the Board of Directors, directors may
be classified with respect to the time for which they severally hold office,
each class consisting of, as nearly as may be possible,
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one-third of the total number of directors constituting the entire Board of
Directors, but in no event less than three (3) members to serve no longer than
three (3) years. The Board of Directors may be classified into three (3)
classes, designated Class I, Class II, and Class III. If the Board of Directors
is classified into classes, there shall be at least two (2) classes, Class I
and Class II, and no more than three (3) classes, Class I, Class II and Class
III. The directors first appointed to Class I will hold office for a term of
one (1) year but each shall continue to serve until his successor is elected
and qualified at the next annual meeting of the shareholders. The directors
first appointed to Class II will hold office for a term of two (2) years but
each shall continue to serve until his successor is elected and qualified at
the annual meeting of shareholders. The directors first appointed to Class III,
if any, will hold office for a term of three (3) years but each shall continue
to serve until his successor is elected and qualified at the annual meeting of
shareholders. At each succeeding annual meeting of the shareholders of the
Corporation, the members of the class of Directors whose term expires at that
meeting will be elected to hold office for a term expiring at the annual
meeting of shareholders held in the third year following the year of their
election.
If the number of directors is changed, any increase or decrease shall
be apportioned among the classes so as to maintain the number of directors in
each class as nearly equal as possible, and any additional director of any class
elected to fill a vacancy resulting from an increase in such class shall hold
office for a term that shall coincide with the remaining term of that class, but
in no case will a decrease in the number of directors shorten the term of any
incumbent director. A director shall hold office until the annual meeting for
the year in which his term expires and until his successor is elected and
qualified.
Section 3. VACANCIES. A resignation from the Board of Directors shall
be deemed to take effect upon its receipt by the Secretary, unless some other
time is specified therein. A vacancy in the Board, including a vacancy created
by an increase in the number of directors, may be filled by a majority vote of
the remaining directors, though less than a majority of the whole Board, until
an election of a new Board by the shareholders is had. Any vacancy on the Board
of Directors that results from an increase in the number of directors, may be
filled by a majority of the directors, then in office, even if less than a
quorum, or by a sole remaining director, and any other vacancy occurring in the
Board of Directors may be filled by a majority of the directors then in office,
even if less than a quorum, or by a sole remaining director. Any director
elected to fill a vacancy not resulting from an increase in the number of
directors shall have the same remaining term as that of his predecessor. Any
director, or the entire Board of Directors, may be removed from office at any
time, but only for cause and only by the affirmative vote of the holders of
two-thirds of the shares entitled to vote thereon.
Section 4. DUTIES OF DIRECTORS. The business and affairs of the
Corporation shall be managed by its Board of Directors which may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by statute or by the Articles of Incorporation or by these Regulations directed
or required to be exercised and done by the shareholders.
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<PAGE> 5
Section 5. FIRST MEETING OF NEW BOARD. The first meeting of each newly
elected Board may be held at such time and place as shall be fixed by the
shareholders at the meeting at which such directors were elected, and no notice
shall be necessary to the newly elected directors in order legally to constitute
the meeting, provided a majority of the whole Board shall be present; or it may
convene at such time and place as may be fixed by the consent in writing of all
the directors.
Section 6. MEETINGS OF THE BOARD. Meetings of the Board may be called
by the Chairman of the Board or the President on at least two (2) days' notice
to each director, either personally or by mail or by telegram. Meetings of the
Board also shall be called by the President or Secretary in like manner and on
like notice on the written request of any two directors if there are three or
more directors holding a position on the Board or, on the written request of any
single director if there are less than three (3) directors holding a position on
the Board. Special meetings may be held at such times and places as may be
designated in the notices of their call, or they may be held at any time or
place, without notice, by the presence of all directors.
Section 7. NOTICE OF MEETINGS. Written notice of each meeting, stating
the time and place, shall be given to each director at least two (2) days before
such meeting, either personally or by mail or telegram.
Section 8. RATIFICATION; ACTION WITHOUT MEETING. The directors, acting
at a meeting at which a quorum is present, may ratify any act of any officer or
officers of the Corporation. If all the directors shall severally or
collectively consent in writing to any action to be taken by the Board, such
action shall be as valid a corporate action as though it had been authorized at
a meeting of the Board.
Section 9. QUORUM. At all meetings of the Board of Directors, a
majority of the directors in office shall be necessary to constitute a quorum
for the transaction of business, and the acts of a majority of the directors
present at a meeting at which a quorum is present shall be the acts of the
Board. Directors who have a personal or financial interest in a contract or
transaction which is before the Board, or who are common directors of the
Corporation and another corporation with respect to which a contract or
transaction is before the Board, may be counted in determining the presence of a
quorum at a meeting of the directors, or a committee thereof, which authorizes
the contract or transaction. If a quorum shall not be present at any meeting of
directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement of the meeting, until a quorum
shall be present.
Section 10. EXECUTIVE COMMITTEE. The Board of Directors may, by
resolution adopted by a majority of the whole Board, designate three or more of
its number to constitute an Executive Committee which, to the extent provided in
such resolution, shall have and exercise the authority of the Board in the
management of the business of the Corporation. Vacancies in the membership of
the Executive Committee shall be filled by the Board of Directors. The Executive
Committee shall keep regular minutes of its proceedings and report the same to
the Board when required.
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Section 11. OTHER COMMITTEES. The Board of Directors may, by resolution
adopted by a majority of the whole Board, designate three or more of its number
to constitute any other committee which shall have and exercise the authority
granted to it by the Board in the management of the business of the corporation.
Vacancies in the membership of a committee shall be filled by the Board of
Directors. Each committee shall keep regular minutes of its proceedings and
report the same to the Board when required.
Section 12. COMPENSATION OF DIRECTORS. Directors may receive a fee for
their services, plus a fixed sum for expenses may be allowed for attendance at
each meeting of the Board or at meetings of any committee of the Board.
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Section 13. TELEPHONIC MEETINGS. To the extent permitted by law,
members of the Board of Directors or any committee thereof may participate in a
meeting of such body through the use of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section shall constitute presence in person at such meeting.
ARTICLE III
-----------
OFFICERS
--------
Section 1. DESIGNATIONS. The Board of Directors shall elect a
President, Secretary and Treasurer and, in its discretion, a Chairman of the
Board of Directors and/or such number of Vice-Presidents as the Board may from
time to time determine. The Board of Directors may from time to time create such
offices and appoint such other officers, subordinate officers and assistant
officers as it may determine. The Chairman of the Board of Directors (if any)
shall be, but the officers need not be, chosen from among the members of the
Board of Directors. Any two or more of such offices may be held by the same
person, but no officer shall execute, acknowledge or verify any instrument in
more than one capacity.
Section 2. TERM AND REMOVAL. The officers of the Corporation shall hold
office until their successors are chosen and have qualified, or until any such
officer has resigned or is removed. Any officer elected or appointed by the
Board of Directors may be removed by the Board of Directors with or without
cause whenever in its judgment the best interests of the Corporation will be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. If the office of any officer becomes
vacant for any reason, the vacancy may be filled by the Board of Directors.
Section 3. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there
be one, shall be the Chief Executive Officer of the Corporation, unless the
Board has designated the President as Chief Executive Officer, and shall preside
at all meetings of the Board of Directors. He shall see that all orders and
resolutions of the Board are carried into effect.
Section 4. PRESIDENT. The President shall preside at all meetings of
the shareholders and shall have general and active management of the business of
the Corporation, unless the Board has delegated those duties to the Chairman of
the Board. If the Corporation has no Chairman of the Board, the President shall
have all of the duties and responsibilities previously enumerated for the
Chairman of the Board.
Section 5. VICE-PRESIDENTS. The Vice-President or, if there are more
than one, the Vice-President who has served as such for the longest period of
time, shall, in the absence or disability of the President, perform the duties
and exercise the powers of the President. In addition, each Vice-President
shall perform such other duties as shall from time to time be imposed upon him
by the Board of Directors, Chairman of the Board or President.
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<PAGE> 8
Section 6. SECRETARY. The Secretary shall give, or cause to be given,
notice of all meetings of the shareholders and of special meetings of the Board
of Directors, and shall perform such other duties as may be prescribed by the
Board of Directors or President, under whose supervision he shall act. He shall
keep in safe custody the corporate seal of the Corporation, if any, and when
authorized by the Board, affix the same to any instrument requiring it, and when
so affixed it shall be attested by his signature or by the signature of the
Treasurer or an Assistant Secretary. The Secretary shall not, without the
express written authorization of the Board of Directors, have any responsibility
for, or any duty or authority with respect to, the withholding or payment of any
federal, state or local taxes of the Corporation or the preparation or filing of
any tax returns, but shall perform such other duties as shall from time to time
be imposed upon him by the Board of Directors, Chairman of the Board, or
President.
Section 7. TREASURER. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation, and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as shall be designated by the Board. The
Treasurer shall disburse the funds of the Corporation as may be ordered by the
Board, taking proper vouchers for such disbursements, and shall render to the
President and directors an account of all his transactions as Treasurer and of
the financial condition of the Corporation. The Treasurer shall perform such
other duties as shall from time to time be imposed upon him by the Board of
Directors, Chairman of the Board or President.
Section 8. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. In the
absence or disability of the Secretary or Treasurer, the Assistant Secretaries
or Assistant Treasurers, as the case may be, in the order designated by the
Board, shall perform the duties of the Secretary or Treasurer, as the case may
be, and shall have the full powers thereof. In no case shall any Assistant
Secretary, without the express authorization and direction of the Board of
Directors, have any responsibility for, or any duty or authority with respect
to, the withholding or payment of any federal, state or local taxes of the
Corporation, or the preparation or filing of any tax return.
ARTICLE IV
----------
INDEMNIFICATION AND LIMITATION OF LIABILITY
-------------------------------------------
Section 1. In case any person was or is a party, or is threatened to be
made a party, to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative, other
than an action by or in the right of the Corporation, by reason of the fact that
he is or was a director, officer, employee, or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, trustee,
officer, employee, or agent of another corporation, domestic or foreign,
nonprofit or for profit, partnership, joint venture, trust, or other enterprise,
the Corporation shall indemnify such person against expenses, including
attorneys' fees, judgments, decrees, fines, penalties, and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding, if he
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<PAGE> 9
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, and with respect to any matter
the subject of a criminal action, suit, or proceeding, he had no reasonable
cause to believe that his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, or conviction, or upon a plea
of nolo contendere or its equivalent, shall not, itself, create a presumption
that the person did not act in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Corporation and with
respect to any matter the subject of a criminal action, suit or proceeding, that
he had reasonable cause to believe that his conduct was unlawful.
Section 2. In case any person was or is a party, or is threatened to be
made a party to any threatened, pending, or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee, or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, trustee, officer, employee, or agent of another corporation, domestic
or foreign, nonprofit or for profit, partnership, joint venture, trust or other
enterprise, the Corporation shall indemnify such person against expenses,
including attorney's fees, actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, except that no indemnifications shall be made in
respect of any of the following: (i) any claim, issue, or matter as to which
such person is adjudged to be liable for misconduct in the performance of his
duty to the Corporation unless and only to the extent that the court of common
pleas, or the court in which such action or suit was brought, determines upon
application that, despite the adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses as the court of common pleas or such other court
shall deem proper; or (ii) any action or suit in which the only liability
asserted against a director is pursuant to Section 1701.95 of the Ohio Revised
Code.
Section 3. To the extent that a director, trustee, officer, employee,
or agent has been successful on the merits or otherwise in defense of any
action, suit, or proceeding referred to in Sections 1 and 2 of this Article IV,
or in defense of any claim, issue, or matter therein, the Corporation shall
indemnify him against expenses, including attorney's fees, actually and
reasonably incurred by him in connection with the action, suit or proceeding.
Section 4. Any indemnification under Sections 1 and 2 of this Article
IV, unless ordered by a court, shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, trustee, officer, employee, or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in Sections 1
and 2 of this Article IV. Such determination shall be made as follows: (i) by a
majority vote of a quorum consisting of directors of the Corporation who were
not and are not parties to or threatened with any such action, suit, or
proceeding, (ii) if the quorum described in clause (i) of this Section 4 is not
obtainable or if a majority vote of a quorum of disinterested directors so
directs, in a written opinion by independent legal counsel other than an
attorney, or a firm having associated with it any attorney, who has been
retained by or who has performed services for the Corporation, or any person to
be indemnified within the past five (5) years, (iii) by the
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<PAGE> 10
shareholders, or (iv) by the court of common pleas or the court in which such
action, suit, or proceeding was brought. Any determination made by the
disinterested directors under clause (i) of this Section 4 or by independent
legal counsel under clause (ii) of this Section 4 shall be promptly communicated
to the person who threatened or brought the action or suit, by or in the right
of the Corporation referred to in Section 2 of this Article IV, and within ten
(10) days after the receipt of such notification, such person shall have the
right to petition the court of common pleas or the court in which such action or
suit was brought to review the reasonableness of such determination.
Section 5. (a) Unless the only liability asserted against a director in
an action, suit, or proceeding referred to in Sections 1 and 2 of this Article
IV is pursuant to Section 1701.95 of the Ohio Revised Code, expenses, including
attorneys' fees, incurred by a director in defending the action, suit, or
proceeding, shall be paid by the Corporation as they are incurred, in advance of
the final disposition of the action, suit, or proceeding, upon receipt of an
undertaking by or on behalf of the director in which he agrees to do both of the
following: (A) repay such amount if it is proved by clear and convincing
evidence in a court of competent jurisdiction that his action or failure to act
involved an act or omission undertaken with deliberate intent to cause injury to
the Corporation or undertaken with reckless disregard for the best interests of
the Corporation; and (B) reasonably cooperate with the Corporation concerning
the action, suit or proceeding.
(b) Expenses, including attorneys' fees, incurred by a
director, trustee, officer, employee or agent in defending any
action, suit or proceeding referred to in Sections 1 and 2 of this
Article IV may be paid by the Corporation as they are incurred in
advance of the final disposition of the action, suit or proceeding as
authorized by the directors in the specific case, upon the receipt of
an undertaking by or on behalf of the director, trustee, officer,
employee or agent to repay such amount, if it ultimately is determined
that he is not entitled to be indemnified by the Corporation.
Section 6. Expenses, including attorneys' fees, amounts paid in
settlement, and (except in the case of an action by or in the right of the
Corporation) judgments, decrees, fines and penalties, incurred in connection
with any potential, threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by any person by reason
of the fact that he is or was a director, officer, employee or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, trustee, officer, employee, or agent of another corporation, domestic
or foreign, nonprofit or profit, partnership, joint venture, trust or other
enterprise, may be paid or reimbursed by the Corporation, as authorized by the
Board of Directors upon a determination that such payment or reimbursement is in
the best interests of the Corporation; provided, however, that, unless all
directors are interested, the interested directors shall not participate and a
quorum shall be one-third of the disinterested directors.
Section 7. The indemnification authorized by this Article IV shall not
be exclusive of, and shall be in addition to, any other rights granted to those
seeking indemnification under the Articles of Incorporation or these Regulations
or any agreement, vote of shareholders or disinterested directors, or otherwise,
both as to action in his official capacity and as to action in
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<PAGE> 11
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, trustee, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such person.
Section 8. The Corporation may purchase and maintain insurance or
furnish similar protection, including, but not limited to, trust funds, letters
of credit or self-insurance, on behalf of or for any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, trustee, officer, employee, or
agent of another corporation, domestic or foreign, nonprofit or for profit,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have indemnified him
against such liability under this Article IV. Insurance may be purchased from or
maintained with a person in which the Corporation has a financial interest.
Section 9. The authority of the Corporation to indemnify persons
pursuant to Sections 1 and 2 of this Article IV does not limit the payment of
expenses as they are incurred, indemnification, insurance, or other protection
that may be provided pursuant to Sections 5, 6, 7 and 8 of this Article IV.
Sections 1 and 2 of this Article IV do not create any obligation to repay or
return payments made by the Corporation pursuant to Sections 5, 6, 7 and 8 of
this Article IV.
Section 10. (a) No person shall be found to have violated his duties to
the Corporation as a director of the Corporation in any action brought against
such director (including actions involving or affecting any of the following:
(i) a change or potential change in control of the Corporation; (ii) a
termination or potential termination of his service to the Corporation as a
director; or (iii) his service in any other position or relationship with the
Corporation), unless it is proved by clear and convincing evidence that the
director has not acted: (i) in good faith; (ii) in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation; or
(iii) with the care that an ordinarily prudent person in a like position would
use under similar circumstances. Notwithstanding the foregoing, nothing
contained in this paragraph (a) limits the relief available under Section
1701.60 of the Ohio Revised Code.
(b) In performing his duties, a director shall be entitled to
rely on information, opinions, reports, or statements, including
financial statements and other financial data, that are prepared or
presented by: (i) one or more directors, officers, or employees of the
Corporation whom the director reasonably believes are reliable and
competent in the matters prepared or presented; (ii) legal counsel,
public accountants, or other persons as to matters that the director
reasonably believes are within the person's professional or expert
competence; or (iii) a committee of the directors upon which he does
not serve, duly established in accordance with the provisions of these
Regulations, as to matters within its designated authority, which
committee the director reasonably believes to merit confidence.
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<PAGE> 12
(c) A director in determining what he reasonably believes to
be in the best interests of the Corporation shall consider the
interests of the Corporation's shareholders and, in his discretion, may
consider (i) the interests of the Corporation's employees, suppliers,
creditors and customers; (ii) the economy of the state and nation;
(iii) community and societal considerations; and (iv) the long-term as
well as short-term interests of the Corporation and its shareholders,
including the possibility that these interests may be best served by
the continued independence of the Corporation.
(d) A director shall be liable in damages for any action he
takes or fails to take as a director only if it is proved by clear and
convincing evidence in a court of competent jurisdiction that his
action or failure to act involved an act or omission undertaken with
deliberate intent to cause injury to the Corporation or undertaken with
reckless disregard for the best interests of the Corporation.
Notwithstanding the foregoing, nothing contained in this paragraph (d)
affects the liability of directors under Section 1701.95 of the Ohio
Revised Code or limits relief available under Section 1701.60 of the
Ohio Revised Code.
Section 11. As used in Article IV, references to the Corporation
include all constituent corporations in a consolidation or merger and the new or
surviving corporation, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at the
request of such a constituent corporation as a director, trustee, officer,
employee or agent of another corporation, domestic or foreign, nonprofit or for
profit, partnership, joint venture, trust, or other enterprise, shall stand in
the same position under this Article IV with respect to the new or surviving
corporation as he would if he had served the new or surviving corporation in the
same capacity. As used in Article IV, words of the masculine gender shall
include the feminine gender.
ARTICLE V
---------
CERTIFICATES FOR SHARES
-----------------------
Section 1. ISSUANCE. The certificates for shares of the Corporation
shall be numbered and registered in a share register as they are issued. They
shall exhibit the name of the registered holder and the number and class of
shares, and the series, if any, represented thereby and the par value of each
share or a statement that such shares are without par value, as the case may be.
The designations, preferences, voting power, qualifications, privileges,
limitations, and any special rights of the shares of each class to be issued
may, but need not, be stated in full or in the form of a summary, either upon
the face or back of the certificate. Every share certificate shall be signed by
the Chairman of the Board, President or Vice-President and the Secretary or an
Assistant Secretary, or the Treasurer or an Assistant Treasurer, but where such
certificate is signed by a registrar or transfer agent, the signature of any
corporate officer upon such certificate may be a facsimile, engraved or printed.
In case any officer who has signed or whose facsimile signature has been placed
upon any share certificate shall have ceased to be such officer because
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<PAGE> 13
of death, resignation or otherwise before the certificate is issued, it may be
issued by the Corporation with the same effect as if the officer had not ceased
to be such prior to its issuance.
Section 2. TRANSFERS OF SHARES. The Board of Directors may from time to
time appoint such transfer agents or registrars of shares as it may deem
advisable, and may define their powers and duties. Upon surrender to the
Corporation, or its transfer agent, of a share certificate duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, a new certificate or certificates shall be issued in accordance with
the directions therein contained and the old certificate shall be cancelled and
the transaction shall be recorded upon the books of the Corporation.
Section 3. FIXING RECORD DATE. The Board of Directors may fix a time,
not more than sixty (60) days nor less than ten (10) days prior to the date of
any meeting of shareholders, or the date fixed for the payment of any dividend
or distribution, or the date for the allotment of rights, or the date when any
change or conversion or exchange of shares will be made or go into effect, as a
record date for the determination of the shareholders entitled to notice of and
to vote at any such meeting, or entitled to receive payment of any such dividend
or distribution, or to receive any such allotment of rights, or to exercise the
rights in respect to any such change, conversion or exchange of shares. In such
case, only such shareholders as shall be shareholders of record on the date so
fixed shall be entitled to notice of and to vote at such meeting, or to receive
payment of such dividend or distribution, or to receive such allotment of
rights, or to exercise such rights, as the case may be, notwithstanding any
transfer of any shares on the books of the Corporation after any record date so
fixed. The Board of Directors may close the books of the Corporation against
transfers of shares during the whole or any part of the period following the
record date, and in such case written or printed notice thereof shall be mailed
at least ten (10) days before the closing thereof to each shareholder of record
at the address appearing on the records of the Corporation or supplied by him to
the Corporation for the purpose of notice.
Section 4. REGISTERED SHAREHOLDERS. The Corporation shall be entitled
to treat the holder of record of any share or shares as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in such share on the part of any other person, and shall
not be liable for any registration or transfer of shares which are registered or
to be registered in the name of a fiduciary, or the nominee of a fiduciary,
unless made with actual knowledge that a fiduciary or nominee of a fiduciary is
committing a breach of trust in requesting such registration or transfer, or
with knowledge of such facts that its participation therein amounts to bad
faith.
Section 5. LOST CERTIFICATE. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation and alleged to have been lost
or destroyed, upon receiving an affidavit of that fact made by the person
claiming that the share certificate has been lost or destroyed. When authorizing
such issuance of a new certificate or certificates, the Board may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it
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<PAGE> 14
shall require and/or give the Corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the Corporation with
respect to the certificate or certificates alleged to have been lost or
destroyed.
ARTICLE VI
----------
DIVIDENDS
---------
Dividends upon the capital stock of the Corporation, subject to the
provisions of the Articles of Incorporation relating thereto, if any, may be
declared by the Board of Directors at any regular or special meeting pursuant to
law. Dividends may be paid in cash, in property, or in shares of the
Corporation.
ARTICLE VII
-----------
FINANCIAL REPORT TO THE SHAREHOLDERS
------------------------------------
Section 1. REQUIREMENTS. At the annual meeting of shareholders, or the
meeting held in lieu thereof, the Corporation shall lay before the shareholders
a financial statement consisting of:
(a) A balance sheet containing a summary of the assets,
liabilities, stated capital, if any, and surplus of the Corporation as
of the end of the Corporation's most recent fiscal year; and
(b) A statement of profit and loss and surplus, including a
summary of profits, dividends or distributions paid, and other changes
in the surplus accounts of the Corporation for the period commencing
with the date marking the end of the period for which the last
preceding statement of profit and loss required under this Section was
made and ending with the date of said balance sheet, or in the case of
the first statement of profit and loss, from the incorporation of the
Corporation to the date of said balance sheet.
Section 2. CERTIFICATE. The financial statement shall have appended
thereto an opinion signed by the President or a Vice-President or the Treasurer
or an Assistant Treasurer of the Corporation, or by a public accountant or firm
of public accountants, to the effect that the financial statement fairly
presents the position of the Corporation and the results of its operations in
conformity with generally accepted accounting principles applied on a consistent
basis with that of the preceding period or to the effect that the financial
statements have been prepared on the basis of accounting practices and
principles that are reasonable under the circumstances.
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<PAGE> 15
Section 3. COPIES. Upon the written request of any shareholder made
within sixty (60) days after notice of any such meeting has been given, the
Corporation, not later than the fifth (5th) day after receiving such request or
the fifth (5th) day before such meeting, whichever is the later date, shall mail
to such shareholder a copy of such financial statement.
ARTICLE VIII
------------
MISCELLANEOUS
-------------
Section 1. CHECKS AND NOTES. All checks or demands for money and notes
of the Corporation shall be signed by such officer or officers or agent or
agents as the Board of Directors may from time to time designate. The signature
of any officer or agent upon any of the foregoing instruments may be a facsimile
when authorized by the Board.
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<PAGE> 16
Section 2. SEAL. The Board of Directors may, but need not, provide a
suitable seal, containing the name of the Corporation, to be kept by the
Secretary. If deemed advisable by the Board of Directors, duplicate seals may be
kept and used by other officers of the Corporation, or by any transfer agent of
its shares.
Section 3. NOTICES. Whenever, under the provisions of the statutes or
of the Articles of Incorporation, or of these Regulations, notice is required to
be given to any person, it may be given to such person either personally or by
sending a copy thereof through the mail or by telegram or similar method,
charges prepaid, to his address appearing on the books of the Corporation or
supplied by him to the Corporation for the purpose of notice. If the notice is
sent by mail or by telegram, it shall be deemed to have been given to the person
entitled thereto when deposited in the United States mail or with a telegraph
office for transmission to such person.
Section 4. WAIVER OF NOTICE. Any notice required to be given to any
person may be waived in writing signed by the person entitled to such notice
whether before or after the holding of the meeting, the notice of which is
thereby waived. Attendance of any person entitled to notice, either in person or
by proxy, at any meeting shall constitute a waiver of notice of such meeting by
such person except where such person attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting was not
lawfully called or convened.
Section 5. EMERGENCY REGULATIONS. The directors may, without further
shareholder approval, adopt such emergency regulations as they may deem
necessary or proper, to be operative only during any emergency for corporations,
when and as proclaimed by the Governor of Ohio or any other person lawfully
exercising the power and discharging the duties of the office of governor.
Section 6. MANNER OF AMENDMENT. These Regulations may be altered,
amended or repealed by the affirmative vote of two-thirds of the shares entitled
to vote thereon at any meeting duly convened after notice to the shareholders of
that purpose; or without a meeting by the written assent of the holders of
record of shares of the Corporation entitling them to exercise two-thirds of the
voting power on such proposal.
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<PAGE> 1
Exhibit 3.3
-----------
SUBSCRIPTION AGREEMENT
This Subscription Agreement (this "Agreement") is made and entered into
this ____ day of ______________, 1997, by and between Cardinal Realty Services,
Inc., an Ohio corporation ("Purchaser"), and Lexreit Properties, Inc., an Ohio
corporation ("Corporation"). The parties hereby agree as follows:
1. SUBSCRIPTION AND SALE.
1.1 SUBSCRIPTION. Purchaser hereby subscribes to purchase the
number of shares of Common Stock, without par value ("Common Shares"), set forth
in Section 1.2; and the number of shares of Class A Senior Preferred Stock
without par value ("Senior Preferred Stock"), set forth in Section 1.2; at a
purchase price of $______ per Common Share and $1,000 per share (the "Stated
Value") of Senior Preferred Stock (collectively, the "Purchase Price"). The
Purchase Price will be paid by Purchaser by (a) a contribution of cash, payable
by wire transfer of legally available funds of Purchaser, in the amount of
$999,000, and (b) a contribution of capital to Corporation, which capital
contribution consists of the transfer by Purchaser to Corporation of Interest
(as defined below) in each of the limited partnerships and limited liability
companies (each, a "Partnership") that own the properties set forth on Schedule
A, attached to this Agreement and incorporated herein by this reference (the
"Contributed Properties," and each, a "Contributed Property"). "Interest" means
(a) an undivided sixty percent (60%) limited partner's interest, if the
Partnership is a limited partnership, and (b) an undivided member's interest in
the percentage amount set forth on Schedule A if the Partnership is a limited
liability company.
1.2 ISSUANCE AND SALE. Subject to the terms and conditions of
this Agreement, Corporation will issue and sell to Purchaser, and Purchaser will
purchase, _________ Common Shares and 4,500 shares of Senior Preferred Stock.
2. TERMS OF CAPITAL STOCK. The Common Shares have those express terms
set forth in the Amended and Restated Articles of Incorporation of Corporation
(the "Articles") and, in addition, will be subject to forfeiture and
cancellation in the manner set forth in Section 7 of this Agreement. The Senior
Preferred Stock has those express terms set forth in the Articles, as well as
the additional terms set forth in this Agreement.
3. CLOSING DATE; DELIVERY; FURTHER ASSURANCES.
3.1 CLOSING DELIVERIES. The closing of the purchase and sale
of the Common Shares and the Senior Preferred Stock ("Closing") shall be held on
such date, and at such time and place, as are mutually agreed upon by the
parties, and is subject to the approval of the shareholders of Purchaser of the
distribution by Purchaser to Purchaser's shareholders of not less than 93% of
the Common Shares purchased under this Agreement. Subject to the terms and
conditions of this Agreement, (a) Purchaser will deliver to Corporation, or will
have delivered prior to Closing, (i) a wire transfer of cash in the amount of
$999,000, and (ii) an Assignment of
<PAGE> 2
Limited Partner's and Member's Interests, in form and substance satisfactory to
Corporation, transferring to Corporation the Interests, and (b) Corporation will
deliver to Purchaser a certificate representing the number of Common Shares, and
a certificate representing the number of shares of Senior Preferred Stock to be
purchased by Purchaser from Corporation, as consideration for the capital
contribution described above.
3.2 FURTHER TRANSFER; FURTHER ASSURANCES. Purchaser and
Corporation acknowledge that Purchaser and Corporation will, concurrently with
the Closing, execute and deliver that certain agreement of limited partnership
("Operating Partnership Agreement") of Cardinal Properties L.P., an Ohio limited
partnership (the "Operating Partnership"); and will proceed to make the
contributions to the capital of the Partnership contemplated by the Operating
Partnership Agreement. The Operating Partnership Agreement will be in
substantially the form attached hereto as Exhibit A. Pursuant to the terms of
the Operating Partnership Agreement, Corporation will further assign
substantially all of the Interests to the Operating Partnership in exchange for
a sixty percent (60%) general partner's interest in the Operating Partnership
and Purchaser will transfer (or will cause its subsidiary or affiliate to
transfer), as its capital contribution to the Operating Partnership,
substantially all remaining interests in the Partnerships (other than the
general partner's or managing member's interests therein) not transferred to
Corporation pursuant to the terms of this Agreement (which interests will be
identified with particularity on a schedule or exhibit to the Operating
Partnership Agreement). Purchaser, in its capacity as general partner or
managing member of each of the Partnerships (or, as the sole equity owner of its
subsidiary or affiliate that is the managing member or general partner, will
cause such subsidiary or affiliate), hereby consents to all of the transactions
contemplated by this Agreement and the Operating Partnership Agreement.
Purchaser, in its capacity as general partner or managing member (or, as the
sole equity owner of its subsidiary or affiliate that is the managing member or
general partner, will cause such subsidiary or affiliate), together with the
Operating Partnership and Corporation will take all such further steps, cause
all things to be done and execute and deliver all such documents in form and
substance mutually satisfactory to the Purchaser and Corporation in order to
substitute Operating Partnership as a limited partner or member, as the case may
be, of each of the Partnerships and effect all necessary governmental
certificate or other filings required under the applicable laws of the states in
which each Partnership is organized or qualified as soon as practicable
following the Closing.
4. REPRESENTATIONS AND WARRANTIES OF CORPORATION. Corporation
represents and warrants to Purchaser as follows:
4.1 ORGANIZATION OF CORPORATION. Corporation is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Ohio with the requisite power and authority to carry on its business as
proposed to be conducted. Corporation is not licensed or qualified to do
business in any other jurisdiction, and the character and location of the
Contributed Properties and the nature of its business does not require it to be
so licensed or qualified.
2
<PAGE> 3
4.2 POWER AND AUTHORITY. Corporation has all requisite power
and authority to execute, deliver and perform this Agreement and to consummate
the transactions contemplated hereby. All consents required to authorize the
execution, delivery and performance of this Agreement by Corporation and the
consummation by Corporation of the transactions contemplated hereby have been
obtained. This Agreement has been duly executed and delivered by Corporation and
constitutes the legal, valid and binding obligation of Corporation enforceable
against Corporation in accordance with its terms.
4.3 CAPITAL STOCK. At the Closing, the authorized capital
stock of Corporation will consist of 2,500,000 Common Shares, 7,500 shares of
Senior Preferred Stock and 500,000 preferred shares, without par value
("Preferred Shares"). Upon the consummation of the transactions contemplated by
this Agreement, the Common Shares and the Senior Preferred Stock issued to
Purchaser hereunder, together with the 100 Common Shares issued previously to
Purchaser on April 4, 1997 (collectively, the "Shares"), will be the only shares
of capital stock of Corporation issued and outstanding, and all of the Shares
will be validly issued and outstanding, fully paid and nonassessable, free and
clear of any lien, charge, encumbrance, mortgage, pledge, security interest,
easement, option, right of first refusal, preemptive right, voting or
stockholder's agreement or other restriction or claim of any nature whatsoever
binding upon Corporation, other than as set forth in this Agreement.
4.4 BROKERS' AND FINDERS' AGREEMENTS. Corporation has not
directly or indirectly entered into or otherwise become obligated under any
contract or arrangement with any person or entity that would obligate
Corporation or Purchaser to pay any commission, brokerage or "finder's fee" in
connection with the transactions contemplated hereby.
5. REPRESENTATIONS AND WARRANTIES OF PURCHASER AND RESTRICTIONS ON
TRANSFER. Purchaser represents and warrants to Corporation as follows:
5.1 ORGANIZATION AND GOOD STANDING. Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Ohio with the requisite corporate power and authority to carry on its
business as currently conducted and as proposed to be conducted.
5.2 CORPORATE POWER; AUTHORIZATION. Purchaser has the
requisite corporate power and authority to execute, deliver and perform this
Agreement and to consummate the transactions contemplated hereby. The execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby by Purchaser have been duly authorized by all
necessary corporate action of Purchaser. This Agreement has been duly executed
and delivered on behalf of Purchaser and constitutes a legal, valid and binding
obligation of Purchaser.
3
<PAGE> 4
5.3 NO CONFLICTS. None of the execution, delivery and
performance of this Agreement nor the consummation of the transactions
contemplated hereby will conflict with, or result in any violation of, or
constitute a default (with or without notice or lapse of time, or both), or give
rise to a right of termination, cancellation or acceleration of any obligation,
or any loss of a material benefit under, any provision of the Articles or
Regulations of Purchaser, or any contract, permit or law applicable to Purchaser
or any of its properties or assets, the effect of which would be to prevent
Purchaser from performing its obligations under this Agreement. No material
consent, approval, order or authorization of, or registration, declaration or
filing with, any governmental agency is required to be obtained or made in
connection with the execution, delivery and performance of this Agreement by
Purchaser or the consummation by Purchaser of the transactions contemplated
hereby.
5.4 BROKERS' AND FINDERS' AGREEMENTS. Purchaser has not
directly or indirectly entered into or otherwise become obligated under any
contract with any person or entity that would obligate Purchaser or Corporation
to pay any commission, brokerage or "finder's fee" in connection with the
transactions contemplated hereby.
5.5 NO DETERMINATION OF FAIRNESS. Purchaser understands and
acknowledges the fact that no federal or state agency has made any finding or
determination as to the fairness for public or private investment, nor any
recommendation or endorsement of the Senior Preferred Stock for investment.
5.6 NEWLY FORMED ISSUER. Purchaser recognizes that Corporation
has only recently been organized and has no meaningful financial or operating
history and, further, that the shares of Senior Preferred Stock, as an
investment, involve a high degree of risk.
5.7 NO PUBLIC MARKET. Purchaser understands and acknowledges
the fact that there is no public market for the shares of Senior Preferred Stock
and that it may not be possible to readily liquidate its investment at any time.
5.8 NO RESALE OR DISTRIBUTION. This Agreement is made in
reliance upon Purchaser's representation to Corporation that the shares of
Senior Preferred Stock to be purchased by Purchaser will be purchased (a) for
its own account entirely, and (b) for investment and not with a view to, or for
resale in connection with, any distribution thereof. Purchaser further
represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Senior Preferred
Stock. Purchaser represents that it has the full power and authority to enter
into this Agreement.
5.9 NO REGISTRATION OF OFFERING. Purchaser understands and
acknowledges that the offering of the Common Shares and the Senior Preferred
Stock pursuant to this Agreement will not be registered under the Securities Act
of 1933, as amended (the "Securities Act"), or under any applicable blue sky or
state securities law on the grounds that the offering and
4
<PAGE> 5
sale of securities contemplated by this Agreement are exempt from registration
pursuant to Section 4(2) of the Securities Act and exempt from qualification
pursuant to the Ohio Securities Act and that Corporation's reliance upon such
exemptions and exceptions is predicated upon such Purchaser's representations
set forth in this Agreement. Purchaser acknowledges and understands that, except
as otherwise provided in this Agreement, the Senior Preferred Stock and the
Common Shares which Purchaser retains following its distribution of Common
Shares to Purchaser's shareholders (the "Retained Common Shares") must be held
indefinitely unless the Senior Preferred Stock and/or the Retained Common Shares
are subsequently registered under the Securities Act and applicable blue sky and
state securities laws or an exemption from such registration is available.
5.10 RESTRICTIONS ON DISTRIBUTION. Purchaser understands and
acknowledges all restrictions imposed by Corporation on the further distribution
of the shares of Senior Preferred Stock and the Retained Common Shares,
including, but not limited to, any restrictive legends appearing or to appear on
the certificates for the shares of Senior Preferred Stock and the Retained
Common Shares, required holding periods, stop transfer orders and optional
redemption rights of Corporation.
5.11. LEGENDS. All Certificates for the Senior Preferred Stock
and the Retained Common Shares shall bear legends to the following effect:
(a) "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES LAWS AND MAY BE
OFFERED, SOLD OR TRANSFERRED ONLY IF REGISTERED PURSUANT TO THE
PROVISIONS OF SUCH LAWS, OR IF IN THE OPINION OF COUNSEL SATISFACTORY
TO THE COMPANY AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE."
(b) Any other legends required in the opinion of counsel to
the Company or under applicable state blue sky laws.
5.12 RULE 144. Purchaser is aware of the adoption of Rule 144
by the Securities and Exchange Commission promulgated under the Securities Act,
which permits limited public resales of securities acquired in a nonpublic
offering, subject to the satisfaction of certain conditions. Purchaser
understands that under Rule 144, the conditions include, among other things, the
availability of certain current public information about the issuer and the
resale occurring not less than one year after the party has purchased and paid
for the securities to be sold. Corporation covenants that (a) at all times after
Corporation first becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended, Corporation will use
its best efforts to comply with the current public information requirements of
Rule 144(c)(1) under the Securities Act; and (b) at all such times as Rule 144
is available for use by Purchaser, Corporation will furnish Purchaser, upon
request, with all
5
<PAGE> 6
information within the possession of Corporation required for the preparation
and filing of Form 144.
6. COVENANTS OF CORPORATION.
6.1 CAPITAL STOCK. Corporation hereby covenants and agrees
that so long as any shares of the Senior Preferred Stock remain outstanding,
Corporation will not, without the affirmative vote or consent of the holders of
at least a majority of the shares of the Senior Preferred Stock outstanding at
the time, given in person or by proxy, either in writing or at a meeting (voting
separately as a class), (a) authorize or create, or increase the authorized or
issued amount of, any class or series of capital stock ranking senior to or on a
parity with the Senior Preferred Stock with respect to payment of dividends or
the distribution of assets upon liquidation, dissolution or winding up; (b)
amend, alter or repeal the provisions of the Articles, or of this Agreement,
whether by merger, consolidation or otherwise, so as to materially and adversely
affect any right, preference, privilege or voting power of the Senior Preferred
Stock or the holders thereof; provided, however, that the creation or issuance
of any other series of Preferred Shares, in each case ranking junior to the
Senior Preferred Stock, will not be deemed to materially and adversely affect
such rights, preferences, privileges or voting powers.
6.2 CONTRIBUTIONS OF ADDITIONAL INTERESTS.
(a) Purchaser may, from time to time, contribute (i) those
additional limited partner's interests in limited partnerships or (ii)
not less than 100% of the issued and outstanding capital stock of
special purpose corporations that own the properties set forth on
Schedule B (collectively, "Additional Interests" and each, an
"Additional Interest") to Corporation. In such event, and at the time
of each such contribution, Corporation will issue to Purchaser shares
of Senior Preferred Stock having a stated value of $1,000 per share of
Senior Preferred Stock ("Stated Value"). The Stated Value of the shares
of Senior Preferred Stock to be issued to Purchaser in exchange for
Purchaser's contribution, from time to time, of the Additional
Interests has been derived from the historical costs (as reflected in
Purchaser's consolidated financial statements) of the properties set
forth on Schedule B attached to this Agreement (the "Additional
Properties") and the undivided, economic ownership interests in such
Additional Properties represented by the corresponding Additional
Interest, in each case, has the value ascribed to such Additional
Interest as set forth on Schedule B attached to this Agreement and
incorporated herein by this reference (in each case "Additional
Interest Value").
(b) In the event Purchaser shall, from time to time,
contribute an Additional Interest or Additional Interests to
Corporation, as set forth in Section 6.2(a) above, notice of such
contribution shall be given by first class mail, postage prepaid,
mailed not less than 5 calendar days nor more than 60 calendar days
prior to the date of such contribution to Corporation. Each such notice
shall state: (i) the Additional Interest to be contributed; (ii) the
date of the contribution (the "Contribution Closing Date"); and (iii)
the Additional
6
<PAGE> 7
Interest Value of the Additional Interest(s), which will equal the
Stated Value of the Senior Preferred Stock to be issued by Corporation
to Purchaser in exchange therefor.
(c) On any and each Contribution Closing Date, (i) Purchaser
will deliver to Corporation, (A) in the event that the Additional
Interest is a limited partner's interest in a limited partnership, an
Assignment of Limited Partner's Interest, and/or (B) in the event that
the Additional Interest is the capital stock of a special purpose
corporation, a stock power, each in form and substance satisfactory to
Corporation, transferring to Corporation the Additional Interest or
Additional Interests, and (C) a certificate duly executed by its
authorized officer setting forth Purchaser's representation and
warranty that to the best of Purchaser's knowledge, there has been no
change to the underlying Additional Property or its operations from the
date of this Agreement through and including the Contribution Closing
Date that would have a material adverse effect on the free
marketability, title or market value of the Additional Property and
(ii) Corporation will deliver to Purchaser a certificate representing
the number of shares of Senior Preferred Stock the Stated Value of
which is equal to the Additional Interest Value of the Additional
Interest(s).
(d) From and after the Contribution Closing Date, dividends on
the shares of Senior Preferred Stock so issued shall commence to
accrue. Said shares shall be deemed to be outstanding and shall have
the same express terms as the shares of Senior Preferred Stock issued
prior to any Contribution Closing Date.
(e) No Contribution Closing Date will occur later than
December 31, 1998.
6.3 DISTRIBUTIONS OF NET PROCEEDS. To the extent that
Corporation receives net proceeds (as a distribution from the Operating
Partnership or otherwise) as a result of each sale, or change of
control of, any Contributed Property, Additional Property, Interest or
Additional Interest (collectively, "Net Proceeds"), it must first apply
such Net Proceeds, subject only to amounts reasonably reserved by the
Board of Directors, in its reasonable discretion, for a specified
business purpose, to the payment of all accumulated and unpaid
dividends outstanding on the Senior Preferred Stock (or, if
insufficient Net Proceeds are available for distribution, pro rata
among each outstanding share of Senior Preferred Stock) to the holders
of Senior Preferred Stock. Any remaining Net Proceeds will be
distributed by Corporation, 75% to the holders of Senior Preferred
Stock (each, a "Distribution of Remaining Net Proceeds"), with the
remaining 25% of the Net Proceeds available for distribution to the
holders of Company Common Stock. The amount of such Distribution of
Remaining Net Proceeds will be applied to the optional redemption and
accordingly, reduce, on a dollar for dollar basis, the liquidation
preference of the Senior Preferred Stock, as set forth in the Articles.
Corporation, in effecting such Distribution of Remaining Net Proceeds,
will comply with the provisions of Corporation's Articles as then in
effect concerning Corporation's redemption of shares of Senior
Preferred Stock.
7
<PAGE> 8
7. FORFEITURES. Certain of the Common Shares issued which Purchaser
intends to distribute to its shareholders will be subject to a risk of
forfeiture. In the event that any such Common Shares are forfeited pursuant to
provisions for forfeiture, Purchaser, in order to avoid a "reconsolidation" of
Purchaser and Corporation, will forfeit the number of Common Shares held by
Purchaser (the "Forfeited Shares") necessary to prevent Purchaser from holding
greater than 7% of the Common Shares then issued and outstanding. At any such
time as a holder of Common Shares shall forfeit any such Common Shares (a "Third
Party Forfeiture"), Purchaser will provide notice to Corporation of (a) the date
that such Third Party Forfeiture will be effective, and (b) the number of Common
Shares to be forfeited in the Third Party Forfeiture. Corporation will thereupon
notify Purchaser of the total number of Common Shares then issued and
outstanding. Purchaser will then forfeit the Forfeited Shares, such forfeiture
to be effective as of the date and time upon which the Third Party Forfeiture is
effective.
8. CONSENT TO CERTAIN TRANSACTIONS. Purchaser covenants and agrees with
Corporation that Purchaser will not (and will not permit any of its subsidiaries
or affiliates to), without first obtaining Corporation's written consent EXCEPT
in the event that the maturity of a mortgage loan secured by the affected
Contributed Property is accelerated for any reason, in which case Corporation's
consent is not required, in its (or their) capacity as general partner or
managing member of any Partnership, effect the (a) mortgage refinancing of any
Contributed Property prior to the maturity of an outstanding mortgage loan
secured by the affected Contributed Property (whether scheduled or by virtue of
acceleration), (b) expansion and/or improvement involving a capital expenditure
or capital expenditures (as determined in accordance with GAAP) involving in
excess of $75,000 in any calendar year, or (c) the sale, of any Contributed
Property (or any controlling interest therein).
9. MISCELLANEOUS.
9.1 WAIVERS AND AMENDMENTS. This Agreement or any provision
hereof may be amended, waived, discharged or terminated only by a statement in
writing signed by the party against which enforcement of the amendment, waiver,
discharge or termination is sought.
9.2 GOVERNING LAW. This Agreement shall be governed by and
construed under the laws of the State of Ohio, without regard to principles of
conflicts of law.
9.3 SURVIVAL. The representations, warranties, covenants and
agreements made herein shall survive the Closing of the transactions
contemplated hereby. All statements as to factual matters contained in any
certificate or other instrument delivered by or on behalf of Corporation
pursuant hereto or in connection with the transactions contemplated hereby shall
be deemed to be representations and warranties by Corporation hereunder as of
the date of such certificate of instrument.
8
<PAGE> 9
9.4 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, the provisions whereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
9.5 NOTICES. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by first class mail,
postage prepaid, addressed
(a) if to Purchaser, to:
Cardinal Realty Services, Inc.
6954 Americana Parkway
Reynoldsburg, Ohio 43068
Attention: Secretary
(b) if to Corporation, to:
Lexreit Properties, Inc.
The Huntington Center
41 South High Street, 24th Floor
Columbus, Ohio 43215
Attention: Treasurer
or at such other address as either party shall have furnished to the other in
writing.
9.6 SEVERABILITY. In case any provision of this Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions of this Agreement shall not in any
way be affected or impaired thereby.
9.7 EXPENSES. If the transactions contemplated hereby are
consummated, Corporation will pay all fees, expenses and disbursements,
including, without limitation, reasonable attorneys' and accountants' fees and
disbursements, incurred in anticipation of the Closing of the transactions
contemplated by this Agreement.
9
<PAGE> 10
9.8 TITLES AND SUBTITLES. The titles of the sections and
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first written above.
CARDINAL REALTY SERVICES, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
LEXREIT PROPERTIES, INC.
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
10
<PAGE> 11
Schedule A
<TABLE>
<CAPTION>
==============================================================================================================================
Limited Partner
================================================================================================================================
Contributed Additional
- -------------------------------------------------------------------------------------------------------------------------------
Property Interest (or Interest
- -------------------------------------------------------------------------------------------------------------------------------
Partnership/Limited Liability Company Name No. Member's Interest) Value
===============================================================================================================================
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Acadia Court Apartments of Bloomington, II, Ltd. 1810 54.6% 317,650.24
- -------------------------------------------------------------------------------------------------------------------------------
Almondtree Apartments of Columbus, Ltd. 1439 54.6% 61,866.71
- -------------------------------------------------------------------------------------------------------------------------------
Amesbury Apartments of Columbus, Ltd. 1824 59.4% 56,021.33
===============================================================================================================================
Apple Ridge Apartments of Circleville, Ltd. 1377 59.4% 108,263.63
- -------------------------------------------------------------------------------------------------------------------------------
Applegate Apartments of Delaware County, II, Limited Partnership 1889 59.4% 379,690.15
- -------------------------------------------------------------------------------------------------------------------------------
Aragon Woods Apartments of Marion County, Ltd. 1880 54.6% 163,521.54
===============================================================================================================================
Ashford Hill Apartments of Reynoldsburg, Ltd. 1814 54.6% 21,149.31
- -------------------------------------------------------------------------------------------------------------------------------
Bel Aire Apartments, II, Ltd. 2469 54.6% 0
- -------------------------------------------------------------------------------------------------------------------------------
Cardinal E.P., Limited Partnership 1839 54.6% 285,218.39
===============================================================================================================================
Cedar Hill Apartments of Knoxville, Ltd. 3166 59.4% 355,780.46
- -------------------------------------------------------------------------------------------------------------------------------
Cedargate Apartments of Bowling Green, II, Ltd. 1838 54.0% 296,914.14
- -------------------------------------------------------------------------------------------------------------------------------
Cedarwood Apartments of Lexington, III, Ltd. 1816 54.6% 189,692.96
===============================================================================================================================
Cedarwood Apartments of Lexington, II, Ltd. 1750 59.4% 146,931.25
- -------------------------------------------------------------------------------------------------------------------------------
Centre Lake Apartments, III, Ltd. 2519 54.6% 245,019.14
- -------------------------------------------------------------------------------------------------------------------------------
Cherry Glen Apartments of Marion County, II, Limited Partnership 1908 54.0% 200,981.52
===============================================================================================================================
Cherry Glen Apartments of Marion County, Limited Partnership 1846 54.6% 55,758.61
- -------------------------------------------------------------------------------------------------------------------------------
Cherry Tree Apartments of Baltimore County, Ltd. 4109 54.6% 531,838.40
- -------------------------------------------------------------------------------------------------------------------------------
Clearwater Apartments of Eastlake LLC 1871 59.4% 91,977.93
===============================================================================================================================
Dogwood Glen Apartments of Marion County, Limited Partnership 1843 59.4% 281,237.62
- -------------------------------------------------------------------------------------------------------------------------------
Garden Court Apartments of Monroe County, Limited Partnership 1986 54.6% 354,786.43
- -------------------------------------------------------------------------------------------------------------------------------
Garden Terrace Apartments, Ltd. 2208 54.0% 216,712.80
===============================================================================================================================
Glenview Apartments of Huntsville, Ltd. 3175 54.6% 0
- -------------------------------------------------------------------------------------------------------------------------------
Glenwood Village Apartments of Macon, Ltd. 3190 54.0% 175,935.24
- -------------------------------------------------------------------------------------------------------------------------------
Harvest Grove Apartments of Columbus, Ltd. 1869 54.0% 221,600.34
===============================================================================================================================
Hayfield Park Apartments of Boone County, Ltd. 1833 59.4% 368,176.05
- -------------------------------------------------------------------------------------------------------------------------------
Heathmoore Apartments of Wayne County, Limited Partnership 1690 59.4% 255,674.83
- -------------------------------------------------------------------------------------------------------------------------------
Hidden Acres Apartments, Ltd. 2515 59.4% 195,013.76
===============================================================================================================================
Holly Sands Apartments, II, Ltd. 2526 59.4% 187,337.50
- -------------------------------------------------------------------------------------------------------------------------------
Hunter Glen Apartments of Springfield, Limited Partnership 1863 54.6% 147,308.62
- -------------------------------------------------------------------------------------------------------------------------------
Indian Lake Apartments of Atlanta, Ltd. 3209 54.6% 1,668,156.67
===============================================================================================================================
Kings Colony Apartments, Ltd. 3532 54.6% 184,527.25
- -------------------------------------------------------------------------------------------------------------------------------
Lakeshore Apartments of Ft. Oglethorpe, Ltd. 3174 59.4% 123,527.05
- -------------------------------------------------------------------------------------------------------------------------------
Laurel Glen Apartments of Acworth, Ltd. 3171 59.4% 449,038.46
===============================================================================================================================
Lindendale Apartments of Columbus, Limited Partnership 1909 54.0% 246,372.30
- -------------------------------------------------------------------------------------------------------------------------------
Marabou Mills Apartments of Indianapolis LLC 1822 79.0% 439,209.19
- -------------------------------------------------------------------------------------------------------------------------------
Marabou Mills Apartments of Marion County, III, Limited Partnership 1982 59.4% 174,137.04
===============================================================================================================================
Marsh Landing Apartments, II, Ltd. 3496 54.0% 14,585.94
- -------------------------------------------------------------------------------------------------------------------------------
Meadowood Apartments of Indianapolis, II, Ltd. 1809 54.6% 68,968.54
- -------------------------------------------------------------------------------------------------------------------------------
Merrifield Apartments of Wicomico County, Limited Partnership 4133 54.6% 315,352.67
===============================================================================================================================
Miguel Place Apartments, Ltd. 2543 59.4% 174,540.37
- -------------------------------------------------------------------------------------------------------------------------------
Newberry Apartments of Eaton County, II, Ltd. 1885 54.0% 37,019.16
- -------------------------------------------------------------------------------------------------------------------------------
Oak Gardens Apartments, Ltd. 2587 54.6% 63,452.30
===============================================================================================================================
Pickerington Meadows Apartments of Pickerington, II, Limited Partnership 5886 59.4% 130,593.87
- -------------------------------------------------------------------------------------------------------------------------------
Ravenwood Apartments of Mauldin, Ltd. 3208 54.0% 137,910.06
- -------------------------------------------------------------------------------------------------------------------------------
Red Deer Apartments of Fairborn, II, Limited Partnership 1935 54.6% 346,911.47
===============================================================================================================================
Ridgewood Apartments of Elkhart, II, Ltd. 1898 54.6% 376,479.56
===============================================================================================================================
</TABLE>
Page 1
<PAGE> 12
<TABLE>
<CAPTION>
===============================================================================================================================
<S> <C> <C> <C>
Ridgewood Apartments of Elkhart, Ltd. 1672 58.8% 151,767.50
- -------------------------------------------------------------------------------------------------------------------------------
River Glen Apartments of Reynoldsburg, II, LLC 1966 59.4% 91,090.49
===============================================================================================================================
Rosewood Commons Apartments of Indianapolis, II, Limited Partnership 1895 54.6% 230,299.52
- -------------------------------------------------------------------------------------------------------------------------------
Sherbrook Apartments of Allegheny County, Ltd. 1877 54.6% 504,700.01
- -------------------------------------------------------------------------------------------------------------------------------
Sky Pines Apartments, II, Ltd. 2512 54.6% 0
===============================================================================================================================
Spicewood Apartments of Indianapolis, Ltd. 1786 54.6% 58,827.68
- -------------------------------------------------------------------------------------------------------------------------------
Springbrook Apartments of Anderson, Ltd. 3173 59.4% 157,498.51
- -------------------------------------------------------------------------------------------------------------------------------
Suffolk Grove Apartments of Grove City, II, Limited Partnership 1936 54.6% 234,508.09
===============================================================================================================================
Sunset Way Apartments, II, Ltd. 2580 54.6% 0
- -------------------------------------------------------------------------------------------------------------------------------
Sunset Way Apartments, Ltd. 2527 54.6% 232,737.96
- -------------------------------------------------------------------------------------------------------------------------------
The Willows Apartments of Delaware, III, Limited Partnership 1937 59.4% 101,469.46
===============================================================================================================================
The Willows Apartments, Ltd. 1389 54.0% 200,580.30
- -------------------------------------------------------------------------------------------------------------------------------
Thymewood Apartments, II, Ltd. 2455 54.6% 184,994.08
- -------------------------------------------------------------------------------------------------------------------------------
Valleybrook Cardinal, LLC 3188 79.0% 687,840.36
===============================================================================================================================
Willow Lakes Apartments of Spartanburg, Ltd. 3189 59.4% 179,073.77
- -------------------------------------------------------------------------------------------------------------------------------
Willowood Apartments of Columbus, II, Limited Partnership 1917 54.6% 239,451.03
- -------------------------------------------------------------------------------------------------------------------------------
Willowood Apartments of Trotwood, II, Limited Partnership 1841 54.6% 62,805.29
===============================================================================================================================
Windwood Apartments, Ltd. 2137 54.0% 42,557.94
- -------------------------------------------------------------------------------------------------------------------------------
Winthrop Court Apartments of Columbus, II, Ltd. 1806 59.4% 89,552.03
- -------------------------------------------------------------------------------------------------------------------------------
Woodlands Apartments of Zelienople, II, Limited Partnership 1914 54.6% 236,050.00
===============================================================================================================================
</TABLE>
Page 2
<PAGE> 13
Schedule B
<TABLE>
<CAPTION>
Limited Partner
==================================================================================================================================
Contributed Additional
- ----------------------------------------------------------------------------------------------------------------------------------
Property Interest Interest
- ----------------------------------------------------------------------------------------------------------------------------------
Partnership/Limited Liability Company Name No. (or Percentage Stock Interest) Value
==================================================================================================================================
<S> <C> <C> <C>
Bradford Place Apartments of St Clair County, Limited Partnership 1825 54.6% 118,496.20
- ----------------------------------------------------------------------------------------------------------------------------------
CRSI SPV 30231, Inc. d/b/a Walker Place Apartments of Dallas 3231 100.0% 0
- ----------------------------------------------------------------------------------------------------------------------------------
CRSI SPV 35, Inc. d/b/a Marabou Mills Apartments of Marion County II 5910 100.0% 574,694.00
==================================================================================================================================
CRSI SPV 50903, Inc. d/b/a Brunswick Apartments of Monongalia County II 5903 100.0% 0
- ----------------------------------------------------------------------------------------------------------------------------------
CRSI SPV 50906, Inc. d/b/a Amesbury Apartments of Columbus II 5906 100.0% 108,599.00
- ----------------------------------------------------------------------------------------------------------------------------------
CRSI SPV 50951, Inc. d/b/a Harvest Grove Apartments of Columbus II 5951 100.0% 87,379.00
==================================================================================================================================
CRSI SPV 59, Inc. d/b/a River Glen Apartments of Reynoldsburg 1887 100.0% 378,874.00
- ----------------------------------------------------------------------------------------------------------------------------------
CRSI SPV 96, Inc. d/b/a Laurel Bay Apartments of Washtenaw County 1039 100.0% 536,636.00
- ----------------------------------------------------------------------------------------------------------------------------------
Forest Glen Apartments, Ltd. 2462 54.6% 269,288.29
==================================================================================================================================
Forsythia Court Apartments of Harford County, II, Limited Partnership 4111 54.6% 0
- ----------------------------------------------------------------------------------------------------------------------------------
Oakwood Village Apartments, Ltd. 2482 54.6% 131,392.72
==================================================================================================================================
</TABLE>
Page 1
<PAGE> 1
EXHIBIT 5.1
May __, 1997
Cardinal Realty Services, Inc.
6954 Americana Parkway
Reynoldsburg, Ohio 43068
Re: Registration of Up to 960,000 Shares of Common Stock,
without par value, of Lexreit Properties, Inc.
Ladies and Gentlemen:
We are acting as counsel for Cardinal Realty Services, Inc., an Ohio corporation
("CRSI"), and Lexreit Properties, Inc., an Ohio corporation (the "Company"), in
connection with the proposed distribution (the "Distribution") by CRSI to its
shareholders of up to 960,000 shares of common stock, without par value, of the
Company (the "Shares").
We have examined and relied on originals or copies, certified or otherwise
identified to our satisfaction as being true copies, of all such records,
agreements and such other documents, certificates and corporate or other records
as we have deemed necessary as a basis for the opinions expressed in this
letter. In our examination, we have assumed the genuineness of all signatures,
the legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals and the conformity to authentic original documents
of all documents submitted to us as certified or photostatic copies. As to facts
material to the opinions expressed in this letter, we have relied on statements
and certificates of officers of CRSI and of state authorities and on the
representations, warranties and statements contained in the Registration
Statement on Form S-11 (the "Registration Statement") filed by the Company. We
have assumed that the Registration Statement, together with the other contracts
referred to in the Registration Statement, reflects the complete understanding
and agreement of the parties with respect to the Distribution.
We have investigated such questions of law for the purpose of rendering the
opinions in this letter as we have deemed necessary. We express no opinion in
this letter concerning any law other than the law of the State of Ohio and the
federal law of the United States of America.
On the basis of and in reliance on the foregoing, we are of the opinion that the
Shares have been duly authorized and validly issued and are fully paid and
nonassessable.
<PAGE> 2
Cardinal Realty Services, Inc.
May __, 1997
Page 2
We hereby consent to the filing of this opinion as Exhibit 5 to the Registration
Statement to effect the registration of the Shares under the Securities Act of
1933, as amended, and to being named in the Registration Statement under the
heading "Legal Matters."
The opinion in this letter is rendered only to CRSI in connection with the
filing of the Registration Statement. The opinion may not be relied upon by CRSI
for any other purpose, or relied upon by any other person, firm or entity for
any purpose. This letter may not be paraphrased, quoted or summarized, nor may
it may be duplicated or reproduced in part.
Very truly yours,
BENESCH, FRIEDLANDER,
COPLAN & ARONOFF LLP
<PAGE> 1
Exhibit 10.1
SERIES 1996-1
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement") made and entered into this
1st day of August, 1996, by and between ______, a(n) ______ limited partnership
("Owner"), and LEXFORD PROPERTIES, INC. ("Manager") relating to an apartment
complex of similar name (the "Property").
W I T N E S S E T H:
--------------------
Owner desires to employ Manager in the management and operation of the
Property by turning over to Manager all control and discretion in the operation,
direction, management and supervision of the Property, and Manager desires to
assume such control and discretion upon the terms and conditions set forth in
this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
promises and covenants herein contained, Owner and Manager agree as follows:
ARTICLE I
DEFINITIONS
-----------
The following terms shall have the following meanings when used in this
Agreement:
1.01. BUDGET. A composite of (i) an Operations Budget, which shall be
an estimate of revenues and expenditures for the operation of the Property
during a Fiscal Year, including a schedule of expected apartment rentals
(excluding security deposits) for the period in question and a schedule of
expected special repairs and maintenance projects, and (ii) a Capital Budget,
which shall be an estimate of capital replacements, substitutions of, and
additions to, the Property for a Fiscal Year.
1.02. DEPOSITORY. A national or state bank qualified to engage in the
banking or trust business designated by Manager and approved by Owner.
1.03. FEE. The MANAGEMENT FEE payable each month by Owner to Manager
hereunder shall be an amount equal to five percent (5%) of the Gross Receipts of
the Property; or a minimum sum of $N/A per month, effective N/A, whichever is
greater. The BOOKKEEPING FEE for general bookkeeping, recording of receipts and
disbursements, check writing and bank account reconciliations, preparation of
monthly statements of cash receipts and disbursements and other required
bookkeeping functions shall be Three Hundred Fifty Dollars ($350.00) per month.
Manager may, at its option, from time to time (but not more often than annually)
adjust the Bookkeeping Fee in order to reflect any increase in the cost of
living index from the date of this agreement through the date of such
adjustment. Any such adjustment shall be effective on a prospective basis, only.
The PERFORMANCE FEE shall be Two Dollars ($2.00) per apartment for each month in
which the Manager collects not less than ninety-six percent (96%) of the
potential gross revenue by the end of
<PAGE> 2
such month. Model apartments, the on-site office and the discounted value of
Property Employees apartments, shall be considered included in the collected
gross revenue at their current market value for purposes of determining the
percentage collected. The Owner agrees that the above payments due to Manager
can and shall be deducted from collected rental receipts.
1.04. FISCAL YEAR. The year beginning January 1st and ending December
31st, which is the fiscal year established by Owner for the Property.
1.05. GROSS RECEIPTS. The entire amount of all receipts, determined on
a cash basis, from tenant rentals collected pursuant to tenant leases for each
month during the term hereof, provided, however, that there shall be excluded
from tenant rentals any tenant security deposits received from tenants.
1.06. PROPERTY EMPLOYEES. Those persons employed by Manager, and/or by
an affiliate of Manager, as a management staff (i.e. Manager, Assistant
Managers, Leasing Agents, Maintenance Personnel, and other personnel necessary
to be employed in order to maintain and operate the property).
1.07. TERM. The term of this Agreement shall commence on the date
hereof and shall, subject to the provisions hereof, expire five (5) years from
the date hereof (the "Original Term"); provided, however, that Owner may
terminate this Agreement at any time pursuant to Section 7.05. Such term shall
automatically be extended for additional terms of one (1) year commencing on the
expiration of the Original Term (each additional term hereinafter referred to as
an "Additional Term"), subject to Section 7.05, unless Owner has given notice to
Manager thirty (30) days prior to such commencement thereof that there shall be
no Additional Term.
ARTICLE II
DUTIES AND RIGHTS OF MANAGER
----------------------------
2.01. APPOINTMENT OF MANAGER. During the term of this Agreement,
Manager agrees, for and in consideration of the compensation hereinafter
provided, and Owner hereby grants to Manager the sole and exclusive right, to
supervise and direct the management and operation of the Property. Everything
performed by Manager under this Agreement shall be done as agent of Owner.
2.02. GENERAL OPERATION. Manager shall operate the Property in the same
manner as is customary and usual in the operation of comparable facilities, and
shall provide such services as are customarily provided by operators of
apartment properties of comparable class and standing consistent with the
Property's facilities. In addition to the other obligations of Manager set forth
herein, Manager shall render the following services and perform the following
duties for Owner in a faithful, diligent and efficient manner: (a) coordinate
the plans of tenants for moving their personal effects into the Property or out
of it, with a view toward scheduling such movements so that there shall be a
minimum of inconvenience to other tenants; (b) maintain business like relations
with tenants whose service requests shall be received, considered and recorded
in systematic fashion in
2
<PAGE> 3
order to show the action taken with respect to each; (c) use its best efforts to
(i) collect all monthly rents due from tenants and rent from users or lessees of
other non-dwelling facilities on the Property, if any; (ii) request, demand,
collect, receive and receipt for any and all charges or rents which become due
to Owner, and (iii) take such legal action, at Owner's expense, as may be
necessary or desirable to evict tenants delinquent in payment of monthly rental,
other charges (security deposits, late charges, etc.); (d) use its best efforts
at all times during the term of this Agreement to operate and maintain the
Property according to the highest standards achievable consistent with the
operation of comparable quality units; (e) advertise when necessary, at Owner's
expense, the availability for rental for the Property units and display "for
rent" or other similar signs upon the Property, it being understood that Manager
may install one or more signs on or about the Property stating that same is
under management of Manager and may use in a tasteful manner Manager's name and
logo in any display advertising which may be done on behalf of the Property; and
(f) sign, renew and cancel tenant leases for the Property, in compliance with
standards established by Owner to bona fide individuals, for monthly rentals
established from time to time by Owner, based on Manager's recommendations;
provided, however, that Property Employees, as a condition of employment, may
occupy apartment units on a month-to-month basis with or without an executed
tenant lease.
2.03. BUDGET.
-------
(a) Manager shall submit for Owner's approval no later than
forty-five (45) days prior to the beginning of each successive Fiscal
Year the Budget for the ensuing Fiscal Year. The Budget shall be
approved by Owner fifteen (15) days after receipt, and in the event
Owner fails to approve or disapprove the Budget within such period, the
Budget shall be deemed to be approved. In the event Owner disapproves
the Budget, Owner and Manager shall jointly prepare the Budget as soon
as may be reasonably practicable. Until a new Budget is approved,
Manager shall operate on the Budget approved for the prior Fiscal Year,
with the exception of expenses for personnel which must be increased
based on existing competitive conditions and expenses relating to
taxes, insurance and utilities. The Budget shall reflect the schedule
of monthly rents proposed for the new Fiscal Year; it shall also
constitute a major control under which Manager shall operate, and there
shall be no substantial variances therefrom except for the variations
which have complied with Section 2.06(a). Consequently, no expenses may
be incurred or commitments made by Manager in connection with the
maintenance and operation of the Property which exceed the amounts
allocated to the total expenses for the period in question in the
approved Budget by more than ten percent (10%) without the prior
written consent of Owner; provided, however, that the foregoing
limitation with respect to incurring any expense not covered by the
Budget shall not apply to expenses relating to taxes, insurance or
utilities. Manager makes no guaranty, warranty, or representation
whatsoever in connection with the accuracy of any Budget, and Owner
agrees that they are intended as good faith estimates only.
(b) In the event there shall be a substantial variance between
the results of operations for any month and the estimated results of
operations for such month as set forth in the Budget, Manager shall,
upon request, furnish to Owner within twenty (20) days after the
expiration of such month, a written explanation as to why the variance
occurred.
3
<PAGE> 4
2.04. MANAGER AND OTHER PERSONNEL. Manager, and/or an affiliate of
Manager, shall employ, discharge, and supervise all on-site employees or
contractors required for the efficient operation and maintenance of the
Property. All on-site personnel, except independent contractors and employees of
independent contractors, shall be employees of Manager, and/or an affiliate of
Manager. Manager, and/or an affiliate of Manager, shall pay all salaries of such
on-site employees. Owner shall reimburse Manager, and/or an affiliate of
Manager, monthly for the total aggregate compensation, including salary and
fringe benefits, payable with respect to the Property employees and any
temporary employees. The term "fringe benefits" as used herein, shall mean and
include the employer's contribution to a defined contribution plan and of FICA,
unemployment compensation and other employment taxes, worker's compensation,
group life and accident and health insurance premiums and disability.
If requested by Manager, Owner shall provide an apartment to a Property
Employee on a discounted basis.
2.05. CONTRACTS AND SUPPLIES. Manager shall, in the name of, and on
behalf of, Owner and at Owner's expense, consummate arrangements with
concessionaires, licensees, tenants or other intended users of the facilities of
the Property, shall enter into contracts for the furnishing to the Property of
electricity, gas, water, telephone, cleaning, vermin extermination, furnace and
air-conditioning maintenance, pest control, and any other utilities, services
and concessions which are provided in connection with the maintenance and
operation of an apartment property in accordance with standards comparable to
those prevailing in other apartment properties, and shall place purchase orders
for such equipment, tools, appliances, materials and supplies as are necessary
to properly maintain the Property.
2.06. ALTERATIONS, REPAIRS AND MAINTENANCE.
(a) Manager shall make or install, or cause to be made and
installed, or do or cause to be done at Owner's expense and in the name
of Owner, all necessary or desirable repairs, interior and exterior
cleaning, painting and decorating, plumbing, alterations, replacements,
improvements and other normal maintenance and repair work on and to the
Property as are customarily made by Manager in the operation of
apartment properties; provided, however, that no unbudgeted expenditure
in excess of $1,000 per item or a total of $5,000 annually may be made
for such purposes without the prior approval of Owner, unless emergency
repairs involving manifest danger to life or property are immediately
necessary for the preservation of the safety of the Property, or for
the safety of the tenants, or are required to avoid the suspension of
any necessary service to the Property, or are required to comply with
local codes or laws in which event such expenditures may be made by
Manager without the prior approval of Owner and irrespective of the
cost limitations imposed by this Section 2.06.
(b) In accordance with the terms of the Budget or upon written
demand and/or approval (except in the case of emergency) of Owner,
Manager shall, at Owner's expense, from time to time during the term
hereof, make all required capital replacements or repairs to the
Property. Any extraordinary supervisory cost of Manager's or an
affiliate of
4
<PAGE> 5
Manager's employees shall be paid for by Owner pursuant to Section
3.03. In regard to sums necessary to cover costs of such capital
replacements or repairs, Manager shall first use any excess funds held
pursuant to Section 4.05 and then from funds furnished by Owner.
2.07. LICENSES AND PERMITS. Manager shall apply for, obtain and
maintain, in the name and at the expense of, Owner, all licenses and permits
(including deposits and bonds) required of Owner or Manager in connection with
the management and operation of the Property. Owner agrees to execute and
deliver any and all applications and other documents and to otherwise cooperate
to the fullest extent with Manager in applying for, obtaining and maintaining
such licenses and permits.
2.08. COMPLIANCE WITH LAWS. Manager, at Owner's expense, shall use its
best efforts to cause all such acts and things to be done in and about the
Property as Owner and/or Manager shall deem necessary, and Owner covenants
throughout the term of this Agreement, at its expense, to comply with all laws,
regulations and requirements of any federal, state or municipal government,
having jurisdiction respecting the use or manner of use of the Property or the
maintenance or operation thereof.
2.09. LEGAL PROCEEDINGS. Manager shall institute, in its own name or in
the name of Owner, but in any event at the expense of Owner, any and all legal
actions or proceedings which Manager deems reasonable to collect charges, rent
or other income from the Property, or to dispossess tenants or other persons in
possession, or to cancel or terminate any lease, license, or concession
agreement for the breach thereof, or default thereunder, by the tenant, licensee
or concessionaire.
2.10. DEBTS OF OWNER. In the performance of its duties as Manager,
Manager shall act solely as the agent of Owner. All debts and liabilities to
third persons incurred by Manager in the course of its operation and management
of the Property, shall be the debts and liabilities of Owner only, and Manager
shall not be liable for any such debts or liabilities, except to the extent
Manager has exceeded its authority hereunder.
ARTICLE III
FEES
3.01. PAYMENT OF FEE. Owner shall pay to Manager, during the term
hereof, the Management Fee, Bookkeeping Fee and Performance Fee for the current
month on or before the last day of such month.
3.02. PLACE OF PAYMENT. All sums payable by Owner to Manager hereunder
shall be payable to Manager at 6954 Americana Parkway, Reynoldsburg, Ohio
43068-4551, unless Manager shall, from time to time, specify a different address
in writing.
3.03. COMPENSATION FOR ADDITIONAL SERVICES. In the event that Owner
requests Manager to perform any services relating to (i) the restoration of the
Property following fire or other damage
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or destruction, (ii) any major capital improvements program, or (iii) leasing
activities for the Property, then Manager shall undertake such services for such
fees as may be agreed upon by the parties.
3.04. COMPUTER IMPLEMENTATION. Owner shall pay to Manager, at the time
of conversion from the manual system to the computerized system, a fee of
$500.00 for set up and training on the computer system, if the conversion has
not been previously accomplished. Manager shall loan Property the necessary
software, at its own expense, as long as this Agreement is in effect. Hardware
will be furnished at Owner's expense and will remain the possession of the
Property. Annual maintenance contracts for the computer software and hardware
will be at Owner's expense.
ARTICLE IV
PROCEDURE FOR HANDLING RECEIPTS & OPERATING CAPITAL
---------------------------------------------------
4.01. BANK DEPOSITS. All monies received by Manager for, or on behalf
of, Owner shall be deposited by Manager with the Depository. Manager shall
maintain accounts for such funds consistent with the system of accounting of the
Property. All funds on deposit shall be and shall remain under the sole and
exclusive control of Manager, subject to the provisions hereof. All monies of
Owner held by Manager pursuant to the terms hereof shall be held by Manager in
trust for the benefit of Owner to be held and disbursed as herein provided.
4.02. SECURITY DEPOSIT ACCOUNT. All tenant security deposits shall be
deposited in the Operating Account and shall be disbursed in accordance with the
applicable lease agreements pursuant to which such deposits have been made. In
the event that applicable law requires that tenant security deposits be held in
a separate account, such account shall be established by Manager as approved by
Owner.
4.03. DISBURSEMENT OF DEPOSITS. Manager shall disburse and pay all
funds on deposit on behalf of, and in the name of, Owner in such amounts and at
such times as the same are required in connection with the ownership,
maintenance and operation of the Property on account of all taxes, assessments
and charges of every kind imposed by any governmental authority having
jurisdiction over the Property, and all costs and expenses of maintaining,
operating, and supervising the operation of the Property, including, but not
limited to, salaries, fringe benefits and expenses of the Property Employees,
insurance premiums, debt services, capital expenditures, legal and accounting
fees and the cost and expense of utilities, services and concessions. Owner
agrees to reimburse Manager for any costs of Manager's advertising staff that
are allocable to the placement and/or creation of advertising for the Property,
subject to Owner's approval, which will not be unreasonably withheld. Manager
shall properly utilize all escrows and reserves established for their intended
purposes and not use operating funds in lieu thereof other than as an advance to
be promptly reimbursed.
4.04. WORKING CAPITAL. In addition to the funds derived from the
operation of the Property, Owner shall furnish and maintain in the operating
accounts in such bank or banks such
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other funds as may be necessary to discharge financial commitments required to
efficiently operate the Property, to meet all payrolls and satisfy, before
delinquency, all accounts payable. Manager shall have no responsibility or
obligation with respect to the furnishing of such funds.
4.05. EXCESS FUNDS.
(a) Any excess operating funds shall be transferred at the
written request of Owner to a bank account opened and maintained solely
by Owner, provided that Manager shall not be required to make any such
transfer if the transfer would reduce the balance of operating funds
below those funds reasonably required to pay ongoing or anticipated
operating expenses for one month; provided that Manager may maintain
sufficient reserves to pay, when due, non-monthly recurring expenses
such as real estate taxes and insurance premiums.
(b) Unless directed to transfer excess operating funds by
Owner pursuant to subparagraph (a) above, Manager shall use its best
efforts to keep any excess operating funds, including security
deposits, in an interest-bearing account. All interest and income
earned on deposits and investments shall constitute a part of Gross
Receipts.
4.06. AUTHORIZED SIGNATORIES. Any persons from time-to-time designated
by Manager shall be authorized signatories on all bank accounts established by
Manager hereunder and shall have authority to make disbursements from such
accounts. Funds may be withdrawn from all bank accounts established by Manager
in accordance with this Article IV, only upon the signature of two individuals
who have been granted that authority by Manager and funds may not be withdrawn
from such accounts by Owner unless Manager is in default hereunder. All persons
who are authorized signatories or who in any way handle funds for the Property
shall be bonded in the minimum amount of $500,000. Any expense relating to such
bond for on-site employees shall be borne by Owner and for off-site employees,
by Manager.
ARTICLE V
ACCOUNTING
----------
5.01. BOOKS AND RECORDS. Manager shall keep, on an accrual basis, on
behalf of Owner, or shall supervise and direct the keeping of a comprehensive
system of office records, books and accounts pertaining to the Property. Such
records shall be subject to examination at the office where they are maintained
by Owner or its authorized agents, attorneys and accountants at all reasonable
hours.
5.02. PERIODIC STATEMENTS AND AUDITS.
(a) On or before fifteen (15) days following the end of each
calendar month, Manager shall deliver, or cause to be delivered, to
Owner (i) an income and expense statement showing the results of
operation of the Property for the preceding calendar month
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and the Fiscal year to date; (ii) a comparison of income and expenses
to the Budget; and (iii) cash balances for savings and operating
accounts as of the last day of such month. Manager shall, at its
option, (i) preserve all invoices for a period of four (4) years or
(ii) at the expiration of each Fiscal Year, deliver all invoices to
Owner. Such statements and computations shall be prepared from the
books of account of the Property.
(b) Within forty-five (45) days after the end of such Fiscal
Year, Manager will also deliver, or cause to be delivered, to Owner, an
income and expense statement as of Fiscal Year end, and the results of
operation of the Property during the preceding Fiscal Year.
ARTICLE VI
GENERAL COVENANTS OF OWNER AND MANAGER
--------------------------------------
6.01. OPERATING EXPENSES. Owner shall be solely liable for the costs
and expenses of maintaining and operating the Property, and shall pay, or
Manager shall pay on Owner's behalf from Property funds, all such costs and
expenses, including, without limitation the salaries of all Property Employees.
6.02. OWNER'S RIGHT OF INSPECTION AND REVIEW. Owner and its
accountants, attorneys and agents shall have the right to enter upon any part of
the Property at all reasonable times during the term of this Agreement for the
purpose of examining or inspecting the Property or examining or making extracts
of books and records of the Property, but any inspection shall be done with as
little disruption to the business of the Property as possible. Books and records
of the Property shall be kept, beginning the date hereof, at the Property or at
the location where any central accounting and bookkeeping services are performed
by Manager but at all times shall be the property of Owner.
6.03. HOLD HARMLESS. Except for the grossly negligent acts or omissions
of Manager and/or any employee or agent of Manager, and/or an affiliate of
Manager, Owner agrees to hold and save Manager or an affiliate of Manager free
and harmless for any error of judgment and from any and all claims for damage
for bodily injury and for damage to, or destruction of, property arising from
any cause either in and about the Property or elsewhere when Manager is carrying
out the provisions of this Agreement or acting under the express or implied
directions of Owner, including the loss of use of such property following and
resulting from such damage or destruction. Owner's indemnification of Manager as
provided herein shall survive the expiration or earlier termination of this
Agreement.
6.04. COVENANTS CONCERNING PAYMENT OF OPERATING EXPENSES. Owner
covenants to pay all sums for operating expenses in excess of Gross Receipts
required to operate the Property upon written notice and demand from Manager
within thirty (30) days after receipt of written notice. Owner further
recognizes that the Property may be operated in conjunction with other phases
and costs may be allocated or shared between such phases on a more efficient and
less expensive method
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of operation. In such regard, Owner consents to the equitable allocation of
costs and/or the sharing of any expenses in an effort to save costs and operate
the Property in a more efficient manner.
ARTICLE VII
DEFAULTS AND TERMINATION RIGHTS
-------------------------------
7.01. DEFAULT BY MANAGER. Manager shall be deemed to be in default
hereunder in the event Manager shall materially fail to keep, observe or perform
any material covenant, agreement, term or provision of this Agreement to be
kept, observed or performed by Manager, and such default shall continue for a
period of thirty (30) days after notice thereof by Owner to Manager, or if such
default cannot be cured within thirty (30) days, then such additional period as
shall be reasonable, provided Manager is capable of curing same and has
proceeded to cure such default.
7.02. REMEDIES OF OWNER. Upon the occurrence of an event of default by
Manager as specified in Section 7.01 hereof, Owner shall be entitled to
terminate this Agreement, and upon any such termination, Owner shall have the
right to pursue any remedy it may have at law or in equity, it being expressly
understood that although Owner shall have no further obligation to pay any Fee
due hereunder, Manager shall remain liable for any losses suffered as a result
of Manager's default and the resulting termination of this Agreement. Upon such
termination, Manager shall deliver to Owner any funds, books and records of
Owner then in the possession or control of Manager.
7.03. DEFAULTS BY OWNER. Owner shall be deemed to be in default
hereunder in the event Owner shall fail to keep, observe or perform any material
covenant, agreement, term or provision of this Agreement to be kept, observed or
performed by Owner, and such default shall continue for a period of thirty (30)
days after notice thereof by Manager to Owner, or if such default cannot be
cured within thirty (30) days, then such additional period as shall be
reasonable, provided that Owner is capable of curing same and has proceeded to
cure such default.
7.04. REMEDIES OF MANAGER. Upon the occurrence of an event of default
by Owner as specified in Section 7.03 hereof, Manager shall be entitled to
terminate this Agreement, and upon any such termination by Manager pursuant to
this Section 7.04, Manager shall have the right to pursue any remedy it may have
at law or in equity, except that Owner shall continue to be obligated to pay and
perform all of its obligations which have accrued as of the date of termination
and provided further that the Fee payable under Section 3.01 shall continue to
be paid through the date of termination.
7.05. TERMINATION WITHOUT CAUSE. Notwithstanding any provision of this
Agreement to the contrary, Manager may terminate this Agreement at any time
without liability therefor by giving thirty (30) days written notice thereof to
Owner. Notwithstanding any provision of this Agreement to the contrary, Owner
may terminate this Agreement without cause, prior to the expiration of its
stated term, only upon payment to Manager of the damages incurred by Manager as
a consequence of such premature termination. The parties acknowledge that the
actual damages incurred by Manager as a consequence of a termination by Owner
without cause or a termination by Manager upon the occurrence of an event of
default hereunder by Owner would be difficult or impossible to calculate with
precision, and, therefore, the parties stipulate and agree that such damages
shall be
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measured by (a) multiplying the compensation payable to Manager for the first
full calendar month under the Original Term of this Agreement by sixty (60) (or
in the case of any Additional Term, by twelve (12)) and (b) reducing the
resulting amount (but not below zero) by the amount of all compensation actually
paid to Manager pursuant to this Agreement since the commencement of such term.
The parties intend the foregoing calculation to constitute a measure of
liquidated damages, and not a penalty.
7.06. EXPIRATION OF TERM. Upon the expiration of the Original Term or
any Additional Term hereof pursuant to Section 1.07 hereof, unless sooner
terminated pursuant to Section 7.03, 7.05, 9.09 or 9.12, Manager shall deliver
to Owner all funds, including tenant security deposits, books and records of
Owner then in possession or control of Manager, save and except such sums as are
then due and owing to Manager hereunder.
ARTICLE VIII
INSURANCE
---------
8.01. OWNER'S INSURANCE COVERAGE. Manager shall cause to be procured
and maintained, to the extent requested by Owner, insurance coverage with regard
to the Property. Manager shall promptly investigate and make a full written
report as to all accidents or claims for damage relating to the ownership,
operating and maintenance of the Property, including any damage or destruction
to the Property and the estimated cost of repair, and shall cooperate and make
any and all reports required by any insurance company in connection therewith.
All general public liability and other liability policies carried by or for
Owner shall name Owner and Manager as co-insureds.
8.02. MANAGER'S INSURANCE COVERAGE. Pursuant to the provisions of
Section 4.03, Manager shall provide and maintain, so long as this Agreement is
in force, worker's compensation, or similar insurance coverage, in full
compliance with all applicable state and federal laws and regulations covering
all employees of Manager, and/or an affiliate of Manager, performing work with
respect to the Property operations.
8.03. SUBROGATION AND INDEMNITY OR DEDUCTIBLE PROVISIONS.
(a) Any insurance which is procured and maintained which in
any way is related to the Property or the authorized activities
connected therewith, is for the sole benefit of the party securing such
insurance and others named as insureds and Manager and Owner hereby
release the other from all rights of recovery under or through
subrogation or otherwise for any loss or damage to the extent recovery
is made from insurance. Any insurance which is procured and maintained
by Manager insuring the interest and property of Owner and others may
contain indemnity or deductible provisions and the cost of such
provisions shall be borne by the Owner.
(b) Owner and Manager hereby waive against the other any and
all claims and demands of whatsoever nature for damages, loss or
injury to the other's property in, upon
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or about the Property, except for claims and demands arising out of the
gross negligence of willful misconduct of Owner, Manager, Manager's
affiliate, or either of their respective agents, employees, officers or
contractors.
(c) Owner shall indemnify and hold harmless Manager and
Manager's agents, officers, employees, and employees of Manager
affiliates, from any and all losses, costs, damage or expenses
resulting or arising from the effecting and maintaining, or the failure
to procure and maintain, any insurance coverage other than that
specifically required by Owner, in writing, or as set forth herein to
be maintained by Manager.
ARTICLE IX
MISCELLANEOUS PROVISIONS
------------------------
9.01. GOVERNING LAW. This Agreement shall be governed by and construed
and interpreted in accordance with the laws of the State of Ohio regardless of
where the Property is located.
9.02. NOTICES. Owner shall designate one person as Owner's
representative in all dealings with Manager, who shall, until further notice, be
the person whose name is indicated beneath Owner's address set forth on the
signature page hereof. Any notice or communication hereunder must be in writing,
and may be given by registered or certified mail, and if given by registered or
certified mail, same shall be deemed to have been given and received when a
registered or certified letter containing such notice, properly addressed, with
postage prepaid, is deposited in the United States mail; and if given otherwise
than by registered mail, it shall be deemed to have been given when delivered to
and received by the party to whom it is addressed. Such notices or
communications shall be given to the parties hereto at the addresses set forth
opposite the names of the respective parties on the signature page hereof. Any
party hereto may, at any time, by giving ten (10) days written notice to the
other party hereto, designate any other address in substitution of the foregoing
address to which such notice or communication shall be given.
9.03. SEVERABILITY. If any term, covenant or condition of this
Agreement or the application thereof to any person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement or such
other documents, or the application of such term, covenant or condition to
persons or circumstances other than those as to which it is held invalid or
unenforceable, shall not be affected thereby, and each term, covenant or
condition of this Agreement or such other documents shall be valid and shall be
enforced to the fullest extent permitted by law.
9.04. NO JOINT VENTURE OR PARTNERSHIP. Owner and Manager hereby agree
that nothing contained herein or in any document executed in connection herewith
shall be construed as making Manager and Owner joint venturers or partners. In
no event shall Manager have any obligation or liability whatsoever with respect
to any debts, obligations or liabilities of Owner.
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9.05. MODIFICATION/TERMINATION. This Agreement terminates any and all
prior management agreements between Owner and Manager relating to the Property,
and any amendment, modification, termination or release hereof may be effected
only by a written instrument executed by Manager and Owner.
9.06. ATTORNEYS' FEES. Should either party employ an attorney or
attorneys to enforce any of the provisions hereof or to protect its interest in
any manner arising under this Agreement, or to recover damages for the breach of
this Agreement, the non-prevailing party in any action (the finality of which is
not legally contested) agrees to pay to the prevailing party all reasonable
costs, damages and expenses, including attorneys' fees, expended or incurred in
connection therewith.
9.07. TOTAL AGREEMENT. This Agreement is a total and complete
integration of any and all undertakings existing between Manager and Owner and
supersedes any prior oral or written agreements, promises or representations
between them.
9.08. APPROVALS AND CONSENTS. If any provision hereof requires the
approval or consent of Owner or Manager to any act or omission, such approval or
consent shall not be unreasonably withheld or delayed.
9.09. CASUALTY. In the event that the Property, or any portion thereof,
is substantially or totally damaged or destroyed by fire, tornado, windstorm,
floor or other casualty during the term of this Agreement, Manager or Owner may
terminate this Agreement upon giving the other party written notice of
termination on or before the date which is thirty (30) days after the date of
such casualty. In the event of termination pursuant to this Section 9.09,
neither party hereto shall have any further liability hereunder.
9.10. COMPETITIVE PROPERTIES. Manager may, individually or with others,
engage or possess an interest in any other properties and ventures of every
nature and description, including but not limited to, the ownership, financing,
leasing, operation, management, brokerage, development and sale of real property
and apartment properties other than the Property, whether or not such other
ventures or properties are competitive with the Property, and Owner shall not
have any right to the income or profits derived therefrom.
9.11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their permitted successors
and assigns. Either Manager or Owner may assign this Agreement upon obtaining
the other party's prior written consent; provided, however, that Manager shall
be permitted to collaterally assign this Agreement to its lender.
9.12. SALE OF THE PROPERTY. In the event the Property is sold, conveyed
or transferred during the term hereof, Owner may assign this Agreement to the
purchaser of the Property, subject to obtaining Manager's prior written consent.
In the event of any termination of this Agreement by Owner as a result of a bona
fide sale of the Property without the prior written consent of Manager,
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Owner shall pay to Manager a termination fee equal to the amount due pursuant to
Section 7.05 to the extent that, as a result of the payment of such fee,
distributions to limited partners of Owner are not thereby reduced.
IN WITNESS WHEREOF, the parties hereto have executed this Management
Agreement as of the day and year first above written.
ADDRESS: OWNER:
6954 Americana Parkway
Reynoldsburg, Ohio 43068
By:
ATTN: Paul R. Selid, Vice President Managing General Partner
By: /s/ Paul R. Selid
-----------------------------
Paul R. Selid, Vice President
ADDRESS: MANAGER:
8615 Freeport Parkway
Suite 200 BY: LEXFORD PROPERTIES, INC.
Irving, TX 75063
ATTN: Pat Holder, President By: /s/ Pat Holder
-------------------------------
Pat Holder, President
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Exhibit 10.1
MANAGEMENT AGREEMENT
--------------------
AGREEMENT dated this 1ST day of OCTOBER, 1992 between
___________________________ (hereinafter called "Owner") and CARDINAL APARTMENT
MANAGEMENT GROUP, INC. (hereinafter called "Agent").
W I T N E S S E T H
-------------------
WHEREAS, Owner wishes to employ Agent to manage its apartment complex
hereafter named and Agent wishes to accept such employment on the terms and
considerations herein contained. NOW, THEREFORE, the parties hereto agree as
follows:
1. The Owner hereby employs the Agent exclusively to rent, lease,
operate and manage the property known as ______________________ Apartments (the
"premises") for a period of five year(s), (the "Initial Term"), beginning on the
1ST day of OCTOBER, 1992, and ending on the 30TH day of SEPTEMBER, 1997, and
thereafter for annual periods (the "Renewal Period") unless on or before sixty
(60) days prior to the expiration of the Initial Term, and such Renewal Period
as the case may be, either party hereto shall notify the other in writing of an
intention to terminate this Agreement, in which case this Agreement shall be
terminated at the end of the Initial Term or such Renewal Term, as the case may
be. Notwithstanding the foregoing, this Agreement may be terminated as provided
in paragraph 4g hereto.
2. The Agent accepts the employment and agrees:
(a) To use due diligence in the management of the premises for
the period and upon the terms herein provided, and agrees to furnish
the services of its organization to assist in the renting, operating
and managing of the premises.
(b) To render monthly statements of receipts, expenses and
charges and to remit to Owner receipts less disbursements. In the event
the disbursements shall be in excess of the rents and other income
collected by the Agent, the Owner hereby agrees to pay such excess
promptly upon demand of the Agent. In connection herewith the Agent
shall prepare an annual budget for the operation of this premises by
November 1st of each year during the term hereof for the immediately
succeeding calendar year and shall submit the same to Owner for its
approval.
(c) To deposit all receipts collected for the Owner (less any
sums properly deducted or otherwise provided herein) in a bank in a
national or state institution qualified to engage in the banking or
trust business, separate from Agent's personal account. Agent shall
notify Owner of the location and title of such accounts. However, Agent
will not be held liable in the event of bankruptcy or failure of a
depository.
(d) The Agent's or Owner's employees who handle or are
responsible for Owner's monies shall be bonded by a fidelity bond in an
amount as determined by Agent on notice to Owner.
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(e) To fully comply with the Fair Housing Act and all
applicable laws, statutes, and ordinances of the United States, the
State and the political subdivisions thereof in which the premises are
located, it being understood that, except as provided in paragraph
4(a)(ii) hereof, Owner shall be responsible for any breaches thereof.
(f) To advise Owner on appropriate insurance coverage to be
maintained for the premises, to assist Owner in obtaining such coverage
and to make sure such coverage is in effect.
(g) To notify Owner of any liens or encumbrances affecting
Owner's property of which Agent becomes aware.
3. The Owner hereby gives to the Agent the following authority and
powers and agrees to assume the expenses in connection herewith:
(a) To advertise the availability for rental of the premises
or any part thereof, and to display "for rent" signs thereon; to sign,
renew and/or cancel leases for the premises or any part thereof; (or to
supervise Owner's employees in the course of signing); to collect rents
due or to become due and give receipts therefore; to terminate
tenancies and give receipts therefore; to terminate tenancies and to
sign and serve in the name of the Owner such notices as are
appropriate; to institute and prosecute legal actions to evict tenants
to recover possession of said premises; to sue for and in the name of
the Owner and recover rents and other sums due; and, when expedient, to
settle, compromise and release such actions or suits or reinstate such
tenancies. Any lease executed for the Owner and approved by the Agent
shall not exceed 2 years.
(b) To make (or cause to be made and supervise) repairs and
alterations, and to do decorating on said premises; to purchase
supplies and pay all bills therefore. The Agent agrees to secure the
prior approval of the Owner on all expenditures in excess of $1,000.00
for any one items, except monthly or recurring operating charges and/or
emergency repairs in excess of the maximum, if in the opinion of the
Agent such repairs are necessary to protect the premises from damage or
to maintain services to the tenants as called for in their leases.
(c) To hire, discharge and supervise all labor and employees
required for the operation and maintenance of the premises, it being
agreed that all employees shall be deemed employees of the Owner and
not the Agent, and that the Agent may perform any of its duties through
Owner's attorneys, agents or employees and shall not be responsible for
their acts, defaults or negligence if reasonable care has been
exercised in their appointment and retention. The Owner further agrees
that while Agent shall be exclusively and directly responsible for
management and direction of all labor and employees, Owner shall be
solely responsible for payment of all compensation and other benefits
for employees.
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(d) To make contracts for electricity, water, telephone, trash
removal, lawn care and other services or such of them as the Agent
shall deem advisable in the name of and for the account of Owner.
(e) Where the premises are adjacent to one or more apartment
complexes which are or were managed by Agent as if all such properties
are together one apartment complex, to allocate any commonly shared
expenses among such properties as Agent may elect, in a fair and
equitable manner.
(f) If requested by Agent, Owner shall provide an apartment to
the Resident Manager of the premise or an on-site rental office, or
both, at a discount from market rate.
4. The Owner and Agent further agree that:
(a) (i) Owner shall indemnify and hold the Agent harmless from
all loss, damage, costs and actions in connection with the
management of the premises or from liability from injury
suffered by any employee or other person whomsoever, and in
connection therewith, to carry at its own expense, necessary
property damage, public liability and worker's compensation
insurance adequate to protect the interests of the parties
hereto, which policies shall be so written as to protect the
Owner, and will name the Agent as co-insured. Owner's
indemnification of Agent as provided herein shall survive the
expiration or earlier termination of this Agreement.
(ii) The Agent, shall not be liable for any error of
judgment or for any mistake of fact or law, or for anything
which it may do or refrain from doing hereafter, except in
cases of willful misconduct or gross negligence.
(b) The Agent is hereby instructed and authorized to pay
mortgage indebtedness, real estate and personal property and employee
taxes special assessments and similar indebtedness, as well as all
amounts for budgeted items and the Agent is hereby directed to accrue
and pay for same from the Owner's funds. Owner shall notify Agent in
writing if Owner wishes Agent to pay any item not contained in the
agreed budget or an amount in excess of such budgeted amount.
(c) Owner shall pay the Agent the following fees:
(i) A MANAGEMENT FEE of 5% of gross receipts.
(ii) A BOOKKEEPING FEE for general bookkeeping,
recording of receipts and disbursements, check writing and
bank account reconciliations, preparation of monthly
statements of cash receipts and disbursements, payroll tax
return filings and other required bookkeeping functions,
$300.00 per month.
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(iii) A PERFORMANCE FEE of $2.00 per apartment ($90.00
per month) for each month in which the Agent collects not less
than 96% of the potential gross revenue by the end of such
month. Model apartments, the on-site office and Resident
Manager apartments, shall be considered included in the
collected gross revenue at their current market value for
purposes of determining the percentage collected.
Agent may, at its option, from time to time (but not
more often than annually) adjust the compensation provided for
above, in order to reflect any increase in the cost of living
index from the date of this agreement through the date of such
adjustment. Any such adjustment shall be effective on a
prospective basis, only.
The Owner agrees that payments due to the Agent under
item (i), (ii) and (iii) above, can and shall be deducted from
collected rental receipts.
(d) Agent shall have the authority to establish rent levels
and implement rent changes deemed by it to be in the best interests of
the premises. Agent shall notify Owner of any rent changes.
(e) The relationship between Owner and Agent shall be one of
principal and Agent. Furthermore, Agent shall in no event be required
to advance its funds to or for the benefit of Owner or for the
operation of the premises.
(f) Other Items of Mutual Agreement:
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
(g) Agent may terminate this Agreement at any time without
liability therefore upon 30 days prior written notice to Owner. This
agreement may be terminated by Owner without cause, prior to the
expiration of its stated term, upon the payment to Agent of an amount
equal to sixty (60) times the monthly management fee payable to Agent
for the first month under this Agreement, reduced by all management
fees paid to Agent hereunder.
5. All notices or reports hereunder shall be sent by regular mail,
overnight delivery service or by telecopier as follows:
If to Agent:
CARDINAL APARTMENT MANAGEMENT GROUP, INC.
2255 Kimberly Parkway East
Columbus, OH 43232
Attention: ______________________
Telecopier # ____________________
4
<PAGE> 18
If to Owner:
---------------------------------
2255 Kimberly Parkway East
Columbus, OH 43232
Attention: ______________________
Telecopier #_____________________
6. The Owner further agrees and understands that upon termination of
the Agreement, it shall pay and honor all debts and agreements entered into on
its behalf by the Agent in good faith during the period of this Agreement.
7. This agreement shall be binding upon the successors and assigns of
the Agent, and the heirs, administrators, executors, successors and assigns of
the Owner. This Agreement supersedes all prior written agreements between the
parties hereto relating to the management of the premises. This Agreement may
only be modified by a writing between the parties hereto. This Agreement has
been entered into in the State of Ohio and shall be governed and construed in
accordance with the laws of such State regardless of where the premises are
located.
IN WITNESS WHEREOF, the parties hereto have affixed or caused to be
affixed in their respective signatures the date first above written.
OWNER: ---------------------------------------------------
--------------------------------------------------
By: Cardinal Industries, Inc.
General Partner
By:
-----------------------------------------------
Its:
-----------------------------------------------
AGENT: CARDINAL APARTMENT MANAGEMENT GROUP, INC.
By:
-----------------------------------------------
Its:
-----------------------------------------------
5
<PAGE> 1
Exhibit 10.2
------------
CORPORATE SERVICES AGREEMENT
----------------------------
THIS AGREEMENT ("Agreement") is made as of this 30th day of September,
1997 by and between Lexreit Properties, Inc., an Ohio corporation ("Company"),
and Cardinal Realty Services, Inc., an Ohio corporation ("CRSI").
R E C I T A L S
---------------
WHEREAS, Company is a real estate investment trust and is the sole
general partner of Cardinal Properties L.P. (the "Operating Partnership"); and
WHEREAS, CRSI is the sole limited partner of the Operating Partnership;
and
WHEREAS, the Operating Partnership currently holds limited partner's
interests in approximately 62 limited partnerships and member's interests in 2
limited liability companies (with Company holding member's interests in 2
limited liability companies) (collectively, the "Partnerships"), each of which
owns and will continue to own an apartment community (collectively, the
"Properties"); and
WHEREAS, the Operating Partnership may acquire interests in additional
real properties subsequent to the date of this Agreement; and
WHEREAS, CRSI and its wholly-owned subsidiaries have the capabilities
and facilities to render the corporate services herein described and are engaged
in the business of providing administrative and real estate services for real
property owners including, without limitation, services relating to regulatory
compliance, insurance procurement and administration, information systems,
banking relations and cash management, accounting, financial reporting and other
financial services and assorted shareholder services; and
WHEREAS, Company desires to employ CRSI to perform such services;
NOW, THEREFORE, in consideration of the promises, mutual
representations, warranties, covenants and agreements contained herein, the
parties agree as follows:
1. APPOINTMENT OF CRSI. Company hereby engages CRSI as its sole and
exclusive corporate services provider to perform the tasks enumerated in this
Agreement for the compensation and subject to the provisions set forth herein.
2. DUTIES OF CRSI. Subject to the provisions hereof, CRSI will have the
duty and authority to expeditiously and within reasonable time periods perform
the following acts and provide the following services to Company:
<PAGE> 2
(a) ACCOUNTING AND FINANCIAL REPORTING SERVICES. CRSI will
maintain at its principal offices such books and records documenting
the operations and financial condition of Company as are customarily
maintained by similarly situated Ohio corporations. CRSI will make such
books and records available for inspection by Company's Board of
Directors (the "Board") and by counsel, auditors and authorized agents
of Company, at any time or from time to time during normal business
hours. CRSI shall keep confidential any and all information obtained in
connection with the services rendered hereunder and shall not disclose
any such information to nonaffiliated persons except with the prior
consent of the Board. In addition, CRSI will maintain appropriate
systems and internal controls in connection with preparing Company's
accounting records and will provide tax planning and evaluation
services for Company, including the preparation and filing of Company's
tax returns.
(b) BANKING RELATIONS AND CASH MANAGEMENT SERVICES. CRSI will
provide banking and cash management services to Company including
reconciling Company's checking accounts and balance sheets. CRSI shall
establish and maintain one or more bank accounts (collectively, "Bank
Accounts") in the name of Company and may collect and deposit into any
such Bank Accounts, and disburse from any such Bank Accounts, any money
on behalf of Company, under such terms and conditions as the Board may
approve. Such monies shall not be commingled with CRSI's own funds.
Monies shall not be withdrawn from any such Bank Accounts to the order
or benefit of CRSI, except as otherwise provided in this Agreement or
as may otherwise be approved by the Board. Upon request, CRSI shall
render appropriate statements with respect to such Bank Accounts to the
Board and to the auditors of Company. CRSI will act on behalf of
Company in disbursing and collecting funds of Company, in paying the
debts and fulfilling the obligations of Company and in handling,
prosecuting, and settling any claims of or against Company, provided
that any fees and costs payable to independent persons incurred by CRSI
in connection with the foregoing shall be the responsibility of
Company. CRSI will, if and when applicable, negotiate on behalf of
Company with banks or other lenders for loans to be made to, or
refinanced with, Company with the Board's approval, and negotiate on
behalf of Company with investment banking firms and broker-dealers or
negotiate private or public sales of the securities of Company subject
to such guidelines as the Board shall from time to time choose to
establish but in no event in such a way so that CRSI shall be acting as
broker-dealer or underwriter.
(c) EMPLOYEE PAYROLL PROCESSING SERVICES. CRSI will provide,
or, when and if applicable, hire, employees to manage the day-to-day
affairs of Company. When and if applicable, CRSI will generate and
administrate Company's employee payroll including, without limitation,
maintaining an employee database, creating, distributing and reviewing
employee time sheets, entering and processing data, creating and
distributing employee payroll checks, preparing and distributing
payroll-
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<PAGE> 3
related reports, providing audit support, when necessary, and complying
with local, state and federal tax authorities and regulatory
organizations.
(d) EMPLOYEE W-2 PREPARATION AND DISTRIBUTION. When and if
applicable, CRSI will, on an annual basis, prepare and distribute W-2
forms for Company employees.
(e) INFORMATION SYSTEMS. CRSI will procure and maintain such
information systems for Company as necessary for the day-to-day
management of Company affairs, including, without limitation,
maintaining appropriate systems and internal controls.
(f) REGULATORY COMPLIANCE. CRSI will communicate on behalf of
Company with shareholders and other persons, and prepare and file all
statements (including registration statements) and reports (including
those statements and reports required pursuant to the Securities and
Exchange Act of 1934, as amended, and the Securities Act of 1933, as
amended), as required to satisfy the continuous reporting and other
requirements of applicable laws and of any governmental bodies or
agencies, including to maintain effective relations with the
shareholders and otherwise to provide investor services and, when and
if applicable, to administer and manage the issuance and/or
registration of any shares or other securities of Company. In addition,
CRSI will obtain on behalf of Company all appropriate federal, state or
local licenses and will monitor and maintain compliance of Company with
all appropriate federal, state and local laws, rules and regulations.
(g) SHAREHOLDER AND INVESTMENT SERVICES. CRSI will assist the
Company with respect to, and execute pursuant to the Board's
instructions (where applicable) and administer, all of the obligations
of Company to its shareholders, including, without limitation, payment
of dividends. CRSI will, from time to time, provide recommendations to
the Board with respect to various matters, including, but not limited
to, capital expenditures, acquisitions and other strategies. In order
to facilitate the investment of the funds of Company and enable it to
avail itself of investment opportunities as they arise, under and in
accordance with such limitations and guidelines as the Board shall from
time to time choose to establish, CRSI shall have the power and
authority to make and dispose of such investments (including disposing
of interests in the Partnerships or Properties and acquiring of
interests in additional partnerships or properties) and to make and
terminate commitments for such investments, on behalf of and in the
name of Company, without further or express authority from the Board;
provided, however, that the Board shall have the power to revoke,
suspend, modify, or limit the aforementioned power and authority at any
time or from time to time, but not retroactively. CRSI shall use its
best efforts to assure that the policies from time to time specified by
the Board with regard to the protection of Company's investments are
carried out.
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<PAGE> 4
(h) INSURANCE PROCUREMENT AND ADMINISTRATION. CRSI and Company
will work together to obtain insurance for Company and to negotiate
insurance premiums for Company, including the procurement of insurance
for Company's directors. CRSI will maintain and administer all
insurance policies of Company, including, without limitation, filing
all insurance applications and filing and collecting proceeds of, any
claims thereunder. Copies of all such insurance policies shall be
furnished to CRSI, Company and, upon request, the Board.
(i) MISCELLANEOUS SUPPLIES AND FACILITY CHARGES. CRSI will
provide to Company certain miscellaneous supplies and services,
including, without limitation, services and supplies relating to the
maintenance of Company's operating facilities. Such miscellaneous
supplies and facility charges will be paid to CRSI by Company as such
charges are incurred.
3. COMPANY'S OBLIGATIONS. In connection with the employment of CRSI,
Company hereby agrees that it will perform or comply with the following:
(a) TRANSMITTAL OF FINANCIAL INFORMATION. Company will fully
and accurately complete, transmit and make available to CRSI all
reports and other documentation required by CRSI to fulfill its
obligations in accordance with the terms of this Agreement;
(b) LEGAL, ACCOUNTING AND OTHER THIRD PARTY OBLIGATIONS.
Company will be responsible for payment of all legal, accounting and
other matters requiring the engagement of third parties by CRSI
pertaining to the Partnerships or the Properties of Company other than
those matters which solely affect or involve CRSI or its duties and
obligations pursuant to this Agreement. Company will promptly notify
CRSI of all legal matters of which Company becomes aware regardless of
materiality. Company will be responsible for paying for its fees and
costs payable to third parties for legal, accounting and other third
party services directly to the party which is engaged (whether by
Company or by CRSI on Company's behalf) to perform such services.
4. COMPENSATION. In consideration for providing the services as
described above, CRSI will be paid on an annual basis $350,000, payable in equal
monthly installments prior to the first day of each month. In addition, Company
will pay CRSI the supplies and facilities charges as set forth in Section 2(i)
above. CRSI will have no liability for payment of any fees, charges or other
sums that may become due and payable to any third parties, whether pursuant to
any contracts or agreements between CRSI (as agent or on behalf of Company) and
such third parties, or otherwise.
5. SPECIAL SERVICES. Company will pay for any special services that it
may request and that are not provided by CRSI under the terms of this Agreement.
Payment for such services will be
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<PAGE> 5
at the normal price and terms pursuant to which CRSI provides such services, or,
if CRSI does not normally provide such services, at such price and terms as
Company and CRSI mutually agree upon.
6. TERM. Unless terminated earlier pursuant to Section 8 of this
Agreement, the term of this Agreement will continue for a period of three (3)
years from the date hereof and will renew automatically for sequential one (1)
year periods unless Company or CRSI, or both, provides written notice to the
other, six (6) months prior to the expiration of the then current term, of its
desire to terminate this Agreement.
7. CRSI'S RESPONSIBILITY AND INDEMNIFICATION. CRSI's duties are only
such as are specifically provided for in this Agreement, and CRSI will incur no
liability whatsoever to Company or any other party, except for CRSI's gross
negligence or willful misconduct. CRSI may consult with counsel and will be
fully protected in any action taken in good faith in accordance with such
advice. CRSI will be fully protected in acting in accordance with any written
instructions given to CRSI hereunder and believed by it to have been executed by
the proper parties.
Company agrees to indemnify, defend upon request and hold CRSI and all
of its subsidiaries, affiliates, stockholders, directors, officers, employees,
agents, attorneys, consultants, independent contractors, designees, successors
and assignees, and each of such persons' spouses, family members and
representatives (the "Indemnified Parties"), harmless from and against, and to
reimburse the Indemnified Parties for, any losses and expenses which the
Indemnified Parties may suffer, sustain or incur and which arise out of or
relate to (a) any act or failure to act of Company, any employee of Company or
any person controlled by Company or under contract with Company; (b) any breach
of this Agreement; or (c) any act or failure to act of CRSI taken in performance
of or arising out of its obligations pursuant to this Agreement, unless such act
or failure to act constitutes gross negligence or willful misconduct of CRSI.
Upon request of CRSI, Company will immediately undertake the defense of
any legal action against or involving the Indemnified Parties, and will retain
reputable, competent and experienced counsel to represent the interests of the
Indemnified Parties approved by CRSI, which approval will not be unreasonably
withheld. Company will not settle any legal action without the specific prior
written consent of each Indemnified Party named in the action and CRSI, which
consent may not be unreasonably withheld. The Indemnified Parties or any of them
will have the right to retain separate counsel and to participate in the
defense, compromise or settlement of the action at the expense of the respective
Indemnified Parties.
8. DEFAULT. In the event that CRSI or its successors or assigns
repeatedly, substantially and materially fails to meet the standards and
specifications hereinabove provided with respect to the services to be rendered
under this Agreement, or engages in gross negligence, fraud or willful
misconduct in the performance of its duties, Company will be released to secure
such services from other parties provided that as long as CRSI continues to
provide services under this Agreement, it will be paid for such services in
accordance with Section 4 herein. No default will be deemed to occur, however,
until Company has served written notice upon CRSI describing in reasonable
detail
5
<PAGE> 6
the events or occurrences giving rise to such claim of default and CRSI has
failed within thirty (30) days after receipt of such notice to cure or remedy
any such claim of default.
The foregoing provisions notwithstanding, Company will not have the
right to consider this Agreement breached if delays and interruptions in the
performance of the required services are the result of causes beyond the control
of CRSI or acts of God, provided that CRSI is using its reasonable best efforts,
in the case of causes beyond its control, to provide alternative sources of
services where needed.
In the event that Company fails to perform any term or condition of
this Agreement, and fails within ten (10) days of receipt of notice from CRSI to
cure such failure, CRSI may terminate this Agreement upon written notice to
Company.
9. NOTICES AND REQUESTS. Any notice, request or demand required may be
delivered by either party to the other in person or by registered or certified
mail to the following respective addresses and shall be deemed delivered upon
receipt:
If to Company:
Lexreit Properties, Inc.
The Huntington Center
41 South High Street, 24th Floor
Columbus, Ohio 43215
Attention: Treasurer
If to CRSI:
Cardinal Realty Services, Inc.
6954 Americana Parkway
Reynoldsburg, Ohio 43068
Attention: Secretary
10. MISCELLANEOUS.
(a) Should any term or provision hereof be deemed invalid,
void or unenforceable, the remainder of this Agreement will nonetheless
remain in full force and effect.
(b) The terms and conditions of this Agreement are governed by
and construed in accordance with the substantive laws of the State of
Ohio and will bind and benefit the respective parties hereto and their
successors and assigns.
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<PAGE> 7
(c) This Agreement contains the complete understanding of the
parties with respect to Company's employment of CRSI to render the
services described herein and any other representations, inducements,
promises, agreements, arrangements or undertakings, whether oral or
written, express or implied, will have no force or effect.
(d) This Agreement may only be assigned with the prior written
consent of the other party to this Agreement.
(e) Any change, modification or discharge of the terms herein
will be valid only if in writing and executed by Company and CRSI.
IN WITNESS WHEREOF, Company and CRSI have set their hands and seals to
this Agreement as of the day and year first above written.
LEXREIT PROPERTIES, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
CARDINAL REALTY SERVICES, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
7
<PAGE> 1
EXHIBIT 10.3
------------
ASSET MANAGEMENT AGREEMENT
--------------------------
THIS AGREEMENT is made as of this 30th day of September, 1997 by and
between [ ], a(n) [(U.S. STATE) (LIMITED PARTNERSHIP OR LIMITED LIABILITY
COMPANY)] (the "Company"), and Cardinal Realty Services, Inc., an Ohio
corporation ("CRSI").
R E C I T A L S
- - - - - - - -
WHEREAS, Lexreit Properties, Inc., an Ohio corporation ("Lexreit"), is
a real estate investment trust and is the sole general partner of Cardinal
Properties L.P. (the "Operating Partnership"); and
WHEREAS, CRSI is the sole limited partner of the Operating Partnership;
and
WHEREAS, the Operating Partnership holds CRSI's interests in various
limited partnerships and limited liability companies, including the Company
(collectively, the "Partnerships"), each of which owns and will continue to own
an apartment community (individually, a "Property"); and
WHEREAS, the general partner or managing member of each Partnership,
including the Company, is and will continue to be directly or indirectly, CRSI;
and
WHEREAS, Lexreit is the limited partner or member of each Partnership,
including the Company; and
WHEREAS, CRSI and its wholly-owned subsidiaries are engaged in the
business of providing administrative and real estate services for real property
owners; and
WHEREAS, the Company desires to employ CRSI to perform the asset
management services herein described;
NOW, THEREFORE, in consideration of the promises, mutual
representations, warranties, covenants and agreements contained herein, the
parties agree as follows:
1. APPOINTMENT OF CRSI. The Company hereby engages CRSI, as its sole
and exclusive asset management services provider, to perform the tasks
enumerated in this Agreement for the compensation and subject to the provisions
set forth herein.
2. DUTIES OF CRSI. Subject to the provisions hereof, CRSI will have the
duty and authority to expeditiously and within reasonable time periods perform
the following acts and provide the following services to the Company:
<PAGE> 2
(a) PREPARATION AND DISTRIBUTION OF REPORTS. CRSI will prepare
and distribute reports to the Company regarding the Company's
operations, finances, management and all other matters that have or may
have an effect on the Company's interest in the Property.
(b) ALLOCATION AND DISTRIBUTION OF FUNDS. CRSI will allocate
and distribute Company funds to the partners or members, as the case
may be, in accordance with the terms of the governing documents.
(c) INTERNAL AUDIT SERVICES. CRSI will, on an annual basis,
systematically inspect, or cause to be inspected, the account records
and the transactions that underlie the Company's financial statements.
(d) TAX PREPARATION SERVICES. CRSI will prepare, or cause to
be prepared, and file tax returns on behalf of the Company, and CRSI
will supervise, prepare, review and distribute copies of the Company's
tax returns to the Company. CRSI will also supervise, prepare, review
and distribute copies of K-1 forms to the partners or members.
(e) REAL ESTATE TAX SERVICES. CRSI will perform certain
services in connection with the real estate taxes of the Property,
including but not limited to: (i) analyzing how the levied real estate
taxes relate to the valuation of the Property; (ii) recommending
whether the Company should file an appeal regarding the assessed
valuation of the Property or the amount of real estate taxes levied in
connection therewith; (iii) filing and prosecuting, if appropriate,
said appeal with the pertinent governmental authority and seeking a
reduction of the amount of the assessed value of the Property; (iv)
completing and signing the requisite documents in connection with the
performance of any of such real estate tax services; (v) retaining
professional real estate appraisers or other professionals, or both,
whose services are required in order to file an appeal for reducing the
assessed value of the Property; and (vi) negotiating, if applicable, a
settlement with the subject governmental authority of any appeal
relating to the real estate taxes subject to the terms set forth in
this Agreement.
(f) EMPLOYEE PAYROLL PROCESSING SERVICES. CRSI will generate
and administer the Company's employee payroll including, without
limitation, maintaining an employee database, creating, distributing
and reviewing employee time sheets, entering and processing data,
creating and distributing employee payroll checks, preparing and
distributing payroll-related reports and complying with local, state
and federal tax authorities and regulatory organizations.
(g) EMPLOYEE W-2 PREPARATION AND DISTRIBUTION. CRSI will, on
an annual basis, prepare and distribute W-2 forms to the Company
employees.
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<PAGE> 3
(h) REGULATORY COMPLIANCE. CRSI will obtain, or cause to be
obtained, on behalf of the Company all appropriate federal, state or
local licenses and will monitor and maintain compliance of the Company
with all appropriate federal, state and local laws, rules and
regulations. CRSI will participate in, and retain and supervise all
independent third parties, as needed, for, the Company's required
governmental filings.
(i) INSURANCE ADMINISTRATION. CRSI will administer insurance
matters for the Company, including procuring insurance with respect to
the Property, negotiating insurance premium payments and handling all
insurance claims.
(j) LOAN ADMINISTRATION. CRSI will administer and monitor the
Company's existing loan or loans, which are secured by the Property,
and will, when applicable, negotiate loans to refinance the Company's
outstanding indebtedness for the Property.
(k) REAL ESTATE SERVICES. When and if the Company offers the
Property for sale, CRSI will serve as a real estate broker and exert
reasonable efforts to consummate said sale.
3. COMPANY'S OBLIGATIONS. In connection with the employment of CRSI,
the Company hereby agrees that it will perform or comply with the following:
(a) TRANSMITTAL OF FINANCIAL INFORMATION. The Company will
fully and accurately complete all daily reports and other documentation
required by CRSI to fulfill its obligations in accordance with the
terms of this Agreement. The Company will transmit such reports and
documents to CRSI.
(b) LEGAL, ACCOUNTING AND OTHER THIRD PARTY OBLIGATIONS. The
Company will be responsible for payment of all legal, accounting and
other matters requiring the engagement of third parties by CRSI
pertaining to the Company or the Property other than those matters
which solely affect or involve CRSI or its duties and obligations
pursuant to this Agreement. The Company will promptly notify CRSI of
all legal matters of which the Company becomes aware regardless of
materiality. The Company will be responsible for paying for its fees
and costs payable to third parties for legal, accounting and other
third party services directly to the party which is engaged (whether by
the Company or by CRSI on the Company's behalf) to perform such
services.
4. CUSTODY AND CONTROL OF THE COMPANY'S CASH. The Company authorizes
CRSI to retain custody and control of its cash on hand (the "Funds") and invest
the Funds, in the Company's name, in either demand or overnight commercial paper
facilities, or both (the "CP Facilities"). CRSI agrees to make the Funds
immediately available to the Company on an as-needed basis. As
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<PAGE> 4
consideration for CRSI's services as described above (in addition to the
compensation set forth in Section 5), CRSI will retain all interest accruing on
the Funds under the CP Facility.
5. COMPENSATION; OUTSOURCING.
(a) In consideration for providing the services as described
herein, in addition to the interest accruing on the Funds under the CP
Facility (as described in Section 4), CRSI will be paid on a monthly
basis a fee equal to (i) an asset management fee of one percent (1%) of
the gross monthly revenues collected by the Company; plus (ii) a
payroll processing fee of $43. Furthermore, CRSI will be paid on an
annual basis (i) a W-2 form preparation and distribution fee in an
amount equal to $1.50 per employee; plus (ii) an insurance
administration fee in an amount equal to $12 per apartment unit; plus
(iii) a tax preparation fee of $1,000; plus (iv) an audit preparation
fee of $1,000 if any loan documents or other agreements executed by the
Company relating to its Property require an annual audit. In addition,
if applicable, CRSI will be paid (i) a real estate tax appeals fee in
an amount equal to forty percent (40%) of first year savings along with
a maintenance fee of $100; (ii) a loan negotiation fee in an amount
equal to one percent (1%) of the face amount of any new or refinanced
loan with respect to the Property; and (iii) a real estate commission
fee in an amount equal to six percent (6%) of the sale price (inclusive
of any fees payable to outside brokers retained by the seller) in the
event of a change in control (as defined in Section 7(b)) of the
Company.
(b) With respect to any of the services to be provided by CRSI
hereunder, CRSI may, at its option, outsource the provision of such
services to third party service providers, and CRSI is hereby
authorized to take such actions as are necessary to outsource such
services. In the event that any services are outsourced, the Company
will be responsible for paying the charges of any third party service
provider. The Company shall not be obligated to pay any fees due to
CRSI hereunder for such services as are outsourced pursuant to this
Section 5(b).
6. SPECIAL SERVICES. The Company will pay for any special services
which it may request and which are not provided by CRSI under the terms of this
Agreement. Payment for such services will be at the normal price and terms
pursuant to which CRSI provides such services, or, if CRSI does not normally
provide such services, at such price and terms as the Company and CRSI mutually
agree upon.
7. TERM
(a) Unless terminated earlier pursuant to Section 9 of this
Agreement, the term of this Agreement will continue for a period of
three (3) years from the date hereof and will renew automatically for
sequential one (1) year periods unless the Company or CRSI, or both,
provides written notice to the other, six (6) months prior to the
expiration of the then current term, of its desire to terminate this
Agreement.
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<PAGE> 5
(b) Notwithstanding subparagraph (a) of this Section 7, CRSI
may, at its option, terminate this Agreement upon ninety (90) days
written notice to the Company in the event of a "change in control" of
the Company. For purposes of this Agreement, a "change in control" of
the Company means that (i) the Company has sold, or otherwise disposed
of, all or substantially all of the assets of the Property; or (ii) the
Company ceases to own a majority interest of the Property.
8. CRSI'S RESPONSIBILITY AND INDEMNIFICATION. CRSI's duties are only
such as are specifically provided for in this Agreement, and CRSI will incur no
liability whatsoever to the Company or any other party, except for CRSI's gross
negligence or willful misconduct. CRSI may consult with counsel and will be
fully protected in any action taken in good faith in accordance with such
advice. CRSI will be fully protected in acting in accordance with any written
instructions given to CRSI hereunder and believed by it to have been executed by
the proper parties.
The Company agrees to indemnify, defend upon request and hold CRSI and
all of its subsidiaries, affiliates, stockholders, directors, officers,
employees, agents, attorneys, consultants, independent contractors, designees,
successors and assignees, and each of such persons' spouses, family members and
representatives (the "Indemnified Parties"), harmless from and against, and to
reimburse the Indemnified Parties for, any losses and expenses which the
Indemnified Parties may suffer, sustain or incur and which arise out of or
relate to (a) any act or failure to act of the Company, any employee of the
Company or any person controlled by the Company or under contract with the
Company; (b) any breach of this Agreement; or (c) any act or failure to act of
CRSI taken in performance of or arising out of its obligations pursuant to this
Agreement, unless such act or failure to act constitutes gross negligence or
willful misconduct of CRSI.
Upon request of CRSI, the Company will immediately undertake the
defense of any legal action against or involving the Indemnified Parties, and
will retain reputable, competent and experienced counsel to represent the
interests of the Indemnified Parties approved by CRSI, which approval will not
be unreasonably withheld. The Company will not settle any legal action without
the specific prior written consent of each Indemnified Party named in the action
and CRSI, which consent may not be unreasonably withheld. The Indemnified
Parties or any of them will have the right to retain separate counsel and to
participate in the defense, compromise or settlement of the action at the
expense of the respective Indemnified Parties.
9. DEFAULT. In the event that CRSI or its successors or assigns
repeatedly, substantially and materially fails to meet the standards and
specifications hereinabove provided with respect to the services to be rendered
under this Agreement, or engages in gross negligence, fraud or willful
misconduct in the performance of its duties, the Company will be released to
secure such services from other parties provided that as long as CRSI continues
to provide services under this Agreement, it will be paid for such services in
accordance with Section 5 herein. No default will be deemed to occur, however,
until the Company has served written notice upon CRSI describing in reasonable
detail the events or occurrences giving rise to such claim of default and CRSI
has failed within thirty (30) days after receipt of such notice to cure or
remedy any such claim of default.
5
<PAGE> 6
The foregoing provisions notwithstanding, the Company will not have the
right to consider this Agreement breached if delays and interruptions in the
performance of the required services are the result of causes beyond the control
of CRSI or acts of God, provided that CRSI is using its reasonable best efforts,
in the case of causes beyond its control, to provide alternative sources of
services where needed.
In the event that the Company fails to perform any term or condition of
this Agreement, and fails within ten (10) days of receipt of notice from CRSI to
cure such failure, CRSI may terminate this Agreement upon written notice to the
Company.
10. NOTICES AND REQUESTS. Any notice, request or demand required may be
delivered by either party to the other in person or by registered or certified
mail to the following respective addresses and shall be deemed delivered upon
receipt:
If to Company:
To the Company
c/o Lexreit Properties, Inc.
The Huntington Center
41 South High Street, 24th Floor
Columbus, Ohio 43215
Attention: Treasurer
If to CRSI:
Cardinal Realty Services, Inc.
6954 Americana Parkway
Reynoldsburg, Ohio 43068
Attention: Secretary
11. MISCELLANEOUS.
(a) Should any term or provision hereof be deemed invalid,
void or unenforceable, the remainder of this Agreement will nonetheless
remain in full force and effect.
(b) The terms and conditions of this Agreement are governed by
and construed in accordance with the substantive laws of the State of
Ohio and will bind and benefit the respective parties hereto and their
successors and assigns.
(c) This Agreement contains the complete understanding of the
parties with respect to the Company's employment of CRSI to render the
services described herein and any other representations, inducements,
promises, agreements,
6
<PAGE> 7
arrangements or undertakings, whether oral or written, express or
implied, will have no force or effect.
(d) This Agreement may only be assigned with the prior written
consent of the other party to this Agreement.
(e) Any change, modification or discharge of the terms herein
will be valid only if in writing and executed by the Company and CRSI.
IN WITNESS WHEREOF, the Company and CRSI have set their hands and seals
to this Agreement as of the day and year first above written.
[COMPANY NAME]
CARDINAL REALTY SERVICES, INC., as General
Partner or Managing Member
By:
---------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
CARDINAL PROPERTIES L.P., as Limited Partner
or Member
By: Lexreit Properties, Inc., as General Partner
By:
---------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
CARDINAL REALTY SERVICES, INC.
By:
---------------------------------------------
Name:
------------------------------------------
Title:
------------------------------------------
7
<PAGE> 1
EXHIBIT 10.4
------------
LIMITED PARTNERSHIP AGREEMENT
OF
CARDINAL PROPERTIES L.P.
<PAGE> 2
TABLE OF CONTENTS
-----------------
PAGE
----
DEFINITIONS
- -----------
ARTICLE ONE
- -----------
FORMATION OF THE PARTNERSHIP........................................3
ARTICLE TWO
- -----------
NAME................................................................3
ARTICLE THREE
- -------------
PLACE OF BUSINESS; AGENT FOR SERVICE OF PROCESS.....................3
ARTICLE FOUR
- ------------
PURPOSES AND POWERS OF THE PARTNERSHIP..............................4
ARTICLE FIVE
- ------------
TERM OF THE PARTNERSHIP.............................................9
ARTICLE SIX
- -----------
NAMES AND ADDRESSES OF PARTNERS; CAPITAL
CONTRIBUTIONS; PERCENTAGE INTERESTS.................................9
ARTICLE SEVEN
- -------------
ALLOCATIONS OF NET PROFITS AND LOSSES; TAX ITEMS;
CAPITAL ACCOUNTS...................................................10
ARTICLE EIGHT
- -------------
DISTRIBUTIONS......................................................10
ARTICLE NINE
- ------------
PARTNERSHIP MATTERS................................................11
ARTICLE TEN
- -----------
MANAGEMENT; DUTIES AND RESTRICTIONS................................12
ARTICLE ELEVEN
- --------------
TRANSFER OF LIMITED PARTNERSHIP INTERESTS..........................14
ARTICLE TWELVE
- --------------
TRANSFER OF GENERAL PARTNER'S INTEREST.............................15
(i)
<PAGE> 3
ARTICLE THIRTEEN
- ----------------
LIQUIDATION, DISSOLUTION, DEATH, LEGAL INCAPACITY,
INSOLVENCY OR REMOVAL OF A GENERAL PARTNER.........................15
ARTICLE FOURTEEN
- ----------------
DISSOLUTION OF THE PARTNERSHIP.....................................16
ARTICLE FIFTEEN
- ---------------
TAX MATTERS........................................................18
ARTICLE SIXTEEN
- ---------------
NOTICE; CONSENT....................................................19
ARTICLE SEVENTEEN
- -----------------
POWER OF ATTORNEY..................................................19
ARTICLE EIGHTEEN
- ----------------
MISCELLANEOUS......................................................20
EXHIBIT A CAPITAL ACCOUNTS; DEFINITIONS; SPECIAL
- --------- ALLOCATIONS & TAX ALLOCATIONS............................A-1
EXHIBIT B ROSTER OF PARTNERS.......................................B-1
- ---------
EXHIBIT C ORIGINAL CONTRIBUTION OF PROPERTIES......................C-1
- ---------
EXHIBIT D SUBSEQUENT CONTRIBUTION OF PROPERTIES....................D-1
- ---------
(ii)
<PAGE> 4
LIMITED PARTNERSHIP AGREEMENT
OF
CARDINAL PROPERTIES L.P.
This Limited Partnership Agreement is made as of the ___ day of
___________, 1997 among Lexreit Properties, Inc. ("Lexreit"), an Ohio
corporation, as General Partner and Cardinal Realty Services, Inc. ("CRSI"), an
Ohio corporation, as Limited Partner.
In consideration of the mutual covenants herein contained and intending
to be legally bound, the parties hereto form a limited partnership under the
laws of the State of Ohio, upon the following terms and conditions:
DEFINITIONS
-----------
Words and phrases used in this Agreement, unless the context clearly
indicates otherwise, have the following meanings:
(i) The term "Act" means the Ohio Limited Partnership Act, Chapter 1782 of
the Ohio Revised Code, as of the date of this Agreement.
(ii) The term "Agreement" means this Limited Partnership Agreement, as
amended from time to time.
(iii) The term "Capital Account" has the meaning set forth in Exhibit A.
(iv) The term "Capital Contribution" means the total amount of cash or
property contributed to the Partnership by each Partner pursuant to the terms of
this Agreement. Any reference to the Capital Contribution of a Partner shall
include the Capital Contribution made by a predecessor holder of the interest of
such Partner.
(v) The term "Certificate" means the valid Certificate of Limited
Partnership of the Partnership, duly filed and amended.
(vi) The term "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(vii) The term "Distributable Funds from Partnership Operations" means (i)
net income (loss) (computed in accordance with generally accepted accounting
principles), excluding gains (losses) from transactions generating Sale and
Refinancing Proceeds, plus (ii) real estate related depreciation and
amortization, reduced by (iii) principal payments on debt service requirements
and capital expenditures and Reserves for the Properties, plus (iv) Sale and
Refinancing Proceeds, plus (v) major maintenance and capital expenditures funded
from deferred escrows.
(viii) The term "General Partner" means Lexreit and any successor general
partners or additional general partners admitted in accordance with Article
Twelve or Article Thirteen.
<PAGE> 5
(ix) The term "Investment Entity" means any Person listed on Exhibits C or
D in which the Partnership holds an equity interest.
(x) The term "Limited Partner" means CRSI, and any person who becomes a
limited partner pursuant to the terms of this Agreement.
(xi) The term "Limited Partnership Interest" means the interest of a
Limited Partner.
(xii) The terms "Net Profits" and "Net Losses" have the meanings set forth
in Exhibit A.
(xiii) The term "Partners" means the General Partner and the Limited
Partner; the term "Partner" means any General Partner or Limited Partner
individually.
(xiv) The term "Partnership" means Cardinal Properties L.P.
(xv) The term "Percentage Interest" means the interest of a Partner in the
Net Profits, Net Losses and certain cash flow distributions of the Partnership,
as set forth in Exhibit B.
(xvi) The term "Person" means any individual, partnership (whether general
or limited), limited liability company, corporation, trust, estate, association,
nominee or other entity.
(xvii) The term "Properties" means (a) interests in the Investment
Entities listed on Exhibits C and D hereto as of the date of formation and as
amended from time to time by the General Partner due to (i) purchases and sales
of interests in such Investment Entities, and (ii) contributions by the Partners
of additional interests in Investment Entities, and (b) other interests in real
property acquired from time to time.
(xviii) The term "Reserves" means reasonable amounts set aside to fund
Partnership expenses, debt payments, capital improvements, replacements, and
contingencies, as determined by the General Partner, in its sole discretion.
(xix) The term "Exhibit A" means Exhibit A to this Agreement.
(xx) The term "Exhibit B" means Exhibit B to this Agreement.
(xxi) The term "Exhibit C" means Exhibit C to this Agreement.
(xxii) The term "Exhibit D" means Exhibit D to this Agreement.
(xxiii) The term "Sale or Refinancing Proceeds" means funds (net of
expenses and debt repayment) generated from the sale of or the refinancing of
property (including furniture and equipment) of the Partnership; or, to the
extent distributed to the Partnership, of property (including furniture and
equipment) of any Investment Entity.
2
<PAGE> 6
(xxiv) The term "Substitute Limited Partner" means a person admitted as a
Limited Partner in the Partnership in accordance with Article Eleven of this
Agreement with all the rights of, and in the place of, a Limited Partner.
ARTICLE ONE
-----------
FORMATION OF THE PARTNERSHIP
----------------------------
The parties agree to form the Partnership as a limited partnership
under the Act on the terms and conditions set forth in this Agreement. The
rights and liabilities of the Partners will be as provided in the Act, except as
otherwise expressly provided in this Agreement. The General Partner will from
time to time execute or cause to be executed all such certificates (including
limited partnership and fictitious name certificates) or other documents and
cause to be done all such filings, recordings, publishings, or other acts as may
be necessary or appropriate to comply with the requirements for the formation
and operation of a limited partnership under the laws of the State of Ohio and
under the laws of any other jurisdiction in which the Partnership conducts
business.
ARTICLE TWO
-----------
NAME
----
The name of the Partnership is Cardinal Properties L.P. The business of
the Partnership may, however, be conducted under any other name or names
selected by the General Partner.
ARTICLE THREE
-------------
PLACE OF BUSINESS; AGENT FOR SERVICE OF PROCESS
-----------------------------------------------
3.1 PLACE OF BUSINESS. The principal office of the Partnership will be
located at 41 South High Street, 24th Floor, Columbus, Ohio 43215 or at such
other place as the General Partner may direct. As required by the Act, records
pertaining to the Partnership will be kept at the Partnership's principal
office. The Partnership may maintain additional offices at any other place or
places as the General Partner may deem advisable.
3.2 AGENT FOR SERVICE OF PROCESS. The agent for service of process as
required by the Act is ACFB Incorporated, 2300 BP America Building, 200 Public
Square, Cleveland, Ohio 44114-2378. The General Partner may remove and change
the agent by amending the Certificate.
3
<PAGE> 7
ARTICLE FOUR
------------
PURPOSES AND POWERS OF THE PARTNERSHIP
--------------------------------------
4.1 PURPOSES AND POWERS OF THE PARTNERSHIP. The Partnership has been
formed pursuant to the Act for the purposes of (i) owning, operating,
maintaining, administering, developing, holding, improving, rehabilitating,
redeveloping, renovating, expanding, leasing, mortgaging, selling, exchanging,
disposing of, and generally dealing in and with, the Properties and any other
property owned by the Partnership, (ii) financing or refinancing for any of the
foregoing purposes, or for any other purpose in furtherance of, or necessary,
convenient, or incidental to the business or requirements of the Partnership,
(iii) seeking to acquire, acquiring, obtaining options or other rights to
acquire (pursuant to a purchase for cash and/or other consideration, exchange,
merger, contribution to the capital of the Partnership, or otherwise) interests
in, or in Persons owning, or owning an interest or interests in property or
properties in anticipation of developing same, or any other property as shall be
specifically, in all such cases, designated from time to time by the General
Partner, (iv) holding an interest as a partner (general and/or limited), member
or shareholder in a management leasing, development, administrative or other
service company, including interests incidental to such interests, and (v)
engaging in any other activities (including the ownership of property) that are
in furtherance of or necessary or incidental or related to any of the foregoing.
In furtherance of its purposes, but subject to the provisions of this
Agreement, the Partnership has the power and is hereby authorized to, directly
or indirectly:
(i) retain, own, hold, do business with, acquire (pursuant to a
purchase for cash and/or other consideration, exchange, merger,
contribution to the capital of the Partnership, or otherwise),
renovate, rehabilitate, improve, expand, lease, operate, maintain, and
administer and sell, convey, assign, exchange, mortgage, finance,
refinance, or demolish, or deal in any manner with, any Property and
any real or personal property used in connection therewith or which
may be in furtherance of, or necessary, convenient, or incidental to
the accomplishment of, the purposes of the Partnership;
(ii) borrow, including, without limitation, borrowing to obtain
funds to acquire, own, obtain an option or other right to acquire,
develop, and/or improve (including, without limitation, to renovate,
rehabilitate, expand, lease, operate, maintain, and administer) an
opportunity, and make capital improvements and/or investments in one or
more Properties, and refinance any indebtedness or borrowing in
furtherance of, or necessary, convenient, or incidental to the
accomplishment of, any purposes or requirements of the Partnership,
issue evidences of indebtedness to evidence such borrowings which may
be convertible in whole or in part into Partnership Interests to be
issued and which may be unsecured or secured by a mortgage, deed of
trust, assignment, pledge, or other lien on a Property or any other
asset(s) of the Partnership and/or a Property, and enter into guaranty
agreements and/or indemnity agreements in connection
4
<PAGE> 8
with any such borrowings or in connection with a borrowing by or
indebtedness of any other Person in which the Partnership holds an
interest;
(iii) contribute to the capital of, or lend to, a Property,
acquire, own, obtain an option or other right to acquire (pursuant to a
purchase for cash and/or other consideration, exchange, merger,
contribution to the capital of the Partnership, or otherwise), develop,
renovate, rehabilitate, improve, expand, lease, make capital
improvements to, satisfy obligations of, or operate an opportunity to
be held as a Property;
(iv) seek and/or locate opportunities that are or are intended to
be in furtherance of, or necessary, convenient or incidental to the
accomplishment of, any purposes of the Partnership;
(v) perform and/or engage others to perform studies and/or
investigation or analysis of any sort in respect of a possible or
proposed opportunity;
(vi) acquire and/or obtain options or other rights to acquire
(pursuant to a purchase for cash and/or other consideration, exchange,
merger, contribution to the capital of the Partnership, or otherwise)
interests in real property or other opportunities that are or are
intended to be in furtherance of, or necessary, convenient, or
incidental to the accomplishment of, the purposes of the Partnership,
as shall be specifically, from time to time, designated by the General
Partner, and enter into and perform any and all agreements, execute any
and all instruments and documents, and take any and all actions with
respect thereto;
(vii) accept, in exchange for a Partnership Interest and, if
desired, admission as a Partner in the Partnership, and as a
contribution to the capital of the Partnership, or through the
liquidation of a corporation or other entity, or otherwise, or
interests in real estate investments;
(viii) take any action reasonably anticipated to enhance, protect,
defend and/or preserve, the value of a Property;
(ix) act as one of the general and/or limited partners of, or a
member of, or act as the sole general or limited partner of a Property,
and exercise all the powers and authorities given to the Partnership by
the partnership agreement, operating agreement or other governing
document covering such Property, or otherwise own all or any part or
portion of a Property;
(x) enter into, consent to, and enter into amendments of, any
partnership agreement, operating agreement or other governing document
covering a Property or any other agreement to which the Partnership or
a Property is or is to be a party;
5
<PAGE> 9
(xi) enter into ground leases, as a tenant or landlord, in respect
of all or any part or portion of the Partnership's real property;
(xii) convert a Property, or a part thereof, to condominium or
cooperative status;
(xiii) prepay in whole or in part, and refinance, recast,
increase, modify, amend, extend, or assign any loan, secured or
unsecured, and in connection therewith, execute any extensions,
renewals, or modifications of any mortgage or deed of trust or lien
securing any such loan;
(xiv) act as one of the general and/or limited partners, or
shareholders of, or member of, or act as the sole general or limited
partner or shareholder of or member of, or otherwise employ, a
management, leasing, development, or other service company, to perform
or engage others to perform all activities and services in respect of a
Property or to perform administrative services for the Partnership and
the General Partner, and pay compensation for such services;
(xv) enter into, perform, and carry out contracts or agreements of
any kind, including, without limitation, contracts or agreements with a
Partner or an affiliate thereof, in furtherance of, or necessary,
convenient, or incidental to the accomplishment of, the purposes of the
Partnership, including, without limitation, the execution and delivery
of all agreements, certificates, instruments, or documents required by
lenders or in connection with any mortgage, deed of trust, or
assignment;
(xvi) place record ownership to a Property (or any part thereof),
or any other Partnership property in the name or names of a nominee or
nominees, or establish a trust ("nominee" or otherwise) to own or hold
a Property, or any other Partnership property, including to direct,
select, and remove the trustee(s) thereof and amend or terminate such
trust, all for the purpose of financing or any other convenience;
(xvii) execute contracts with governmental agencies, including,
without limitation, any documents required in connection with any debt;
(xviii) execute any lease or leases (without limit as to the term
thereof (including beyond the term of the Partnership), whether or not
the space so leased is to be occupied by the lessee or, in turn,
sub-leased in whole or in part to others) with respect to all or any
part of a Property;
(xix) obtain, through contract or otherwise, goods and services;
(xx) maintain insurance;
(xxi) invest in, reinvest, and oversee the investment of, cash and
cashlike assets;
6
<PAGE> 10
(xxii) make or revoke any election permitted the Partnership by
any taxing or other authority;
(xxiii) foreclose upon any property;
(xxiv) admit a Person as a Partner to the Partnership, or increase
or decrease the interest of a Partner in the Partnership, pursuant to
the terms of this Agreement;
(xxv) sell, exchange, or otherwise dispose of, upon any terms, all
or any part or portion of Partnership property or the property of a
Property;
(xxvi) enter into, perform, and carry out contracts which may be
lawfully carried out or performed by a partnership under applicable
laws including, without limitation, agreements with respect to
management of real property, including agreements with persons
affiliated with a Partner;
(xxvii) enter into an agreement to merge with or into another
partnership, limited liability company or corporation, having similar
purposes as the Partnership and having the Partnership or such other
partnership, limited liability company or corporation as the surviving
entity;
(xxviii) retain legal counsel, accountants, appraisers, and any
other professionals in connection with the business of the Partnership
or of a Property;
(xxix) execute or deliver any assignment for the benefit of
creditors of the Partnership or of a Property;
(xxx) negotiate with, defend, and resolve all matters with any
person;
(xxxi) sue on, defend, pursue, or compromise any and all claims or
liabilities in favor of or against the Partnership or a Property,
submit any or all such claims or liabilities to arbitration, and
confess a judgment against the Partnership or a Property in connection
with litigation in which the Partnership or a Property may be involved;
(xxxii) take any action and exercise any right (including the
assignment or disposition of same) under any contract or agreement to
which the Partnership or a Property is a party;
(xxxiii) terminate, dissolve, and liquidate any Person, including,
without limitation, a Property, and retain and deal in and with the
assets (subject to liabilities and obligations) received as a result of
any such liquidation;
7
<PAGE> 11
(xxxiv) amend, modify, or terminate and deal in any manner with
any instrument, including, without limitation, any trust instrument,
corporate document, partnership agreement, or joint venture agreement
covering or in respect of a Property;
(xxxv) indemnify the General Partner and satisfy such
indemnifications from the assets of the Partnership; and
(xxxvi) in addition to the foregoing, take or omit to take any
action as may be necessary, convenient, or desirable to further the
purposes or intent of the Partnership, and have and exercise all of the
powers and rights conferred upon limited partnerships formed pursuant
to the Act.
4.2 PARTNERSHIP ONLY FOR PURPOSES SPECIFIED. The Partnership shall be a
partnership only for the purposes specified in Section 4.1 hereof, and this
Agreement shall not be deemed to create a partnership among the Partners with
respect to any activities whatsoever other than the activities within the
purposes of the Partnership as specified in Section 4.1 hereof. Except as
otherwise provided in this Agreement, no Partner shall have any authority to act
for, bind, commit, or assume any obligation or responsibility on behalf of the
Partnership, its properties, or any other Partner. No Partner, in its capacity
as a Partner under this Agreement, shall be responsible or liable for any
indebtedness or obligation of another Partner, nor shall the Partnership be
responsible or liable for any indebtedness or obligation of any Partner incurred
either before or after the execution and delivery of this Agreement by such
Partner, except as to those responsibilities, liabilities, indebtedness, or
obligations incurred pursuant to and as limited by the terms of this Agreement
or incurred pursuant to the Act.
4.3 REAL ESTATE INVESTMENT TRUST REQUIREMENTS. Notwithstanding anything
to the contrary contained in this Agreement, for so long as the General Partner
is a Partner, the Partnership shall operate in such a manner and the Partnership
shall take or omit to take all actions as may be necessary (including making
appropriate distributions from time to time), so as to permit the General
Partner (i) to continue to qualify as a Real Estate Investment Trust under
Sections 856 through 860 of the Code so long as such requirements exist and as
such provisions may be amended from time to time, or corresponding provisions of
succeeding law (the "REIT REQUIREMENTS"), and (ii) to minimize its exposure to
the imposition of an excise tax under Section 4981(a) of the Code or a tax under
Section 857(b)(5) of the Code, so long as such taxes may be imposed and as such
provisions may be amended from time to time, or corresponding provisions of
succeeding law, each of (i) and (ii) to at all times be determined (a) as if the
General Partner's sole asset is its Partnership Interest, and (b) without regard
to the action or inaction of the General Partner with respect to distributions
(by way of dividends or otherwise) and the timing thereof.
8
<PAGE> 12
ARTICLE FIVE
------------
TERM OF THE PARTNERSHIP
-----------------------
The term of the Partnership will begin on the date that the Certificate
of Limited Partnership is filed with the Secretary of State of Ohio and will
continue in existence until December 31, 2037, unless earlier terminated as
provided in Article Fourteen.
ARTICLE SIX
-----------
NAMES AND ADDRESSES OF PARTNERS;
--------------------------------
CAPITAL CONTRIBUTIONS; PERCENTAGE INTERESTS
-------------------------------------------
6.1 NAMES AND ADDRESSES. The full names and addresses of the Partners
are set forth in Exhibit B to this Agreement.
6.2 CAPITAL CONTRIBUTIONS. The Capital Contributions of each of the
Partners is set forth in Exhibit B to this Agreement. The Capital Contributions
credited to Cardinal Realty Services, Inc.'s ("Cardinal") Capital Account were
made by certain subsidiaries of Cardinal who directed the Partnership to issue
the Partnership interests to be received in exchange therefor to Cardinal.
6.3 PERCENTAGE INTERESTS. The Percentage Interest of each of the
Partners is set forth in Exhibit B to this Agreement.
6.4 EXHIBIT B. The Percentage Interests of the Partners shall be
adjusted upon the event of a sale, transfer, assignment or redemption of an
interest in the Partnership. The General Partner will amend Exhibit B to reflect
any adjustments to the Percentage Interests of the Partners. In addition, the
General Partner will (a) amend Exhibit B to reflect additional capital
contributions by Partners, (b) add to Exhibit B the name and addresses of any
new Partners admitted to the Partnership in accordance with the terms of this
Agreement and (c) delete from Exhibit B the names and addresses of any Partners
who withdraw from the Partnership.
6.5 ADDITIONAL CAPITAL CONTRIBUTIONS. No Limited Partner will be
permitted to make additional capital contributions to the Partnership without
the consent of the General Partner. No Limited Partner will at any time be
required to make any additional contributions to the capital of the Partnership.
Any capital contributions made after those referenced in Section 6.2 hereof
shall be listed on Exhibit D hereof.
6.6 NO RETURN OF CAPITAL CONTRIBUTIONS; NO INTEREST ON CAPITAL
CONTRIBUTIONS. No Partner will be entitled to demand or receive the return of
his Capital Contribution, except as otherwise specifically provided in this
Agreement. No interest will be paid on Capital Contributions to the Partnership.
9
<PAGE> 13
ARTICLE SEVEN
-------------
ALLOCATIONS OF NET PROFITS AND LOSSES;
--------------------------------------
TAX ITEMS; CAPITAL ACCOUNTS
---------------------------
7.1 NET PROFITS, NET LOSSES AND TAX ITEMS. The Net Profits and Net
Losses of the Partnership, and tax items of the Partnership, will be allocated
among the Partners as set forth in Exhibit A.
7.2 CAPITAL ACCOUNT. There shall be maintained a Capital Account for
each Partner in the manner set forth in Exhibit A.
ARTICLE EIGHT
-------------
DISTRIBUTIONS
-------------
8.1 DISTRIBUTIONS OF DISTRIBUTABLE FUNDS FROM PARTNERSHIP OPERATIONS.
Distributions of Distributable Funds from Partnership Operations shall be made
no less frequently than quarterly, in the following proportions:
(a) First, to the extent of the net income of the Partnership,
as determined under United States generally accepted accounting
principles, excluding gains (losses) from a transaction which generates
Sale or Refinancing Proceeds ("Modified Net Income"), distributions
shall be made to the Partners in proportion to their Percentage
Interests (which distributions shall be funded, to the extent possible,
from Distributable Funds from Partnership Operations other than Sale or
Refinancing Proceeds);
(b) Next, to the extent that Distributable Funds from
Partnership Operations exceed the Modified Net Income of the
Partnership (the "Excess Distributable Funds"), distributions of such
Excess Distributable Funds shall be made:
(i) to the General Partner, to the extent that such
Excess Distributable Funds are not Sale or Refinancing
Proceeds; provided, however, to the extent that distributions
are made to the General Partner as a result of the proviso in
Section 8.1(b)(ii) below, an equivalent amount of
distributions shall be made to the Limited Partner pursuant
to this Section 8.1(b)(i) prior to any distributions being
made to the General Partner pursuant to this Section
8.1(b)(i), and
(ii) to the Partners in proportion to, and to the extent
of, their relative positive Capital Account balances (after
taking into account all Capital Account adjustments through
the date of the event giving rise to such Sale or Refinancing
Proceeds) to the extent that such Excess Distributable Funds
are Sale or Refinancing Proceeds until no Partner has a
positive Capital Account balance, and thereafter to the
Partners in proportion to their Percentage Interests;
provided, however, in no event shall the Sale or Refinancing
Proceeds to be distributed to the General Partner pursuant to
this Section 8.1(b)(ii) be less than the lesser of (x) the
amount of taxable gain allocable to the General Partner as a
result of the event giving rise to such Sale or Refinancing
Proceeds (y) the amount necessary for the General Partner to
meet its minimum distribution requirements under Sections 857
and 4981 of the Code, as determined by the General Partner in
its reasonable discretion and taking into account any other
distributions made to the General Partner pursuant to this
Article Eight, as well as the capacity of the General Partner
to borrow funds to satisfy such distribution requirements.
10
<PAGE> 14
8.2 DISTRIBUTIONS IN LIQUIDATION. Notwithstanding any provision of this
Agreement to the contrary, all distributions in liquidation shall be made in
accordance with Article Fourteen of this Agreement.
8.3 COVENANTS OF LEXREIT AND CRSI.
(a) Lexreit covenants that as General Partner of this
Partnership, Lexreit will not unreasonably cause the Partnership to
withhold or refrain from distributing Distributable Funds from
Partnership Operations; provided, however, that establishment of
reasonable Reserves shall not constitute an unreasonable withholding or
refraining from distributing Distributable Funds from Partnership
Operations.
(b) CRSI covenants that as general partner or manager, as the
case may be, of the Investment Entities, CRSI will not unreasonably
cause the Investment Entities to withhold or refrain from distributing
Distributable Funds from Partnership Operations.
ARTICLE NINE
------------
PARTNERSHIP MATTERS
-------------------
9.1 EXPENSES. All expenses of the Partnership including, but not
limited to, expenses incurred by or on behalf of the Partnership in connection
with the formation of the Partnership will be paid by the Partnership. The
Partnership may borrow funds if the General Partner determines that the
Partnership needs additional funds to pay its expenses.
9.2 BANK ACCOUNTS. All Partnership income will be deposited in such
bank accounts as the General Partner determines and funds deposited therein will
be used only for the business and purposes of the Partnership. All withdrawals
from bank accounts will be made by checks or other documents signed by the
General Partner, or a person who may be designated in writing from time to time
by the General Partner. The General Partner will not commingle Partnership funds
with those of any other Person.
9.3 BOOKS OF ACCOUNT. Proper and usual books of account for the
Partnership will be maintained by the Partnership using the method of accounting
determined by the accountants for the Partnership. The books of account will at
all times be retained at the principal office of the Partnership, unless
otherwise determined by the General Partner, and will be available at all
reasonable times for examination and inspection by any Partner or any Partner's
representative, subject to reasonable conditions to protect the confidentiality
of such information.
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<PAGE> 15
ARTICLE TEN
-----------
MANAGEMENT; DUTIES AND RESTRICTIONS
-----------------------------------
10.1 MANAGEMENT AND CONTROL OF THE PARTNERSHIP. The General Partner
will have exclusive authority to manage the operations and affairs of the
Partnership. Except to the extent that the consent of any Partner is required by
this Agreement, the General Partner will have the exclusive management and
control of the business and affairs of the Partnership and will devote such time
as the General Partner, in its reasonable discretion, deems necessary to conduct
the business and affairs of the Partnership.
10.2 AUTHORITY OF THE GENERAL PARTNER. Without limiting the generality
of the authority granted to the General Partner, and subject to the other
provisions of this Article Ten, the General Partner, on behalf of the
Partnership, will have the sole and exclusive authority to make all decisions
necessary to manage the Partnership business, to enter into contracts in respect
of the Partnership business, to select and dismiss employees, attorneys,
accountants, brokers and consultants, and to determine terms and conditions of
hiring with respect to the services provided by such persons, notwithstanding
that any Partner, or a firm or corporation of which the General or a Limited
Partner is a member, officer, director or stockholder, be such employee,
attorney, accountant, broker or consultant.
10.3 BORROWINGS AND LIMITATIONS ON BORROWINGS. The General Partner may
incur debt on behalf of the Partnership for any purpose consistent with Section
4.1 hereof without the consent of the Limited Partners.
10.4 INSTRUMENTS AND DOCUMENTS. Any instrument or document signed by
the General Partner will conclusively be deemed to be binding on the
Partnership.
10.5 COMPENSATION. The General Partner shall not be entitled to receive
compensation for services provided to the Partnership in its capacity as General
Partner.
10.6 NO MANAGEMENT POWER BY LIMITED PARTNERS. Except as set forth in
Section 10.7 hereof, the Limited Partners may not take part in the management,
conduct, or control of the Partnership business nor do the Limited Partners have
the right or authority to act for or bind the Partnership. The exercise of any
of the rights or powers of the Limited Partners pursuant to the terms of this
Agreement will not be deemed to be taking part in the day-to-day affairs of the
Partnership or the exercise of control over Partnership affairs.
10.7 LIMITATIONS ON POWERS. Notwithstanding anything in this Agreement
to the contrary, the General Partner may not, without the consent of a majority,
measured by Percentage Interests, of the Limited Partners: (i) issue additional
Limited Partner Interests; (ii) change the General Partner, including a change
resulting from a voluntary withdrawal, or a transfer or assignment by the
General Partner of its general partner interest, and as further limited in
Section 12.1 hereof; (iii) execute or deliver a general assignment for the
benefit of creditors of the Partnership, or appoint or acquiesce in the
appointment of a custodian, receiver or trustee;
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<PAGE> 16
(iv) institute any proceeding for bankruptcy; (v) agree to or consummate the
merger or consolidation of the Partnership with any other entity; (vi) take
title to property other than in the name of the Partnership; or (vii) dissolve
the Partnership. Further, except as provided in Section 18.11 hereof, amendments
to this Agreement require the consent of a majority of the Limited Partners,
measured by Percentage Interests, specifically including any amendment to
Article Four. Provided further, consent of any Partner adversely affected (other
than as the result of the issuance of additional Limited Partner Interests) by
an amendment to Articles Seven, Eight, Eleven and Section 10.8 is required.
10.8 INDEMNIFICATION OF A GENERAL PARTNER. No General Partner will have
any liability to the Partnership or any of the Partners for any mistakes or
errors in judgment or for any acts or omissions believed by it in good faith to
be within the scope of authority conferred upon it by this Agreement and will
have liability only for acts or omissions performed or omitted fraudulently or
in bad faith or as a result of gross negligence or intentional wrongdoing. The
fact that a General Partner has obtained the advice of legal counsel for the
Partnership that any act or omission by such General Partner is within the scope
of authority conferred upon it by this Agreement will be conclusive evidence
that such General Partner believed in good faith such act or omission to be
within the scope of authority conferred upon such General Partner by this
Agreement, but such General Partner will not be required to procure such advice
to be entitled to the benefit of the preceding sentence. The Partnership will
indemnify and save harmless any General Partner (including any General Partner's
officers, directors, shareholders, agents and employees) against and from any
personal loss, liability, or damage incurred by it or any of them as a result of
any act or omission with respect to which the General Partner is protected under
the provisions of this Section to the fullest extent allowable by law.
10.9 MANAGEMENT AGREEMENTS. Each of the Investment Entities and either
CRSI or an affiliate thereof have entered into agreements whereby CRSI or an
affiliate thereof shall provide specified services to one or more of such
Investment Entities for a specified term of years, usually five, and which renew
for successive one-year terms (the "Management Agreements"). In the event of the
termination of any Management Agreement prior to expiration of the stated term,
other than due to the sale of substantially all of the assets of such Investment
Entity, CRSI (or the appropriate affiliate) will be entitled to liquidated
damages in an amount equal to the annual compensation payable under such
terminated Management Agreement, based on the prior twelve months' fees, times
five (the "Damages"). Upon termination of a Management Agreement, the
Partnership shall pay any Damages due to CRSI (or the appropriate affiliate),
subject to a credit for any amount paid by such Investment Entity for Damages.
Damages may be collected by CRSI through payment directly by the Partnership,
or may be withheld by CRSI (to the appropriate affiliate) as general partner
or manager of an Investment Entity from amounts otherwise due to the
Partnership from such Investment Entity.
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<PAGE> 17
ARTICLE ELEVEN
--------------
TRANSFER OF LIMITED PARTNERSHIP INTERESTS
-----------------------------------------
11.1 TRANSFER OF LIMITED PARTNERSHIP INTEREST. The sale, assignment,
transfer, or pledge of a Limited Partnership Interest by a Limited Partner is
prohibited unless the Partnership causes such Limited Partnership Interest to be
registered under the Securities Act of 1933, as amended, or counsel satisfactory
to the General Partner has rendered to the Partnership an opinion, in form and
substance satisfactory to the General Partner, that an exemption from
registration is available and that such transfer will not otherwise violate
federal or state securities law. Subject to this restriction, a Limited Partner
may, by written notice to the Partnership, sell, assign, transfer, pledge, or
otherwise encumber its Limited Partnership Interest (including the right to
receive distributions of cash flow and capital) to any person other than a
person under the age of 18 years or a person theretofore declared insane,
incompetent, or bankrupt; provided, however, that once a Limited Partnership
Interest has been sold, assigned, transferred, pledged, or otherwise encumbered,
neither the Limited Partner nor his assignee, transferee, pledgee, or otherwise
(hereafter, the "Assignee") may exercise any voting rights with respect to such
Limited Partnership Interest unless the Assignee becomes a Substitute Limited
Partner in accordance with this Article Eleven.
11.2 DEFERRAL OF EFFECTIVENESS OF TRANSFER. Notwithstanding anything in
this Article Eleven to the contrary, if necessary to avoid a termination of the
Partnership for federal income tax purposes, the effectiveness of any transfer
or assignment of a Limited Partnership Interest or any part of a Limited
Partnership Interest will be deferred if it will result in fifty percent (50%)
or more of the total interest in Partnership capital and profits having been
transferred within a twelve (12) month period. The assignor will be notified in
such event and any deferred transfers will be effected (in chronological order
to the extent practicable) as soon as practicable after such transfers can be
effected without a termination of the Partnership for tax purposes. In the event
transfers are suspended for the foregoing reason, the General Partner will give
written notice of such suspension as soon as practicable to the Limited
Partners.
11.3 SUBSTITUTE LIMITED PARTNER. No Assignee may become a Substitute
Limited Partner except with the written consent of the General Partner, which
consent may be withheld by the General Partner in its sole and unreviewable
discretion, with or without cause. If the General Partner consents, the
Assignee will be admitted as a Substitute Limited Partner upon compliance with
the following conditions:
(a) The Assignee delivers to the Partnership an executed
counterpart of the instrument of assignment, satisfactory in substance
and form to the General Partner, containing a statement of the
assignor's desire that the Assignee be admitted as a Substitute Limited
Partner.
(b) The General Partner consents in writing to the admission
of the Assignee as a Substitute Limited Partner.
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<PAGE> 18
(c) The assignor and the Assignee execute and acknowledge such
instruments as the General Partner may deem necessary or desirable to
effect such admission and the Assignee agrees to pay all expenses in
connection with such admission, including, but not limited to, the cost
of preparing and filing an amendment to the Partnership's Certificate.
11.4 SUCCESSORS TO LIMITED PARTNERS. The Partnership will not terminate
or dissolve upon the liquidation, insolvency, bankruptcy or withdrawal of a
Limited Partner. If a Limited Partner dissolves or is declared insolvent or
bankrupt, it will cease to be a Limited Partner and its successor or estate
will immediately succeed to the interest of the former Limited Partner in the
Net Profits, Net Losses and distributable cash of the Partnership.
The successor or estate will be subject to all of the restrictions
specified in this Article Eleven applicable to the Assignee of a Limited
Partnership Interest and will not become a Substitute Limited Partner except
upon compliance with the conditions specified in Section 11.3 above. The
successor or estate will be entitled to receive all sums payable with respect to
such Limited Partnership Interest.
ARTICLE TWELVE
--------------
TRANSFER OF GENERAL PARTNER'S INTEREST
--------------------------------------
12.1 RESTRICTION ON ASSIGNMENT OF GENERAL PARTNER'S INTEREST. A General
Partner may not sell, transfer, encumber or withdraw its interest in the
Partnership, in whole or in part, without the written consent of a majority,
measured by Percentage Interest, of the Limited Partners.
12.2 ADDITIONAL GENERAL PARTNER. Additional General Partners may be
admitted to the Partnership only upon the written consent of each Partner.
ARTICLE THIRTEEN
----------------
LIQUIDATION, DISSOLUTION, DEATH, LEGAL INCAPACITY,
--------------------------------------------------
INSOLVENCY OR REMOVAL OF A GENERAL PARTNER
------------------------------------------
In the event of the liquidation, dissolution, death or declaration of
legal incompetency of a General Partner, or the withdrawal of a General Partner,
or if a General Partner does or experiences one of the acts of insolvency
specified in the Act, such General Partner (in any of the foregoing cases, the
"Removed General Partner") will thereupon cease to be a General Partner and the
General Partner interest of the Removed General Partner will be deemed to be
converted to that of a Limited Partner with the result that the Removed General
Partner may no longer take part in the management or control of the Partnership
business (except to the extent that a Limited Partner may do so under the
express terms of this Agreement), and will continue to have the same Capital
Account and will be entitled to the proportionate share of allocations and
distributions that it had or was entitled to as a General Partner. In such
event, the Partnership will terminate unless
15
<PAGE> 19
there is at least one other General Partner, or if within ninety (90) days after
such event, a majority of the Limited Partners (measured by Percentage
Interests) consent to continue the business of the Partnership and to the
appointment of one or more additional General Partners. The Removed General
Partner will remain liable, to the extent provided by law, for all obligations
and liabilities incurred by it while a General Partner of the Partnership. The
Removed General Partner will not be liable for any Partnership obligation
incurred after its removal is effected by the appropriate filing of an amendment
to the Partnership's Certificate reflecting its removal as a General Partner.
ARTICLE FOURTEEN
----------------
DISSOLUTION OF THE PARTNERSHIP
------------------------------
14.1 TERMINATION OF PARTNERSHIP. The Partnership will dissolve upon the
first to occur of the following:
(a) December 31, 2027;
(b) The sale or exchange of all of the Partnership's assets;
(c) The written agreement of all the Partners;
(d) The ninetieth (90th) day following receipt of notice of
the dissolution, liquidation, insolvency, bankruptcy, death or
withdrawal of a General Partner unless there is another General
Partner, or unless a majority of the Limited Partners (measured by
Percentage Interests) consent within such time period to the
continuance of the Partnership and the appointment of a new General
Partner;
(e) The redemption of all of the Interests of the Partners in
the Partnership; or
(f) as otherwise provided by law.
14.2 DISTRIBUTION UPON LIQUIDATION. Upon the dissolution of the
Partnership, the General Partner or, if none, a remaining Limited Partner may
proceed to liquidate and wind up the Partnership (the "Liquidating Partner").
Upon fifteen (15) days' prior written notice to all of the Partners identifying
the assets to be sold, the Liquidating Partner may sell the Partnership assets
at public or private sale, for whatever price and upon whatever terms and
conditions the Liquidating Partner deems appropriate, and the Liquidating
Partner may retain such assets as the Liquidating Partner deems appropriate, for
distribution in-kind. The Partnership assets, and the net proceeds of any
liquidation sale, will be applied and distributed in the following order of
priority:
(i) To the payment of all debts and liabilities of the
Partnership (including those owing to Partners for loans and interest
accrued thereon) and all expenses of liquidation.
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<PAGE> 20
(ii) To the setting up of such reserves as the Liquidating
Partner may deem necessary for any contingent or unforeseen liabilities
or obligations of the Partnership.
(iii) To Partners, in liquidation of their Partnership interests,
in accordance with the respective positive Capital Account balances of
the Partners, as determined after taking into account all Capital
Account adjustments as provided in Article Seven and Exhibit A for the
Partnership's taxable year during which such liquidation occurs.
Distributions must be made pursuant to this section by the end of the
Partnership's taxable year during which such liquidation occurs (or, if
later, within ninety (90) days after the date of such liquidation).
In the event a Partner's Partnership interest is liquidated other than
in connection with the dissolution and liquidation of the Partnership, the
liquidating distribution is to be made in accordance with his positive Capital
Account balance, as determined after taking into account all Capital Account
adjustments as provided in Article Seven and Exhibit A for the Partnership's
taxable year during which such liquidation occurs. Any such liquidating
distribution must be made by the end of the Partnership's taxable year during
which such liquidation occurs (or, if later, within ninety (90) days after the
date of such liquidation).
14.3 LIQUIDATING PARTNER. The Liquidating Partner will be allowed a
reasonable time and, if the Liquidating Partner is not the General Partner, be
paid a reasonable fee for the orderly liquidation of the Partnership. As soon as
practicable after the liquidation, each of the Partners will be furnished with a
statement of the Partnership's financial condition on the date of liquidation,
prepared by the Partnership's accountants, showing the Partnership assets and
liabilities in reasonable detail.
14.4 COMPLIANCE WITH TIMING REQUIREMENTS OF REGULATIONS. If the
Partnership is "liquidated" within the meaning of Regulations Sections
1.704-1(b)(2)(ii)(g): (a) distributions shall be made pursuant to this Article
Fourteen to the General Partner and Limited Partners who have positive Capital
Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2); and (b)
if a General Partner's Capital Account has a deficit balance (after giving
effect to all contributions, distributions and allocations for all taxable
years, including the year during which such liquidation occurs), such General
Partner shall contribute to the capital of the Partnership the amount necessary
to restore such deficit balance to zero in compliance with Regulations Section
1.704-1(b)(2)(ii)(b)(3). If the Limited Partner has a deficit balance in its
Capital Account (after giving effect to all contributions, distributions and
allocations for all taxable years, including the year during which such
liquidation occurs), such Limited Partner shall have no obligation to make any
contribution to the capital of the Partnership with respect to such deficit, and
such deficit shall not be considered a debt owed to the Partnership or to any
other person for any purpose whatsoever. In the discretion of the General
Partner, a pro rata portion of the distributions that would otherwise be made to
the General Partner and Limited Partner pursuant to this Article Fourteen may
be:
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<PAGE> 21
(a) distributed to a trust established for the benefit of the
General Partner and Limited Partner for the purposes of liquidating
Partnership assets, collecting amounts owed to the Partnership, and
paying any contingent or unforeseen liabilities or obligations of the
Partnership or of the General Partners arising out of or in connection
with the Partnership. The assets of any such trust shall be distributed
to the General Partner and Limited Partner from time to time, in the
discretion of the General Partner, in the same proportion as the amount
distributed to such trust by the Partnership would otherwise have been
distributed to the General Partner and Limited Partner pursuant to this
Agreement; or
(b) withheld to provide a reserve for Partnership liabilities
(contingent or otherwise) and to reflect the unrealized portion of any
installment obligations owed to the Partnership, provided that such
withheld amounts shall be distributed to the General Partner and
Limited Partner as soon as reasonably practicable.
14.5 DEEMED DISTRIBUTION AND RECONTRIBUTION. Notwithstanding any other
provision of this Article Fourteen, if the Partnership is liquidated within the
meaning of Regulations Section 1.704-1(b)(2)(ii)(g), but no event specified in
Section 14.1 has occurred, then the Partnership shall not be liquidated, the
Partnership's liabilities shall not be paid or discharged, and the Partnership's
affairs shall not be wound up. Instead, the Partnership shall be deemed to have
distributed its property in kind to the General Partner and Limited Partner, who
shall be deemed to have assumed and taken subject to all Partnership
liabilities, all in accordance with their respective Capital Accounts.
Immediately thereafter, the General Partner and Limited Partner shall be deemed
to have recontributed such property in kind to the Partnership, which shall be
deemed to have assumed and taken subject to all such liabilities.
ARTICLE FIFTEEN
---------------
TAX MATTERS
-----------
The General Partner is designated as the "Tax Matters Partner" of the
Partnership for purposes of Section 6221 ET SEQ. of the Code.
The Tax Matters Partner may, in its sole discretion, make or revoke the
election referred to in Section 754 of the Code or any similar provision enacted
in lieu thereof. Each of the Partners will, upon request, supply the information
necessary to give proper effect to such an election, if made. All other
elections required or permitted to be made by the Partnership under federal or
any other tax laws may be made, and once made may be revoked, at the sole
discretion of the Tax Matters Partner. With respect to any Partner whose
interest in the Partnership has been affected by an election pursuant to
Sections 754 or 732(d) of the Code, appropriate adjustments will be made with
respect to the determination of Net Profits, Net Losses, distributions and
Capital Accounts as provided in Sections 732, 734, and 743 of the Code and
in Regulations Section 1.704-1(b)(2)(iv)(m).
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<PAGE> 22
The Tax Matters Partner shall be reimbursed by the Partnership for all
reasonable expenses incurred by it in performing its duties as Tax Matters
Partner.
ARTICLE SIXTEEN
---------------
NOTICE; CONSENT
---------------
Any notice, communication, document, election, demand, consent, or
dissent required or permitted under this Agreement is to be in writing and will
be deemed served when delivered personally or deposited in the United States
mail, postage prepaid, addressed to the Partner for whom it is intended at his
last address disclosed by the records of the Partnership, and if intended for
the Partnership, addressed to the office thereof. Any notice intended for the
personal representative of a deceased or insane Partner must be served on his
duly appointed personal representative, executor, or administrator, if any, or
if no such person has been appointed, on the surviving or living spouse, or if
there be none, on a member of the immediate family of such Partner, in the same
manner as provided above, and addressed to the person upon whom such notice is
intended to be served at the last address of the Partner disclosed on the
records of the Partnership. Any Partner may designate a different place for
service of notice upon him or his personal representative or successors by
written notice given in accordance with the provisions of this Article.
ARTICLE SEVENTEEN
-----------------
POWER OF ATTORNEY
-----------------
17.1 APPOINTMENT. The Limited Partner, by its execution of this
Agreement, and any Substitute Limited Partner, irrevocably constitute and
appoint the General Partner and any successor, with full power of substitution,
their true and lawful Attorney-in-Fact, in their name, place, and stead to
make, execute, sign, acknowledge, record, and file, on behalf of them and on
behalf of the Partnership, the following:
(a) a Certificate of Limited Partnership, a Report of Use of
Fictitious Name, and all other certificates or instruments, and any
amendments thereof, which the General Partner deems appropriate to
form, qualify or continue the Partnership as a limited partnership in
the State of Ohio and to qualify the Partnership to do business in the
State of Ohio and such other states as the General Partner deems
appropriate;
(b) a Certificate of Cancellation of the Partnership and such
other instruments or documents as may be deemed necessary or desirable
upon the termination of the Partnership business;
(c) any and all amendments to the Certificate of Limited
Partnership and this Agreement adopted in accordance with their terms
and all instruments which the General
19
<PAGE> 23
Partner deems appropriate to effect a change or modification of the
Partnership in accordance with the terms of this Agreement;
(d) any and all amendments to the Certificate of Limited
Partnership or this Agreement admitting or substituting holders of
Limited Partnership Interests as Limited Partners or reflecting the
return to Limited Partners of any portion of their Capital
Contributions;
(e) any and all such other instruments as may be deemed
necessary or desirable by the General Partner to carry out fully the
provisions of this Agreement in accordance with its terms.
17.2 POWER COUPLED WITH AN INTEREST; FACSIMILE SIGNATURES; SURVIVAL.
The foregoing grant of authority: (i) is an irrevocable special power of
attorney coupled with an interest and will survive the disability or incapacity
of any person giving such power; (ii) may be exercised by a facsimile signature
of the person giving the power or by listing the name of such person together
with the names of all other persons for whom such attorney is so acting, and
executing the Partnership Agreement and such other certificates, instruments,
and documents with the single signature of the General Partner or of the
President, Vice President or Secretary of the General Partner as such
Attorney-in-Fact acting for all the Persons whose names are so listed; and (iii)
will survive the delivery of any assignment by a Limited Partner of his Limited
Partnership Interest.
ARTICLE EIGHTEEN
----------------
MISCELLANEOUS
-------------
18.1 VOTING. The General Partner may at any time call a meeting of the
Limited Partners to vote on matters on which the Limited Partners are entitled
to vote, or call for such vote without a meeting, and the General Partner will
call for such a meeting or call for such vote immediately following receipt of a
written request by the Limited Partners. The General Partner will notify Limited
Partners by certified mail as to the time and place of any meeting called by the
General Partner, and the general nature of the business to be conducted at the
meeting, or, if a vote without a meeting has been called, the matter or matters
to be voted on and the date by which the vote of the Limited Partners must be
received. The date of such meeting, or the date by which a vote must be received
if no meeting is called, will be no less than ten (10) or more than sixty (60)
days following mailing of the notice by the General Partner. All expenses of the
voting and such notification will be borne by the Partnership. A Limited Partner
who is entitled to vote shall be entitled to cast the number of votes equal to
the Percentage Interest which he owns: (i) at a meeting, in person, by written
proxy or by a signed writing directing the manner in which he desires that his
vote be cast, which writing must be received by the General Partner prior to
such meeting; (ii) without a meeting, by a signed writing directing the manner
in which he desires that his vote be cast.
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<PAGE> 24
18.2 VALIDITY. Each Article and Section of this Agreement is deemed
severable and if for any reason any Article or Articles, Section or Sections,
are invalid or contrary to any existing or future law, such invalidity will not
affect the applicability or validity of any other provision of this Agreement.
18.3 CONSTRUCTION. This Agreement for all purposes is to be construed
under and governed by the laws of the State of Ohio and, except as otherwise
provided, the Partnership and this Agreement and the rights and liabilities of
the Partners under this Agreement will be governed by the Act, as it may from
time to time be amended.
18.4 SPECIFIC PERFORMANCE. In addition to all other remedies provided
for in this Agreement or by law, the Partnership will have the right to enforce
any obligation of any Partner by an action for specific performance.
18.5 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which will have the force and effect of an original.
18.6 WAIVER. Failure to enforce any term or condition of this Agreement
will not be deemed a waiver of that term or condition for the future, nor will
any specific waiver of a term or condition at one time be deemed a waiver of
such term or condition for the future.
18.7 PARTNERS DEALING WITH THE PARTNERSHIP. Nothing in this Agreement
will prohibit the Partners, or persons related to or employed by the Partners,
from dealing with the Partnership; provided, however, that all prices, terms and
conditions applicable to any such transactions may not be less favorable than
those customarily charged by non-affiliated persons for similar goods, property
or services in the same area.
18.8 BINDING EFFECT. Except as otherwise provided in this Agreement,
this Agreement will inure to the benefit of and be binding upon the heirs,
personal representatives, successors and assigns of the parties.
18.9 WAIVER OF PARTITION. Each of the Partners irrevocably waives any
right that he may have to maintain an action for partition with respect to any
of the property of the Partnership.
18.10 NO THIRD-PARTY BENEFICIARIES. Nothing express or implied in this
Agreement is intended or will be construed to confer upon or to give to any
person, other than the parties or their successors in interest in accordance
with the provisions of this Agreement, any rights or remedies under this
Agreement or by reason of this Agreement. Without limiting the generality of the
foregoing, this Agreement is not intended and may not be construed to confer
upon or to give to any creditors of the Partnership, or of its Partners, any
rights to or interest in the assets of the Partnership.
18.11 ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire
agreement among the parties with respect to the transactions contemplated in
this Agreement and supersedes
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<PAGE> 25
all prior negotiations, representations, warranties, commitments, offers,
discussions, and writings. This Agreement may be amended (a) by the General
Partner without the approval of any other Partner if such amendment is solely
for the purpose of clarification and does not change the substance hereof; (b)
by the General Partner without the approval of any other Partner if such
amendment is for the purpose of admitting Limited Partners or Substitute Limited
Partners in accordance with the terms of this Agreement; (c) by the General
Partner without the approval of any other Partner if such amendment is, in the
opinion of counsel for the Partnership, necessary or appropriate to satisfy
requirements of the Code (or any rules or regulations promulgated in connection
therewith) with respect to partnerships or of any federal or state securities
laws or regulations. Any other amendment shall require the consent of a
majority of the Limited Partners, measured by Percentage Interests,
specifically including any amendment to Article Four; provided, however, the
consent of any Partner adversely affected (other than as a result of the
issuance of additional Limited Partner Interests) by an amendment to Articles
Seven, Eight, Eleven and Section 10.8 is required. Any amendment made pursuant
to this paragraph may be made effective as of the date of this Agreement.
Except as otherwise specifically provided in this Section 18.11,
amendments to this Agreement shall require the approval of the General Partner
and the approval of a majority (measured by Percentage Interest) of the Limited
Partners.
18.12 GENDER. Except when otherwise indicated by the context, any
masculine terminology used in this Agreement includes the feminine and neuter,
and the neuter includes the masculine and feminine, and the definition of any
term as the singular also includes the plural.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
____ day of __________, 1997.
GENERAL PARTNER: LIMITED PARTNER:
LEXREIT PROPERTIES, INC. CARDINAL REALTY SERVICES, INC.
By: By:
---------------------------- --------------------------
____________________, President _________________________, President
Date:___________________________ Date: ________________________________
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<PAGE> 26
EXHIBIT A
---------
CAPITAL ACCOUNTS; DEFINITIONS; SPECIAL
ALLOCATIONS & TAX ALLOCATIONS
1.1 A Capital Account shall be maintained for each Partner (regardless
of the time or manner in which such Partner's interest was acquired) in
accordance with Section 1.704-1(b)(2)(iv) of the Treasury Regulations
("Regulations"). Each Partner's Capital Account shall be:
(a) increased by (i) the amount of money contributed by the
Partner to the Partnership, including the amount of any Partnership
liabilities that are assumed by such Partner (other than in connection
with the distribution of Partnership property as described in
Regulations Section 1.704-1(b)(2)(iv)(b) and (c)), (ii) the fair market
value of property contributed by the Partner to the Partnership (net of
liabilities secured by such contributed property that the Partnership
is considered to assume or take subject to under Section 752 of the
Internal Revenue Code of 1986, as amended ("Code")), and (iii)
allocations to the Partner of Partnership Net Profits (or items
thereof) under the Agreement;
(b) decreased by (i) the amount of money distributed by the
Partnership to the Partner, including the amount of such Partner's
individual liabilities that are assumed by the Partnership (other than
in connection with contributions of property to the Partnership as
described in Regulations Section 1.704-1(b)(2)(iv)(b) and (c)), (ii)
the fair market value of property distributed by the Partnership to the
Partner (net of liabilities secured by such distributed property that
such Partner is considered to assume or take subject to under Section
752 of the Code), (iii) allocations to the Partner of expenditures of
the Partnership not deductible in computing the Partnership's taxable
income and not properly chargeable to capital account (within the
meaning of Section 705(a)(2)(B) of the Code), and (iv) allocations to
the Partner of Partnership Net Losses (or items thereof) under the
Agreement;
(c) increased by any items in the nature of income or gain
which are specially allocated pursuant to Sections 1.5 and 1.6, and
decreased by any items in the nature of expenses or losses which are
specially allocated pursuant to Sections 1.5 and 1.6;
(d) if property is to be distributed to a Partner in kind,
adjusted (prior to such distribution) to reflect the manner in which
the unrealized income, gain, loss and deduction inherent in such
property (that has not been reflected in the Partners' Capital Accounts
previously) would be allocated to the Partners if there were a taxable
disposition of such property for its fair market value (taking Section
7701(g) of the Code into account) as of the date of the distribution;
and
(e) except as provided in Regulations Section
1.704-1(b)(2)(iv)(m), computed without regard to any adjustments to the
adjusted tax basis of Partnership property pursuant to an election
under Section 754 of the Code which may be made by the Partner.
A-1
<PAGE> 27
If there is a transfer of all or a part of an interest in the
Partnership by a Partner, the Capital Account of the transferor Partner
that is attributable to the transferred interest shall carry over to
the transferee of such Partner as provided in Regulations Section
1.704-1(b)(iv)(1).
In the event of additional capital contributions by new or
existing Partners, or a withdrawal of a Partner from the Partnership,
the Capital Accounts of the Partners shall be revalued in accordance
with Regulations Section 1.704-1(b)(2)(iv)(f). The General Partner
shall determine the fair market value of the assets of the Partnership
for purposes of Regulations Section 1.704-1(b)(2)(iv)(f).
1.2 The following terms shall have the following meanings:
(a) The term "Adjusted Capital Account Deficit" means, with
respect to any Limited Partner, the deficit balance, if any, in such
Limited Partner's Capital Account as of the end of the relevant fiscal
year, after giving effect to the following adjustments:
(i) Credit to such Capital Account any amounts which
such Limited Partner is obligated to restore pursuant to any
provision of the Agreement or is deemed to be obligated to
restore pursuant to the penultimate sentences of Regulations
Sections 1.704-2(g)(l) and 1.704-2(i)(5); and
(ii) Debit to such Capital Account the items described
in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5),
and 1.704-1(b)(2)(ii)(d)(6) of the Regulations.
The foregoing definition of Adjusted Capital Account Deficit is
intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d)
of the Regulations and shall be interpreted consistently therewith.
(b) The term "Agreed Value" means with respect to all property
contributed to or revalued by the Partnership, the fair market value of
such property on the date of such contribution or revaluation as
determined by the General Partner.
(c) The term "Capital Account Depreciation" shall mean, for
each fiscal year or other period, an amount equal to the Federal income
tax depreciation, amortization, or other cost recovery deduction
allowable with respect to any Partnership asset for such year or other
period, except that, if the Agreed Value of any asset as adjusted for
any Capital Account Depreciation taken with respect thereto differs
from its adjusted basis for Federal income tax purposes at the
beginning of such year or other period, Capital Account Depreciation
shall be an amount which bears the same ratio to such beginning
adjusted Agreed Value as Federal income tax depreciation, amortization,
or other cost recovery deduction for such year or other period bears to
such beginning adjusted tax basis.
A-2
<PAGE> 28
(d) The terms "Net Profits" and "Net Losses" shall mean the
taxable income and loss, respectively, of the Partnership, as
determined for Federal income tax purposes, except that
(i) any income of the Partnership that is exempt from
Federal income tax and not otherwise taken into account in
computing taxable income or loss shall be added to such
taxable income or loss, and any related expenses not allowed
as a deduction under Section 265 of the Code shall be
subtracted from such taxable income or loss;
(ii) items of income, gain, loss and deduction relating
to property contributed to the Partnership or which may be
revalued pursuant to Regulations Section 1.704-1(b)(2)(iv)(f)
shall be computed as if the basis of the property to the
Partnership at the time of contribution or revaluation was
equal to its fair market value at that time, and in lieu of
the depreciation, amortization and other cost recovery
deductions taken into account with respect to such property,
there shall be taken into account Capital Account Depreciation
for such period;
Net Profits and Net Losses shall include, where the context
requires, related Federal income tax items such as capital
gain or loss, tax preferences, investment interest,
depreciation, cost recovery, depreciation recapture and cost
recovery recapture; and
(iii) any items which are specially allocated pursuant to
Sections 1.5 and 1.6 hereof shall not be taken into account.
Net Profits or Net Losses (or items thereof) shall be
considered to have been earned or accrued ratably over the
period of the fiscal year of the Partnership, except that, if
permitted under the applicable provisions of the Code, Net
Profits or Net Losses (or items thereof) arising from the
disposition of assets shall be taken into account as of the
date thereof.
(e) The term "Nonrecourse Deductions" has the meaning set
forth in Section 1.704-2(b)(l) of the Regulations. The amount of
Nonrecourse Deductions for a Partnership fiscal year equals the excess,
if any, of the net increase, if any, in the amount of Partnership
Minimum Gain during that fiscal year over the aggregate amount of any
distributions during that fiscal year of proceeds of a Nonrecourse
Liability that are allocable to an increase in Partnership Minimum
Gain, determined according to the provisions of Sections 1.704-2(c) and
(d) of the Regulations.
(f) The term "Nonrecourse Liability" has the meaning set forth
in Section 1.704-2(b)(3) of the Regulations.
A-3
<PAGE> 29
(g) The term "Partner Nonrecourse Debt Minimum Gain" means an
amount, with respect to each Partner Nonrecourse Debt, equal to the
Partnership Minimum Gain that would result if such Partner Nonrecourse
Debt were treated as a Nonrecourse Liability, determined in accordance
with Section 1.704-2(i)(3) of the Regulations.
(h) The term "Partner Nonrecourse Debt" has the meaning set
forth in Section 1.704-2(b)(4) of the Regulations.
(i) The term "Partner Nonrecourse Deductions" has the meaning
set forth in Section 1.704-2(i)(1) of the Regulations. The amount of
Partner Nonrecourse Deductions with respect to a Partner Nonrecourse
Debt for a Partnership fiscal year equals the excess, if any, of the
net increase, if any, in the amount of Partner Nonrecourse Debt Minimum
Gain attributable to such Partner Nonrecourse Debt during that fiscal
year over the aggregate amount of any distributions during that fiscal
year to the Partner that bears the economic risk of loss for such
Partner Nonrecourse Debt to the extent such distributions are from the
proceeds of such Partner Nonrecourse Debt and are allocable to an
increase in Partner Nonrecourse Debt Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Sections
1.704-2(i)(2) and (3) of the Regulations.
(j) The term "Partnership Minimum Gain" has the meaning set
forth in Sections 1.704-2(b)(2) of the Regulations.
1.3 ALLOCATION OF NET PROFITS AND NET LOSSES. Except as provided in
Section 1.4, and after giving effect to Sections 1.5 and 1.6, Net Profits and
Net Losses of the Partnership for a taxable year shall be allocated among the
Partners in accordance with their Percentage Interests in the Partnership.
1.4 LIMITATION ON ALLOCATION OF NET LOSSES. Notwithstanding anything to
the contrary herein, Net Losses of the Partnership shall not be allocated to a
Limited Partner if such allocation would cause such Limited Partner to have an
Adjusted Capital Account Deficit. Any such allocation of Net Losses shall be
reallocated to the General Partner.
1.5 SPECIAL ALLOCATIONS. The following special allocations shall be
made in the following order:
(a) MINIMUM GAIN CHARGEBACK. Notwithstanding any other
provision of this Section 1.5, and subject to the exceptions set forth
in Regulations Section 1.704-2(f)(2), (3), (4) and (5), if there is a
net decrease in Partnership Minimum Gain during any Partnership fiscal
year, each Partner shall be specially allocated items of Partnership
income and gain for such year (and, if necessary, subsequent years) in
an amount equal to the portion of such Partner's share of the net
decrease in Partnership Minimum Gain, determined in accordance with
Regulations Section 1.704-2(g). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required
to be allocated to each Partner pursuant thereto. The items to be so
allocated shall be
A-4
<PAGE> 30
determined in accordance with Section 1.704-2(f) of the Regulations.
This Section 1.5(a) is intended to comply with the minimum gain
chargeback requirement in such Section of the Regulations and shall be
interpreted consistently therewith.
(b) PARTNER NONRECOURSE DEBT MINIMUM GAIN CHARGEBACK.
Notwithstanding any other provision of this Section 1.5, except Section
1.5(a), and subject to the exception in Regulations Section
1.704-2(i)(4), if there is a net decrease in Partner Nonrecourse Debt
Minimum Gain attributable to Partner Nonrecourse Debt during any
Partnership fiscal year, each Partner who has a share of the Partner
Nonrecourse Debt Minimum Gain attributable to such Partner Nonrecourse
Debt, determined in accordance with Section 1.704-2(i)(5), shall be
specially allocated items of Partnership income and gain for such year
(and, if necessary, subsequent years) in an amount equal to the portion
of such Partner's share of the net decrease in Partner Nonrecourse Debt
Minimum Gain attributable to such Partner Nonrecourse Debt, determined
in accordance with Regulations Section 1.704-2(i)(5). Allocations
pursuant to the previous sentence shall be made in proportion to the
respective amounts required to be allocated to each Partner pursuant
thereto. The items to be so allocated shall be determined in accordance
with Section 1.704-2(i)(4) of the Regulations. This Section 1.5(b) is
intended to comply with the minimum gain chargeback requirement in such
Section of the Regulations and shall be interpreted consistently
therewith.
(c) QUALIFIED INCOME OFFSET. In the event any Limited Partner
unexpectedly receives any adjustments, allocations, or distributions
described in Section 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5),
or 1.704-1(b)(2)(ii)(d)(6) of the Regulations, items of Partnership
income and gain shall be specially allocated to each such Limited
Partner in an amount and manner sufficient to eliminate, to the extent
required by the Regulations, the Adjusted Capital Account Deficit of
such Limited Partner as quickly as possible, provided that an
allocation pursuant to this Section 1.5(c) shall be made only if and to
the extent that such Limited Partner would have an Adjusted Capital
Account Deficit after all other allocations provided for in this
Section 1.5 have been tentatively made as if this Section 1.5(c) were
not in the Agreement.
(d) GROSS INCOME ALLOCATION. In the event any Limited Partner
has a deficit Capital Account at the end of any Partnership fiscal year
which is in excess of the sum of (i) the amount such Limited Partner is
obligated to restore pursuant to any provision of the Agreement and
(ii) the amount such Limited Partner is deemed to be obligated to
restore pursuant to the penultimate sentences of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5), each such Limited Partner shall be
specially allocated items of Partnership income and gain in the amount
of such excess as quickly as possible, provided that an allocation
pursuant to this Section 1.5(d) shall be made only if and to the extent
that such Limited Partner would have a deficit Capital Account in
excess of such sum after all other allocations provided for in Section
1.5 have been made as if Section 1.5(c) hereof and this Section 1.5(d)
were not in the Agreement.
A-5
<PAGE> 31
(e) NONRECOURSE DEDUCTIONS. Nonrecourse Deductions for any
fiscal year or other period shall be specially allocated to the
Partners in accordance with their Percentage Interests.
(f) PARTNER NONRECOURSE DEDUCTIONS. Any Partner Nonrecourse
Deductions for any fiscal year or other period shall be specially
allocated to the Partner who bears the economic risk of loss with
respect to the Partner Nonrecourse Debt to which such Partner
Nonrecourse Deductions are attributable in accordance with Regulations
Section 1.704-2(i).
(g) SECTION 754 ADJUSTMENTS. To the extent the adjusted tax
basis of any Partnership asset pursuant to Code Section 734(b) or Code
Section 743(b) is required, pursuant to Regulations Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall
be treated as an item of gain (if the adjustment increases the basis of
the asset) or loss (if the adjustment decreases such basis) and such
gain or loss shall be specially allocated to the General Partner and
Limited Partners in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section
of the Regulations.
1.6 CURATIVE ALLOCATIONS.
(a) The "Regulatory Allocations" consist of the "Basic
Regulatory Allocations," as defined in Section 1.6(b) hereof, the
"Nonrecourse Regulatory Allocations," as defined in Section 1.6(c)
hereof, and the "Partner Nonrecourse Regulatory Allocations", as
defined in Section 1.6(d) hereof.
(b) The "Basic Regulatory Allocations" consist of (i)
allocations pursuant to the last sentence of Section 1.4 and (ii)
allocations pursuant to Sections 1.5(c), 1.5(d), and 1.5(g) hereof.
Notwithstanding any other provision of this Agreement, other than the
Regulatory Allocations, the Basic Regulatory Allocations shall be taken
into account in allocating items of income, gain, loss, and deduction
among the General Partner and Limited Partners so that, to the extent
possible, the net amount of such allocations of other items and the
Basic Regulatory Allocations to the General Partner and each Limited
Partner shall be equal to the net amount that would have been allocated
to the General Partner and each such Limited Partner if the Basic
Regulatory Allocations had not occurred. For purposes of applying the
foregoing sentence, allocations pursuant to this Section 1.6(b) shall
only be made with respect to allocations pursuant to Section 1.5(g)
hereof to the extent the General Partner reasonably determines that
such allocations will otherwise be inconsistent with the economic
agreement among the parties to this Agreement.
(c) The "Nonrecourse Regulatory Allocations" consist of all
allocations pursuant to Sections 1.5(a) and 1.5(e) hereof.
Notwithstanding any other provision of this
A-6
<PAGE> 32
Agreement, other than the Regulatory Allocations, the Nonrecourse
Regulatory Allocations shall be taken into account in allocating items
of income, gain, loss, and deduction among the General Partner and
Limited Partners so that, to the extent possible, the net amount of
such allocations of other items and the Nonrecourse Regulatory
Allocations to the General Partner and each Limited Partner shall be
equal to the net amount that would have been allocated to the General
Partner and each such Limited Partner if the Nonrecourse Regulatory
Allocations had not occurred. For purposes of applying the foregoing
sentence (i) no allocations pursuant to Section 1.6(c) shall be made
prior to the Partnership fiscal year during which there is a net
decrease in Partnership Minimum Gain, and then only to the extent
necessary to avoid any potential economic distortions caused by such
net decrease in Partnership Minimum Gain, and (ii) allocations pursuant
to this Section 1.6(c) shall be deferred with respect to allocations
pursuant to Section 1.5(e) hereof to the extent the General Partner
reasonably determines that such allocations are likely to be offset by
subsequent allocations pursuant to Section 1.5(a) hereof.
(d) The "Partner Nonrecourse Regulatory Allocations" consist
of all allocations pursuant to Sections 1.5(b) and 1.5(f) hereof.
Notwithstanding any other provision of this Agreement, other than the
Regulatory Allocations, the Partner Nonrecourse Regulatory Allocations
shall be taken into account in allocating items of income, gain, loss
and deduction among the General Partner and Limited Partners so that,
to the extent possible, the net amount of such allocations of other
items and the Partner Nonrecourse Regulatory Allocations to the General
Partner and each Limited Partner shall be equal to the net amount that
would have been allocated to the General Partner and each such Limited
Partner if the Partner Nonrecourse Regulatory Allocations had not
occurred. For purposes of applying the foregoing sentence (i) no
allocations pursuant to this Section 1.6(d) shall be made with respect
to allocations pursuant to Section 1.5(f) relating to a particular
Partner Nonrecourse Debt prior to the Partnership fiscal year during
which there is a net decrease in Partner Nonrecourse Debt Minimum Gain
attributable to such Partner Nonrecourse Debt, and then only to the
extent necessary to avoid any potential economic distortions caused by
such net decrease in Partner Nonrecourse Debt Minimum Gain, and (ii)
allocations pursuant to this Section 1.6(d) shall be deferred with
respect to allocations pursuant to Section 1.5(f) hereof relating to a
particular Partner Nonrecourse Debt to the extent the General Partner
reasonably determines that such allocations are likely to be offset by
subsequent allocations pursuant to Section 1.5(b) hereof.
(e) The General Partner shall have reasonable discretion, with
respect to each Partnership fiscal year, to (i) apply the provisions of
Sections 1.6(b), 1.6(c), and 1.6(d) hereof in whatever order is likely
to minimize the economic distortions that might otherwise result from
the Regulatory Allocations, and (ii) divide all allocations pursuant to
Sections 1.6(b), 1.6(c), and 1.6(d) hereof among the General Partners
and Limited Partners in a manner that is likely to minimize such
economic distortions.
A-7
<PAGE> 33
1.7 TAX ALLOCATIONS. Items of income, gain, loss or deduction for
Federal income tax purposes will be allocated among the Partners in the same
manner as such items were allocated to the Partners' Capital Accounts pursuant
to Sections 1.2, 1.3, 1.4, 1.5 and 1.6 hereof. In accordance with Code Section
704(c) and the Regulations thereunder, income, gain, loss, and deduction with
respect to any property contributed to the capital of the Partnership shall,
solely for tax purposes, be allocated among the General Partner and Limited
Partners so as to take account of any variation between the adjusted basis of
such property to the Partnership for Federal income tax purposes and its Agreed
Value.
In the event the Agreed Value of any Partnership asset is adjusted, subsequent
allocations of income, gain, loss and deduction with respect to such asset shall
take account of any variation between the adjusted basis of such asset for
Federal income tax purposes and its Agreed Value in the same manner as under
Code Section 704(c) and the Regulations thereunder.
Any elections or other decisions relating to such allocations shall be made by
the General Partner in any manner that reasonably reflects the purpose and
intention of the Agreement. Allocations pursuant to this Section 1.7 are solely
for purposes of federal, state, and local taxes and shall not affect, or in any
way be taken into account in computing any Partner's Capital Account or share of
Net Profits, Net Losses, other items, or distributions pursuant to any provision
of the Agreement.
A-8
<PAGE> 34
EXHIBIT B
---------
ROSTER OF PARTNERS
<TABLE>
<CAPTION>
GENERAL PARTNER CAPITAL CONTRIBUTION PERCENTAGE INTEREST
--------------- -------------------- -------------------
<S> <C> <C>
LEXREIT PROPERTIES, INC. Interests in the 60%
41 South High Street, 24th Floor Properties listed on
Columbus, OH 43215 Exhibit C hereto, with
an agreed aggregate
value of $__________.
LIMITED PARTNERS CAPITAL CONTRIBUTION PERCENTAGE INTEREST
---------------- -------------------- -------------------
CARDINAL REALTY SERVICES, INC. Interests in the 40%
6954 Americana Parkway Properties listed on
Reynoldsburg, OH 43068 Exhibit C hereto, with
an agreed aggregate
value of $__________.
</TABLE>
B-1
<PAGE> 35
EXHIBIT C
---------
ORIGINAL CONTRIBUTION OF PROPERTIES
INVESTMENT ENTITY PERCENTAGE INTEREST
- ----------------- -------------------
C-1
<PAGE> 36
EXHIBIT D
---------
SUBSEQUENT CONTRIBUTION OF PROPERTIES
INVESTMENT ENTITY PERCENTAGE INTEREST
- ----------------- -------------------
D-1
<PAGE> 37
LIMITED PARTNERSHIP AGREEMENT
OF CARDINAL PROPERTIES L.P.
<PAGE> 1
Exhibit 10.5
------------
TAX INDEMNIFICATION AGREEMENT
THIS TAX INDEMNIFICATION AGREEMENT (the "Agreement") is made and
entered into as of _______________, 1997, by and between Cardinal Realty
Services, Inc., an Ohio corporation ("Cardinal"), and Lexreit Properties, Inc.,
an Ohio corporation ("Company").
WHEREAS, in connection with Cardinal's distribution to its shareholders
of 93% of the outstanding common stock of Company (the date of such distribution
being referred to as the "Distribution Date") the parties have agreed to execute
this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. INDEMNITY. Cardinal covenants and agrees to indemnify, defend
and hold Company harmless from any and all costs, expenses, losses or
liabilities, including, without limitation, reasonable attorneys' fees, incurred
by Company, or any of its subsidiaries, resulting from, attributable to or
arising under any of the following:
(a) any federal, state, local or foreign tax liabilities
(including penalties, interest and additions to tax) of Company or any
of its current subsidiaries for all taxable periods ending on or
before the Distribution Date;
(b) any federal, state, local or foreign tax liabilities
(including penalties, interest and additions to tax) of any
subsidiaries that Cardinal contributes to Company after the
Distribution Date for all taxable periods ending on or before the
date any such subsidiary is contributed to Company;
(c) any federal income tax liabilities (including penalties,
interest and additions to tax) that Company or any of its subsidiaries
is, or may be, liable for under Treasury Regulation Section 1.1502-6(a)
as a result of being a member of the Cardinal affiliated group for any
and all taxable periods, or portions thereof, ending on or before, or
including the Distribution Date; and
(d) any state, local or foreign income tax (including any
franchise tax based on income) liabilities (including penalties,
interest and additions to tax) that Company or any of its subsidiaries
is, or may be, liable for as a result of any state, local or foreign
law or regulation similar to Treasury Regulation Section 1.1502-6(a) as
a result of being a member of a combined, unitary or consolidated group
that includes Cardinal or any of its subsidiaries (other than Company
and its subsidiaries) for any and all taxable periods, or portions
thereof, ending on or before, or including, the Distribution Date;
<PAGE> 2
2. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns.
3. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original but all of which
together will constitute one and the same document.
4. APPLICABLE LAW. This Agreement shall be governed by and construed
in accordance with Ohio law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the _____ day of _________________, 1997.
CARDINAL REALTY SERVICES, INC.
By:__________________________________
Its:_________________________________
LEXREIT PROPERTIES, INC.
By:__________________________________
Its:_________________________________
2
<PAGE> 1
Exhibit 11.1
------------
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
-----------------------------------------------------
See footnote 6 under "SELECTED FINANCIAL DATA" in the Registration Statement to
which this Exhibit is attached.
<PAGE> 1
Exhibit 12.1
------------
STATEMENT REGARDING COMPUTATION OF RATIOS
-----------------------------------------
See footnote 6 under "SELECTED FINANCIAL DATA" in the Registration Statement to
which this Exhibit is attached.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF JACK A. STAPH
I consent to the use of my name in Amendment No. 1 to the Registration
Statement on Form S-11 as a nominee for election to the Board of Directors of
Lexreit Properties, Inc.
Cleveland, Ohio /s/ Jack A. Staph
May 15, 1997 ---------------------------
JACK A. STAPH
<PAGE> 2
EXHIBIT 23.3
CONSENT OF RICHARD LERNER
I consent to the use of my name in Amendment No. 1 to the Registration
Statement on Form S-11 as a nominee for election to the Board of Directors of
Lexreit Properties, Inc.
New York, New York /s/ Richard Lerner
May 15, 1997 ---------------------------
RICHARD LERNER
<PAGE> 3
EXHIBIT 23.3
CONSENT OF CRAIG LIPKA
I consent to the use of my name in Amendment No. 1 to the Registration
Statement on Form S-11 as a nominee for election to the Board of Directors of
Lexreit Properties, Inc.
New York, New York /s/ Craig Lipka
May 15, 1997 ---------------------------
Craig Lipka
<PAGE> 1
EXHIBIT 99.1
<TABLE>
<CAPTION>
LEXREIT PROPERTIES GROUP
- --------------------------------------------------------------------------------------------------
INDIVIDUAL PROPERTY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------
NOTE: FINANCIAL INFORMATION PRESENTED DOES NOT REFLECT THE ELIMINATION OF
- --------------------------------------------------------------------------------------------------
INTERCOMPANY PROFIT.
- --------------------------------------------------------------------------------------------------
LAUNDRY,
- --------------------------------------------------------------------------------------------------
VENDING
- --------------------------------------------------------------------------------------------------
RENT INTEREST SECURITY & OTHER
- --------------------------------------------------------------------------------------------------
PROP # NAME REVENUE REVENUE DEPOSITS REVENUE VACANCIES BAD DEBTS
==================================================================================================
- --------------------------------------------------------------------------------------------------
PROPERTIES
- ---------==============================-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1377 APPLE RIDGE I 262,425 487 4,119 3,345 (26,694) (7,994)
- --------------------------------------------------------------------------------------------------
1389 THE WILLOWS I 224,914 3,967 2,753 1,298 (28,334) (3,732)
- --------------------------------------------------------------------------------------------------
1439 MONTROSE SQUARE 575,970 2,711 6,835 (1,237) (85,889) (28,888)
- --------------------------------------------------------------------------------------------------
1672* RIDGEWOOD ELHART 140,280 0 0 6,210 (7,485) (1,886)
- --------------------------------------------------------------------------------------------------
1690 HEATHMOORE I 386,582 2,014 3,206 4,548 (9,737) (3,203)
- --------------------------------------------------------------------------------------------------
1750 CEDARWOOD II 240,426 1,242 3,557 2,514 (16,673) (4,834)
- --------------------------------------------------------------------------------------------------
1786 SPICEWOOD 267,249 149 2,112 3,093 (7,581) (4,605)
- --------------------------------------------------------------------------------------------------
1806 WINTHROP CT II 195,737 415 1,487 2,038 (15,186) (2,500)
- --------------------------------------------------------------------------------------------------
1809 MEADOWOOD II 339,655 4,318 3,612 3,884 (37,520) (6,550)
- --------------------------------------------------------------------------------------------------
1810 ACADIA CT II 548,878 2,395 15,106 7,607 (23,765) (14,513)
- --------------------------------------------------------------------------------------------------
1814 ASHFORD HILL 372,358 1,476 5,255 6,386 (13,412) (18,845)
- --------------------------------------------------------------------------------------------------
1816 CEDARWOOD III 242,823 1,784 3,230 3,561 (19,860) (5,335)
- --------------------------------------------------------------------------------------------------
1822 MARABOU MILLS I 434,537 2,728 2,834 8,832 (32,020) (8,935)
- --------------------------------------------------------------------------------------------------
1824 AMESBURY I 311,770 1,219 1,562 4,489 (31,167) (5,416)
- --------------------------------------------------------------------------------------------------
1833 HAYFIELD PARK 416,692 1,870 4,572 6,609 (20,177) (3,675)
- --------------------------------------------------------------------------------------------------
1838 CEDARGATE II 269,120 107 2,292 2,027 (11,449) (34)
- --------------------------------------------------------------------------------------------------
1839 DARTMOUTH PL II 276,045 2,820 1,794 2,016 (9,319) (1,184)
- --------------------------------------------------------------------------------------------------
1841 WILLOWOOD II 286,099 1,353 3,646 2,649 (27,799) (5,011)
- --------------------------------------------------------------------------------------------------
1843 DOGWOOD GLEN I 427,154 1,561 2,563 5,511 (14,295) (1,567)
- --------------------------------------------------------------------------------------------------
1846 CHERRY GLEN I 345,542 890 (697) 4,592 (21,625) (2,758)
- --------------------------------------------------------------------------------------------------
1863 HUNTER GLEN 334,582 2,932 1,311 3,086 (32,292) (2,277)
- --------------------------------------------------------------------------------------------------
1869 HARVEST GROVE I 351,145 1,372 524 4,760 (16,175) 0
- --------------------------------------------------------------------------------------------------
1871 CLEARWATER 238,751 2,823 1,755 3,088 (8,981) (1,968)
- --------------------------------------------------------------------------------------------------
1877 SHERBROOK 478,893 4,294 3,090 7,219 (8,485) (2,141)
- --------------------------------------------------------------------------------------------------
1880 ARAGON WOODS 343,592 1,016 3,702 3,583 (27,465) (11,903)
- --------------------------------------------------------------------------------------------------
1885 NEWBERRY II 255,375 2,109 241 1,255 (7,433) 0
- --------------------------------------------------------------------------------------------------
1889 APPLEGATE II 398,786 2,152 3,301 2,053 (19,763) (1,823)
- --------------------------------------------------------------------------------------------------
1895 ROSEWOOD COMMONS II 373,503 4,333 (853) 5,879 (26,754) (2,627)
- --------------------------------------------------------------------------------------------------
1898 RIDGEWOOD II 442,942 5,708 2,770 2,950 (21,590) (3,319)
- --------------------------------------------------------------------------------------------------
1908 CHERRY GLENN II 343,392 1,785 80 4,832 (18,087) (3,487)
- --------------------------------------------------------------------------------------------------
1909 LINDENDALE 365,755 1,115 617 5,861 (19,488) (2,743)
- --------------------------------------------------------------------------------------------------
1914 WOODLANDS II 348,577 1,568 1,903 2,703 (16,547) (4,205)
- --------------------------------------------------------------------------------------------------
1917 WILLOWOOD II 278,453 2,121 2,568 1,213 (5,619) (228)
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
LEXREIT PROPERTIES GROUP
- --------------------------------------------------------------------------------------------------
INDIVIDUAL PROPERTY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------
NOTE: FINANCIAL INFORMATION PRESENTED DOES NOT REFLECT THE ELIMINATION OF
- --------------------------------------------------------------------------------------------------
INTERCOMPANY PROFIT.
- --------------------------------------------------------------------------------------------------
LAUNDRY,
- --------------------------------------------------------------------------------------------------
VENDING
- --------------------------------------------------------------------------------------------------
RENT INTEREST SECURITY & OTHER
- --------------------------------------------------------------------------------------------------
PROP # NAME REVENUE REVENUE DEPOSITS REVENUE VACANCIES BAD DEBTS
==================================================================================================
<S> <C> <C> <C> <C> <C> <C>
1935 RED DEER II 322,774 2,492 2,013 1,922 (2,311) (97)
- --------------------------------------------------------------------------------------------------
1936 SUFFOLK GROVE II 273,950 1,911 1,455 1,752 (6,621) (2,128)
- --------------------------------------------------------------------------------------------------
1937 THE WILLOWS III 211,380 1,564 4,090 4,158 (11,426) (4,819)
- --------------------------------------------------------------------------------------------------
1966 RIVER GLEN II 273,618 933 2,367 3,299 (29,866) (5,393)
- --------------------------------------------------------------------------------------------------
1982 MARABOU MILLS III 310,494 478 1,427 3,081 (21,455) (1,640)
- --------------------------------------------------------------------------------------------------
1986 GARDEN CT 561,254 1,397 2,657 4,885 (14,753) (2,646)
- --------------------------------------------------------------------------------------------------
2137 WINDWOOD I 291,076 2,075 1,263 6,352 (46,853) (9,210)
- --------------------------------------------------------------------------------------------------
2208 GARDEN TERRACE I 258,524 3,863 1,735 4,354 (24,952) (6,282)
- --------------------------------------------------------------------------------------------------
2455 THYMEWOOD II 493,949 2,487 2,907 12,461 (26,924) (11,760)
- --------------------------------------------------------------------------------------------------
2469 BEL AIRE II 314,980 897 5,585 8,119 (17,364) (4,186)
- --------------------------------------------------------------------------------------------------
2512 SKY PINES II 263,836 1,066 3,378 4,242 (18,715) (16,881)
- --------------------------------------------------------------------------------------------------
2515 HIDDEN ACRES 454,719 2,007 5,735 5,664 (18,496) (12,177)
- --------------------------------------------------------------------------------------------------
2519 CENTRE LAKE III 1,418,593 11,644 9,496 84,811 (85,753) (87,996)
- --------------------------------------------------------------------------------------------------
2526 HOLLY SANDS II 264,588 2,095 2,676 4,588 (6,273) (419)
- --------------------------------------------------------------------------------------------------
2527 SUNSET WAY I 646,841 1,886 6,326 17,942 (58,877) (17,452)
- --------------------------------------------------------------------------------------------------
2543 MIGUEL PL 393,735 5,020 1,517 (3,172) (24,851) (4,244)
- --------------------------------------------------------------------------------------------------
2580 SUNSET WAY II 648,108 2,000 6,256 21,135 (55,142) (24,241)
- --------------------------------------------------------------------------------------------------
2587 OAK GARDENS 650,552 2,993 6,421 10,596 (25,652) (4,597)
- --------------------------------------------------------------------------------------------------
3166 CEDAR HILL 387,139 2,447 3,482 3,314 (11,762) 27
- --------------------------------------------------------------------------------------------------
3171 LAUREL GLEN 448,752 907 4,072 2,610 (2,609) (2,871)
- --------------------------------------------------------------------------------------------------
3173 SPRINGBROOK 428,237 3,163 1,910 5,001 (25,677) (11,193)
- --------------------------------------------------------------------------------------------------
3174 LAKESHORE I 358,878 2,022 6,580 (601) (8,080) (6,293)
- --------------------------------------------------------------------------------------------------
3175 GLENVIEW 371,955 637 1,380 (376) (19,031) (3,037)
- --------------------------------------------------------------------------------------------------
3188 VALLEYBROOK 382,952 2,191 5,225 5,420 (9,627) (2,816)
- --------------------------------------------------------------------------------------------------
3189 WILLOW LAKES 460,480 2,440 2,261 3,476 (22,160) (3,550)
- --------------------------------------------------------------------------------------------------
3190 GLENWOOD VILLAGE 376,829 2,834 2,480 2,246 (8,743) (2,314)
- --------------------------------------------------------------------------------------------------
3208 RAVENWOOD 396,322 980 1,012 2,654 (7,963) (3,026)
- --------------------------------------------------------------------------------------------------
3209 INDIAN LAKE I 1,395,642 15,711 12,922 30,134 (72,172) (18,027)
- --------------------------------------------------------------------------------------------------
3496 MARSHLANDING II 236,044 698 2,614 2,434 (8,449) (2,655)
- --------------------------------------------------------------------------------------------------
3532 KINGS COLONY 457,596 4,403 3,394 5,308 (10,942) (2,029)
- --------------------------------------------------------------------------------------------------
4109 CHERRY TREE 595,795 6,078 4,068 8,361 (40,896) (4,616)
- --------------------------------------------------------------------------------------------------
4133 MERRIFIELD 530,190 3,109 2,693 7,716 (26,715) (5,280)
- --------------------------------------------------------------------------------------------------
5886 PICKERINGTON MEADOWS 309,346 545 2,163 2,689 (25,865) (2,792)
- --------------------------------------------------------------------------------------------------
66 26,307,126 161,805 214,407 405,033 ######### (454,822)
- --------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
LEXREIT PROPERTIES GROUP
- --------------------------------------------------------------------------------------------------
INDIVIDUAL PROPERTY FINANCIAL INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------
NOTE: FINANCIAL INFORMATION PRESENTED DOES NOT REFLECT THE ELIMINATION OF
- --------------------------------------------------------------------------------------------------
INTERCOMPANY PROFIT.
- --------------------------------------------------------------------------------------------------
LAUNDRY,
- --------------------------------------------------------------------------------------------------
VENDING
- --------------------------------------------------------------------------------------------------
RENT INTEREST SECURITY & OTHER
- --------------------------------------------------------------------------------------------------
PROP # NAME REVENUE REVENUE DEPOSITS REVENUE VACANCIES BAD DEBTS
==================================================================================================
<S> <C> <C> <C> <C> <C> <C>
* Partial year, purchased 8/01/96.
ADDITIONAL PROPERTIES
---------------------
1039 LAUREL BAY 392,210 4,189 2,284 9,307 (32,905) (10,758)
- --------------------------------------------------------------------------------------------------
1825 BRADFORD PL 319,609 718 1,332 4,497 (12,198) (441)
- --------------------------------------------------------------------------------------------------
1887 RIVER GLEN I 292,048 2,264 2,955 4,033 (23,142) (2,030)
- --------------------------------------------------------------------------------------------------
2462 FOREST GLEN 340,395 1,934 7,272 5,486 (13,349) (2,064)
- --------------------------------------------------------------------------------------------------
2482 OAKWOOD VILLAGE 313,215 1,485 3,271 677 (32,892) (315)
- --------------------------------------------------------------------------------------------------
3231 WALKER PL 315,621 309 564 8,610 (26,425) (4,181)
- --------------------------------------------------------------------------------------------------
4111 FORSYTHIA CT II 428,187 1,489 1,291 4,483 (23,928) (1,252)
- --------------------------------------------------------------------------------------------------
5903 BRUNSWICK II 400,603 1,424 2,504 (237) (81,949) (4,832)
- --------------------------------------------------------------------------------------------------
5906 AMESBURY II 360,892 2,235 1,372 1,246 (47,008) (5,354)
- --------------------------------------------------------------------------------------------------
5910 MARABOU MILLS II 321,981 5,960 2,862 5,234 (20,574) (8,972)
- --------------------------------------------------------------------------------------------------
5951 HARVEST GROVE II 284,292 1,365 224 1,282 (21,559) (316)
===================================================================================================
3,769,052 23,372 25,931 44,618 (335,931) (40,515)
===================================================================================================
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
CONTRACTUAL
- -----------------------------------------------------------------------------------------
NET OPERATING NET OPERATING MAJOR CAPITAL MORTGAGE
- -----------------------------------------------------------------------------------------
REVENUES EXPENSES INCOME REPLACEMENT MAINTENANCE EXPENDITURES PRINCIPAL
=========================================================================================
<S> <C> <C> <C> <C> <C> <C>
235,688 94,839 140,849 14,940 4,165 7,200 1,061,450
- -----------------------------------------------------------------------------------------
200,867 90,246 110,620 23,726 1,124 14,736 601,932
- -----------------------------------------------------------------------------------------
469,500 245,572 223,929 30,251 1,021 0 1,759,807
- -----------------------------------------------------------------------------------------
137,119 67,397 69,722 6,228 2,364 0 1,223,260
- -----------------------------------------------------------------------------------------
383,410 153,216 230,194 18,194 15,263 0 1,601,847
- -----------------------------------------------------------------------------------------
226,233 84,133 142,100 14,205 25,345 3,011 1,020,000
- -----------------------------------------------------------------------------------------
260,418 124,919 135,499 6,368 0 2,927 1,036,385
- -----------------------------------------------------------------------------------------
181,991 79,768 102,223 7,874 1,108 300 760,000
- -----------------------------------------------------------------------------------------
307,400 190,728 116,672 21,432 6,243 463 760,434
- -----------------------------------------------------------------------------------------
535,709 241,539 294,170 25,723 19,493 1,470 1,886,146
- -----------------------------------------------------------------------------------------
353,217 157,056 196,160 34,117 2,014 2,100 1,606,595
- -----------------------------------------------------------------------------------------
226,203 85,702 140,501 11,133 6,335 23,740 888,760
- -----------------------------------------------------------------------------------------
407,975 174,125 233,850 10,429 6,782 4,203 1,468,322
- -----------------------------------------------------------------------------------------
282,458 126,354 156,104 11,973 0 3,030 1,257,832
- -----------------------------------------------------------------------------------------
405,892 155,573 250,319 21,986 1,661 10,785 1,615,000
- -----------------------------------------------------------------------------------------
262,063 93,183 168,880 3,452 968 0 1,032,435
- -----------------------------------------------------------------------------------------
272,172 108,409 163,762 10,665 4,989 2,970 897,388
- -----------------------------------------------------------------------------------------
260,936 134,686 126,250 18,140 2,642 0 957,792
- -----------------------------------------------------------------------------------------
420,926 158,633 262,293 19,002 4,863 21,107 1,792,218
- -----------------------------------------------------------------------------------------
325,944 148,992 176,952 12,733 21 0 1,396,026
- -----------------------------------------------------------------------------------------
307,342 148,559 158,783 6,301 6,796 0 1,051,233
- -----------------------------------------------------------------------------------------
341,626 130,370 211,256 4,021 4,604 0 1,400,534
- -----------------------------------------------------------------------------------------
235,468 95,955 139,513 9,324 2,277 13,839 1,061,450
- -----------------------------------------------------------------------------------------
482,870 216,798 266,072 25,309 10,159 8,400 1,397,504
- -----------------------------------------------------------------------------------------
312,526 142,091 170,435 5,469 7,117 0 1,150,600
- -----------------------------------------------------------------------------------------
251,547 95,332 156,215 9,169 7,473 0 1,331,331
- -----------------------------------------------------------------------------------------
384,706 162,232 222,474 8,853 19 10,705 1,265,575
- -----------------------------------------------------------------------------------------
353,481 151,638 201,843 25,654 1,308 201 1,318,698
- -----------------------------------------------------------------------------------------
429,461 187,137 242,324 19,033 3,061 0 1,393,574
- -----------------------------------------------------------------------------------------
328,515 148,141 180,374 15,345 21 1,660 1,143,198
- -----------------------------------------------------------------------------------------
351,117 127,669 223,447 12,567 1,578 0 1,439,828
- -----------------------------------------------------------------------------------------
334,000 146,650 187,350 18,579 4,004 (249) 1,189,328
- -----------------------------------------------------------------------------------------
278,508 102,079 176,429 11,842 0 21,600 1,065,380
===================================================================================================
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
CONTRACTUAL
- -----------------------------------------------------------------------------------------
NET OPERATING NET OPERATING MAJOR CAPITAL MORTGAGE
- -----------------------------------------------------------------------------------------
REVENUES EXPENSES INCOME REPLACEMENT MAINTENANCE EXPENDITURES PRINCIPAL
=========================================================================================
<S> <C> <C> <C> <C> <C> <C>
326,795 108,284 218,510 17,398 2,527 0 1,261,013
- -----------------------------------------------------------------------------------------
270,320 96,939 173,380 8,862 2,034 2,085 1,096,137
- -----------------------------------------------------------------------------------------
204,946 85,006 119,941 10,201 154 6,054 884,000
- -----------------------------------------------------------------------------------------
244,958 90,507 154,452 4,709 370 0 1,184,132
- -----------------------------------------------------------------------------------------
292,386 117,816 174,570 6,618 1,767 0 1,205,060
- -----------------------------------------------------------------------------------------
552,795 217,533 335,262 18,138 2,810 1,856 2,185,573
- -----------------------------------------------------------------------------------------
244,702 152,918 91,784 28,460 18,722 27,495 606,231
- -----------------------------------------------------------------------------------------
237,241 123,275 113,966 16,934 13,895 39,180 621,464
- -----------------------------------------------------------------------------------------
473,120 231,654 241,466 17,146 2,207 0 1,729,672
- -----------------------------------------------------------------------------------------
308,030 174,917 133,113 5,526 1,393 0 1,198,276
- -----------------------------------------------------------------------------------------
236,926 119,294 117,632 17,072 7,916 50,450 1,070,741
- -----------------------------------------------------------------------------------------
437,452 204,853 232,599 22,458 8,014 685 1,686,279
- -----------------------------------------------------------------------------------------
1,350,795 717,737 633,057 120,911 16,616 6,239 4,952,458
- -----------------------------------------------------------------------------------------
267,254 111,677 155,577 9,289 4,573 39,715 1,062,500
- -----------------------------------------------------------------------------------------
596,666 299,029 297,638 24,908 16,968 0 1,685,131
- -----------------------------------------------------------------------------------------
368,006 163,350 204,656 30,967 11,602 0 1,504,500
- -----------------------------------------------------------------------------------------
598,117 308,771 289,346 19,566 1,162 0 2,719,585
- -----------------------------------------------------------------------------------------
640,313 301,595 338,717 19,092 179 484 2,756,106
- -----------------------------------------------------------------------------------------
384,647 154,275 230,372 16,812 12,044 0 1,487,500
- -----------------------------------------------------------------------------------------
450,861 171,342 279,519 17,206 13,268 0 1,742,500
- -----------------------------------------------------------------------------------------
401,440 178,928 222,512 25,239 1,909 32,645 1,742,965
- -----------------------------------------------------------------------------------------
352,506 179,165 173,341 18,451 16,286 (60) 1,265,576
- -----------------------------------------------------------------------------------------
351,528 156,617 194,911 9,263 12,399 0 1,734,783
- -----------------------------------------------------------------------------------------
383,344 107,949 275,395 12,551 8,753 0 1,586,737
- -----------------------------------------------------------------------------------------
442,949 170,792 272,156 19,214 (144) 0 2,099,515
- -----------------------------------------------------------------------------------------
373,331 158,263 215,068 18,727 14,793 0 1,534,803
- -----------------------------------------------------------------------------------------
389,979 159,621 230,358 7,927 508 0 1,718,721
- -----------------------------------------------------------------------------------------
1,364,210 473,684 890,526 61,268 31,435 4,481 4,711,452
- -----------------------------------------------------------------------------------------
230,686 107,602 123,084 11,325 7,706 2,778 982,213
- -----------------------------------------------------------------------------------------
457,730 185,283 272,447 11,009 2,852 0 2,107,287
- -----------------------------------------------------------------------------------------
568,790 207,635 361,155 25,293 10,126 2,988 2,217,868
- -----------------------------------------------------------------------------------------
511,713 203,505 308,208 17,164 13,236 2,546 2,127,341
- -----------------------------------------------------------------------------------------
286,087 123,559 162,528 17,523 1,200 0 1,186,165
- -----------------------------------------------------------------------------------------
25,147,908 10,933,096 ########## 1,181,269 414,098 373,819 98,486,146
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
CONTRACTUAL
- -----------------------------------------------------------------------------------------
NET OPERATING NET OPERATING MAJOR CAPITAL MORTGAGE
- -----------------------------------------------------------------------------------------
REVENUES EXPENSES INCOME REPLACEMENT MAINTENANCE EXPENDITURES PRINCIPAL
=========================================================================================
<S> <C> <C> <C> <C> <C> <C>
364,327 193,530 170,797 15,125 10,724 0 924,211
- -----------------------------------------------------------------------------------------
313,517 147,684 165,833 10,319 9,221 0 1,181,417
- -----------------------------------------------------------------------------------------
276,127 104,038 172,089 11,456 0 0 1,106,752
- -----------------------------------------------------------------------------------------
339,674 149,312 190,362 17,985 4,322 12,000 1,136,177
- -----------------------------------------------------------------------------------------
285,441 164,764 120,677 19,817 10,760 0 757,708
- -----------------------------------------------------------------------------------------
294,497 155,851 138,646 18,243 0 0 1,198,295
- -----------------------------------------------------------------------------------------
410,270 160,526 249,744 7,235 733 0 2,414,099
- -----------------------------------------------------------------------------------------
317,512 157,636 159,877 17,348 4,753 0 1,341,640
- -----------------------------------------------------------------------------------------
313,382 143,037 170,345 20,751 340 4,660 1,331,775
- -----------------------------------------------------------------------------------------
306,491 128,633 177,858 5,446 3,190 2,233 1,030,710
- -----------------------------------------------------------------------------------------
265,288 121,055 144,233 11,661 2,910 1,433 1,124,610
- -----------------------------------------------------------------------------------------
3,486,527 1,626,065 1,860,461 155,387 46,952 20,326 13,547,394
- -----------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
EXHIBIT 99.2
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
LEXREIT PROPERTIES GROUP
- ------------------------------------------------------------------------------------------------
INDIVIDUAL PROPERTY FINANCIAL INFORMATION (UNAUDITED)
- ------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
NOTE: FINANCIAL INFORMATION PRESENTED DOES NOT REFLECT THE ELIMINATION OF
- ------------------------------------------------------------------------------------------------
INTERCOMPANY PROFIT. LAUNDRY,
- ------------------------------------------------------------------------------------------------
VENDING
- ------------------------------------------------------------------------------------------------
RENT INTEREST SECURITY & OTHER
- ------------------------------------------------------------------------------------------------
PROP # NAME REVENUE REVENUE DEPOSITS REVENUE VACANCIES BAD DEBTS
=================================================================================================
ADDITIONAL PROPERTIES
- -----------======================---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1039 LAUREL BAY 392,210 4,189 2,284 9,307 (32,905) (10,758)
- ------------------------------------------------------------------------------------------------
1825 BRADFORD PL 319,609 718 1,332 4,497 (12,198) (441)
- ------------------------------------------------------------------------------------------------
1887 RIVER GLEN I 292,048 2,264 2,955 4,033 (23,142) (2,030)
- ------------------------------------------------------------------------------------------------
2462 FOREST GLEN 340,395 1,934 7,272 5,486 (13,349) (2,064)
- ------------------------------------------------------------------------------------------------
2482 OAKWOOD VILLAGE 313,215 1,485 3,271 677 (32,892) (315)
- ------------------------------------------------------------------------------------------------
3231 WALKER PL 315,621 309 564 8,610 (26,425) (4,181)
- ------------------------------------------------------------------------------------------------
4111 FORSYTHIA CT II 428,187 1,489 1,291 4,483 (23,928) (1,252)
- ------------------------------------------------------------------------------------------------
5903 BRUNSWICK II 400,603 1,424 2,504 (237) (81,949) (4,832)
- ------------------------------------------------------------------------------------------------
5906 AMESBURY II 360,892 2,235 1,372 1,246 (47,008) (5,354)
- ------------------------------------------------------------------------------------------------
5910 MARABOU MILLS II 321,981 5,960 2,862 5,234 (20,574) (8,972)
- ------------------------------------------------------------------------------------------------
5951 HARVEST GROVE II 284,292 1,365 224 1,282 (21,559) (316)
- ------------------------------------------------------------------------------------------------
3,769,052 23,372 25,931 44,618 (335,931) (40,515)
- ------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
EXHIBIT 99.2
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
CONTRACTUAL
- --------------------------------------------------------------------------------------
NET OPERATING NET OPERATING MAJOR CAPITAL MORTGAGE
- --------------------------------------------------------------------------------------
REVENUES EXPENSES INCOME REPLACEMENT MAINTENANCE EXPENDITURES PRINCIPAL
======================================================================================
<S> <C> <C> <C> <C> <C> <C>
364,327 193,530 170,797 15,125 10,724 0 924,211
- --------------------------------------------------------------------------------------
313,517 147,684 165,833 10,319 9,221 0 1,181,417
- --------------------------------------------------------------------------------------
276,127 104,038 172,089 11,456 0 0 1,106,752
- --------------------------------------------------------------------------------------
339,674 149,312 190,362 17,985 4,322 12,000 1,136,177
- --------------------------------------------------------------------------------------
285,441 164,764 120,677 19,817 10,760 0 757,708
- --------------------------------------------------------------------------------------
294,497 155,851 138,646 18,243 0 0 1,198,295
- --------------------------------------------------------------------------------------
410,270 160,526 249,744 7,235 733 0 2,414,099
- --------------------------------------------------------------------------------------
317,512 157,636 159,877 17,348 4,753 0 1,341,640
- --------------------------------------------------------------------------------------
313,382 143,037 170,345 20,751 340 4,660 1,331,775
- --------------------------------------------------------------------------------------
306,491 128,633 177,858 5,446 3,190 2,233 1,030,710
- --------------------------------------------------------------------------------------
265,288 121,055 144,233 11,661 2,910 1,433 1,124,610
- --------------------------------------------------------------------------------------
3,486,527 1,626,065 1,860,461 155,387 46,952 20,326 13,547,394
- --------------------------------------------------------------------------------------
</TABLE>
