<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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
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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. [ ]
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CALCULATION OF REGISTRATION FEE
=================================================================================================
TITLE OF SECURITIES AMOUNT BEING PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
BEING REGISTERED REGISTERED(1) PRICE PER SHARE(2) AGGREGATE PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, without
par value............ 960,000 $1.50 $1,440,000 $436.36
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(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).
------------------------
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 Consolidated 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; Management; Business
and Properties
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>
<CAPTION>
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>
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 1, 1997
UP TO 960,000 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 and up to 1,049,900 additional shares of Company
Common Stock, constituting 100% of the Company Common Stock (depending upon the
number of issued and outstanding shares of CRSI Stock as of the Distribution
Record Date).
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 Interests in two limited liability companies for
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 one of its wholly-owned subsidiaries, 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
Additional Property 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 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 (the "CRSI Cash Dividend"). 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........................................................................ 36
SELECTED FINANCIAL DATA............................................................... 37
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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.......................................................................... 39
Introduction..................................................................... 39
Results of Operations............................................................ 39
Liquidity and Capital Resources.................................................. 41
Financing and Debt Restructuring of the Properties............................... 41
Funds From Operations............................................................ 41
BUSINESS AND PROPERTIES............................................................... 42
Description of Properties and Additional Properties.............................. 42
Executive Officers; Contracts for Services with Manager and CRSI................. 42
Environmental Matters............................................................ 42
Competition...................................................................... 43
Legal Proceedings................................................................ 43
POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES............................ 44
Investment Policies.............................................................. 44
Financing........................................................................ 45
Policies with Respect to Certain Other Activities................................ 45
Conflicts of Interest Policy..................................................... 45
THE FORMATION......................................................................... 45
MANAGEMENT............................................................................ 47
Company Directors and Executive Officers......................................... 47
Committees of the Board of Directors............................................. 48
Liability and Indemnification of Directors and Officers.......................... 48
Executive Compensation........................................................... 49
Compensation of Directors........................................................ 49
Conflicts of Interest............................................................ 49
CERTAIN TRANSACTIONS; TRANSACTIONS WITH CRSI.......................................... 49
Initial Transactions............................................................. 49
Contributions of Additional Interests............................................ 50
Agreements Between the Company and CRSI.......................................... 50
Management Agreements............................................................ 51
Corporate Services Agreement..................................................... 53
Asset Management Agreements...................................................... 53
Tax Indemnification Agreement.................................................... 54
OPERATING PARTNERSHIP AGREEMENT....................................................... 54
Management....................................................................... 54
Transferability of Interests..................................................... 55
Capital Contributions............................................................ 55
Tax Matters; Profits and Losses.................................................. 55
Operations....................................................................... 55
Termination of Management Agreements............................................. 55
Distributions.................................................................... 56
Term............................................................................. 56
SUBSCRIPTION AGREEMENT................................................................ 57
General.......................................................................... 57
Consent of the Company to Certain Transactions................................... 57
Contributions of Additional Interests............................................ 57
PRINCIPAL SHAREHOLDERS OF THE COMPANY................................................. 57
</TABLE>
ii
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PAGE
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CAPITAL STOCK OF THE COMPANY.......................................................... 58
General.......................................................................... 58
Company Common Stock............................................................. 59
Preferred Stock.................................................................. 59
Restrictions on Transfer......................................................... 61
Ohio Anti-Takeover Provisions.................................................... 62
SHARES AVAILABLE FOR FUTURE SALE...................................................... 64
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS............................................. 64
General.......................................................................... 64
Taxation of the Company as a REIT................................................ 65
Requirements for Qualification as a REIT......................................... 66
Future Tax Legislation........................................................... 70
Tax Aspects of the Company's Investment in the Partnerships...................... 70
Taxation of Taxable Domestic Shareholders........................................ 71
Taxation of Tax-Exempt Shareholders.............................................. 72
Taxation of Foreign Shareholders................................................. 73
Other Tax Considerations......................................................... 74
ERISA CONSIDERATIONS.................................................................. 74
EXPERTS............................................................................... 75
LEGAL MATTERS......................................................................... 75
GLOSSARY.............................................................................. 76
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iii
<PAGE> 10
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 Additional
Property 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 Companies.......... Cardinal Realty Services, Inc., an Ohio corporation, and its wholly-
owned subsidiaries.
Distributed Company............. Lexreit Properties, Inc., an Ohio corporation (the "Company").
Shares to be Distributed........ Up to 960,000 shares of Company Common Stock based on an estimate of
not more than 4,800,000 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 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 record 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 value 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 the Distribution 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 Distribution. 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 subsequent to the Distribution Date.
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.
</TABLE>
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<PAGE> 14
<TABLE>
<S> <C>
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 ("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 or (ii) pro rated to the partners in
accordance with their respective capital account balances if such distributions
are attributable to sales or refinancings of Properties or Additional Properties
by the Partnerships. 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
6
<PAGE> 16
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 companies) to
the Company and will receive 100% of the Class A Senior Preferred Stock
and up to 1,049,900 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% Interest) to the Operating Partnership,
and the CRSI Group will contribute 40% of the Interests in each of the
Partnerships (excluding two limited liability companies in which the CRSI
Group will retain a 21% Interest) to the Operating Partnership.
7
<PAGE> 17
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 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 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 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.
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:
LOGO (See pcn 819)
- ---------------
<TABLE>
<C> <S>
(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 $90.00 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 from Partnership Operations 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 or (ii) pro rata to the
partners in accordance with their respective capital account balances if such
distributions are attributable to sales or refinancings of Properties or
Additional Properties by the Partnerships. 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 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."
10
<PAGE> 20
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)
<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>
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<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.................. $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 838,000 shares of Common Stock to be outstanding estimated 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
Prospective investors 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 entirely 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
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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.
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; however, the Company Common
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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's income will consist primarily
of its allocable share of the income of the Operating Partnership.
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.
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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 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, (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
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subject to existing mortgage financing and other indebtedness which have
priority over the equity interests of the Company. In addition, because the
Company anticipates 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 and 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
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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 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 negotiated 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
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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 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
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value of its outstanding shares be owned by 5 or fewer individuals, while
providing the Company's Board of 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 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. 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,"
"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). As a result, 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 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 value indicated on the IRS Form 1099-DIV to
be distributed to each holder of record 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.
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
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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 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
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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 date of the Distribution
and the portion of the Distribution and CRSI Cash Dividend that constitutes a
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 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.
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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 as General Partner of the Operating Partnership for the purpose of
creating 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 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 from Partnership
Operations 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 Partner-
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ship. 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 or (ii) pro
rata to the partners in accordance with their respective capital account
balances if such distributions are attributable to sales or refinancings of
Properties or Additional Properties by the Partnerships. 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 Property to the Company than to sell (or otherwise
dispose of) such Additional Interest. 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, 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.
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 "Distribution Policy."
29
<PAGE> 39
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 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 $90.00 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 preferences 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 from Partnership Operations 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 or (ii) pro rata to the
partners in accordance with their respective capital account balances if such
distributions are attributable to sales or refinancings of Properties or
Additional Properties by the Partnerships. 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
30
<PAGE> 40
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 partners).
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 December 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
Regulation S-X of the Securities and Exchange Commission. 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 the 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.
31
<PAGE> 41
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
face 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>
32
<PAGE> 42
LEXREIT PROPERTIES, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENT OF OPERATIONS
AS OF DECEMBER 31, 1996
(000S)
<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.................. 838(G)
======
Net (Loss) per Common Share........................... ($ 2.43)
======
</TABLE>
33
<PAGE> 43
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 Limited Partnerships and Limited Liability Companies. 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, the Limited Partnerships, and Limited Liability Companies
(representing the carryover historical basis of CRSI's investments), along
with the preferred ($1,000 face 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>
34
<PAGE> 44
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 general partner interests in the Limited
Partnerships, the interests retained in the Limited Liability Companies, and
the limited partner interest in the Operating Partnership properties which
were contributed to the Operating Partnership by the Company.
(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.
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.
35
<PAGE> 45
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 1,050,000 shares outstanding at
April 4, 1997 and Distribution Date,
respectively................................... -- --
Additional Paid-in Capital....................... 1 2,025
--- --------
Total Capitalization........................ $ 1 $99,568
=== ========
</TABLE>
36
<PAGE> 46
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)
<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>
37
<PAGE> 47
<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 838,000 shares of Common Stock to be outstanding estimated 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.
38
<PAGE> 48
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 Property's
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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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 related to
salary expense due to maintenance work increasing due to escrow funds available
from 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. The increase is a reflection of increased
maintenance expenditures 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 property employees.
Interest Expense decreased approximately $238,000 in 1995 as compared to
1994. Interest expense was affected by the Chapter 11 Bankruptcy Plan of
Reorganization for 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.
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<PAGE> 50
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> 51
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 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 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. In addition, CRSI will
initially provide day-to-day management and certain administrative, accounting
and financial, tax, insurance administration and administrative services to the
Partnerships. 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."
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
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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, Operating Partnership, Partnership, 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.
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, Operating Partnership, Partnerships or the Properties.
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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
"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 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 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
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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 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 Properties to the Company or the
Operating Partnership 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 intend to 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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- 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 1,049,900 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% Interest) to the Operating
Partnership, and the CRSI Group will contribute a 40% Interest in each of
the Partnerships (excluding two limited liability companies in which the
CRSI Group will retain a 21% 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, 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 has been 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 corporation,
indemnification may not be made (i) if the person seeking indemnification is
adjudged liable for
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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.
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:
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- 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 1,049,900 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% Interest) to the Operating
Partnership, and the CRSI Group will contribute 40% of the Interests in
each of the Partnerships (excluding two limited liability companies in
which the CRSI Group will retain a 21% 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 will be contributed to
the Company by CRSI, 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 will be contributed to the Company by CRSI, 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.
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 and
negotiated 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.
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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;
(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;
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(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 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 from occupied units or from all
rentable units (whether rented or not, i.e., "economic occupancy"), as the case
may be. 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.
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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 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 public reporting, insurance procurement and administration, management
information systems, tax planning, compliance and return preparation, if
necessary, payroll and W-2 matters and accounting 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 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.
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 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
limited partners regarding operations, finances, management and all other
matters that could have an affect on their economic interests in the Properties
and the Additional Properties; (ii) allocation and distribution of funds to
limited partners in accordance with the terms of their partnership agreements;
(iii) supervision of the preparation, and review and distribution, of
partnership tax returns to each limited partner; and (iv) participation in, and
supervision of professionals involved in, examination of partnership filings.
Payment by each of the Partnerships for the provision of day-to-day management
services during the 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 in an amount equal to 40% of
first year savings plus a maintenance fee of $100 per Property or Additional
Property;
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(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 5% 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 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 CRSI or any
of CRSI's subsidiaries (other than the Company) 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 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. Additionally, 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.
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." 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.
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TRANSFERABILITY OF INTERESTS
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.
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) as its initial capital contribution. The Limited Partner
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."
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 any termination
fee amount 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.
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DISTRIBUTIONS
The Operating Partnership Agreement provides that the Operating Partnership
will make cash distributions quarterly, in amounts equal to all OP Distributable
Funds. The portion of OP Distributable Funds from Partnership Operations 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 or (ii) pro rata to the partners in accordance with their respective
capital account balances if such distributions are attributable to sales or
refinancings of Properties or Additional Properties by the Partnerships. 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.
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.
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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, (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 on 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.
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 1,050,000 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) and the distribution of whole shares of the
Company Common Stock in lieu of fractional shares.
<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 9.8%
Cardinal Realty Services, Inc.
6954 Americana Parkway
Reynoldsburg, Ohio 43068................................... 72,300 7%
</TABLE>
57
<PAGE> 67
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OWNERSHIP
NAME AND ADDRESS COMPANY OF THE COMPANY AFTER
OF BENEFICIAL OWNER(1) COMMON STOCK DISTRIBUTION
- ------------------------------------------------------------- ------------ --------------------
<S> <C> <C>
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%.
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 shall 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 1,050,000 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
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<PAGE> 68
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 Held by CRSI. The holders of the 4,500
shares of Class A Senior Preferred Stock to be issued and outstanding on the
Distribution Date are 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 at quarter end. 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.
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 from five to seven 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
59
<PAGE> 69
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.
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.
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. 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 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.
60
<PAGE> 70
The stated amount 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
amount, 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 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
61
<PAGE> 71
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 Company so long as the
alternative shareholder consent procedures set forth in Article Seventh of the
Company's Articles of Incorporation are in effect.
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<PAGE> 72
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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<PAGE> 73
SHARES AVAILABLE FOR FUTURE SALE
On the completion of the Distribution, the Company expects to have up to
1,050,000 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
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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<PAGE> 74
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
73
<PAGE> 83
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 and Local 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.
74
<PAGE> 84
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.
75
<PAGE> 85
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.
"Anticipated Dividend Value" means the anticipated 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.
76
<PAGE> 86
"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.
77
<PAGE> 87
"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.
"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.
"Ownership Limit" means the beneficial ownership of 9% of the outstanding
Company Common Stock.
"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 Property attributed to
the Preferred Stock based on the historical cost 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.
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<PAGE> 88
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> 89
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> 90
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> 91
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
----------- ----------- -----------
Net 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> 92
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> 93
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> 94
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 its allocable share 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 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 ownership interests from CRSI and have been prepared as if the Company 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> 95
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> 96
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> 97
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 of the Properties were refinanced in 1996 that 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> 98
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 date of distribution.
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 predominately 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> 99
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> 100
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>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COLUMN A COLUMN B COLUMN C COLUMN D
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
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
MARIBOU 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> 101
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>
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COLUMN A COLUMN B COLUMN C COLUMN D
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
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> 102
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>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
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> 103
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>
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COLUMN A COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
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>
- ------------------------------------------------------------------------------------------------------------------------------
MARIBOU 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> 104
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> 105
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> 106
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> 107
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> 108
======================================================
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............................ 36
SELECTED FINANCIAL DATA................... 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................. 39
BUSINESS AND PROPERTIES................... 42
POLICIES AND OBJECTIVES WITH RESPECT TO
CERTAIN ACTIVITIES...................... 44
THE FORMATION............................. 45
MANAGEMENT................................ 47
CERTAIN TRANSACTIONS; TRANSACTIONS WITH
CRSI.................................... 49
OPERATING PARTNERSHIP AGREEMENT........... 54
SUBSCRIPTION AGREEMENT.................... 57
PRINCIPAL SHAREHOLDERS OF THE COMPANY..... 57
CAPITAL STOCK OF THE COMPANY.............. 58
SHARES AVAILABLE FOR FUTURE SALE.......... 64
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS.......................... 64
ERISA CONSIDERATIONS...................... 74
EXPERTS................................... 75
LEGAL MATTERS............................. 75
GLOSSARY.................................. 76
</TABLE>
======================================================
======================================================
UP TO 960,000 COMMON SHARES
LOGO
COMPANY COMMON STOCK
------------------------
PROSPECTUS
June , 1997
------------------------
======================================================
<PAGE> 109
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.......................................................... $436.36
*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> 110
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
*99.1 Summary of Properties and Additional Properties
*99.2 Valuation of Additional Properties
</TABLE>
- ---------------
*To be filed by Amendment
II-2
<PAGE> 111
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> 112
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF OF THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF COLUMBUS, STATE OF OHIO, ON THE 1ST DAY OF MAY, 1997.
LEXREIT PROPERTIES, INC.
By: /s/ JOHN B. BARTLING, JR.
------------------------------------
John B. Bartling, Jr.
President
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> 113
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 the Registration Statement (Form
S-11) and related Prospectus of Lexreit Properties, Inc. dated May 1, 1997.
/s/ ERNST & YOUNG LLP
------------------------------------
Ernst & Young LLP
Columbus, Ohio
April 29, 1997
II-5
