<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 24, 1997
REGISTRATION NO. 333-33547
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PRIME GROUP REALTY TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENT)
77 WEST WACKER DRIVE, SUITE 3900 [/R]
CHICAGO, ILLINOIS 60601
(312) 917-1500
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
----------------
MICHAEL W. RESCHKE
CHAIRMAN OF THE BOARD
PRIME GROUP REALTY TRUST
77 WEST WACKER DRIVE, SUITE 3900 [/R]
CHICAGO, ILLINOIS 60601
(312) 917-1500
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
WAYNE D. BOBERG, ESQ. J. GREGORY MILMOE, ESQ.
BRIAN T. BLACK, ESQ. SKADDEN, ARPS, SLATE,
WINSTON & STRAWN MEAGHER & FLOM LLP
35 WEST WACKER DRIVE 919 THIRD AVENUE
CHICAGO, ILLINOIS 60601 NEW YORK, NEW YORK 10022
(312) 558-5600 (212) 735-3000
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES 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 offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES BEING TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE(2)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Convertible Preferred
Shares of Beneficial
Interest, $.01 par
value per share........ 2,105,000 $21.00 $44,205,000 $13,396
- --------------------------------------------------------------------------------
Common Shares of Benefi-
cial Interest, $.01 par
value per share........ 14,237,000(4) $21.00 $298,977,000 $90,600
- --------------------------------------------------------------------------------
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Calculated pursuant to Rule 457(a) under the Securities Act of 1933.
(3) The Registrant paid $99,319 of the total registration fee of $103,996 in
connection with the initial filing of this Registration Statement on
August 13, 1997. The Registrant has paid $4,677, representing the balance
of the total registration fee, in connection with the filing of this
Amendment No. 2.
(4) Includes an aggregate of 1,857,000 Common Shares that the Underwriters
have the option to purchase from the Company to cover over-allotments, if
any.
----------------
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.
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- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectuses: one form to
be used in connection with the offering of the Common Shares of the Registrant
and one form to be used in connection with the offering of the Convertible
Preferred Shares of the Registrant. Final forms of each prospectus will be
filed with the Securities and Exchange Commission under Rule 424(b), as
appropriate.
<PAGE>
Rider A
-------
The forepart of the inside front cover of the prospectus contains
photographs of the 77 West Wacker Drive Building, including photographs of the
building by day and night, as well as photographs of certain details of the
building, such as the Gaylord Donnelley Library, the lobby of Jones, Day,
Reavis & Pogue and the lobby of the 77 West Wacker Drive Building.
The inside front cover of the prospectus contains photographs of certain of
the office properties of the Company: 1699 E. Woodfield Road in Schaumburg,
Illinois; 625 Gay Street in Knoxville, Tennessee; 941-961 Weigel Drive in
Elmhurst, Illinois; 4343 Commerce Court in Lisle, Illinois; 555 Huehl Road in
Northbrook, Illinois; and 280 Shuman Boulevard in Naperville, Illinois. The
inside back cover also contains photographs of certain of the industrial
properties of the Company: the Libertyville Business Park in Libertyville,
Illinois (an aerial photograph showing locations of buildings as well as sites
for future development); 801 Technology Way in Libertyville, Illinois; 425 E.
Algonquin Road in Arlington Heights, Illinois; 1051 N. Kirk Road in Batavia,
Illinois; 343 Carol Lane in Elmhurst, Illinois; 475 Superior Avenue in Munster,
Indiana; and 4407 Railroad Avenue in East Chicago, Indiana. The inside front
cover of the prospectus also contains a map of the Chicago region, including
Northwest Indiana. The map indicates the location of the Company's properties in
the area covered by the map, broken down into four categories: Office
Properties, Industrial Properties, Corporate Headquarters and Land for
Development.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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--DATED OCTOBER 24, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
12,380,000 Shares [/R]
LOGO
LOGO
Common Shares of Beneficial Interest [/R]
- --------------------------------------------------------------------------------
Prime Group Realty Trust, a Maryland real estate investment trust (the
"Company"), is a fully-integrated, self-administered and self-managed real
estate company that has been formed to continue and expand the office and
industrial real estate business conducted by The Prime Group, Inc. and certain
of its affiliates (collectively, "Prime"). Upon the completion of this offering
and certain related transactions described herein, including the offering of
cumulative convertible preferred shares of the Company to Security Capital
Preferred Growth Incorporated, the Company, through its subsidiaries, will own
16 office properties (the "Office Properties"), 44 industrial properties (the
"Industrial Properties"), one industrial property under construction, one
parking facility and one retail center (collectively, the "Properties"). The
Properties are located primarily in the Chicago, Illinois metropolitan area
(the "Chicago Metropolitan Area") and contain approximately 2.4 million net
rentable square feet of office space and 5.7 million net rentable square feet
of industrial space. As of June 30, 1997, the Office Properties were 88.0%
leased to more than 200 tenants, and the Industrial Properties were 87.9%
leased to more than 60 tenants. As of June 30, 1997, the Office Properties and
the Industrial Properties generated
(continued on carryover page) [/R]
Prior to the Offering, there has been no public market for the Common Shares.
It is currently estimated that the initial public offering price of the Common
Shares will be between $19.00 and $21.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price of the Common Shares. The Company has applied for listing of the
Common Shares on the New York Stock Exchange (the "NYSE") under the symbol
"PGE."
SEE "RISK FACTORS" ON PAGES 29 TO 44 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
COMMON SHARES OFFERED HEREBY, INCLUDING:
. The possibility that the consideration paid by the Company for certain of
the Properties and other assets contributed to the Company in connection
with its formation may exceed their fair market value, and the fact that
there were no arm's-length negotiations or third-party appraisals of such
Properties and other assets (Prime will receive Common Units worth
approximately $69.3 million and cash reimbursement of approximately $5.2
million for certain expenses incurred by Prime in connection with the
Formation Transactions and the Offering, in exchange for the contribution by
Prime of certain assets having a deficit book value of approximately $140.3
million at June 30, 1997);
. Geographic concentration of the Properties in the Chicago Metropolitan Area
and the significance of the 77 West Wacker Drive Building to the Company's
revenue which renders the Company vulnerable to the possible adverse effect
of general economic and other conditions in the Chicago Metropolitan Area on
real estate values and on the ability of tenants to pay rent;
. Conflicts of interest in the formation and operations of the Company,
including conflicts between the holders of LP Common Units (the "Limited
Partners"), the NAC General Partner (as defined herein) and their respective
affiliates with their positions as officers and trustees of the Company in
connection with the potential sale or refinancing of certain of the
Properties or the enforcement of certain agreements;
. Real estate debt financing risks, including the potential inability to
refinance the Company's debt upon maturity or violation of other loan
covenants that could result in the loss of properties secured by such debt;
. Limitation on the ownership of Common Shares to 9.9% of the outstanding
Common Shares and certain provisions in the organizational documents of the
Company which could make takeovers more difficult and may deter acquisition
proposals;
. Taxation of the Company as a regular corporation if it fails to qualify as a
REIT for federal income tax purposes;
. The immediate and substantial dilution of $4.00 per share in net tangible
book value of the Common Shares purchased in the Offering, which will result
in an immediate increase of $55.24 per Common Unit in net tangible book
value of the Common Units received by Prime in exchange for the Prime
Properties and the Prime Contribution Properties;
. Risk that the Company will not have sufficient cash available to make its
expected annual distributions for the 12-month period following the
completion of the Offering, which represent approximately 95.5% of the
estimated cash available for distribution for such period; and
. The Company has incurred net losses on a historical basis and may incur net
losses in the future.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Common Share............................................. $ $ $
- ---------------------------------------------------------------------------------------------------------
Total(3)..................................................... $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) The Company and the Operating Partnership have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
approximately $4.5 million.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 1,857,000 additional Common Shares on the same terms and
conditions as set forth above. If all such additional shares are purchased
by the Underwriters, the total Price to Public will be $ , the
total Underwriting Discounts and Commissions will be $ and the
total Proceeds to Company will be $ . The Underwriters have agreed to
reserve up to 200,000 Common Shares offered hereby for sale to certain
individuals at the Price to the Public less Underwriting Discounts and
Commissions. To the extent such reserved shares are sold to such
individuals, the total Underwriting Discounts and Commissions will be
reduced to the extent of such discounts. See "Underwriting."
- --------------------------------------------------------------------------------
The Common Shares are offered by the several Underwriters, subject to delivery
by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares to the Underwriters is expected to be made at the office of
Prudential Securities Incorporated, One New York Plaza, New York, New York, on
or about November , 1997.
PRUDENTIAL SECURITIES INCORPORATED
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
SMITH BARNEY INC.
MORGAN KEEGAN & COMPANY, INC. [/R]
November , 1997
<PAGE>
(continued from cover page)
65.1% and 34.9%, respectively, of the Company's Annualized Net Rent (as
defined herein). The Company also will own approximately 83.4 acres and have
rights to acquire approximately 157.2 acres of developable land (including
rights to acquire one development site located in the Chicago central business
district (the "Chicago CBD") containing approximately 58,000 square feet),
which management believes could be developed with approximately 1.2 million
square feet of additional office space in the Chicago CBD and approximately
4.4 million square feet of additional industrial properties primarily in the
Chicago Metropolitan Area.
All of the Common Shares of beneficial interest of the Company, $.01 par value
per share (the "Common Shares"), offered hereby (the "Common Share Offering")
are being sold by the Company. The Company is also offering (the "Convertible
Preferred Offering") 2,000,000 shares of its cumulative convertible preferred
shares of beneficial interest, $.01 par value per share (the "Convertible
Preferred Shares"), to Security Capital Preferred Growth Incorporated
("Security Capital Preferred Growth"), which the Company expects to close
concurrently with the closing of the Common Share Offering. It is currently
estimated that the offering price of the Convertible Preferred Shares will be
between $19.00 and $21.00 per share. The Common Share Offering and the
Convertible Preferred Offering are collectively referred to herein as the
"Offering," and the Common Shares and the Convertible Preferred Shares are
collectively referred to herein as the "Shares."
Upon the completion of the Offering, the Common Shares offered hereby will
represent approximately 55.3% of the common equity of the Company (58.8% if
the Underwriters' over-allotment option is exercised in full). The remaining
44.7% of the common equity of the Company (41.2% if the Underwriters' over-
allotment option is exercised in full) will be owned by Prime, by a joint
venture (the "Primestone Joint Venture") between Prime and certain affiliates
of Blackstone Real Estate Advisors, L.P. ("Blackstone"), by senior management
of the Company and by certain others in the form of (i) limited partnership
interests (the "LP Common Units") in Prime Group Realty, L.P., a Delaware
limited partnership (the "Operating Partnership"), which, subject to certain
conditions, are exchangeable on a one-for-one basis for Common Shares and (ii)
general partnership interests in the Operating Partnership (together with the
general partnership interests in the Operating Partnership held by the
Company, the "GP Common Units;" the GP Common Units and the LP Common Units
are collectively referred to herein as the "Common Units"). The Company will
be the managing general partner of the Operating Partnership. See "Principal
Shareholders of the Company." See "Glossary" beginning on page G-1 for
definitions of certain terms used in this Prospectus.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 3
The Company............................................................. 3
Risk Factors............................................................ 6
Benefits to Prime of the Formation Transactions and the Offering........ 7
Conflicts of Interest................................................... 8
Business Objective and Growth Strategies................................ 8
The Properties.......................................................... 12
The Company's Markets................................................... 18
Structure and Formation of the Company.................................. 20
Restrictions on Ownership and Transfer.................................. 23
Distribution Policy..................................................... 24
The Common Share Offering............................................... 25
Tax Status of the Company............................................... 25
SUMMARY FINANCIAL DATA.................................................... 26
RISK FACTORS.............................................................. 29
Lack of Independent Appraisals in the Formation Transactions; Market
Capitalization of the Company May Exceed Fair Market Value of the
Company's Assets; Value of Services Company Not Determined through
Arm's-Length Negotiation............................................... 29
Geographic Concentration of the Properties in the Chicago Metropolitan
Area, Nashville, Knoxville and Columbus; Local Economic Conditions..... 30
Conflicts of Interest; Benefits to Prime................................ 30
Real Estate Financing Risks............................................. 31
Certain Anti-Takeover Provisions May Inhibit a Change in Control of the
Company................................................................ 32
Adverse Consequences of Failure to Qualify as a REIT; Other Tax
Liabilities............................................................ 35
Immediate and Substantial Dilution Resulting to Purchasers of Common
Shares................................................................. 36
Distributions to Shareholders Affected by Many Factors.................. 36
Initial Distribution Payout Percentage Will be 95.5% for the Twelve
Months Ending June 30, 1998............................................ 37
Historical Losses and Accumulated Deficit; Possibility of Future
Losses................................................................. 37
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Acquisition and Development Risks....................................... 37
Company's Performance and Value are Subject to Real Estate Investment
Risks.................................................................. 38
Consequences of Failure to Qualify as Partnerships...................... 40
Changes in Policy and Investment Activity without Shareholder Approval.. 40
Dependence on Key Personnel............................................. 41
Dependence on Significant Tenants....................................... 41
Managed Property Business and Non-REIT Services......................... 41
Liabilities for Environmental Matters Could Adversely Affect the
Company's Financial Condition.......................................... 41
Possible Adverse Effects on Share Price Arising from Shares Eligible for
Future Sale............................................................ 43
Market Interest Rates Could Adversely Impact the Market Price of the
Common Shares.......................................................... 44
Absence of Prior Public Market Could Adversely Impact the Market Price
of the Common Shares................................................... 44
THE COMPANY............................................................... 45
Services Company........................................................ 47
BUSINESS OBJECTIVE AND GROWTH STRATEGIES.................................. 49
Business Objective...................................................... 49
Operating Strategy...................................................... 49
Acquisition Strategy.................................................... 51
Development Strategy.................................................... 52
Financing Strategy...................................................... 52
USE OF PROCEEDS........................................................... 53
DISTRIBUTION POLICY....................................................... 54
Estimated Cash Flows.................................................... 56
DILUTION.................................................................. 60
CAPITALIZATION............................................................ 62
SELECTED FINANCIAL DATA................................................... 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 66
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Results of Operations.................................................... 66
Pro Forma Liquidity and Capital
Resources............................................................... 68
Historical Cash Flows.................................................... 70
Funds from Operations.................................................... 71
Inflation................................................................ 71
BUSINESS AND PROPERTIES.................................................... 72
General.................................................................. 72
The Office and Industrial Properties..................................... 74
Summary Land Parcel Information.......................................... 79
Occupancy and Rental Information......................................... 79
Lease Expirations........................................................ 80
Tenant Information....................................................... 94
Office Properties........................................................ 94
Industrial Properties.................................................... 95
Development, Leasing and Management Activities........................... 95
Contribution Properties.................................................. 96
Acquisition Properties................................................... 96
Prime Contribution Properties............................................ 97
The Company's Markets.................................................... 97
The Company's Office Submarkets.......................................... 102
The Company's Industrial Submarkets...................................... 116
Land for Development and Option
Properties.............................................................. 125
Competition.............................................................. 128
Tax-Exempt Bonds......................................................... 128
Insurance................................................................ 128
Government Regulations................................................... 128
Management and Employees................................................. 131
Legal Proceedings........................................................ 131
Prime Assets Not Acquired by the
Company................................................................. 131
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................................ 132
Investment Objectives and Policies....................................... 132
Financing Strategy....................................................... 132
Conflicts of Interest Policies........................................... 133
Working Capital Reserves................................................. 134
Policies with Respect to Other
Activities.............................................................. 134
MANAGEMENT................................................................. 135
Trustees, Executive Officers and Key
Employees............................................................... 135
Committees of the Board of Trustees...................................... 140
Compensation of Trustees................................................. 140
Executive Compensation................................................... 141
Employment Agreements.................................................... 141
Share Incentive Plan..................................................... 142
Share Option Grants in Connection with the Formation Transactions........ 144
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Indemnification of Trustees and Officers................................ 144
STRUCTURE AND FORMATION OF THE COMPANY.................................... 145
Formation Transactions.................................................. 145
Reasons for the Organization of the Company............................. 147
Comparison of Common Shares and Common Units............................ 148
Advantages and Disadvantages of the Formation Transactions to
Unaffiliated Shareholders.............................................. 148
Benefits of the Formation Transactions and the Offering................. 149
Determination and Valuation of Ownership Interests...................... 150
Acquisition of the Properties and the Business from Prime............... 150
Formation of the Services Company....................................... 151
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 152
Formation Agreement..................................................... 152
Partnership Agreement................................................... 152
Exchange Rights and Registration Rights................................. 152
The Primestone Joint Venture............................................ 152
IBD Contribution Agreement.............................................. 153
NAC Contribution Agreement; Put Option Agreement........................ 153
Tax Indemnification Agreements.......................................... 153
Non-Compete Agreement between Prime and Michael W. Reschke.............. 154
Consulting Agreement with Stephen J. Nardi.............................. 154
Option to Purchase and Right of First Offer............................. 154
Patterson Contribution Agreement........................................ 155
Leases with Prime Affiliates............................................ 155
Sale of Common Shares to Mr. Reschke.................................... 155
Other Transactions...................................................... 155
PARTNERSHIP AGREEMENT..................................................... 156
Management.............................................................. 156
Indemnification......................................................... 156
Transferability of Interests............................................ 156
Extraordinary Transactions.............................................. 157
Issuance of Additional Common Units..................................... 157
Capital Contributions................................................... 157
Awards Under Share Incentive Plan....................................... 158
Distributions........................................................... 158
Operations.............................................................. 158
Limited Partner Exchange Rights......................................... 158
Registration Rights..................................................... 159
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Tax Matters............................................................ 159
Duties and Conflicts................................................... 159
Term................................................................... 159
PRINCIPAL SHAREHOLDERS OF THE COMPANY.................................... 160
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST............................. 161
Authorized Shares...................................................... 161
Convertible Preferred Shares........................................... 161
Common Shares.......................................................... 171
Additional Preferred Shares............................................ 172
Restrictions on Ownership and Transfer................................. 172
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S DECLARATION OF
TRUST AND BYLAWS........................................................ 175
Classification of the Board of Trustees................................ 175
Removal of Trustees.................................................... 175
Business Combinations.................................................. 175
Control Share Acquisitions............................................. 176
Amendment to the Declaration of Trust.................................. 177
Advance Notice of Trustee Nominations and New Business................. 177
Maryland Asset Requirements............................................ 177
Meetings of Shareholders............................................... 178
SHARES ELIGIBLE FOR FUTURE SALE.......................................... 179
General................................................................ 179
Exchange Rights and Registration Rights................................ 180
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................. 182
General................................................................. 182
Taxation of the Company................................................. 183
Requirements for Qualification.......................................... 184
Failure to Qualify...................................................... 189
Tax Aspects of the Company's Investments in Partnerships................ 189
Income Taxation of the Partnerships and Their Partners.................. 190
Taxation of Taxable U.S. Shareholders................................... 192
Taxation of Tax-Exempt Shareholders..................................... 193
Taxation of Non-U.S. Shareholders....................................... 193
Information Reporting Requirements and Backup Withholding Tax........... 196
Special Rules Regarding the Taxation of Holders of Convertible Preferred
Shares................................................................. 196
Other Tax Considerations................................................ 197
ERISA CONSIDERATIONS...................................................... 199
Employee Benefit Plans, Tax-qualified Retirement Plans and IRAs......... 200
Status of the Company under ERISA....................................... 200
UNDERWRITING.............................................................. 202
LEGAL MATTERS............................................................. 204
EXPERTS................................................................... 204
ADDITIONAL INFORMATION.................................................... 204
GLOSSARY.................................................................. G-1
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
iii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the financial statements and notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes (i) the consummation of
the transactions described under "Structure and Formation of the Company"
(collectively, the "Formation Transactions"), (ii) an initial public offering
price for the Common Shares of $20.00 per Common Share (representing the
midpoint of the price range), (iii) the Underwriters' over-allotment option
with respect to the Common Shares will not be exercised and (iv) the purchase
by Security Capital Preferred Growth of 2,000,000 Convertible Preferred Shares
at a price of $20.00 per Convertible Preferred Share (representing the midpoint
of the price range) pursuant to the Convertible Preferred Offering. Unless the
context otherwise requires, all references to the "Company" in this Prospectus
include Prime Group Realty Trust and its subsidiaries, including Prime Group
Realty, L.P. (the "Operating Partnership"), Prime Group Realty Services, Inc.
(the "Services Company"), or any one of them. See "Glossary" beginning on page
G-1 for the definitions of certain other terms used in this Prospectus.
THE COMPANY
The Company is a fully-integrated, self-administered and self-managed real
estate company that has been formed to continue and expand the office and
industrial real estate business of The Prime Group, Inc. and certain of its
affiliates (collectively, "Prime"). The Company expects to qualify as a real
estate investment trust ("REIT") for federal income tax purposes. In connection
with the Offering, the Company will succeed to the office and industrial
development, leasing and property management business of Prime and will acquire
certain additional office and industrial properties from third parties. The
Company will own 16 office properties (the "Office Properties") containing an
aggregate of approximately 2.4 million net rentable square feet, 44 industrial
properties (the "Industrial Properties") containing an aggregate of
approximately 5.7 million net rentable square feet, one industrial property
under construction, one parking facility and one retail center (collectively,
the "Properties"). The Properties are located primarily in the Chicago,
Illinois metropolitan area (the "Chicago Metropolitan Area"). As of June 30,
1997, the Office Properties and the Industrial Properties generated 65.1% and
34.9%, respectively, of the Company's Annualized Net Rent (as defined herein).
The Company also will own approximately 83.4 acres and have rights to acquire
approximately 157.2 acres of developable land (including rights to acquire one
development site located in the Chicago central business district ("Chicago
CBD") containing approximately 58,000 square feet), which management believes
could be developed with approximately 1.2 million square feet of additional
office space in the Chicago CBD and approximately 4.4 million square feet of
additional industrial properties primarily in the Chicago Metropolitan Area.
In terms of net rentable area, approximately 80.0% of the Office Properties
and 87.1% of the Industrial Properties are located in the Chicago Metropolitan
Area in prime business locations within established business communities. The
Properties located in the Chicago Metropolitan Area account for approximately
88.7% of the annualized net rent of the Properties ("Annualized Net Rent"). The
remaining Office Properties are located in the Nashville, Tennessee and
Knoxville, Tennessee metropolitan areas, and the remaining Industrial
Properties are located in the Columbus, Ohio metropolitan area. After the
completion of the Offering, the Company intends to invest in the acquisition,
development and redevelopment of office and industrial properties primarily
located in Suburban Chicago (as defined herein) and Chicago CBD office markets
and the Chicago Metropolitan Area warehouse/distribution market and overhead
crane/manufacturing market. In addition, the Company believes that it will be
the only publicly-traded REIT primarily focusing on both the office and
industrial markets in the Chicago Metropolitan Area.
The Company believes that the Properties are well-located, have excellent
highway access, attract high-quality tenants and are well-maintained and
professionally managed. Approximately 71.7% of the Office Properties, in terms
of Annualized Net Rent, are Class A properties. The Company considers Class A
office buildings to be buildings that are centrally located, professionally
managed and maintained, attract high-quality
3
<PAGE>
tenants, command upper-tier rental rates and are modern structures or have been
modernized to compete with new buildings. The Industrial Properties, in terms
of Annualized Net Rent, consist of 58.5% warehouse/distribution properties and
41.5% overhead crane/manufacturing properties. As of June 30, 1997, the Office
Properties were 88.0% leased to more than 200 tenants and the Industrial
Properties were 87.9% leased to more than 60 tenants. Management of the Company
has developed (or redeveloped), leased and managed 79.2% of the Office
Properties and 81.9% of the Industrial Properties, based on net rentable square
feet.
The Properties have a diverse and stable base of tenants and have
historically provided steadily increasing rents which the Company believes is
due to the quality of the Properties, the existence of long-term leases with
contractual rent escalations and the strength of the markets in which the
Properties are located. As of June 30, 1997, approximately 58.2% of the leases
for the Properties, in terms of Annualized Net Rent, had contractual rent
increases, of which approximately 42.4% of the Annualized Net Rent was
attributable to leases with specified contractual rent increases which on
average provided for annual rent increases of 4.9% over the next three years
and approximately 15.8% of the Annualized Net Rent was attributable to leases
with contractual rent increases tied to the annual change in the Consumer Price
Index (the "CPI"), subject to certain limitations. The three largest tenants in
the Properties, in terms of Annualized Net Rent, are R.R. Donnelley & Sons
Company ("Donnelley"), Everen Securities, Inc. ("Everen") and Jones, Day,
Reavis & Pogue ("Jones Day"). As of June 30, 1997, the Company's ten largest
office and ten largest industrial tenants (based upon Annualized Net Rent) had
leased space from the Company for an average of 8.9 and 3.7 years,
respectively, and accounted for 43.3% and 19.3%, respectively, of Annualized
Net Rent.
The Prime Group, Inc. was founded in 1981 by Michael W. Reschke and has been
involved in the ownership, acquisition, renovation, development, construction,
financing, marketing, leasing and management of institutional quality, income-
producing real estate properties for nearly 17 years. In 1994, Prime
contributed its retail development business and its multi-family housing
business to separate publicly-traded real estate investment trusts--Prime
Retail, Inc. (NYSE: PRT) and Ambassador Apartments, Inc. (NYSE: AAH). In May
1997, Prime contributed its senior and assisted living business to Brookdale
Living Communities, Inc. (Nasdaq: BLCI), a publicly-traded owner, operator and
developer of senior housing and a provider of senior and assisted living
services to the elderly.
Concurrently with the Common Share Offering, the Company is conducting the
Convertible Preferred Offering to Security Capital Preferred Growth, which the
Company expects to close simultaneously with the closing of the Common Share
Offering. The Common Shares offered hereby will represent 55.3% of the common
equity of the Company (58.8% if the Underwriters' over-allotment option is
exercised in full). Another 35.5% of the common equity of the Company (32.8% if
the Underwriters' over-allotment option is exercised in full) will be owned in
the form of Common Units by the Primestone Joint Venture, a joint venture
between Prime and Blackstone. The balance of 9.2% of the common equity of the
Company (8.4% if the Underwriters' over-allotment option is exercised in full)
will be held by Prime, senior management of the Company and certain others. See
"Principal Shareholders of the Company."
The Company engages in property management, leasing, acquisition,
development, redevelopment, construction, marketing, finance and other related
activities. The senior management of the Company includes the executives of
Prime who are responsible for the strategic direction, management and day-to-
day operations of Prime's office and industrial real estate business. The
Company's management has substantial experience in the full range of real
estate activities undertaken by the Company. The top ten senior executives of
the Company have an average of 19.3 years experience in the real estate
industry in the Chicago Metropolitan Area.
The Company's primary business strategy is to achieve its investment and
growth objectives by focusing on the acquisition, development and operation of
office and industrial real estate located in the Chicago Metropolitan Area and,
to a lesser extent, other midwestern markets. To implement this strategy, the
Company intends to (a) own, acquire, develop, redevelop, lease, manage and
operate Class A office properties, (b) acquire distressed, underperforming and
undermanaged office properties in desirable locations and improve the income
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potential of such assets by raising these properties to a higher level of
operating standard through value-added renovation programs, professional
property management and aggressive leasing, retenanting and marketing efforts
and (c) own, acquire, develop, redevelop, lease, manage and operate bulk
warehouse/distribution facilities and overhead crane/manufacturing facilities.
The Company believes that it can draw upon its extensive experience and long-
term presence in the Chicago Metropolitan Area to create a strategic advantage
in competing for future development and acquisition opportunities.
The Company believes that the solid, diversified local economy in the Chicago
Metropolitan Area is creating continued office space demand and absorption.
Because of steady expansion of office employment and nearly no new
construction, the overall Class A vacancy rate has steadily declined for five
years and is expected to continue to decline. According to Rosen Consulting
Group ("RCG"), Class A rental rates in the Company's largest office market, the
Chicago CBD, have begun to rise as Class A vacancy rates in the Chicago CBD
have decreased from 23.1% in 1992 to 9.3% by the end of the second quarter of
1997.
The Chicago Metropolitan Area also has experienced a very active market in
industrial space in the 1990s. As of the end of the second quarter of 1997, the
Chicago Metropolitan Area's industrial market's overall vacancy rate was 7.5%,
below the national average vacancy rate of 8.1%. In addition, 32.6% (in terms
of net rentable square feet) of the Company's Industrial Properties in the
Chicago Metropolitan Area consists of overhead crane facilities, which have a
replacement cost substantially in excess of the Company's basis in its
Properties. The Company believes that current rental rates in the overhead
crane/manufacturing submarket are less than the level which would justify the
construction of new overhead crane/manufacturing facilities and, therefore, the
Company believes that there will be little new competition with the Company's
overhead crane/manufacturing Properties. See "Business and Properties--The
Company's Markets."
The Company believes that the foundation for growth in cash flow per share in
future years will be from a number of sources, including contractual rent
escalations in existing leases, the leasing of all or a portion of the existing
vacant space in the Properties, the quality and strategic location of its
Properties, the acquisition at below replacement cost, renovation (where
necessary) and repositioning of additional office and industrial properties,
the strengthening of the Chicago Metropolitan Area economy, the development of
new office and industrial properties when market conditions warrant such new
development and the knowledge and experience of its senior management team and
their long-term relationships with large corporate tenants, municipalities,
landowners and institutional sellers. Further, upon the completion of the
Offering, the Company believes it will be conservatively capitalized with
outstanding debt of approximately 25.2% of the Company's total market
capitalization.
The Company was formed on July 21, 1997 as a Maryland real estate investment
trust. The Company's executive offices are located at 77 West Wacker Drive,
Suite 3900, Chicago, Illinois 60601, and its telephone number is (312) 917-
1500.
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RISK FACTORS
An investment in the Shares involves various material risks. Prospective
investors should carefully consider the matters discussed under "Risk Factors"
prior to making an investment decision. These risks include:
. The possibility that the consideration paid by the Company for certain of
the Properties and other assets contributed to the Company in its
formation may exceed their fair market value, and the fact that there
were no arm's-length negotiations or third-party appraisals of such
Properties and other assets (Prime will receive Common Units worth
approximately $69.3 million and cash reimbursement of approximately $5.2
million for certain expenses incurred by Prime in connection with the
Formation Transactions and the Offering, in exchange for the contribution
by Prime of certain assets having a deficit book value of approximately
$140.3 million at June 30, 1997).
. The geographic concentration of the Properties in the Chicago
Metropolitan Area and the significance of the 77 West Wacker Drive
Building to the Company's revenue, which renders the Company vulnerable
to the local economic conditions and tenants' continued demand and
ability to pay rent for office and industrial space in the Chicago
Metropolitan Area. The local economic conditions of the Nashville,
Tennessee, Knoxville, Tennessee and Columbus, Ohio metropolitan areas
also will affect the Company due to the location of certain of its
Properties in such areas.
. Real estate debt financing risks, including the potential inability to
refinance mortgage indebtedness upon maturity, the potential loss of
properties from a foreclosure proceeding if the Company fails to meet its
obligations under any secured mortgage indebtedness, the absence of any
limitation in the organizational documents of the Company restricting the
level of debt the Company may incur and the potential increase in
interest cost of the Company resulting from increases in market interest
rates upon the refinancing of any existing mortgage indebtedness or
fluctuations in any of the Company's variable rate indebtedness,
including under the Company's floating rate tax-exempt bond debt ($74.5
million outstanding at June 30, 1997).
. The potential anti-takeover effects of provisions in the Company's
Declaration of Trust (the "Declaration of Trust") and Amended and
Restated Bylaws (the "Bylaws"), including, among other things, provisions
generally limiting the actual or constructive ownership of Common Shares
by any one person or entity to 9.9% of the outstanding Common Shares,
restricting ownership of the Common Shares and staggering the terms of
the members of the Company's board of trustees (the "Board of Trustees"),
which could deter the acquisition of control by a third party, thus
making it more difficult to effect a change in management or limiting the
opportunity for shareholders to receive a premium over the market price
for their Common Shares.
. The taxation of the Company as a regular corporation if it fails to
qualify as a REIT and the resulting decrease in funds available to pay
distributions to shareholders.
. The immediate and substantial dilution of $4.00 per share in the net
tangible book value of the Common Shares purchased in the Offering, which
will result in an immediate increase of $55.24 per Common Unit in net
tangible book value of the Common Units received by Prime in exchange for
the Prime Properties and the Prime Contribution Properties in connection
with the Formation Transactions.
. The Company's cash available for distribution, which may be less than the
Company expects and may decrease in future periods from such expected
levels, materially adversely affecting the Company's ability to make the
expected annual distributions of $1.35 per Common Share during the 12-
month period following the completion of the Offering (which aggregate
expected annual distributions represent approximately 95.5% of the
estimated cash available for distribution for such period) or to sustain
such distribution rate in the future.
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. The inability of the Company to make any distributions in respect of the
Common Shares unless current and accumulated dividends on all Convertible
Preferred Shares have been paid in full.
. The incurrence of a net loss on an historical basis in accordance with
generally accepted accounting principles ("GAAP") for each of the last
five calendar years for the Prime Properties and the fact that there can
be no assurance that the Company will not experience net losses in the
future.
. The risk that permanent financing for newly-developed properties may be
unavailable or may be available only on disadvantageous terms. In
addition, an acquisition of an office or industrial property entails the
risk that such investment will fail to perform in accordance with
expectations.
. Real estate ownership risks, such as the effect of economic and other
conditions on real estate values, the general lack of liquidity of
investments in real estate, competition in seeking properties for
acquisition and development and in seeking tenants, the inability of
tenants to make rent payments, increases in real estate taxes, the
possibility that the Company will be unable to lease space currently
available or as it becomes available on terms favorable to the Company,
the potential for unknown or future environmental liabilities,
uninsurable losses and the inability of a property to generate income
sufficient to meet operating expenses and debt service obligations
relating to such property, which, individually or in the aggregate, may
negatively affect the Company's ability to make distributions.
. The Company's dependence on certain significant tenants.
. Development, leasing and management business risks, including the
limitation on the ability of the Company to control the operations of the
Services Company due to the lack of control by the Company in connection
with the election of the directors and the appointment of the officers of
the Services Company.
. The absence of a prior public market for the Common Shares and the
possibility that the trading volume of the Common Shares may be limited.
BENEFITS TO PRIME OF THE FORMATION TRANSACTIONS AND THE OFFERING
Prime and certain of its affiliates will receive certain material benefits in
connection with the Formation Transactions and the Offering, including the
following:
. Prime will receive in the aggregate 3,465,000 Common Units with an
aggregate value of $69.3 million (assuming that each Common Unit held by
Prime has a value equal to that of a Common Share). The Operating
Partnership will pay on behalf of Prime, or reimburse Prime for,
approximately $5.2 million of expenses incurred by or on behalf of Prime
in connection with the Formation Transactions and the Offering.
. Prime will receive the return of approximately $15.0 million of cash and
$7.2 million of securities previously pledged as additional collateral by
Prime to secure its limited recourse guarantee obligations to the issuers
of the letters of credit which secure the payment of principal and
interest of the Tax-Exempt Bonds. Such collateral will be returned to
Prime upon the completion of the Offering and the replacement of such
letters of credit by the Operating Partnership.
. Prime will realize an immediate increase in the net tangible book value
of its investment in the Company of $55.24 per Common Unit upon the
completion of the Offering. The assets to be transferred by Prime in the
Formation Transactions had an aggregate deficit book value of
approximately $140.3 million (as determined at June 30, 1997 in
accordance with GAAP).
. Prime will no longer be liable as a general partner of the Property
Partnerships that own certain of the Properties. In addition, Prime will
be released from various limited recourse guaranties and obligations to
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indemnify the lenders in connection with the Tax-Exempt Bonds encumbering
certain of the Properties and $60.0 million of other debt.
. Prime will defer certain tax consequences to it from certain of the
Formation Transactions through the contribution to the Operating
Partnership of its interests in the Properties and the business related
thereto for Common Units.
. Prime will obtain improved liquidity of its investment in its office and
industrial real estate business as a result of the Formation Transactions
through the ownership of Common Units, which are exchangeable for Common
Shares or cash, at the option of the Company.
The $5.2 million expense reimbursement and the Common Units that Prime will
receive with an aggregate value of $69.3 million (assuming the value of each
Common Unit held by Prime is equal to the initial public offering price of a
Common Share) in exchange for its interests in the Prime Properties and the
Prime Contribution Properties and the office and industrial development,
leasing and property management businesses will significantly exceed the
historical deficit book value of such interests computed in accordance with
GAAP (approximately $140.3 million at June 30, 1997). Similarly, the value of
the Company will exceed the depreciated book value of its tangible assets. See
"Dilution." The Company does not believe, however, that book value is a
relevant measure of the going concern value of its office and industrial real
estate business because real estate book values typically decrease over time
due to the cumulative effect of depreciation and do not reflect that the
current economic values of real estate assets are directly related to the cash
flow generated by such assets.
CONFLICTS OF INTEREST
Certain conflicts of interest exist between the Company and (a) the Limited
Partners (including Prime) and the NAC General Partner and (b) certain of its
officers and trustees (including Michael W. Reschke, Richard S. Curto, Edward
S. Hadesman and Stephen J. Nardi, who are affiliates of certain of the Limited
Partners and, in the case of Mr. Nardi, the NAC General Partner). In addition,
such Limited Partners and such General Partner or their affiliates will have
significant influence over the affairs of the Company, which, together with the
foregoing conflicts of interest, may influence certain officers and trustees of
the Company to make decisions which may not be in the best interests of all
shareholders, in connection with the (i) Formation Transactions, (ii) operation
of the Company's ongoing businesses, including conflicts associated with the
tax consequences to Limited Partners and such General Partner of sales or
refinancings of certain of the Properties, which, together with certain
provisions of the Partnership Agreement, may influence the Company's decision
to sell or refinance, or to prepay debt secured by, certain Properties, (iii)
potential election by the Company to exercise its option to purchase or right
of first offer with respect to any of the land tracts owned or controlled by
one or more of the Limited Partners and such General Partner or their
affiliates and (iv) enforcement of agreements with affiliates of the Company.
The Company has adopted certain policies that are designed to eliminate or
minimize certain potential conflicts of interest. See "Policies with Respect to
Certain Activities--Conflicts of Interest Policies." The Company intends to
engage in transactions with certain related parties. See "Certain Relationships
and Related Transactions."
BUSINESS OBJECTIVE AND GROWTH STRATEGIES
BUSINESS OBJECTIVE
The Company currently intends to invest in the acquisition, development and
redevelopment of office and industrial properties located in Suburban Chicago
and Chicago CBD office markets and the midwestern region of the United States
with a primary focus on the office and industrial markets in the Chicago
Metropolitan Area. The Company's primary business objective is to achieve
sustainable long-term growth in cash flow per share and to enhance the value of
its portfolio through the implementation of effective operating, acquisition,
development and financing strategies. While there can be no assurance that the
Company will achieve such business objective, the Company believes it will
realize increased cash flow per share by:
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. contractual rent increases in existing leases;
. leasing all or a portion of the existing vacant space in the Properties;
. acquiring office and industrial properties (or entities that own or
control such properties) at or below replacement cost and at positive
spreads to its cost of capital;
. increasing rental and occupancy rates and decreasing tenant concessions
as vacancy rates in the Company's submarkets generally continue to
decline;
. developing office and industrial properties for the benefit of the
Company where such development will result in a favorable risk-adjusted
return on investment;
. expanding its property management, leasing and corporate advisory
services business; and
. using, when available, long-term, tax-exempt bonds (which typically have
lower interest costs) to finance the acquisition and renovation of
existing industrial facilities and the development of new industrial
facilities.
The Company believes that a number of factors will enable it to achieve its
business objectives, including: (a) the opportunity to lease available space at
attractive rental rates because of increasing demand and, with respect to the
Office Properties, the present limited level of new construction in the Chicago
Metropolitan Area; (b) the presence of distressed sellers and inadvertent
owners (through foreclosure or otherwise) of office and industrial properties
in the Company's markets, as well as the Company's ability to acquire
properties with Common Units (thereby deferring the seller's taxable gain), all
of which create enhanced acquisition opportunities; and (c) the quality and
location of the Properties.
Management believes that the Company is well-positioned to take advantage of
these opportunities because of its extensive experience in its markets, its
seasoned management team, its significant land holdings and option rights and
its ability to develop, redevelop, lease and efficiently manage office and
industrial properties. In addition, the Company believes that public ownership
and its capital structure will provide the Company with enhanced access to the
public debt and equity capital markets and new opportunities for growth. The
Company has obtained a commitment from BankBoston, N.A. and Prudential
Securities Credit Corporation ("PSCC") for a credit facility up to a maximum of
$225.0 million (the "Credit Facility") which, subject to compliance by the
Company with the applicable loan covenants, may be used to provide funds for
acquisitions and development activities and to provide the replacement letters
of credit for the $74.5 million of Tax-Exempt Bonds. PSCC is an affiliate of
Prudential Securities Incorporated, one of the Underwriters. There can be no
assurance that such financing will be obtained. Upon the completion of the
Offering, the Company expects to have outstanding debt of approximately 25.2%
of the Company's total market capitalization. See "Business Objective and
Growth Strategies--Business Objective" and "--Financing Strategy."
OPERATING STRATEGY
The Company will focus on enhancing its cash flow per share by: (a)
maximizing cash flow from its Properties through contractual rent increases,
pro-active leasing programs and effective property management; (b) managing
operating expenses through the use of in-house management, leasing, marketing,
financing, accounting, legal, construction, management and data processing
functions; (c) maintaining and developing long-term relationships with a
diverse tenant group; (d) attracting and retaining motivated employees by
providing financial and other incentives to meet the Company's operating and
financial goals; and (e) continuing to emphasize value-added capital
improvements to enhance the Properties' competitive advantages in their
submarkets.
Contractual Increases in Rent
A substantial portion of the Company's existing portfolio is leased pursuant
to long-term leases with contractual annual rent increases, thereby providing
the Company with both stable and escalating rental revenues.
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By way of example, the contractual rent increases from existing leases in the
77 West Wacker Drive Building average approximately $630,000 per year over the
next ten years. As of June 30, 1997, approximately 58.2% of the leases for the
Properties, in terms of Annualized Net Rent, had contractual rent increases, of
which approximately 42.4% of the Annualized Net Rent was attributable to leases
with specified contractual rent increases which on average provided for annual
rent increases of 4.9% over the next three years and approximately 15.8% of the
Annualized Net Rent was attributable to leases with contractual rent increases
related to the CPI. The Company believes that reporting rental revenues on a
cash basis will result in a more accurate presentation of its actual operating
activities than if rental revenues were reported on a straight-line basis and,
accordingly, expects to report Funds from Operations on a cash basis. As a
result, contractual rent increases will cause reported Funds from Operations to
increase.
Pro-Active Leasing; Ability to Lease Vacant Space
The Company believes that the strength of its leasing program is demonstrated
by the current occupancy status of the Properties. The Company believes that
one of its most notable leasing accomplishments is the 77 West Wacker Drive
Building, a recently developed 50-story office tower located in downtown
Chicago, containing approximately 944,600 square feet of net rentable area.
Construction began in April 1990 and was successfully completed with the
opening of the building in May 1992. At its opening, the building had
commitments for long-term leases for over 95.0% of its net rentable office
area. In 1995, the Company restructured its lease with Keck, a significant
tenant at the 77 West Wacker Drive Building, to decrease the space subject to
the lease and to reduce the rent on Keck's remaining space. In June 1997, Keck
stopped paying rent and, in connection with a settlement of the resulting
litigation, has agreed to vacate its remaining space no later than November 30,
1997. See "Business and Properties--Legal Proceedings." The Company believes it
will be able to increase cash flow per share by continuing to lease the
existing vacant space in its Properties. As of June 30, 1997, the Company had
282,069 net rentable square feet of vacant space in its Office Properties
(including approximately 113,000 net rentable square feet at the 77 West Wacker
Drive Building leased to Keck (the "Keck Space"), of which approximately 52,000
net rentable square feet has been subsequently leased). As of June 30, 1997 the
Company also had 690,007 net rentable square feet of vacant space in its
Industrial Properties.
Long-Term Leases; Tenant Retention
A substantial portion of the Properties is leased on a long-term basis,
thereby providing the Company with a reduced level of costs and capital
expenditures due to tenant lease expirations. Approximately 56.7% of the
Company's Annualized Net Rent is attributable to leases expiring in 2002 or
beyond, and approximately 40.5% of the Company's Annualized Net Rent is
attributable to leases expiring in 2007 or beyond. With regard to the Office
Properties, as of June 30, 1997, 65.6% of the office leases, in terms of
Annualized Net Rent, had terms expiring in five years or more, resulting in an
average annual turnover for the next five years of 6.9% per annum. With regard
to the Industrial Properties, as of June 30, 1997, 34.0% of the industrial
leases, in terms of Annualized Net Rent, had terms expiring in five years or
more, resulting in an average annual turnover for the next five years of 13.2%
per annum. From January 1, 1994 through June 30, 1997, the Prime Properties
have achieved a tenant retention rate, based on renewals of leases with
scheduled expirations, of approximately 64.0% in terms of net rentable square
feet. The Company intends, as market conditions permit, to continue to favor
longer-term leases with contractual annual rent increases. See "Business and
Properties--Lease Expirations."
Management of Operating Expenses
The Company believes that it has been successful in providing high-quality
and professional property management services to its tenants, while maintaining
property operating expenses and real estate taxes at or below such expense
levels for comparable properties. As the Company continues to grow through the
acquisition and development of additional office and industrial properties,
management of the Company believes that economies of scale will allow the
Company to operate its properties with increasing efficiency.
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ACQUISITION STRATEGY
The Company will seek to increase its cash flow per share by acquiring
additional office and industrial properties at prices below replacement cost,
including properties that: (a) may provide attractive initial yields and
significant potential for growth in cash flow from property operations; (b) are
well-located, high quality and competitive in their respective submarkets; (c)
are located in the Company's existing submarkets and/or in other strategic
submarkets where the demand for office and industrial space exceeds available
supply; or (d) have been undermanaged or are otherwise capable of improved
performance through intensive management, marketing and leasing.
The Company plans to concentrate its acquisition activities in the Chicago
Metropolitan Area and, to a lesser extent, in other midwestern markets. The
Company believes that attractive opportunities exist to acquire office and
industrial properties in these markets at prices below replacement cost. Each
acquisition opportunity will be reviewed to evaluate whether it meets one or
more of the following criteria: (a) potential for higher occupancy levels
and/or rents as well as for lower tenant turnover and/or operating expenses;
(b) ability to generate returns in excess of the Company's weighted average
cost of capital, taking into account the estimated costs associated with
renovation and tenant turnover (i.e., tenant improvements and leasing
commissions); and (c) a purchase price at or below estimated replacement cost.
See "Business Objective and Growth Strategies--Acquisition Strategy" and
"Business and Properties--Acquisition Properties."
DEVELOPMENT STRATEGY
As opportunities arise and where market conditions support a favorable risk-
adjusted return on investment, the Company intends to pursue opportunities for
growth through the development of new office and industrial properties. The
Company believes that the strength and experience of its management in the
development of office and industrial properties will provide it with a
competitive advantage in evaluating and pursuing opportunities to develop
additional properties. During the next few years, the Company expects that most
of its development activities will be focused on office and industrial
properties in the Chicago Metropolitan Area.
Based on ongoing marketing activities and discussions with prospective
tenants, the Company expects that over the next several years there will be
significant demand from several large tenants that are unable to find large
blocks of contiguous Class A office space in downtown Chicago which may lead to
significant office development opportunities. The Company believes that its
significant land holdings and land option rights will provide it with a
distinct advantage in competing for future development opportunities. The
Company owns approximately 83.4 acres and has rights to acquire approximately
157.2 acres of developable land, which management believes could be developed
with approximately 1.2 million square feet of additional office space in the
Chicago CBD and approximately 4.4 million square feet of additional industrial
properties primarily in the Chicago Metropolitan Area. The Company's option
rights include an option to acquire a development site containing approximately
58,000 square feet known as 300 N. LaSalle in downtown Chicago which, to the
extent the Company is able to obtain significant preleasing commitments for
such a project, the Company believes it could develop as an office project
containing up to approximately 1.2 million net rentable square feet.
The Services Company's corporate advisory activities with third parties are
expected to give the Company further access to future development
opportunities. The Services Company also will continue to undertake build-to-
suit projects for third parties.
FINANCING STRATEGY
The Company's financing strategy and objectives are determined by the Board
of Trustees. The Company presently intends to operate with a ratio of debt-to-
total market capitalization (defined as the total debt of the Company as a
percentage of the sum of the market value of issued and outstanding Shares,
including the
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Common Units exchangeable for Common Shares, plus total debt) in the range of
25.0% to 40.0%. The Company also intends to operate in a manner that will
facilitate its ability to secure an investment grade rating on future unsecured
debt as soon as practicable. However, such objectives may be altered without
the consent of the Company's shareholders, and the Company's organizational
documents do not limit the amount or type of indebtedness that the Company may
incur. Upon the completion of the Offering and the consummation of the
Formation Transactions, the Company's total debt will constitute approximately
25.2% of its total market capitalization.
The Company intends to use one or more sources of capital for future
acquisitions and development activities. These capital sources may include
undistributed cash flow, borrowings under certain acquisition facilities,
proceeds from the issuance of long-term tax-exempt bonds, other debt or equity
securities and other bank and/or institutional borrowings, including the $225.0
million Credit Facility. The Company has a commitment for the Credit Facility;
however, there can be no assurance that any such financing will be obtained.
See "Business and Properties--Development, Leasing and Management Activities"
and "Business Objective and Growth Strategies--Financing Strategy."
THE PROPERTIES
Upon the completion of the Offering and the consummation of the Formation
Transactions, the Company (through the Operating Partnership) will own 16
Office Properties encompassing an aggregate of approximately 2.4 million net
rentable square feet, 44 Industrial Properties containing an aggregate of
approximately 5.7 million net rentable square feet, one industrial property
under construction, one retail center and one parking facility with 398 parking
spaces. Twelve of the 16 Office Properties, 38 of the 44 Industrial Properties,
the industrial property under construction and the retail center are located in
the Chicago Metropolitan Area. Three of the Office Properties are located in
Knoxville, Tennessee, one Office Property is located in downtown Nashville,
Tennessee, six of the Industrial Properties are located in the Columbus, Ohio
metropolitan area and the parking facility is located in Knoxville, Tennessee.
In the Chicago Metropolitan Area, the most notable Office Property is the 77
West Wacker Drive Building, a premier 50-story landmark office tower in
downtown Chicago, which contains approximately 944,600 net rentable square
feet. The building has won numerous awards including, in 1993, the Sun-Times
Real Estate Development of the Year Award and the Best New Building Award from
Friends of Downtown. As of June 30, 1997, the Office Properties were
approximately 88.0% leased to more than 200 tenants, and the Industrial
Properties were approximately 87.9% leased to more than 60 tenants. In
addition, the Company owns or has options to acquire certain land for
development. See "Business and Properties--Land for Development."
Following the completion of the Offering, the Company will provide its own
development, leasing and property management services for all of the
Properties, and the Services Company will provide fee-based development,
leasing and property management services on a selected basis for unaffiliated
third parties. The Company's staff of approximately 151 employees will provide
these services from the Company's executive headquarters in Chicago, Illinois
and through on-site staff at the Properties.
12
<PAGE>
THE OFFICE AND INDUSTRIAL PROPERTIES
The following table sets forth certain information relating to each of the
Properties as of June 30, 1997, unless indicated otherwise. After completion
of the Formation Transactions, the Company (through the Operating Partnership)
will own a 100% interest in all of the Office Properties and the Industrial
Properties.
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED EFFECTIVE NET
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET RENT PER
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3) SQ. FT.($)(4)
- -------- -------- ----------- -------- ---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICE PROPER-
TIES:
77 West Wacker Chicago, IL 1992 944,556 84.6 18,263 22.84 15,367 19.22(6)
Drive(5)........
1990 Algonquin
Road/
2000-2060 Algon-
quin Road
(Salt Creek Of-
fice
Center)(7)(8)... Schaumburg, IL 1979/1986 125,922 90.9 1,153 10.07 1,141 9.97
1699 E.
Woodfield Road
(Citibank Office
Plaza)(9)....... Schaumburg, IL 1979 105,400 95.2 932 9.29 922 9.19
555 Huehl Northbrook, IL 1987 74,000 100.0 529 7.15 522 7.05
Road(10)........
201 4th Avenue Nashville, TN 1968/1985 250,566 90.1 1,987 8.80 1,870 8.28(6)
N...............
620 Market Knoxville, TN 1988 93,711 91.4 895 10.45 805 9.40(6)
Street..........
625 Gay Street.. Knoxville, TN 1988 91,426 90.0 701 8.52 589 7.16(6)
4823 Old Knoxville, TN 1988 34,638 100.0 305 8.80 257 7.43(6)
Kingston Pike...
941-961 Weigel Elmhurst, IL 1989/1994 123,077 100.0 1,571 12.76 1,559 12.66
Drive(10).......
4100 Madison Hillside, IL 1978 24,536 51.2 39 3.07 37 2.97
Street(10)......
350 N. Mannheim Hillside, IL 1977/1987 4,850 -- -- -- -- --
Road(10)........
1600-1700 167th Calumet City, IL 1981 65,394 53.1 431 12.41 427 12.31
Street(10)......
4343 Commerce Lisle, IL 1989 170,708 88.9 2,622 17.28 2,607 17.18
Court(10).......
1301 E. Tower Schaumburg, IL 1992 50,400 100.0 524 10.41 519 10.31
Road(10)........
280 Shuman Naperville, IL 1979 65,001 98.8 648 10.09 642 9.99
Blvd.(7)........
<CAPTION>
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE
FEET PER PROPERTY
PROPERTY AS OF 6/30/97
- -------- ------------------------
<S> <C>
OFFICE PROPER-
TIES:
77 West Wacker Donnelley (25.6%)
Drive(5)........ Everen (25.5%)
Jones Day (11.8%)
1990 Algonquin
Road/
2000-2060 Algon-
quin Road
(Salt Creek Of-
fice
Center)(7)(8)... Silicon Graphics
(19.4%)
1699 E.
Woodfield Road
(Citibank Office
Plaza)(9)....... McGladrey &
Pullen (47.5%)
Merrill Lynch (11.3%)
555 Huehl
Road(10)........ Rank Video (100.0%)
201 4th Avenue
N............... SunTrust Bank (49.0%)
620 Market Morton, Lewis, King &
Street.......... Kreig (31.7%)
FNB Financial (20.7%)
625 Gay Street.. Healthsource (28.3%)
4823 Old
Kingston Pike... Talbots (68.1%)
941-961 Weigel Household Financial
Drive(10)....... Corporation (100.0%)(11)
4100 Madison Nardi Group (27.3%)
Street(10)...... Narco Construction
(20.9%)
350 N. Mannheim
Road(10)........ Vacant
1600-1700 167th
Street(10)...... Unger-Sirovatka (11.1%)
4343 Commerce Computer Associates
Court(10)....... (25.3%)
EquiFax (17.2%)
Hinshaw, Culbertson
(11.1%)
1301 E. Tower Household Credit
Road(10)........ Services (100.0%)(12)
280 Shuman EBY-Brown (35.4%)
Blvd.(7)........ Devtech Associates
(14.3%)
General Electric (10.1%)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3)
- -------- -------- ----------- --------- ---------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
2205-2255 Enter-
prise
Drive(7)....... Westchester, IL 1987 129,574 91.4 1,174 9.91 1,162
--------- ----- ------ ------
Office Proper- 2,353,759 88.0 31,774 15.34 28,426
ties Subtotal..
--------- ----- ------ ------
INDUSTRIAL PROP-
ERTIES:
Warehouse/Distribution
Facilities:
425 E. Algonquin Arlington Heights, IL 1978 304,506 100.0 946 3.11 836
Road...........
1001 Technology Libertyville, IL 1996 212,831 100.0 841 3.95 819
Way(10)........
3818 Grandville/
1200 Northwest-
ern(10) ....... Gurnee, IL 1961/1990 345,232 100.0 1,041 3.02 1,007
306-310 Era Northbrook, IL 1984 36,495 100.0 393 10.77 389
Drive(10)(13)..
2160 McGaw
Road(9)........ Obetz, OH 1974 310,100 100.0 458 1.48 427
4849 Groveport
Road(9)........ Obetz, OH 1968 132,100 100.0 288 2.18 274
2400 McGaw
Road(9)........ Obetz, OH 1972 86,400 100.0 191 2.21 183
5160 Blazer Me-
morial
Parkway
(9)(14)........ Dublin, OH 1983 85,962 64.5 348 6.28 343
600 London Delaware, OH 1981 52,441 100.0 110 2.11 105
Road(9)........
1401 S. Jeffer- Chicago, IL 1965/1985 17,265 100.0 89 5.15 87
son(10)........
1051 N. Kirk Batavia, IL 1990 120,004 100.0 474 3.95 462
Road(10).......
4211 Madison Hillside, IL 1977/1992 90,334 100.0 349 3.87 340
Street(10).....
200 E. Fullerton Carol Stream, IL 1968/1995 66,254 100.0 248 3.75 242
Avenue(10).....
350 Randy Carol Stream, IL 1974 25,200 87.5 129 5.85 127
Road(10).......
4248, 4250 and
4300 Madison
Street(10)..... Hillside, IL 1980 127,129 100.0 597 4.70 585
370 Carol Elmhurst, IL 1977/1994 60,290 100.0 256 4.25 250
Lane(10).......
<CAPTION>
TENANTS LEASING
10% OR MORE OF
ANNUALIZED NET RENTABLE
EFFECTIVE NET SQUARE
RENT PER FEET PER PROPERTY
PROPERTY SQ. FT.($)(4) AS OF 6/30/97
- -------- ------------- ----------------------------
<S> <C> <C>
2205-2255 Enter-
prise
Drive(7)....... 9.81 Census Bureau (14.5%)
National Restaurant
Enterprise (12.6%)
Cherry Communications
(12.3%)
Office Proper- 13.72
ties Subtotal..
INDUSTRIAL PROP-
ERTIES:
Warehouse/Distribution
Facilities:
425 E. Algonquin 2.75(6) Berlin Packaging (34.2%)
Road........... AM International (26.2%)
International Components
(20.8%)
Barnes & Reineke (18.9%)
1001 Technology 3.85 Rank Video (76.0%)
Way(10)........ Arlington Industries (23.9%)
3818 Grandville/
1200 Northwest-
ern(10) ....... 2.92 Rank Video (100.0%)
306-310 Era 10.67 Roche/NICL (62.3%)
Drive(10)(13).. SLJ/Lionstone (37.7%)
2160 McGaw
Road(9)........ 1.38 Spartan Warehouse (100.0%)
4849 Groveport Premier Auto Glass Corp
Road(9)........ 2.08 (100.0%)
2400 McGaw
Road(9)........ 2.11 S.P. Richards (100.0%)
5160 Blazer Me-
morial
Parkway
(9)(14)........ 6.18 Cross Medical (32.2%)
Alkon (32.3%)
600 London 2.01 Schneider National, Inc.
Road(9)........ (100.0%)
1401 S. Jeffer- 5.05 Federal Express Corp
son(10)........ (100.0%)
1051 N. Kirk 3.85 Houghton Mifflin Co., Inc.
Road(10)....... (100.0%)
4211 Madison 3.77 Dynamic Manufacturing Co.
Street(10)..... (71.2%)
Aratex Services, Inc.
(28.8%)
200 E. Fullerton 3.65 Spraying Systems
Avenue(10)..... (100.0%)(15)
350 Randy 5.75 Data Instruments (37.5%)
Road(10)....... Micro Energy (12.5%)
Miller Pharmaceutical Group
(12.5%)
Mar-Cole Music Center
(12.5%)
Installation Services
(12.5%)
4248, 4250 and
4300 Madison
Street(10)..... 4.60 Best Buy Co., Inc. (40.1%)
Micron Industries (28.9%)
Friction Automotive (12.3%)
370 Carol 4.15
Lane(10)....... Semblex Corp (100.0%)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED EFFECTIVE NET
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET RENT PER
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3) SQ. FT.($)(4)
- -------- -------- -------------- -------- ---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
388 Carol Elmhurst, IL 1979 40,920 88.4 180 4.97 176 4.87
Lane(10)........
342-346 Carol Elmhurst, IL 1989 67,935 100.0 294 4.32 287 4.22
Lane(10)........
343 Carol
Lane(10)........ Elmhurst, IL 1989 30,084 100.0 202 6.71 199 6.61
4160-4190 Madison
Street(10)...... Hillside, IL 1974/1992 79,532 100.0 318 4.00 310 3.90
11039 Gage Ave-
nue(10)......... Franklin Park, IL 1965/1993 21,935 100.0 107 4.90 105 4.80
11045 Gage Ave-
nue(10)......... Franklin Park, IL 1970/1992 140,815 100.0 535 3.80 521 3.70
550 Kehoe
Blvd(10)........ Carol Stream, IL 1997 44,575 100.0 292 6.55 288 6.45
475 Superior Ave-
nue(7).......... Munster, IN 1989 450,000 100.0 1,258 2.80 1,213 2.70
Overhead
Crane/Manufacturing
Facilities:
1301 Ridgeview
Drive(10)(18)... McHenry, IL 1995 217,600 100.0 1,031 4.74 1,009 4.64
515 Huehl Road/
500
Lindberg(10).... Northbrook, IL 1988 201,244 100.0 822 4.08 801 3.98
455 Academy
Drive(10)(19)... Northbrook, IL 1976 105,444 100.0 406 3.85 395 3.75
4411 Marketing
Place(9)........ Groveport, OH 1984 65,804 100.0 227 3.45 220 3.35
Chicago
Enterprise
Center.......... Chicago, IL 1916/1991-1996
13535-A S.
Torrence
Avenue......... 384,806 37.9 321 2.20 321 2.20
13535-B S.
Torrence
Avenue......... 239,752 100.0 649 2.71 432 1.80
13535-C S.
Torrence
Avenue......... 99,333 81.9 210 2.59 106 1.31
13535-D S.
Torrence
Avenue......... 77,325 100.0 236 3.05 213 2.75
13535-E S.
Torrence
<CAPTION>Avenue......... 57,453 15.3 30 3.42 25 2.85
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE
FEET PER PROPERTY
PROPERTY AS OF 6/30/97
- -------- ----------------------------
<S> <C>
388 Carol
Lane(10)........ Ameritech (88.4%)
342-346 Carol 3-D Exhibits (70.5%)
Lane(10)........ Old Kent Financial Corp.
(29.5%)
343 Carol Matsushita Industrial
Lane(10)........ Equipment (100.0%)
4160-4190 Madison
Street(10)...... Evans, Inc. (46.0%)
Dynamic Manufacturing
(32.3%)
Charles A. Levy (21.7%)(16)
11039 Gage Ave- Boston Coach Illinois Corp.
nue(10)......... (100.0%)
11045 Gage Ave-
nue(10)......... Echlin, Inc. (100.0%)(17)
550 Kehoe
Blvd(10)........ Associated Material (100.0%)
475 Superior Ave-
nue(7).......... General Electric (100.0%)
Overhead
Crane/Manufacturing
Facilities:
1301 Ridgeview
Drive(10)(18)... Motorola (100.0%)
515 Huehl Road/
500
Lindberg(10).... Rank Video (100.0%)
455 Academy National Service Industries
Drive(10)(19)... (100.0%)
4411 Marketing
Place(9)........ Wes-Tran Corp. (100.0%)
Chicago
Enterprise
Center..........
13535-A S.
Torrence
Avenue......... Co-Steel Lasco (37.9%)
13535-B S.
Torrence
Avenue......... Welded Tube Company (100.0%)
13535-C S.
Torrence
Avenue......... Sterling Steel (81.9%)
13535-D S.
Torrence
Avenue......... Alpha Processing (100.0%)
13535-E S.
Torrence
Avenue......... Signode (13.9%)
13535-F S.
Torrence
Avenue......... 44,800 100.0 146 3.25 129 2.87
13535-G S.
Torrence
Avenue......... 54,743 -- -- -- -- --
13535-H S.
Torrence
Avenue......... 73,612 56.3 75 1.82 71 1.72(6)
13535-F S.
Torrence
Avenue......... Signode (100.0%)
13535-G S.
Torrence
Avenue......... Vacant
13535-H S.
Torrence
Avenue......... Performance Minerals (42.4%)
Jet Vac, Inc. (13.9%)
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED EFFECTIVE NET
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET RENT PER
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3) SQ. FT.($)(4)
- -------- -------- -------------- --------- ---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
East Chicago
Enterprise
Center........... East Chicago, IN 1917/1991-1997
Building 2 (4407
Railroad
Avenue)......... 169,435 -- -- -- -- --
Building 3 (4407 291,550 100.0 1,423 4.88 1,273 4.37(6)
Railroad
Avenue).........
Building 4 (4407
Railroad
Avenue)......... 87,483 98.1 286 3.33 277 3.23
4440 Railroad
Avenue(20)...... 40,000 100.0 299 7.47 287 7.17
4635 Railroad
Avenue.......... 14,070 -- -- -- -- --
Hammond
Enterprise
Center........... Hammond, IN 1920-1952
4507 Columbia
Avenue.......... 256,595 98.8 572 2.26 226 .89(6)
4527 Columbia
Avenue(22)...... 16,701 62.8 56 5.36 56 5.36
4531 Columbia
Avenue.......... 250,266 74.1 274 1.48 253 1.36
--------- ------ ------
Industrial Prop- 5,696,355 87.9 17,007 3.40 15,669 3.13
erties Subtotal..
--------- ------ ------
Portfolio Total.. 8,050,114 87.9 48,781 6.89 44,095 6.23
========= ====== ======
OTHER PROPERTIES
398 Unit Parking
Facility......... Knoxville, TN 1981
371-385 N. Gary
Avenue(10)(24)... Carol Stream, IL 1978 11,276
801 Technology Libertyville, IL 1997 68,824 -- -- -- -- --
Way(25)..........
<CAPTION>
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE
FEET PER PROPERTY
PROPERTY AS OF 6/30/97
- -------- ------------------------
<S> <C>
East Chicago
Enterprise
Center...........
Building 2 (4407
Railroad
Avenue)......... Vacant
Building 3 (4407 Acutus-Gladwin (47.1%)
Railroad Metro Metals (52.9%)
Avenue).........
Building 4 (4407
Railroad
Avenue)......... Illiana Steel (98.1%)
4440 Railroad
Avenue(20)...... Inland Steel (100.0%)
4635 Railroad
Avenue.......... Vacant
Hammond
Enterprise
Center...........
4507 Columbia
Avenue.......... A.M. Castle (47.3%)
Slitting Services
(37.8%)(21)
HECO (12.7%)
4527 Columbia The Prime Group, Inc.
Avenue(22)...... (24.2%)(23)
Town & Country (20.4%)
Great Lakes Engineering
LLC
(16.6%)
4531 Columbia
Avenue.......... HECO (41.6%)
Bar Processing (32.5%)
Industrial Prop-
erties Subtotal..
Portfolio Total..
OTHER PROPERTIES
398 Unit Parking
Facility.........
371-385 N. Gary
Avenue(10)(24)...
801 Technology
Way(25).......... Vacant
</TABLE>
- ----
(1) Annualized Net Rent is the monthly net rent due under the lease as
determined in accordance with GAAP, annualized for all leases in effect
on June 30, 1997. Net rent is the amount due under the lease without
including operating expenses, taxes and other similar reimbursements due
from the tenant.
(2) Annualized Net Rent per square foot represents Annualized Net Rent
divided by net rentable square feet for leases in effect at June 30,
1997.
(3) Annualized Effective Net Rent represents total net rent to be received
over their respective terms from all leases in effect at June 30, 1997
minus all tenant improvements, leasing commissions, and other concessions
("Tenant Expenditures") for all such leases, divided by the terms in
months for such leases, multiplied by 12. Tenant Expenditures for
Acquisition and Contribution Properties have been estimated at $0.10 per
square foot for leases in effect at June 30, 1997.
(4) Annualized Effective Net Rent per square foot represents Annualized
Effective Net Rent at June 30, 1997 divided by net rentable square feet
leased at June 30, 1997.
(5) One of the Company's other significant tenants at the 77 West Wacker
Drive Building, Keck, has agreed to vacate the Keck Space on or before
November 30, 1997 pursuant to a settlement agreement. Accordingly, the
Keck Space is assumed vacant for purposes of the calculations in this
table. See "Business and Properties--The Company's Office Submarkets--77
West Wacker Drive Building" and "--Legal Proceedings."
(6) For the purpose of this table, the historical Tenant Expenditures for
these Properties developed by Prime have been adjusted for management's
estimate of costs that can be reused for future tenants (77 West Wacker
Drive Building--$24.65 per leased square foot, other Office Properties--
$5.12 per leased square foot and Industrial Properties--$4.20 per leased
square foot).
(7) These Properties are Acquisition Properties.
(8) This property complex is comprised of 1990 Algonquin Road (a two-story
office building) and 2000-2060 Algonquin Road (seven single-story office
buildings), but is treated as one Office Property.
16
<PAGE>
(9) These Properties are Prime Contribution Properties.
(10) These Properties are Contribution Properties.
(11) Household Financial Corporation has a right of first refusal to purchase
941-961 Weigel Drive.
(12) Household Credit Services has both a right of first refusal to purchase
1301 E. Tower Road and a purchase option exercisable prior to December
30, 2001 at fair market value.
(13) Roche/NICL Ltd. has a right of first refusal to purchase 306 Era Drive.
(14) This Property is a mixed use Industrial/Office Property that has been
classified as an Industrial Property.
(15) Spraying Systems has a right of first refusal for 200 E. Fullerton
Avenue.
(16) This lease expired on August 31, 1997 and has not been renewed.
(17) Echlin, Inc. has a right of first refusal to purchase 11045 Gage Avenue.
(18) Motorola has an option to purchase 1301 Ridgeview Drive for $10,375,000
on May 31, 2000, the end of the initial lease term, $11,620,040 on May
31, 2003, the end of the first option period, $13,014,488 on May 31,
2006, the end of the second option period and $14,576,297 on May 31,
2009, the end of the third option period.
(19) National Service Industries, Inc., has a right of first refusal to
purchase the industrial building at 455 Academy Drive, and the land
adjacent thereto.
(20) This property is an office building adjacent to the East Chicago
Enterprise Center.
(21) This space was leased to A.M. Castle on August 1, 1997 for $2.39 per
square foot, at which time A.M. Castle increased its existing space from
121,000 square feet to 218,589 square feet.
(22) This property is an office building within the Hammond Enterprise Center.
(23) The Company will assume this lease upon the completion of the Offering.
(24) This is a retail center.
(25) This industrial property is under construction and is expected to be
completed during the fourth quarter of 1997. The Property is being
purchased for cash from certain of the IBD Contributors.
17
<PAGE>
LAND FOR DEVELOPMENT AND OPTION PROPERTIES
Following the completion of the Offering, the Company will own approximately
83.4 acres and have rights to acquire approximately 157.2 acres of developable
land (including rights to acquire one development site located in the Chicago
CBD containing approximately 58,000 square feet), which management believes
could be developed with approximately 1.2 million square feet of additional
office space in the Chicago CBD and approximately 4.4 million square feet of
additional industrial properties primarily in the Chicago Metropolitan Area.
For more information regarding these parcels, see "Business and Properties--
Land for Development and Option Properties."
THE COMPANY'S MARKETS
CHICAGO METROPOLITAN AREA
The Company's primary focus is the Chicago Metropolitan Area, the third most
populous metropolitan area in the nation, with an estimated population of over
7.7 million. The Company has relied, with permission, on information concerning
the economies of the Chicago Metropolitan Area, Nashville, Tennessee,
Knoxville, Tennessee and Columbus, Ohio and office and industrial markets
thereof derived from a report commissioned by the Company and prepared by RCG,
a nationally recognized expert in real estate consulting and urban economics.
The discussion of such submarkets below and under the caption "Business and
Properties--The Company's Markets" is based upon such findings of RCG. While
the Company believes that these estimates of economic trends are reasonable,
there can be no assurance that these trends will in fact continue.
The Company currently owns office and industrial properties in the suburban
and downtown submarkets of the Chicago Metropolitan Area. The Company believes
that the Chicago Metropolitan Area has been and will continue to be an
excellent market in which to own and operate office and industrial properties
over the long term. The Company believes that this area is attractive for a
number of reasons, including:
. The Chicago Metropolitan Area contains the largest number of jobs of any
consolidated Metropolitan Statistical Area ("MSA") in the United States,
and is the third most populous MSA, with an estimated population of over
7.7 million;
. Chicago's manufacturing sector has continued to expand, and the services
sector of the Chicago Metropolitan Area economy has grown even faster,
and has outpaced the manufacturing sector in additional employment both
in absolute terms and as a proportion of the local economy. This
development has diversified Chicago's employment base, which already
leads the nation in four out of the seven major employment sectors
(manufacturing; wholesale and retail trade; transportation,
communications and utilities; and construction);
. Employment sectors requiring the use of office and industrial properties
continue to expand with the Chicago Metropolitan Area's continuing growth
and diversification of industries; and
. Since 1992, there has been no increase in the inventory of Chicago CBD
office space and only a slight increase in the inventory of Suburban
Chicago office space.
The strengths of Chicago's economy include its transportation system, highly
diverse economy, strong high-technology sector, growing international trade and
high per capita income. For example, Chicago retains its preeminent role in
transportation as the location of the world's busiest airport, the hub of the
nation's rail system and the primary port connecting the Great Lakes with the
Mississippi River and the Gulf of Mexico. While Chicago has been (and continues
to be) a national center of heavy manufacturing, Illinois recently surpassed
Massachusetts in high-technology employment and merchandise exports and is
behind only California, New York and Texas, according to a 1997 ranking by the
American Electronics Association (the "AEA"). Furthermore, Chicago, as the home
of the Chicago Board of Trade (the "CBOT"), the Chicago Mercantile Exchange
(the "CME") and the Chicago Board Options Exchange (the "CBOE"), has become the
international
18
<PAGE>
center of options, futures and commodity trading and an important center of
international finance. In addition, according to RCG, the Chicago Metropolitan
Area's median household income in 1996 was $59,895, 28.3% above the national
average. Based on the foregoing, the Company believes that the Chicago
Metropolitan Area's long-term outlook is positive.
The Chicago Metropolitan Area's top companies include Sears, Motorola,
Ameritech, Allstate, UAL Corporation (United Airlines), Waste Management,
Baxter International, McDonald's, Abbott Laboratories, Walgreen's, Sara Lee,
Donnelley, Arthur Andersen, Amoco and First Chicago NBD. In addition, the
Chicago Metropolitan Area is predicted by market analysts to continue its path
of steady growth until at least the year 2000. The economic fundamentals and
steady growth of both the midwestern region and the Chicago Metropolitan Area
lead the Company to expect continued strength in this market.
The Company believes that the solid, diversified local economy in the Chicago
Metropolitan Area is creating continued office space demand and absorption.
Because of steady expansion of office employment and nearly no new
construction, the overall Class A vacancy rate has steadily declined for five
years and is expected to continue to decline. According to RCG, Class A rental
rates in the Company's largest office market, the Chicago CBD, have begun to
rise as Class A vacancy rates in the Chicago CBD have decreased from 23.1% in
1992 to 9.3% by the end of the second quarter of 1997. The Chicago Metropolitan
Area also has experienced a very active market in industrial space in the
1990s. As of the end of the first quarter of 1997, the Chicago Metropolitan
Area's industrial market overall vacancy rate was 7.3%, below the national
average vacancy rate of 8.1%. In addition, 32.6% (in terms of net rentable
square feet) of the Company's Industrial Properties in the Chicago Metropolitan
Area consist of overhead crane facilities, which have a replacement cost
substantially in excess of the Company's basis in its Properties. The Company
believes that current rental rates in the overhead crane/manufacturing
submarket are less than the level which would be required to justify the
construction of new overhead crane/manufacturing facilities, and, therefore,
the Company believes that there will be little new competition with the
Company's overhead crane/manufacturing Properties. See "Business and
Properties--The Company's Markets."
OTHER MARKETS
In addition to its Properties in the Chicago Metropolitan Area, the Company
also has one Office Property in Nashville, Tennessee, three Office Properties
in Knoxville, Tennessee, six Industrial Properties in the Columbus, Ohio
metropolitan area and a parking facility in Knoxville, Tennessee. Nashville is
the capital of the state of Tennessee and has the advantages of employment by
the state government and the music publishing industry as well as growing
employment by industry market leaders. Knoxville benefits from the presence of
the University of Tennessee and several major governmental employers. Columbus
is the capital of the state of Ohio, and the Columbus metropolitan area is
Ohio's fastest-growing metropolitan economy. As the state capital and the
location of The Ohio State University, Ohio's largest university, Columbus
benefits from employment by the state government and the university. Columbus
also serves as a retail and warehousing center and a regional banking center
and has a diverse economy.
19
<PAGE>
STRUCTURE AND FORMATION OF THE COMPANY
The Formation Transactions are designed to consolidate the ownership of the
Properties in the Company and to continue and expand the operations of the
office and industrial real estate business of Prime. The Company believes that
the Formation Transactions will provide the Company with enhanced access to the
public markets for debt and equity capital, thereby enhancing its potential for
future growth to the benefit of the shareholders and the Limited Partners.
The business and operations of the Company are conducted through the
Operating Partnership and the Services Company. Fee title to the Properties is
held in separate entities (the "Property Partnerships") that will be owned,
directly or indirectly, 100.0% by the Company.
The structure of the Company and the ownership of the equity in the Company
after giving effect to the Offering (assuming the Underwriters' over-allotment
option will not be exercised) and the Formation Transactions is shown in the
following chart:
LOGO
- --------
(1) The Company also owns 2,000,000 Preferred Units in the Operating
Partnership, the terms and conditions of which correspond to the
Convertible Preferred Shares. The Company is the managing general partner
of the Operating Partnership.
(2) The Operating Partnership also owns a promissory note issued by the
Services Company (the "Note") with an initial principal balance of
approximately $4.2 million. As a result of the Operating Partnership's
ownership of non-voting participating preferred stock of the Services
Company and the Note, the Company, through the Operating Partnership,
expects to receive 95.0% of the after-tax economic benefits of the Services
Company. See "Structure and Formation of the Company--Formation
Transactions."
20
<PAGE>
Formation Transactions. The Company, the Operating Partnership, the Services
Company and the Property Partnerships will engage in the following series of
transactions with Prime and certain other parties:
. The Company will contribute the $269.9 million of the estimated net
proceeds from the Offering (after the deduction of underwriting discounts
and commissions but before payment of costs and expenses incurred in
connection with the Formation Transactions and the Offering) to the
Operating Partnership in exchange for 12,380,000 GP Common Units and
2,000,000 Preferred Units. The Company will be the managing general
partner of the Operating Partnership. See "Partnership Agreement--
Distributions," "Description of Shares of Beneficial Interest--
Convertible Preferred Shares" and "--Common Shares."
. Prime will contribute to the Operating Partnership (i) its ownership
interests in the Property Partnerships that own the Prime Properties and
the Prime Contribution Properties, (ii) its rights to purchase the
subordinate mortgage encumbering the Property Partnership that owns the
77 West Wacker Drive Building from certain third-party lenders and its
rights to acquire certain third parties' ownership interests in the
Property Partnerships that own the Prime Properties and (iii)
substantially all of its assets and liabilities relating to its office
and industrial development, leasing and management business. The
foregoing assets had an aggregate deficit book value of approximately
$140.3 million (as determined at June 30, 1997 in accordance with GAAP).
In exchange, Prime will receive 3,465,000 Common Units, representing a
15.5% limited partnership interest in the Operating Partnership (with an
aggregate value of $69.3 million, assuming the value of each Common Unit
is equal to the initial offering price of a Common Share). As described
below, Prime will contribute 3,375,000 of such Common Units to the
Primestone Joint Venture, resulting in the direct ownership by Prime of a
0.5% limited partnership interest in the Operating Partnership. The
Operating Partnership will pay approximately $1.9 million in transfer
taxes related to Prime's contributions of the assets described above and
will pay on behalf of Prime, or reimburse Prime for, approximately $5.2
million of expenses incurred by it in connection with the Formation
Transactions and Offering. In addition, Jeffrey A. Patterson, an
executive officer of the Company, is contributing his interest in the
assets of the office and industrial division of Prime. In exchange, Mr.
Patterson will receive 110,000 Common Units, representing a 0.5% limited
partnership interest in the Operating Partnership.
. Certain affiliates of the NAC General Partner (collectively, the "NAC
Contributors") will contribute the NAC Properties to the Operating
Partnership. In exchange, the NAC Contributors will receive 927,100 GP
Common Units, representing a 4.1% general partnership interest in the
Operating Partnership (with an aggregate value of $18.5 million, assuming
the value of each Common Unit is equal to the initial public offering
price of a Common Share). In addition, the Operating Partnership will pay
the NAC Contributors approximately $23.5 million in cash and will pay
approximately $0.4 million in transfer taxes related to the transfer of
the NAC Properties.
. The IBD Contributors will contribute to the Operating Partnership their
ownership interests in the IBD Properties in exchange for 919,450 Common
Units, representing a 4.1% limited partnership interest in the Operating
Partnership and having an aggregate value of $18.4 million (assuming the
value of each Common Unit is equal to the initial public offering price
of a Common Share). In addition, the Operating Partnership will pay the
IBD Contributors approximately $5.2 million in cash, will assume
approximately $6.4 million in debt and will pay approximately $0.2
million in transfer taxes related to the transfer of the IBD Properties.
. Prime, BRE/Primestone Investment L.L.C., a Delaware limited liability
company, and BRE/Primestone Management Investment L.L.C., a Delaware
limited liability company (each of which is an affiliate of Blackstone),
will form the Primestone Joint Venture to invest in LP Common Units. To
capitalize the Primestone Joint Venture, Prime will contribute to the
Primestone Joint Venture 3,375,000 of the Common Units it receives in
exchange for its contributions to the Operating Partnership. Blackstone
will contribute $45.0 million in cash to the Primestone Joint Venture. In
exchange for such capital contributions, Prime will receive a 60.0%
interest and Blackstone will receive a 40.0% interest in the Primestone
Joint Venture. The Primestone Joint Venture will also borrow $40.0
million and will use the proceeds of such loan and the cash contributed
by Blackstone to purchase 4,569,893 LP Common Units from the Operating
Partnership at a price per Common Unit equal to the per share initial
public offering price of the Common Shares, net of an amount equal to the
underwriting discount applicable to the
21
<PAGE>
Common Shares, simultaneously with the other Formation Transactions. As a
result, the Primestone Joint Venture will own, in the aggregate, 7,944,893
Common Units, representing a 35.5% limited partnership interest in the
Operating Partnership. In connection with the purchase of the LP Common
Units, Blackstone has designated Thomas J. Saylak to be elected as one of
the Company's trustees. The consummation of the Primestone Joint Venture
is subject to various conditions precedent. There can be no assurance that
such conditions precedent will be met. See "Certain Relationships and
Related Transactions--The Primestone Joint Venture."
. The Operating Partnership expects to borrow $83.5 million under two
separate mortgage loans secured by certain of the Contribution Properties
(the "New Mortgage Notes"). The Company currently has no commitment for
such financing, and there can be no assurance that such financing will be
available to the Company on favorable terms, if at all.
. The Operating Partnership will repay third-party lenders approximately
$350.8 million (including prepayment fees) of obligations of the Property
Partnerships or indebtedness encumbering the Properties.
. The Operating Partnership will utilize the Credit Facility to replace the
outstanding letters of credit which secure the payment of principal and
interest on the $74.5 million of Tax-Exempt Bonds. Upon the replacement
of the outstanding letters of credit, Prime will receive the return of
approximately $15.0 million of cash and $7.2 million of certain
securities previously pledged by Prime as additional collateral to secure
certain of its guarantee obligations in connection with the existing
letters of credit.
. The Operating Partnership will pay approximately $41.4 million to acquire
the Acquisition Properties and approximately $5.9 million to acquire the
assets and business of Continental Offices, Ltd. and Continental Offices,
Ltd. Realty (collectively, the "Continental Management Business") from
third parties. The purchase price for the Acquisition Properties and the
Continental Management Business was in each case negotiated in arm's-
length transactions with third parties based on a multiple of the net
operating income of each of the Acquisition Properties and the
Continental Management Business, respectively.
. The Operating Partnership will pay approximately $1.7 million in cash to
third parties for the balance of the ownership interests and subordinate
debt interests relating to certain of the Prime Properties.
. The Operating Partnership will pay approximately $1.7 million in fees to
obtain the Credit Facility and the New Mortgage Notes.
. The Operating Partnership will contribute the Continental Management
Business, the health club facility located in the 77 West Wacker Drive
Building and the office and industrial development, leasing and
property management business to the Services Company in exchange for (i)
100% of the non-voting participating preferred stock of the Services
Company (the "Preferred Stock") and (ii) the Note. Messrs. Reschke and
Curto will contribute an aggregate of $50,000 for 100% of the Services
Company's voting common stock. The Operating Partnership is expected to
receive approximately 95.0% of the economic benefits of the operations of
the Services Company by virtue of payments on the Note and distributions
in respect of its ownership of the Preferred Stock.
See "Structure and Formation of the Company."
Determination and Valuation of Ownership Interests. The Company's percentage
interest in the Operating Partnership was determined based upon the percentage
of estimated cash available for distribution required to pay estimated cash
distributions to shareholders, resulting in an annual distribution rate equal
to 6.75% of the assumed initial public offering price of the Common Shares of
$20.00, representing the midpoint of the price range. The Contributors will
receive cash of $28.7 million and 1,846,550 Common Units based on the
negotiated value of the Contribution Properties of $155.5 million, and the
remaining interest in the Operating Partnership having a value of approximately
$71.5 million (before giving effect to the Primestone Joint Venture
transactions) will be allocated to Prime and Mr. Patterson in connection with
the Formation Transactions. The parameters and assumptions used in deriving the
estimated cash available for distribution are described under the caption
"Distribution Policy."
22
<PAGE>
In connection with the Offering, the Company did not obtain appraisals with
respect to the market value of any of the Properties or other assets that the
Company will own immediately after completion of the Offering and the Formation
Transactions or an opinion as to the fairness of the allocation of Common Units
among the Company and the Limited Partners. The initial public offering price
will be determined based upon the estimated cash available for distribution and
the factors discussed under the caption "Underwriting," rather than a property
by property valuation based on historical cost or current market value. This
methodology has been used because the Underwriters and management believe it is
appropriate to value the Company as an ongoing business rather than with a view
to values that could be obtained from a liquidation of the Company or of the
individual Properties. See "Underwriting."
Formation of the Services Company. The Services Company was formed in March
1997 under the laws of the state of Maryland to succeed to the office and
industrial property management, leasing and corporate advisory services
business of Prime. Following the consummation of the Formation Transactions,
Messrs. Reschke and Curto together will own 100.0% of the voting common stock
of the Services Company, and the Operating Partnership will own 100.0% of the
Preferred Stock of the Services Company and the Note. The ownership structure
of the Services Company is necessary to permit the Company to share in the
Services Company's income and also maintain its status as a REIT for federal
income tax purposes. Although the Company anticipates that it will receive
substantially all of the economic benefit of the business carried on by the
Services Company (by virtue of the Company's right to receive (i) dividends
through the Operating Partnership's investment in the Preferred Stock and (ii)
interest payments on the Note held by the Operating Partnership), the Company
will not be able to elect the Services Company's officers or directors and,
consequently, will not have the ability to control the operations of the
Services Company or require the declaration of dividends. The Operating
Partnership and the Services Company will enter various management contracts
(the "Management Contracts") and other agreements in connection with the
Formation Transactions pursuant to which the Services Company will render
property management, development and leasing services for third parties. See
"Risk Factors--Managed Property Business and Non-REIT Services--Lack of Control
Over the Services Company," "The Company--Formation of the Services Company"
and "Certain Relationships and Related Transactions."
RESTRICTIONS ON OWNERSHIP AND TRANSFER
Subject to certain conditions, beginning 12 months following completion of
the Offering, each Common Unit held by a Limited Partner may be exchanged for
one Common Share or, at the option of the Company, cash equal to the fair
market value of a Common Share at the time of exchange. The exchange of Common
Units for Common Shares will not cause any dilution of the then existing
shareholders' indirect interest in the Operating Partnership, because any
decrease in such shareholders' interest in the Company will be offset by a
corresponding increase in the Company's interest in the Operating Partnership.
See "Partnership Agreement--Limited Partner Exchange Rights."
The Limited Partners have agreed not to sell, offer, offer to sell, contract
to sell, pledge, grant any option to purchase or otherwise sell or dispose of
their Common Units for a certain period of time after completion of the
Offering without the consent of Prudential Securities Incorporated, on behalf
of the Underwriters; such periods are (i) two years in the case of Prime, (ii)
two years in the case of the Primestone Joint Venture with respect to Common
Units contributed by Prime to the Primestone Joint Venture (the "Contributed
Common Units") (except, in the event of a Dividend Reduction, one year), (iii)
one year in the case of the Primestone Joint Venture with respect to Common
Units purchased by the Primestone Joint Venture (the "Purchased Common Units")
and (iv) one year in the case of the IBD Contributors and Mr. Patterson (the
foregoing periods being hereinafter referred to collectively as the "Holding
Periods"). In addition, neither the Company nor the NAC General Partner (other
than in accordance with the Put Option Agreement) may withdraw from the
Operating Partnership or transfer its general partner interest, nor may another
general partner be admitted to the Operating Partnership, without the consent
of the other general partner. See "Partnership Agreement--Transferability of
Interests," "Shares Eligible for Future Sale," "Certain Relationships and
Related Transactions--NAC Contribution Agreement; Put Option Agreement" and
"Underwriting."
23
<PAGE>
Ownership of the Common Shares by any one person is generally restricted in
the Declaration of Trust to 9.9% of the outstanding Common Shares. Exchange of
interests in the Operating Partnership for Common Shares is restricted to the
extent that ownership of the Common Shares upon exchange would exceed the
ownership limitation with respect to the Common Shares. The Board of Trustees
may, but in no event will be required to, waive such ownership limitation with
respect to a particular shareholder if it determines that such ownership will
not jeopardize the Company's status as a REIT and the Board of Trustees
otherwise decides such action would be in the best interest of the Company. In
addition, the Company has waived the ownership limitations set forth in the
Company's Declaration of Trust with respect to the Common Shares to permit
Security Capital Preferred Growth to own, at any one time, the Common Shares
issuable upon conversion of the Convertible Preferred Shares issued in the
Convertible Preferred Offering. See "Description of Shares of Beneficial
Interest--Restrictions on Ownership and Transfer" and "Partnership Agreement--
Limited Partner Exchange Rights."
DISTRIBUTION POLICY
The Company presently intends to make regular quarterly distributions to
holders of Common Shares and Common Units. Distributions in respect of the
Common Shares and Common Units are not permitted unless all current and any
accumulated distributions in respect of the Convertible Preferred Shares and
Preferred Units, respectively, have been paid in full. The Company intends to
declare and pay a pro rata distribution with respect to the period commencing
on the completion of the Offering and ending on December 31, 1997, based upon
$0.3375 per share for a full quarter. On an annualized basis, this would be
$1.35 per Common Share, or an annual distribution rate of 6.75% based on an
assumed initial public offering price per share of $20.00 (representing the
midpoint of the price range set forth on the cover page of this Prospectus).
The Company does not intend to reduce the expected distribution per share if
the Underwriters' over-allotment option is exercised in whole or in part. The
Company expects its distributions to represent approximately 95.5% of the
Company's cash available for distribution for the 12 months ending June 30,
1998. Common Units and Common Shares will receive equal distributions. The
Board of Trustees may vary the percentage of cash available for distribution
which is distributed if the actual results of operations, economic conditions
or other factors differ from the assumptions used in the Company's estimates.
24
<PAGE>
THE COMMON SHARE OFFERING
12,380,000 shares
Common Shares Offered Hereby..... [/R]
Common Shares to be Outstanding after 22,371,443 shares(1)
the Offering.................... [/R]
Proposed NYSE Symbol............. [/R] PGE [/R]
Use of Proceeds from the Offering..... The Company will use the net proceeds
of the Offering (which are estimated to
be approximately $230.3 million for the
Common Share Offering and approximately
$39.6 million for the Convertible
Preferred Offering), to acquire
12,380,000 GP Common Units and
2,000,000 Preferred Units. The
Operating Partnership will use such
funds to (i) repay, assume or purchase
certain mortgage and other indebtedness
related to the Properties and held by
third-party lenders, (ii) acquire the
ownership interests in the Prime
Properties not held by Prime, (iii)
acquire the Contribution Properties,
(iv) acquire the Acquisition Properties
and the Continental Management Business
and (v) pay expenses of the Formation
Transactions and the Offering. See "Use
- -------- of Proceeds" and "Capitalization." [/R]
(1) Includes the Common Shares being offered hereby and the Common Units held
by Prime, the Primestone Joint Venture, the IBD Contributors and management
of the Company (which, subject to certain conditions, are exchangeable for
up to 9,064,343 Common Shares or, at the Company's option, cash); also
includes the 927,100 Common Units held by the NAC General Partner which are
not exchangeable for Common Shares but which represent common equity
interests in the Operating Partnership; does not include 1,850,000 Common
Shares reserved for issuance pursuant to the Company's Share Incentive
Plan; assumes that the Underwriters' over-allotment option to purchase up
to 1,857,000 Common Shares will not be exercised; and assumes that the
2,000,000 Convertible Preferred Shares to be issued in the Convertible
Preferred Offering are not converted. See "Management--Share Incentive
Plan," and "Description of Shares of Beneficial Interest--Convertible
Preferred Shares."
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Section 856(c) of the
Internal Revenue Code of 1986, as amended (the "Code"), commencing with its
taxable year ending December 31, 1997. REITs are subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95.0% of its REIT taxable income each year,
determined without regard to the deduction for dividends paid and by excluding
any net capital gains. If the Company qualifies for taxation as a REIT, the
Company generally will not be subject to federal income tax at the corporate
level on income it distributes currently to its shareholders. If the Company
fails to qualify as a REIT for federal income tax purposes in any taxable year,
the Company will be subject to federal income tax (including any alternative
minimum tax) on its taxable income at regular corporate rates. See "Risk
Factors--Adverse Consequences of Failure to Qualify as a REIT; Other Tax
Liabilities" and "Certain Federal Income Tax Considerations--Failure to
Qualify" for a more detailed discussion of the consequences of the failure of
the Company to qualify as a REIT for federal income tax purposes. The Company
may be subject to certain state and local taxes on its income and property
notwithstanding its qualification for taxation as a REIT.
25
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents certain financial and operating data on a pro
forma basis for the Company, and on an historical basis for the Prime
Properties being contributed to the Company (the "Combined Financial
Statements"), whose financial results will be consolidated in the pro forma
financial statements of the Company. The financial and operating data should be
read in conjunction with the historical and pro forma financial statements and
notes thereto included in this Prospectus. The combined historical financial
data as of June 30, 1997 and December 31, 1996 and 1995 and for the six months
ended June 30, 1997 and for the years ended December 31, 1996, 1995 and 1994
have been derived from the audited combined financial statements of the Prime
Properties included elsewhere in this Prospectus. The combined historical
financial data as of December 31, 1994, 1993 and 1992 and for the years ended
December 31, 1993 and 1992 have been derived from the combined financial
statements of the Prime Properties not included in this Prospectus. The
combined historical financial data for the six months ended June 30, 1996 has
been derived from the unaudited combined financial statements of the Prime
Properties included elsewhere in this Prospectus. The pro forma data assume the
consummation of the Formation Transactions, including the contribution of the
Prime Properties and the Prime Contribution Properties by Prime, the
contribution of the Contribution Properties by the Contributors, the
acquisition of the Acquisition Properties and the Continental Management
Business and the completion of the Offering, and use of the aggregate net
proceeds therefrom as described under "Use of Proceeds" as of the beginning of
the periods presented for the operating data and as of the balance sheet date
for the balance sheet data. The pro forma financial data are not necessarily
indicative of what the actual financial position or results of operations of
the Company would have been as of and for the periods indicated, nor does it
purport to represent the future financial position and results of operations.
26
<PAGE>
SUMMARY FINANCIAL DATA
THE COMPANY (PRO FORMA) AND PRIME PROPERTIES (COMBINED HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ---------------------------------------------------------
COMBINED
HISTORICAL COMBINED HISTORICAL
PRO FORMA ------------------ PRO FORMA -----------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
--------- -------- -------- --------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUE:
Rental............... $28,026 $ 16,131 $ 14,449 $53,001 $ 30,538 $ 33,251 $ 30,352 $ 28,177 $17,339
Tenant reimburse-
ments............... 10,458 7,769 6,962 19,216 14,225 14,382 12,451 10,750 5,221
Insurance settle-
ment................ -- -- -- -- -- 7,257 -- -- --
Other................ 368 689 1,439 2,778 3,397 2,715 3,170 1,527 1,435
------- -------- -------- ------- -------- -------- -------- -------- -------
Total revenue...... 38,852 24,589 22,850 74,995 48,160 57,605 45,973 40,454 23,995
------- -------- -------- ------- -------- -------- -------- -------- -------
EXPENSES:
Property operations.. 5,716 4,318 4,304 12,532 9,767 9,479 8,852 8,452 6,518
Real estate taxes.... 7,799 5,590 5,154 13,440 9,383 9,445 9,057 7,167 4,331
Depreciation and
amortization........ 8,815 6,492 6,146 17,051 12,409 12,646 11,624 11,739 7,558
Interest............. 4,709 13,587 13,512 9,291 27,080 27,671 25,985 22,827 10,936
Interest--affiliate.. -- 5,649 4,852 -- 10,137 8,563 7,402 6,335 6,699
Property management
fee--affiliate...... -- 801 766 -- 1,561 1,496 1,388 1,106 1,384
Financing fees....... 640 640 692 1,232 1,232 -- -- -- --
General and adminis-
trative............. 2,967 1,886 1,575 7,161 4,927 4,508 3,727 3,657 1,277
Provision for envi-
ronmental
remediation costs... 3,205 3,205 -- -- -- -- -- -- --
Write-off of deferred
tenant costs........ -- -- -- 3,081 3,081 13,373 -- -- --
------- -------- -------- ------- -------- -------- -------- -------- -------
Total expenses..... 33,851 42,168 37,001 63,788 79,577 87,181 68,035 61,283 38,703
------- -------- -------- ------- -------- -------- -------- -------- -------
Income (loss) before
share of income of
investment
subsidiary,
Convertible
Preferred Share
dividend and
minority interest... 5,001 (17,579) (14,151) 11,207 (31,417) (29,576) (22,062) (20,829) (14,708)
Share of income of
investment
subsidiary.......... 182 -- -- 387 -- -- -- -- --
------- -------- -------- ------- -------- -------- -------- -------- -------
Income (loss) before
Convertible
Preferred Share
dividend and
minority interest... 5,183 (17,579) (14,151) 11,594 (31,417) (29,576) (22,062) (20,829) (14,708)
Convertible Preferred
Share dividend...... (1,400) -- -- (2,800) -- -- -- -- --
------- -------- -------- ------- -------- -------- -------- -------- -------
Income (loss) before
minority interest... 3,783 (17,579) (14,151) 8,794 (31,417) (29,576) (22,062) (20,829) (14,708)
Minority interest.... (1,690) 368 371 (3,928) 894 3,281 5,393 10,531 8,941
------- -------- -------- ------- -------- -------- -------- -------- -------
Net income (loss).... $ 2,093 $(17,211) $(13,780) $ 4,866 $(30,523) $(26,295) $(16,669) $(10,298) $(5,767)
======= ======== ======== ======= ======== ======== ======== ======== =======
Pro forma net income
per
Common Share(1)(2).. $ 0.17 $ 0.39
======= =======
OTHER OPERATING DATA:
Ratio of earnings
before
minority interest to
combined fixed
charges and
Convertible
Preferred Share
dividend(3)......... 1.60 0.10 0.24 1.70 0.17 0.21 0.35 0.31 0.16
Excess of combined
fixed charges and
Convertible
Preferred Share
dividend over
earnings before
minority interest... -- $ 17,579 $ 14,151 -- $ 31,417 $ 29,576 $ 22,062 $ 20,829 $19,552
Ratio of Funds from
Operations to
combined fixed
charges and
Convertible
Preferred Share
dividend(4)......... 3.24 0.58 0.52 3.01 0.54 0.66 0.62 0.69 0.49
Excess of combined
fixed charges and
Convertible
Preferred Share
dividend over Funds
from Operations..... -- $ 8,180 $ 8,891 -- $ 17,367 $ 12,733 $ 12,930 $ 9,345 $11,994
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31,
-------------------- ------------------------------------------------
COMBINED HISTORICAL
COMBINED ------------------------------------------------
PRO FORMA HISTORICAL 1996 1995 1994 1993 1992
--------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate assets,
before accumulated
depreciation.......... $514,944 $295,369 $291,757 $289,558 $285,687 $281,316 $259,469
Total assets........... 550,076 318,278 325,230 343,641 356,421 357,158 327,776
Mortgages notes and
bonds payable......... 164,375 430,285 421,983 405,562 388,309 361,832 294,691
Total liabilities...... 192,048 458,557 447,927 434,993 421,257 397,539 343,098
Minority interest...... 159,901 (7,273) (6,905) (6,047) 886 (11,527) (10,297)
Shareholders' equity
(partners' deficit)... 198,127 (133,006) (115,792) (85,305) (65,722) (28,854) (5,025)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------ -----------------------------------------
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA -------------------- PRO FORMA -------------------------------
1997 1997 1996 1996 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Opera-
tions(5).............. $ 15,647 $ (8,180) $ (8,891) $ 28,086 $ (17,367) $ (12,733) $ (12,930)
Cash flows provided by
(used in):
Operating activi-
ties............... -- (2,727) (3,162) -- (3,165) (1,259) (13,875)
Investing activi-
ties............... -- (809) 1,567 -- 1,126 (9,176) (6,495)
Financing activi-
ties............... -- 2,421 3,763 -- 5,733 10,873 15,422
Office Properties:
Square footage...... 2,353,759 1,414,897 1,414,897 2,353,759 1,414,897 1,414,897 1,414,897
Occupancy (%) (6)... 88.0 86.8 88.8 91.6 92.5 95.8 93.7
Industrial Properties:
Square footage...... 5,696,355 2,462,430 2,478,030 5,651,780 2,462,430 2,551,624 2,547,388
Occupancy (%)....... 87.9 73.5 73.3 87.3 73.5 72.9 62.3
</TABLE>
- --------
(1) Pro forma net income per share equals pro forma net income divided by the
12,380 Common Shares outstanding after the Offering.
(2) The pro forma net income (loss) per Common Share based solely on the number
of shares issued in the Offering, the proceeds of which will be used to
retire debt, would be $(0.42) and $(0.49) per share for the six months
ended June 30, 1997 and the year ended December 31, 1996, respectively,
calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------- --------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma Common Shares
in the Offering issued
to retire debt......... 12,151 12,151
=================== ===================
Historical net loss..... $ (17,211) $ (30,523)
Plus pro forma reduction
in interest expense due
to repayment of indebt-
edness................. 12,160 24,550
------------------- -------------------
Pro forma net loss...... $ (5,051) $ (5,973)
=================== ===================
Pro forma net loss per
Common Shares in the
offering issued to re-
tire debt.............. $ (0.42) $ (0.49)
=================== ===================
</TABLE>
(3) For purposes of these computations, earnings before minority interests
consist of income (loss) less income from unconsolidated investment
partnerships, plus fixed charges. Combined fixed charges and Convertible
Preferred Share dividend consist of interest costs, whether expensed or
capitalized, and amortization of debt issuance costs and Convertible
Preferred Share dividend.
(4) For purposes of these computations, Funds from Operations consist of Funds
from Operations (as defined in note 5 below) plus combined fixed charges
and Convertible Preferred Share dividend (as defined in note 3 above).
(5) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), Funds from Operations represents net income (loss) before
minority interest of holders of Common Units (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures. Non-cash adjustments to
Funds from Operations were as follows: in all periods, depreciation and
amortization, for pro forma 1997, provision for environmental remediation
cost, for the years ended December 31, 1996, 1995, 1994 and pro forma 1996,
gains on the sale of real estate, for the years ended December 31, 1996 and
1995 and pro forma 1996, write-off of deferred tenant costs, for the year
ended December 31, 1995, excess proceeds from insurance claims, and for the
year ended December 31, 1994, lease termination fees. Management considers
Funds from Operations an appropriate measure of performance of an office
and/or industrial REIT because industry analysts have accepted it as such.
The Company computes Funds from Operations in accordance with standards
established by the Board of Governors of NAREIT in its March 1995 White
Paper (with the exception that the Company expects to report rental
revenues on a cash basis, rather than a straight-line GAAP basis, which the
Company believes will result in a more accurate presentation of its actual
operating activities), which may differ from the methodology for
calculating Funds from Operations used by certain other office and/or
industrial REITs and, accordingly, may not be comparable to such other
REITs. Further, Funds from Operations does not represent amounts available
for management's discretionary use because of needed capital replacement or
expansion, debt repayment obligations, or other commitments and
uncertainties. (See "Distribution Policy"). Funds from Operations should
not be considered as an alternative for net income as a measure of
profitability nor is it comparable to cash flows provided by operating
activities determined in accordance with GAAP.
(6) The pro forma office occupancy percentage for the six months ended June 30,
1997 was calculated by treating the Keck Space as vacant because, pursuant
to a settlement agreement, Keck has agreed to vacate the space on or before
November 30, 1997. See "Business and Properties--Legal Proceedings."
28
<PAGE>
RISK FACTORS
In addition to the other information presented in this Prospectus,
prospective investors should carefully consider the following matters before
purchasing Shares in the Offering.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, results of operations and financial
position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks
and uncertainties and that actual results may differ materially from those
included within the forward-looking statements as a result of various factors.
Factors that could cause or contribute to such differences include, but are
not limited to, those described below, under the headings "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business and Properties--The Company's Markets" and elsewhere in this
Prospectus.
LACK OF INDEPENDENT APPRAISALS IN THE FORMATION TRANSACTIONS; MARKET
CAPITALIZATION OF THE COMPANY MAY EXCEED FAIR MARKET VALUE OF THE COMPANY'S
ASSETS; VALUE OF SERVICES COMPANY NOT DETERMINED THROUGH ARM'S-LENGTH
NEGOTIATION. The valuation of the Company's assets has not been determined
through arm's-length negotiations or from independent third-party appraisals
of the Properties and the Company's other assets; therefore, the consideration
being paid by the Company for the Properties and other assets may exceed the
current fair market value of such assets. Furthermore, management believes it
is appropriate to value the Company as an ongoing business enterprise rather
than with a view to values that could be obtained from a liquidation of the
Company or of individual properties owned by the Company. Accordingly, the
valuation of the Company has been determined based on a capitalization of the
Company's estimated cash available for distribution and the other factors set
forth in the section captioned "Underwriting." See "Structure and Formation of
the Company--Determination and Valuation of Ownership Interests." Because the
liquidation value of the Company may be less than the value of the Company as
a going concern, holders of Shares may suffer a loss in the value of their
Shares if the Company is required to sell its assets in a liquidation. The
Company's estimate of cash available for distribution is based on certain
assumptions, including assumptions with respect to future leasing,
acquisitions, and anticipated operating expense levels, which may not prove
accurate and actual results may vary substantially from the estimate. See
"Distribution Policy." Accordingly, there can be no assurance that the value
of the Common Units (assuming that the value of the Common Units is equal to
the initial public offering price of the Common Shares) received by Prime and
others in exchange for their interests in certain of the Properties is
equivalent to the actual value of those assets to the Company or that the
initial public offering price of the Common Shares or the initial offering
price of the Convertible Preferred Shares reflects the fair market value of
the Shares purchased in the Offering.
The valuation of the Company's office and industrial property management,
leasing and corporate advisory services business has not been determined
through arm's-length negotiations or from independent third-party appraisals.
The value has been derived, in part, from a capitalization of the estimated
net profit derived from the Company's agreements with third parties for
development, leasing and management services. Prime will receive Common Units
worth approximately $69.3 million and cash of approximately $5.2 million for
reimbursement of certain expenses incurred by Prime in connection with the
Formation Transactions and the Offering, in exchange for the contribution by
Prime of the Prime Properties and the Prime Contribution Properties which had
a deficit book value of approximately $140.3 million at June 30, 1997. There
can be no assurance that the value of the Common Units received by Prime in
exchange for its interests in such businesses is equivalent to the actual
value of such assets to the Company. Upon completion of the Offering, these
development, leasing and management services will be provided through the
Services Company, a separate corporation that is subject to federal and state
income tax at the corporate level. See "--Conflicts of Interest; Benefits to
Prime" and "Structure and Formation of the Company--Formation of the Services
Company."
29
<PAGE>
GEOGRAPHIC CONCENTRATION OF THE PROPERTIES IN THE CHICAGO METROPOLITAN AREA,
NASHVILLE, KNOXVILLE AND COLUMBUS; LOCAL ECONOMIC CONDITIONS. The Company's
revenues and the value of its Properties may be affected by a number of
factors, including the local economic climate (which may be adversely impacted
by business layoffs or downsizing, industry slowdowns, changing demographics
and other factors) and local real estate conditions (such as oversupply of or
reduced demand for office and industrial properties). Further, 12 of the
Office Properties and 38 of the Industrial Properties, comprising an aggregate
of approximately 1.9 million and 5.0 million rentable square feet,
respectively (representing approximately 80.0% of the aggregate net rentable
square feet of the Company's office space and 87.1% of the aggregate net
rentable square feet of the Company's industrial space, and approximately
88.7% of the Annualized Net Rent of all of the Properties), are located in the
Chicago Metropolitan Area. Further, the 77 West Wacker Drive Building, which
represents 37.4% of the Annualized Net Rent of the Properties, is located in
the Chicago CBD. A material decline in the demand and/or the ability of
tenants to pay rent for office and industrial space in the Chicago
Metropolitan Area may result in a material decline in the demand for the
Company's office or industrial space and the Company's cash available for
distribution, which may have a material adverse effect greater than if the
Company had a more geographically diverse portfolio of properties. The local
economic conditions of the Nashville, Tennessee, Knoxville, Tennessee and
Columbus, Ohio metropolitan areas also will affect the Company due to the
location of certain of its Properties in such areas.
CONFLICTS OF INTEREST; BENEFITS TO PRIME
No Arm's-Length Negotiations in Formation Transactions with Prime; Prime
Will Receive Material Benefits from the Formation Transactions. The Company is
acquiring a substantial portion of the Properties from partnerships that are
controlled by Prime or in which Prime has ownership interests. As a result,
the agreements pursuant to which such Properties will be acquired were not
negotiated on an arm's-length basis, and the representations, warranties and
covenants in these agreements may not provide the same level of protection as
those contained in a purchase contract negotiated on an arm's-length basis. In
addition, Prime will receive material benefits from the Formation
Transactions, such as the return of approximately $22.2 million of collateral
(consisting of cash and marketable securities) currently securing certain
indebtedness of the Properties, release of guarantees and indemnification
obligations relating to certain indebtedness of the Properties and the
deferral of certain tax consequences through the contribution of the
Properties to the Operating Partnership, that will not generally be received
by other participants in the Formation Transactions. See "Structure and
Formation of the Company--Benefits of the Formation Transactions and the
Offering."
Ability of Limited Partners, Officers and Trustees to Influence Operating
Partnership. Upon completion of the Offering, Prime will directly own a 0.5%
interest in the Operating Partnership, and the Primestone Joint Venture (in
which Prime owns a 60.0% interest) will own a 35.5% interest in the Operating
Partnership. Because of Prime's ownership interest in the Operating
Partnership and the fact that Messrs. Reschke, Curto and Rudnik are executive
officers and/or trustees of the Company and also are owners of Prime, Prime
may be in a position to exercise significant influence over the affairs of the
Company. In addition, Mr. Patterson, an executive officer of the Company, will
own a 0.5% interest in the Operating Partnership. Certain conflicts exist
between the obligations of Mr. Reschke as a trustee of the Company and his
interest as a Limited Partner through his ownership of Prime. Blackstone, as
the 40.0% owner of the Primestone Joint Venture, has designated Mr. Saylak to
be elected a trustee of the Company. In addition, the Contributors will own,
in the aggregate, an 8.2% interest in the Operating Partnership. Edward S.
Hadesman, an affiliate of the IBD Contributors, will be an officer of the
Company and Stephen J. Nardi, an affiliate of the NAC General Partner, will be
a trustee of the Company. As Limited Partners, Prime, the Primestone Joint
Venture, the IBD Contributors and Mr. Patterson and, as a General Partner, the
NAC General Partner, may suffer different and more adverse tax consequences
than the Company upon the sale or refinancing of certain of the Properties. In
addition, Prime has agreed to indemnify the Company for certain amounts the
Company may be required to pay for tax liabilities incurred by the
Contributors upon the sale of Properties they contributed to the Company in
connection with the Formation Transactions. Therefore, the Limited Partners
and the NAC General Partner may have different objectives than the Company
regarding the appropriate pricing and timing of any sale or refinancing of
such Properties. While the Company, as the
30
<PAGE>
managing general partner of the Operating Partnership, has the ability to
determine whether and on what terms to sell or refinance an individual
Property, those members of the Company's management and Board of Trustees who
directly or indirectly hold Common Units, including Messrs. Reschke, Curto,
Rudnik, Patterson, Hadesman and Nardi, could have an ability to influence the
Company not to sell or refinance certain Properties, even though such sale
might otherwise be financially advantageous to the Company, or may influence
the Company to refinance a Property with a high level of debt. See "Policies
With Respect to Certain Activities--Conflicts of Interest Policies."
Mr. Reschke Will Continue to Engage in Activities Outside of the Company,
Including Real Estate Activities. Under the terms of his employment agreement
as Chairman of the Board of the Company, Mr. Reschke will be permitted to
devote a considerable portion of his time to the management of interests
outside of the Company. In addition to serving as Chairman of the Board of the
Company, Mr. Reschke expects to continue to serve as Chairman of the Board of
Prime Retail, Inc. (NYSE: PRT), Chairman of the Board of Brookdale Living
Communities, Inc. (Nasdaq: BLCI), Chairman of the Board and CEO of The Prime
Group, Inc. and a member of the board of Ambassador Apartments, Inc. (NYSE:
AAH) and to serve on various other boards and civic organizations. See
"Management" and "Principal Shareholders of the Company." As a result of these
interests and the business time to be devoted to activities related to them,
certain conflicts of interest may arise between Mr. Reschke's duties and
responsibilities to the Company and his other interests. The Company could be
adversely affected if these conflicts of interest adversely affect his
performance of managerial duties and responsibilities to the Company. Prime
and Mr. Reschke have entered a Non-Compete Agreement with the Company (the
"Non-Compete Agreement") that contains restrictions on their ability to
compete with the Company. However, there can be no assurance that these
contracts or the Company's policies with respect to conflicts of interest
always will be successful in eliminating the influence of such conflicts and,
if they are not successful, decisions could be made that might fail to reflect
fully the interests of all shareholders. See "Policies with Respect to Certain
Activities--Conflicts of Interest Policies" and "Certain Relationships and
Related Transactions."
Certain Partner Approval Rights Limit the Company's Ability to Take Certain
Actions with Respect to the Operating Partnership. While the Company will be
the managing general partner of the Operating Partnership, and generally will
have the ability to exercise full and exclusive responsibility and discretion
in the management and control of the Operating Partnership, certain provisions
of the Partnership Agreement place limitations on the Company's ability to act
with respect to the Operating Partnership. For example, the Company cannot
withdraw as a general partner of the Operating Partnership or admit another
general partner to the Operating Partnership without the consent of the NAC
General Partner, in its capacity as general partner of the Operating
Partnership. In addition, the Partnership Agreement provides that the Company
shall not, on behalf of the Operating Partnership, take any action without the
prior consent of the holders of more than 50.0% of the LP Common Units to
dissolve the Operating Partnership. Furthermore, the Partnership Agreement
provides that, except in connection with certain transactions, and in addition
to the required consent of the NAC General Partner, the Company may not
voluntarily withdraw from the Operating Partnership, or transfer or assign its
interest in the Operating Partnership, unless it obtains the consent of the
holders of at least 50.0% of the Common Units (including Common Units held by
the Company) and meets certain other criteria with respect to the
consideration to be received by the Limited Partners. Further, in connection
with certain extraordinary transactions where the Limited Partners are treated
differently than the holders of Common Shares, the consent of the Limited
Partners holding more than 50.0% of the LP Common Units will be required. See
"Partnership Agreement--Transferability of Interests" and "--Extraordinary
Transactions."
REAL ESTATE FINANCING RISKS
Required Repayment of Debt or of Interest Thereon Could Adversely Affect the
Company. The Company will be subject to the risks associated with debt
financing, including the risk that the Company's cash flow will be
insufficient to meet required payments of principal and interest, the risk
that the Company will not be able to refinance existing indebtedness on the
Properties or that the terms of such refinancing will not be as favorable to
the Company as the terms of existing indebtedness and the risk that necessary
capital expenditures
31
<PAGE>
for purposes such as reletting space will not be able to be financed on
favorable terms. If a property is mortgaged to secure payment of indebtedness
and the Company is unable to meet mortgage payments, the property could be
transferred (by foreclosure or otherwise) to the mortgagee with a consequent
loss of any prospective income and equity value from such property to the
Company. Prime Funding, an affiliate of Prime, is expected to be the mortgagee
on the PCF Mortgage Notes, which will be secured by certain of the
Contribution Properties.
Company's Ability to Increase Its Debt Could Adversely Affect the Company's
Cash Flow. Immediately following the completion of the Offering and the
Formation Transactions, the Company will have outstanding debt equal to
approximately 25.2% of the total market capitalization of the Company. See
"Management's Discussion and Analysis of Financial Condition and Result of
Operations--Liquidity and Capital Resources." Subject to certain limitations
in the Declaration of Trust with regard to the Convertible Preferred Shares,
the Company's organizational documents do not limit the level or amount of
debt that it may incur. The Company intends to pursue a strategy of
conservative use of leverage, generally with a ratio of debt-to-total market
capitalization in the range of 25.0% to 40.0%, although this strategy is
subject to reevaluation and modification by the Board of Trustees. See
"Policies with Respect to Certain Activities--Financing Policies." If this
strategy were modified to permit a higher degree of leverage and the Company
were to incur additional indebtedness, debt service requirements would
increase accordingly, and such an increase could adversely affect the
Company's financial condition and results of operations. In addition,
increased leverage could increase the risk of default by the Company on its
debt obligations, with the potential for loss of cash available for
distribution, and asset values, of the Company.
In determining an appropriate level of leverage, the Company will utilize
its market capitalization rather than the aggregate book value of its assets.
The Company has chosen to use market capitalization because it believes that
the book value of its assets (which is primarily the historic cost of real
property less depreciation) does not accurately reflect its ability to borrow
and to meet debt service requirements. The market capitalization of the
Company, however, is more variable than book value, and does not necessarily
reflect the fair market value of the underlying assets of the Company at all
times. Although the Company will consider factors other than market
capitalization in making decisions regarding the incurrence of debt (such as
the purchase price of properties to be acquired with debt financing, the
estimated market value of the properties to be financed, and the ability of
particular properties and the Company as a whole to generate cash flow to
cover expected debt service and to make distributions), there can be no
assurance that management decisions based on the ratio of debt-to-total market
capitalization (or to any other measure of asset value) will not adversely
affect the expected level of distributions to shareholders.
Company's Ability to Obtain Permanent Financing Cannot Be Assured. The
Company anticipates that it will finance its acquisitions and development
activities in part with proceeds from the Credit Facility and that such
acquisition financing then will be replaced by permanent financing. There can
be no assurance that the Company will be able to obtain such permanent
financing on acceptable terms. Further, if market interest rates were to
increase at a time when amounts are outstanding under the Credit Facility or
under the Company's floating rate tax-exempt bond debt ($74.5 million
outstanding at June 30, 1997) or if other variable rate debt amounts were
outstanding, the Company's debt service obligations likewise would increase,
with potentially adverse effects on the Company's financial condition and
results of operations.
CERTAIN ANTI-TAKEOVER PROVISIONS MAY INHIBIT A CHANGE IN CONTROL OF THE
COMPANY
General. Certain provisions contained in the Declaration of Trust and Bylaws
and the Maryland General Corporation Law (the "MGCL"), as applicable to
Maryland REITs, and certain provisions of the Partnership Agreement may have
the effect of discouraging a third party from making an acquisition proposal
for the Company and may thereby delay, deter or prevent a change in control of
the Company or the removal of existing management and, as a result, could
prevent the shareholders of the Company from being paid a premium for their
Common Shares over then-prevailing market prices. See "Description of Shares
of Beneficial Interest--Restrictions on Ownership and Transfer" and "Certain
Provisions of Maryland Law and of the Company's Declaration of Trust and
Bylaws."
32
<PAGE>
In order to, among other things, protect the Company against the risk of
losing REIT status for federal income tax purposes due to a concentration of
ownership among its shareholders, the Ownership Limit set forth in the
Declaration of Trust provides that, subject to certain specified exceptions
(e.g., the Company has waived the Ownership Limit for Security Capital
Preferred Growth with respect to the Common Shares issuable upon the
conversion of the Convertible Preferred Shares), no person or entity (which
does not include certain pension plans and mutual funds) may own, or be deemed
to own by virtue of the applicable constructive ownership provisions of the
Code, more than 9.9% (by number or value, whichever is more restrictive) of
the outstanding Common Shares. The Board of Trustees may, but in no event will
be required to, waive the Ownership Limit or such other limit set forth in the
Declaration of Trust, as applicable, with respect to a particular shareholder
if the Board of Trustees determines that such ownership will not jeopardize
the Company's status as a REIT and the Board of Trustees otherwise decides
such action would be in the best interest of the Company. As a condition of
such waiver, the Board of Trustees may require a ruling from the IRS or an
opinion of counsel satisfactory to it with respect to preserving the REIT
status of the Company. The foregoing ownership limitations may have the effect
of precluding acquisition of control of the Company without the consent of the
Board of Trustees and, consequently, shareholders may be unable to realize a
premium for their shares over the then-prevailing market price (a premium is
customarily associated with such acquisitions).
Potential Effects of the Issuance of Additional Preferred Shares. The
Declaration of Trust permits the Board of Trustees to issue up to 30.0 million
shares of Preferred Shares, par value $.01 per share, of which 2.0 million are
designated as Convertible Preferred Shares to be sold in the Convertible
Preferred Offering, and to establish the preferences and rights (including the
right to vote, participate in earnings, and to convert into Common Shares) of
any such Preferred Shares issued. Thus, the Board of Trustees could authorize
the issuance of Preferred Shares with terms and conditions which could have
the effect of discouraging a takeover or other transaction in which holders of
some or a majority of the Common Shares might receive a premium for their
Common Shares over the then-prevailing market price of such Common Shares. See
"Description of Shares of Beneficial Interest--Preferred Shares."
Potential Effects of a Staggered Board. The Board of Trustees has three
classes of trustees. The terms of the first, second and third classes will
expire in 1999, 2000 and 2001, respectively. Trustees for each class will be
chosen for a three-year term upon the expiration of the current class' term,
beginning in 1999. Subject to the rights of the holders of the Convertible
Preferred Shares and holders of any future series of Preferred Shares to elect
and/or remove trustees in certain circumstances, the affirmative vote of two-
thirds of the outstanding Common Shares is required to remove a trustee. The
staggered terms of trustees may reduce the possibility of a tender offer or an
attempt to change control of the Company, even though a tender offer or a
change in control might be in the best interest of shareholders. See "Certain
Provisions of Maryland Law and of the Company's Declaration of Trust and
Bylaws--Classification of the Board of Trustees."
Certain Provisions of the Operating Partnership Agreement Could Inhibit
Acquisitions and Changes in Control. The Operating Partnership Agreement
provides that the Company may not generally engage in any merger,
consolidation or other combination with or into another person or sale of all
or substantially all of its assets, or any reclassification, or any
recapitalization or change of outstanding Common Shares (a "Business
Combination"), unless the holders of LP Common Units will receive, or have the
opportunity to receive, the same consideration per Common Unit as holders of
Common Shares receive per Common Share in the transaction; if holders of LP
Common Units will not be treated in such manner in connection with a proposed
Business Combination, the Company may not engage in such transaction unless
Limited Partners holding more than 50.0% of the LP Common Units vote to
approve the Business Combination. In addition, as provided in the Operating
Partnership Agreement, the Company will not consummate a Business Combination
in which the Company conducted a vote of the shareholders unless the matter
would have been approved had holders of LP Common Units been able to vote
together with the shareholders on the transaction. The foregoing provision of
the Operating Partnership Agreement would under no circumstances enable or
require the Company to engage in a Business Combination which required the
approval of the Company's shareholders if the Company's shareholders did not
in fact give the requisite approval. Rather, if the Company's shareholders did
approve a Business Combination, the Company would not consummate the
transaction unless (i) the Company as managing
33
<PAGE>
general partner first conducts a vote of holders of Common Units (including
the Company and the NAC General Partner) on the matter, (ii) the Company votes
the Common Units held by it in the same proportion as the shareholders of the
Company voted on the matter at the shareholder vote and (iii) the result of
such vote of the Common Unit holders (including the proportionate vote of the
Company's Common Units) is that had such vote been a vote of shareholders, the
Business Combination would have been approved by the shareholders. As a result
of these provisions of the Operating Partnership, a third party may be
inhibited from making an acquisition proposal that it would otherwise make, or
the Company, despite having the requisite authority under its Declaration of
Trust, may not be authorized to engage in a proposed Business Combination.
Possible Limitations on Change of Control Pursuant to Maryland Business
Combination Statute. Under the MGCL, as applicable to Maryland REITs, certain
"business combinations" (including certain issuances of equity securities)
between a Maryland REIT such as the Company and any person who owns 10.0% or
more of the voting power of the trust's shares or an affiliate or associate of
the trust which, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10.0% or more of the voting power of the
trust (an "Interested Shareholder"), or between a Maryland REIT and an
affiliate of an Interested Shareholder, are prohibited for five years after
the most recent date on which the Interested Shareholder became an Interested
Shareholder. Thereafter, any such business combination must be approved by the
board of trustees and a super-majority shareholder vote unless, among other
things, the holders of shares of beneficial interest receive a minimum price
(as defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Shareholder for
its shares. As permitted by the MGCL, the Board of Trustees of the Company has
opted out of the business combinations provisions of the MGCL with respect to
any business combination involving Prime, the Primestone Joint Venture or any
of the Contributors or any of their respective affiliates (including Mr.
Reschke). Accordingly, the five-year prohibition and the super-majority
shareholder vote requirement will not apply to any "business combinations"
between Prime, the Primestone Joint Venture or any of the Contributors or
their respective affiliates and the Company. As a result, Prime, the
Primestone Joint Venture or any of the Contributors and their respective
affiliates may be able to enter into "business combinations" with the Company,
which may or may not be in the best interests of the shareholders, without the
super-majority shareholder approval. Further, the business combinations
statute could have the effect of discouraging offers from third parties to
acquire the Company and increasing the difficulty of consummating any such
offer. See "Certain Provisions of Maryland Law and of the Company's
Declaration of Trust and Bylaws--Business Combinations."
Possible Limitations on Change of Control Pursuant to Maryland Control Share
Acquisition Statute. Maryland law provides that "control shares" of a Maryland
REIT acquired in a "control share acquisition" have no voting rights except to
the extent approved by a vote of two-thirds of the votes eligible under the
statute to be cast on the matter. "Control shares" are voting shares of stock
or beneficial interest which, if aggregated with all other such shares of
stock or beneficial interest previously acquired by the acquiror, would
entitle the acquiror to exercise voting power in electing trustees within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority or (iii) a majority
of all voting power. Control shares do not include shares that the acquiring
person is then entitled to vote as a result of having previously obtained
shareholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
If voting rights are not approved at a meeting of shareholders then, subject
to certain conditions and limitations, the trust may redeem any or all of the
control shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for control shares are approved at
a shareholders' meeting and the acquiror becomes entitled to vote a majority
of the shares of beneficial interest entitled to vote, all other shareholders
may exercise appraisal rights.
The Bylaws contain a provision exempting from the control share acquisition
statute any and all acquisitions by any person of the Company's shares of
beneficial interest. There can be no assurance that such provision will
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<PAGE>
not be amended or eliminated at any point in the future. If the foregoing
exemption in the Bylaws is rescinded, the control share acquisition statute
could have the effect of discouraging offers to acquire the Company and of
increasing the difficulty of consummating any such offer. See "Certain
Provisions of Maryland Law and of the Company's Declaration of Trust and
Bylaws--Control Share Acquisitions."
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
Tax Liabilities as a Consequence of Failure to Qualify as a REIT. The
Company intends to operate its business so as to qualify as a REIT under the
Code commencing with its taxable year ending December 31, 1997. Although
management believes that the Company will be organized and will operate in
such a manner, no assurance can be given that the Company will be able to
operate in a manner so as to qualify or remain so qualified. Qualification as
a REIT involves the satisfaction of numerous requirements (some on an annual
and others on a quarterly basis) established under highly technical and
complex Code provisions for which there are only limited judicial and
administrative interpretations and involves the determination of various
factual matters and circumstances not entirely within the Company's control.
For example, in order to qualify as a REIT, at least 95.0% of the Company's
gross income in any year must be derived from qualifying sources and the
Company must pay distributions to shareholders aggregating annually at least
95.0% of its REIT taxable income (determined without regard to the dividends
paid deduction and by excluding net capital gains). The complexity of these
provisions and of the applicable Treasury Regulations that have been
promulgated under the Code is greater in the case of a REIT that holds its
assets in partnership form. In addition, no assurance can be given that new
legislation, regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to qualification as a
REIT or the federal income tax consequences of such qualification. The
Company, however, is not aware of any pending tax legislation that would
adversely affect the Company's ability to operate as a REIT. The Company has
received the opinion of Winston & Strawn, counsel to the Company, regarding
the Company's ability to qualify as a REIT. See "Certain Federal Income Tax
Considerations--Taxation of the Company" and "Legal Matters." Such legal
opinion is based on various assumptions and factual representations by the
Company regarding the Company's ability to meet the various requirements for
qualification as a REIT, and no assurance can be given that actual operating
results will meet these requirements. Such legal opinion is not binding on the
IRS or any court.
Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed 5.0% of the value of the
REIT's total assets on certain testing dates. See "Certain Federal Income Tax
Considerations--Requirements for Qualification." The Company believes that its
allocable share of the aggregate value of the securities of the Services
Company to be held by the Operating Partnership (i.e., the Note and the
Preferred Stock) will be less than 5.0% of the value of the Company's total
assets, based on the initial allocation of Common Units among participants in
the Formation Transactions and the Company's opinion regarding the maximum
value that could be assigned to the expected securities and net operating
income contributions of the Services Company after the Offering. In rendering
its opinion as to the qualifications of the Company as a REIT, Winston &
Strawn is relying on the conclusion of the Company regarding the value of the
Services Company. In addition to the 5.0% limitation, a REIT is not permitted
to own more than 10.0% of the voting securities of any particular issuer. The
Preferred Stock and Note of the Services Company held by the Operating
Partnership should not be treated as voting securities. However, the IRS could
challenge this conclusion if it determines that the Operating Partnership
exercises de facto control over and management of the Services Company.
If the Company fails to satisfy the 5.0% or 10.0% limitations or otherwise
fails to qualify as a REIT in any taxable year, except as to certain failures
for which there may be statutory relief or imposition of intermediate
sanctions in the form of monetary penalties, the Company would be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates and would not be allowed a deduction
in computing its taxable income for amounts distributed to its shareholders.
This treatment would reduce the net earnings of the Company available for
investment or distribution to shareholders because of the additional tax
liability to the Company for the years involved. In addition, unless entitled
to relief under certain statutory provisions, the Company also would be
disqualified from treatment as a REIT for the four taxable years
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following the year during which qualification is lost. See "Certain Federal
Income Tax Considerations--Failure to Qualify."
Other Tax Liabilities. Even if the Company qualifies as and maintains its
status as a REIT, it will be subject to certain federal, state and local taxes
on its income and property. For example, if the Company has net income from a
"prohibited transaction," such income will be subject to a 100.0% tax. See
"Certain Federal Income Tax Considerations--Requirements for Qualification--
Penalty Tax on Prohibited Transactions."
IMMEDIATE AND SUBSTANTIAL DILUTION RESULTING TO PURCHASERS OF COMMON
SHARES. Purchasers of Common Shares in the Offering will suffer an immediate
and substantial dilution of $4.00 per share in the net tangible book value of
the shares from the initial public offering price, which will result in an
immediate increase of $55.24 per Common Unit in the net tangible book value of
the Common Units of the Operating Partnership received by Prime in exchange
for assets contributed to the Operating Partnership. See "Dilution."
DISTRIBUTIONS TO SHAREHOLDERS AFFECTED BY MANY FACTORS. Distributions by the
Company to its shareholders will be based principally on cash available for
distribution from the Properties. Contractual increases in rent under the
leases of the Properties or the receipt of rental revenue in connection with
future acquisitions will increase the Company's cash available for
distribution to shareholders. However, in the event of a default or a lease
termination by a lessee, there could be a decrease or cessation of rental
payments and thereby a decrease in cash available for distribution. In
addition, the amount available to make distributions may decrease if
properties acquired in the future yield lower than expected returns.
The distribution requirements for REITs under federal income tax laws may
limit the Company's ability to finance future developments, acquisitions
and/or expansions without additional debt or equity financing. If the Company
incurs additional indebtedness in the future, it will require additional funds
to service such indebtedness and as a result amounts available to make
distributions may decrease. Distributions by the Company will also be
dependent on a number of other factors, including the Company's financial
condition, any decision to reinvest funds rather than to distribute such
funds, capital expenditures, the annual distribution requirements under the
REIT provisions of the Code and such other factors as the Company deems
relevant. In addition, the Company may issue from time to time additional
Common Shares in connection with the acquisition of properties or in certain
other circumstances. No prediction can be made as to the number of such Common
Shares which may be issued, if any, and, if issued, the effect on cash
available for distributions on a per share basis to holders of Common Shares.
Such issuances, if any, will have a dilutive effect on cash available for
distribution on a per share basis to holders of Common Shares. See "Business
Objective and Growth Strategies." The possibility exists that actual results
of the Company may differ from the assumptions used by the Board of Trustees
in determining the initial distribution rate. In such event, the trading price
of the Common Shares may be adversely affected.
To obtain the favorable tax treatment associated with REITs, the Company
generally will be required to distribute to its shareholders at least 95.0% of
its REIT taxable income (determined without regard to the dividends paid
deduction and by excluding net capital gains) each year. See "Certain Federal
Income Tax Considerations--Requirements for Qualification--Annual Distribution
Requirements." In addition, the Company will be subject to tax at regular
corporate rates to the extent that it does not distribute all of its net
capital gain or distributes more than 95.0% but less than 100.0% of its REIT
taxable income each year. The Company will also be subject to a 4.0%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it for any calendar year are less than the sum of 85.0% of its REIT
ordinary income, 95.0% of its REIT capital gain net income and 100.0% of its
undistributed income from prior years.
The Company intends to make distributions to its shareholders to comply with
the distribution requirements of the Code and to eliminate, or at least
minimize, exposure to federal income taxes and the nondeductible excise tax.
Differences in timing between the receipt of income and the payment of
expenses in arriving at taxable income and the effect of required debt
amortization payments could require the Company to borrow funds on a
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short-term basis to meet the distribution requirements that are necessary to
achieve the tax benefits associated with qualifying as a REIT.
INITIAL DISTRIBUTION PAYOUT PERCENTAGE ON THE COMMON SHARES WILL BE 95.5%
FOR THE TWELVE MONTHS ENDING JUNE 30, 1998. The Company's expected annual
distributions on the Common Shares for the 12 months following the completion
of the Offering are expected to be $1.35 per Common Share (representing
approximately 95.5% of the estimated cash available for distribution during
such period). If cash available for distribution generated by the Company's
assets for such 12-month period is less than the Company's estimate, or if
such cash available for distribution decreases in future periods from expected
levels, the Company's ability to make the expected distributions would be
adversely affected. Any such failure to make expected distributions may result
in a decrease in the market price of the Common Shares. See "Distribution
Policy."
On a pro forma basis giving effect to the Offering and the Formation
Transactions for the year ended December 31, 1996, the Company's earnings and
Funds from Operations, respectively, would have been sufficient to cover fixed
charges (including distributions on the Convertible Preferred Shares) by
approximately $8.8 million and $25.3 million, respectively. While the Company
expects to have sufficient cash available to pay distributions on the
Convertible Preferred Shares, no assurances can be made that such
distributions will be declared or paid in respect of the Convertible Preferred
Shares.
The Company is not permitted to make any distributions in respect of the
Common Shares unless all current and any accumulated dividends in respect of
the Convertible Preferred Shares have been paid in full. The Convertible
Preferred Shares are entitled to payment of distributions at the same rate
declared on the Common Shares if such rate is greater than the stated
distribution rate on the Convertible Preferred Shares. Accordingly, at such
time as the distribution rate on the Common Shares is greater than the stated
rate on the Convertible Preferred Shares, holders of Convertible Preferred
Shares will be entitled to participate in any increases in distributions on
Shares together with the holders of Common Shares. See "Distribution Policy"
and "Partnership Agreement--Distributions."
HISTORICAL LOSSES AND ACCUMULATED DEFICIT; POSSIBILITY OF FUTURE LOSSES. The
Company, through the Prime Properties, has had historical accounting losses
for certain fiscal years, and there can be no assurance that the Company will
not have similar losses in the future. The Prime Properties had a net loss
before allocation to minority interest of approximately $31.4 million in the
aggregate in 1996 and had cumulative aggregate deficits in owners' equity,
inclusive of minority interest, of approximately $140.3 million and $122.7
million at June 30, 1997 and December 31, 1996, respectively.
ACQUISITION AND DEVELOPMENT RISKS
General. The Company intends to acquire additional office and industrial
properties. See "Business Objective and Growth Strategies." The Company
anticipates that future acquisitions will be financed, in part, through a
combination of secured or unsecured financing. If new developments are
financed through construction loans, there is a risk that, upon completion of
construction, permanent financing for newly-developed properties may not be
available or may be available only on disadvantageous terms. In addition, an
acquisition of an office or industrial property entails the risk that such
investment will fail to perform in accordance with expectations. Estimates of
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may also prove
inaccurate. Further, there are general investment risks associated with any
real estate investment. See "--General Real Estate Investment Risks."
While the Company expects to limit its business primarily to the Chicago
Metropolitan Area, and to a lesser extent the rest of the midwestern United
States, and to continue to explore opportunities within these areas, it is
possible that the Company will in the future expand its business to new
geographic markets. The Company will not initially possess the same level of
familiarity with new markets that it has with respect to the markets in which
it currently operates, which could adversely affect its ability to develop,
acquire, manage or lease properties in such markets.
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Cash Flows Are Uncertain. A portion of the Company's anticipated cash
available for distribution may be generated from development activities, which
are partially dependent on the availability of development opportunities and
which are subject to the risks inherent in development and general economic
conditions. There can be no assurance that the Company will realize such
anticipated cash flows from future development projects.
COMPANY'S PERFORMANCE AND VALUE ARE SUBJECT TO REAL ESTATE INVESTMENT RISKS
General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend on the
amount of income earned and capital appreciation generated by the Properties
as well as the expenses incurred in connection therewith. If the Properties do
not generate income sufficient to meet operating expenses, including debt
service and capital expenditures, the ability to make distributions to the
Company's shareholders could be adversely affected. Income from, and the value
of, the Properties may be adversely affected by the general economic climate,
local conditions such as oversupply of office or industrial space or a
reduction in demand for office or industrial space in the area, the
attractiveness of the Properties to potential tenants, competition from other
office or industrial buildings, and the ability of the Company to provide
adequate maintenance and insurance and increased operating costs (including
insurance premiums, utilities and real estate taxes). In addition, revenues
from properties and real estate values also are affected by such factors as
interest rate levels, the availability of financing, the cost of compliance
with regulations and the potential for liability under applicable laws,
including changes in tax laws. See "Business and Properties--Competition."
The Company's income would be adversely affected if a significant number of
tenants were unable to pay rent or if office or industrial space could not be
rented on favorable terms. Certain significant expenditures associated with an
investment in real estate (such as mortgage payments, real estate taxes and
maintenance costs) generally are not reduced when circumstances cause a
reduction in rental income from tenants. It would be very difficult for the
Company to convert a project to an attractive alternative use or to sell a
project to recoup the Company's investment if a project were not successful.
Should such an event occur, the Company's income and funds available for
distribution would be adversely affected.
Illiquidity of Real Estate Could Adversely Affect the Company's Financial
Condition. Real estate investments are relatively illiquid and, therefore, the
Company has a limited ability to vary its portfolio quickly in response to
changes in economic or other conditions. In addition, the Code and related
regulations prohibit a REIT from holding property for sale, which may affect
the Company's ability to sell properties without adversely affecting
distributions to the Company's shareholders.
Competition Could Adversely Affect the Company. The Company plans to expand,
primarily through the acquisition and development of additional office and
industrial buildings in the Chicago Metropolitan Area and other midwestern
markets where the acquisition and/or development of property would, in the
opinion of management, result in a favorable risk-adjusted return on
investment. There are a number of office and industrial building developers
and real estate companies that compete with the Company in seeking properties
for acquisition, prospective tenants and land for development. All of the
Properties are in developed areas where there are generally other properties
of the same type and quality. Competition from other office and industrial
properties may affect the Company's ability to attract and retain tenants,
rental rate and expenses of operation (particularly in light of the higher
vacancy rates of many competing properties which may result in lower-priced
space being available in such properties). The Company also may be competing
with other entities that have greater financial and other resources than the
Company.
Lease Expirations and Reletting Expenses Could Adversely Affect the
Company's Cash Flow. Certain leases expiring during the first several years
following the Offering are at rental rates higher than those attained by the
Company in its recent leasing activity. Such leases, or other leases of the
Company, may not be renewed or, if renewed, may be renewed at rental rates
lower than rental rates in effect immediately prior to expiration. Decreases
in the rental rates for the Company's properties, the failure of tenants to
renew any such leases or the
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failure of the Company to relet any of the Company's space could materially
adversely affect the Company and its ability to make distributions. From July
1, 1997 through December 31, 1999, the Company will have expiring Office
Property leases covering approximately 543,000 net rentable square feet (which
represent 21.0% of the Annualized Net Rent of the Office Properties) and
Industrial Property leases covering approximately 1,634,000 net rentable
square feet (which represent 28.9% of the Annualized Net Rent of the
Industrial Properties). These lease expirations represent, in the aggregate,
approximately 23.7% of the Annualized Net Rent of the Company. As of June 30,
1997, such expiring leases had a weighted average annual net rent per net
rentable square foot of approximately $12.27 for Office Property leases and
$3.01 for Industrial Property leases. If the Company is unable to promptly
relet or renew the leases for all or a substantial portion of this space, if
the rental rate upon such renewal or reletting is significantly lower than
expected rates, then the Company's cash flow and ability to make expected
distributions to shareholders would be adversely affected. See "Business and
Properties--General" and "--Lease Expirations."
Capital Improvement Requirements Could Adversely Affect the Company's Cash
Flow. The Properties vary in age and require regular capital improvements. If
the cost of improvements, whether required to attract and retain tenants or to
comply with governmental requirements, substantially exceeds management's
expectations, cash available for distribution may be reduced.
Uninsured Losses Could Adversely Affect the Company's Cash Flow. Management
believes that the Properties are covered by adequate comprehensive liability,
fire, flood, extended coverage, rental loss and all-risk insurance provided by
reputable companies and with commercially reasonable deductibles, limits and
policy specifications customarily carried for similar properties. Certain
types of losses, however, may be either uninsurable or not economically
insurable, such as losses due to floods, riots or acts of war, or may be
insured subject to certain limitations, such as large deductibles or
copayments. Should an uninsured loss or a loss in excess of insured limits
occur, the Company could lose its investment in and the cash flow from a
property and may be obligated on any mortgage indebtedness or other
obligations related to such property. Any such loss could adversely affect the
Company and its ability to make distributions.
Bankruptcy and Financial Condition of Tenants Could Adversely Affect the
Company's Cash Flow. At any time, a tenant of the Properties may seek the
protection of the bankruptcy laws, which could result in the rejection and
termination of such tenant's lease and thereby cause a reduction in the cash
available for distribution by the Company. No assurance can be given that
certain tenants will not file for bankruptcy protection in the future or, if
any tenants file, that they will affirm their leases and continue to make
rental payments in a timely manner. In addition, a tenant from time to time
may experience a downturn in its business which may weaken its financial
condition and result in the failure to make rental payments when due, which
may adversely affect the Company's cash flow and its ability to make expected
distributions to shareholders. For example, certain legal action has been
taken against Keck to obtain possession of the Keck Space at the 77 West
Wacker Drive Building. A settlement agreement was entered pursuant to which
Keck has agreed to vacate the Keck Space by no later than November 30, 1997.
See "Business and Properties--Legal Proceedings."
Risks of Investments in Securities Related to Real Estate. The Company may
pursue its investment objectives through the ownership of securities of
entities engaged in the ownership of real estate. Ownership of such securities
may not entitle the Company to control the ownership, operation and management
of the underlying real estate. In addition, the Company may have no ability to
control the distributions with respect to such securities, which may adversely
affect the Company's ability to make required distributions to shareholders.
Furthermore, if the Company desires to control an issuer of securities, it may
be prevented from doing so by the limitations on the asset and gross income
tests which must be satisfied by the Company in order for the Company to
qualify as a REIT for federal income tax purposes. See "Certain Federal Income
Tax Considerations--Taxation of the Company" and "--Requirements for
Qualification." The Company intends to operate its business in a manner that
will not require the Company to register under the Investment Company Act of
1940, as amended, and shareholders will therefore not have the protection of
such act.
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The Company also may invest in mortgages or other debt instruments secured
by real estate and may do so as a strategy for ultimately acquiring the
underlying real estate. In general, investments in mortgages include the risk
that borrowers may be unable to make debt service payments or pay principal
when due, the risk that the value of the mortgaged property may be less than
the principal amount of the mortgage note securing such property and the risk
that interest rates payable on the mortgages may be lower than the Company's
cost of funds to acquire these mortgages. In any of these events, Funds from
Operations and the Company's ability to make required distributions to
shareholders could be adversely affected.
Changes in Laws and Property Tax Rates Could Adversely Affect the Company's
Financial Condition. Costs resulting from changes in real estate laws and
property taxes generally may be passed through to tenants of the Properties
and should not adversely affect the Company. Increases in income, services or
transfer taxes, however, generally are not passed through to tenants and may
adversely affect the Company's results of operations and ability to make
distributions to its shareholders. Similarly, changes in laws increasing the
potential liability for environmental conditions existing on properties or
increasing the restrictions on discharges or other conditions, however, may
result in significant unanticipated expenditures, which could adversely affect
the Company's ability to make distributions to shareholders.
Costs of Complying With the Americans with Disabilities Act Could Adversely
Affect the Company's Cash Flow. Under the Americans with Disabilities Act of
1990, as amended (the "ADA"), all public accommodations and commercial
facilities are required to meet certain federal requirements related to access
and use by disabled persons. These requirements became effective in 1992.
Compliance with the ADA requirements could require removal of access barriers,
and non-compliance could result in imposition of fines by the federal
government or an award of damages to private litigants. Although the Company
believes that the Properties are substantially in compliance with these
requirements, the Company may incur additional costs to comply with the ADA.
Although the Company believes that such costs will not have a material adverse
effect on the Company, if required changes involve a greater expenditure than
the Company currently anticipates, the Company's ability to make expected
distributions to shareholders could be adversely affected.
CONSEQUENCES OF FAILURE TO QUALIFY AS PARTNERSHIPS. The Company expects that
the Operating Partnership and each of the Property Partnerships will be
organized as partnerships and will be treated as partnerships for federal
income tax purposes. If the Operating Partnership or any of the Property
Partnerships fails to qualify as a partnership for federal income tax purposes
and instead is taxable as a corporation, the Company could cease to qualify as
a REIT and such partnership would be subject to federal income tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. See "Certain Federal Income Tax Considerations--Failure to
Qualify" and "--Tax Aspects of the Company's Investment in Partnerships--
Partnership Classification." The imposition of a corporate level tax on the
Operating Partnership would reduce the amount of cash available for
distribution to the Company and its shareholders.
CHANGES IN POLICY AND INVESTMENT ACTIVITY WITHOUT SHAREHOLDER APPROVAL
Ability to Change Certain Policies Without Shareholder Approval. The
investment and financing policies of the Company and its policies with respect
to other activities, including acquisitions, developments, expansions,
capitalizations, distributions and operations will be determined by the Board
of Trustees. Although the Board of Trustees has no present intention to do so,
the Board of Trustees may amend or revise these and other policies from time
to time without a vote of the shareholders of the Company. Change in these
policies could adversely affect the Company's financial condition or results
of operations. The Company cannot, however, change its policy of seeking to
maintain its qualification as a REIT for federal income tax purposes without
the approval of the holders of at least a majority of the outstanding Common
Shares. See "Policies with Respect to Certain Activities."
Ability to Engage in Investment Activity Without Shareholder Approval. In
the future, the Company expects to acquire and develop additional real estate
assets pursuant to its investment strategies and consistent with its
investment policies. See "Business Objective and Growth Strategies." The
shareholders of the Company
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will not be entitled to receive historical financial statements regarding, or
to vote on, any such activities and, instead, will be required to rely
entirely on the decisions of management.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of
certain of its executive officers and trustees, particularly Mr. Reschke,
Chairman of the Board, and Mr. Curto, President and Chief Executive Officer,
for strategic business direction and experience in the Chicago Metropolitan
Area and other real estate markets. While the Company believes that it could
find replacement for these key personnel, the loss of their services could
have an adverse effect on the operations of the Company. The Company has
entered employment agreements with Mr. Reschke and Mr. Curto. See
"Management--Employment Agreements."
DEPENDENCE ON SIGNIFICANT TENANTS. The Company's ten largest office tenants
as of June 30, 1997 represented approximately 43.3% of the Annualized Net
Rent, and its ten largest industrial tenants as of June 30, 1997 represented
approximately 19.3% of the Annualized Net Rent. Of this amount, its three
largest tenants, Donnelley, Everen and Jones Day, currently lease
approximately 594,500 rentable square feet of office space in the 77 West
Wacker Drive Building, representing approximately 32.2% of the Annualized Net
Rent. The Company's revenues and cash available for distribution to
shareholders would be disproportionately and materially adversely affected in
the event of bankruptcy or insolvency of, or a downturn in the business of, or
the nonrenewal of leases by, any of its significant tenants or the renewal of
such leases on terms less favorable to the Company than their current terms.
MANAGED PROPERTY BUSINESS AND NON-REIT SERVICES
Lack of Control Over the Services Company. To comply with the REIT asset
tests that restrict ownership of shares of other corporations, upon the
completion of the Offering, the Operating Partnership will own 100.0% of the
Preferred Stock of the Services Company, Messrs. Reschke and Curto of the
Company will hold 100.0% of the voting stock of the Services Company, and the
initial board of directors of the Services Company will consist of Messrs.
Reschke, Curto and Derderian. This ownership structure is necessary to permit
the Company to share in the income of the Services Company while also
maintaining its status as a REIT. Moreover, such persons, as the holders of
100.0% of the voting stock, will retain the ability to elect the board of
directors of the Services Company after the terms of the initial directors
expire. Although it is anticipated that the Company will receive substantially
all of the economic benefit of the business carried on by the Services Company
due to the Company's right to receive interest on the Note and dividends
through the Operating Partnership, the Company will not be able to elect
directors or officers of the Services Company. Therefore, the Company will not
have the ability to influence directly the operations of the Services Company
or to require that the Services Company's board of directors declare and pay a
cash dividend on the Preferred Stock held by the Operating Partnership. As a
result, the board of directors and management of the Services Company may
implement business policies or decisions that would not have been implemented
by entities controlled by the Company and that are adverse to the interests of
the Company or that lead to adverse financial results, which could adversely
impact the Company's net operating income and cash flow.
Tax Liabilities and Adverse Consequences of REIT Status on the Business of
the Services Company. The Services Company will be subject to federal and
state income tax on its taxable income at regular corporate rates. Certain
requirements for REIT qualification may in the future limit the Company's
ability to receive increased distributions from the Services Company without
jeopardizing the Company's qualifications as a REIT. See
"--Adverse Consequences of Failure to Qualify as a REIT; Other Tax
Liabilities."
LIABILITIES FOR ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT THE COMPANY'S
FINANCIAL CONDITION. Under various federal, state and local laws, ordinances
and regulations relating to the protection of the environment, an owner or
operator of real property may be held liable for the costs of removal or
remediation of certain hazardous or toxic substances located on or in such
property. These laws often impose liability without regard to whether the
owner or operator was responsible for, or even knew of, the presence of such
hazardous or toxic substances. The costs of investigation, removal or
remediation of such substances may be substantial, and the presence of such
substances may adversely affect the owner's or operator's ability to rent or
sell such
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property or to borrow using such property as collateral and may expose such
owner or operator to liability resulting from any release of or exposure to
such substances. Persons who arrange for the disposal or treatment of
hazardous or toxic substances at another location also may be liable for the
costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person. Certain environmental laws impose liability for release of asbestos-
containing materials into the air, and third parties may also seek recovery
from owners or operators of real properties for personal injury associated
with asbestos-containing materials and other hazardous or toxic substances. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be considered an owner or
operator of such properties or as having arranged for the disposal or
treatment of hazardous or toxic substances and therefore potentially liable
for removal or remediation costs, as well as certain other related costs,
including governmental penalties and injuries to persons and property.
All of the Properties have been subject to recent Phase I or similar
environmental assessments by independent environmental consultants within the
past two years. Phase I assessments are intended to discover information
regarding, and to evaluate the environmental condition of, the surveyed
property and surrounding properties. Phase I assessments generally include an
historical review, a public records review, an investigation of the surveyed
site and surrounding properties, and preparation and issuance of a written
report, but do not include soil sampling or subsurface investigations. The
Company is aware of contamination at certain of the Industrial Properties,
which are already in remediation programs sponsored by the state in which they
are located. Prime has sued a former environmental consultant and a former
tenant of one of these Properties for damages. Prime has contractually agreed
to retain liability, and indemnify the Company, for environmental remediation
with regard to certain of these Industrial Properties, which environmental
consultants have estimated will cost, in the aggregate, approximately $3.2
million. The Company also has received contractual indemnification from a
tenant for possible environmental liabilities caused by the tenant at one of
the Contribution Properties. See "Business and Properties--Government
Regulations--Environmental Matters."
The Company believes that the other Properties are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances. The Company has not been
notified by any governmental authority, and is not otherwise aware, of any
material noncompliance liability or claim relating to hazardous or toxic
substances in connection with any of its other Properties. None of the
Company's environmental assessments of the Properties has revealed any
environmental liability that, after giving effect to the contractual
indemnities described above, the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liability. Nonetheless, it is possible that the Company's assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no
assurance that (i) future laws, ordinances or regulations will not impose any
material environmental liability or (ii) the current environmental condition
of the Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks) or by third parties unrelated to the Company. If
compliance with the various laws and regulations, now existing or hereafter
adopted, exceeds the Company's budgets for such items, the Company's ability
to make expected distributions to shareholders could be adversely affected.
Other Regulations Could Adversely Affect the Company's Financial
Condition. The Properties also are subject to various federal, state and local
regulatory requirements, such as state and local fire and safety requirements.
Failure to comply with these requirements could result in the imposition of
fines by governmental authorities or awards of damages to private litigants.
The Company believes that the Properties are currently in material compliance
with all such regulatory requirements. There can be no assurance, however,
that these requirements will not be changed or that new requirements will not
be imposed which would require significant unanticipated expenditures by the
Company and could have an adverse effect on the Company's Funds from
Operations and expected distributions.
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POSSIBLE ADVERSE EFFECTS ON SHARE PRICE ARISING FROM SHARES ELIGIBLE FOR
FUTURE SALE
No prediction can be made as to the effect, if any, of future sales of
Common Shares, or the availability of shares for future sales, on the market
price of the Common Shares. Sales of substantial amounts of Common Shares
(including Common Shares issued upon the exercise of options, the exchange of
LP Common Units or conversion of Convertible Preferred Shares), or the
perception that such sales could occur, may adversely affect prevailing market
prices for the Common Shares.
In connection with the Formation Transactions, approximately 9,064,343 LP
Common Units in the aggregate will be issued. None of the Limited Partners can
exchange such LP Common Units for Common Shares until the first anniversary of
the completion of the Offering. Further, each of the Limited Partners has
agreed not to directly or indirectly offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose of (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of
any option to purchase or other sale or disposition of) any LP Common Units or
Common Shares or other shares of beneficial interest of the Company, or any
securities convertible or exercisable or exchangeable for any LP Common Units
or Common Shares or other shares of beneficial interest of the Company for the
applicable Holding Periods, and the Company has agreed not to offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition of) any Common Shares or other shares of beneficial interest of
the Company, or any securities convertible or exercisable or exchangeable for
any LP Common Units or Common Shares or other shares of beneficial interest of
the Company (other than pursuant to the Share Incentive Plan), for a period of
180 days from the date of this Prospectus, in each case without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, subject to certain limited exceptions. Prudential Securities
Incorporated, at any time and without notice, may release all or any portion
of the Common Shares subject to the foregoing lock-up agreements. Following
the expiration of the foregoing restrictions, any Common Shares issued to a
Limited Partner upon exchange of their respective LP Common Units may be sold
in the public market pursuant to registration statements which the Company
will be obligated to file pursuant to the exercise of registration rights that
have been granted by the Company or available exemptions from registration.
See "Shares Eligible for Future Sale" and "Underwriting."
Upon the completion of the Offering and the consummation of the Formation
Transactions, the Company will have 12,380,000 Common Shares outstanding (or
14,237,000 Common Shares if the Underwriters' over-allotment option is
exercised in full), all of which will be freely tradeable in the public market
by persons other than "affiliates" of the Company without restriction or
registration under the Securities Act. All Common Shares that are issuable
upon the exchange of Common Units or the conversion of the Convertible
Preferred Shares will be deemed to be "restricted securities" within the
meaning of Rule 144 under the Securities Act and may not be transferred unless
such Common Shares are registered under the Securities Act or an exemption
from registration is available, including any exemption from registration
provided under Rule 144. In general, upon satisfaction of certain conditions,
Rule 144 permits the sale of certain amounts of restricted securities one year
following the date of acquisition of the restricted securities from the
Company and, after two years, permits unlimited sales by persons unaffiliated
with the Company.
The Company has agreed to provide registration rights to the Limited
Partners receiving Common Units in connection with the Formation Transactions
with respect to the Common Shares acquired by them upon exchange of Common
Units for Common Shares. In addition, the Company has granted certain
registration rights to Security Capital Preferred Growth with respect to the
Common Shares acquired by it upon the conversion of the Convertible Preferred
Shares into Common Shares. See "Shares Eligible for Future Sale--Exchange
Rights and Registration Rights."
It is expected that upon completion of the Offering the Company will grant
options to purchase an aggregate of 1,113,000 Common Shares at the initial
public offering price to certain trustees, executive officers and other
employees of the Company, and an additional 737,000 Common Shares will be
reserved for issuance upon the
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exercise of options granted under the Share Incentive Plan. See "Management--
Share Incentive Plan." In addition, the Company may issue from time to time
additional Common Shares or Common Units in connection with the acquisition of
properties. See "Business Objective and Growth Strategies--Acquisition
Strategy." The Company anticipates that it will file a registration statement
with respect to the Common Shares issuable under the Share Incentive Plan
following the completion of the Offering. Such registration statement and any
subsequent registration statements filed pursuant to the foregoing
registration rights generally will allow Common Shares covered thereby,
including Common Shares issuable upon the exchange of Common Units, the
conversion of the Convertible Preferred Shares or the exercise of options, to
be transferred or resold without restriction under the Securities Act.
MARKET INTEREST RATES COULD ADVERSELY IMPACT THE MARKET PRICE OF THE COMMON
SHARES. One of the factors that will influence the market prices of the
Common Shares will be the annual yield on the price paid for Common Shares
from distributions by the Company. An increase in market interest rates may
lead prospective purchasers of the Common Shares to demand a higher annual
yield from future distributions. Such an increase in the required yield from
distributions may adversely affect the market price of the Common Shares. In
addition, the market value of the Common Shares could be affected
substantially by other general market conditions. Numerous other factors, such
as government regulatory action and modification of tax laws, could have a
significant effect on the future market price of the Common Shares.
ABSENCE OF PRIOR PUBLIC MARKET COULD ADVERSELY IMPACT THE MARKET PRICE OF
THE COMMON SHARES. Prior to the Offering, there has been no public market for
the Common Shares. There can be no assurance that an active trading market
will develop in the Common Shares or that if such a market develops, it will
be sustained. The initial public offering price of the Common Shares will be
determined through negotiations among the Company, Prime and the Underwriters
and may not be indicative of the market prices for the Common Shares after the
Offering. See "Underwriting."
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THE COMPANY
The Company is a fully-integrated, self-administered and self-managed real
estate company that has been formed to continue and expand the office and
industrial real estate business of Prime. The Company expects to qualify as a
REIT for federal income tax purposes. In connection with the Offering, the
Company will succeed to the office and industrial development, leasing and
property management business of Prime and will acquire certain additional
office and industrial properties from third parties. The Company will own 16
Office Properties containing an aggregate of approximately 2.4 million net
rentable square feet, 44 Industrial Properties containing an aggregate of
approximately 5.7 million net rentable square feet, one industrial property
under construction, one retail center and one parking facility. The Properties
are located primarily in the Chicago Metropolitan Area. As of June 30, 1997,
the Office Properties and the Industrial Properties generated 65.1% and 34.9%,
respectively, of the Company's Annualized Net Rent. The Company also will own
approximately 83.4 acres and have rights to acquire approximately 157.2 acres
of developable land (including rights to acquire one development site located
in the Chicago CBD containing approximately 58,000 square feet), which
management believes could be developed with approximately 1.2 million square
feet of additional office space in the Chicago CBD and approximately 4.4
million square feet of additional industrial properties primarily in the
Chicago Metropolitan Area.
In terms of net rentable square feet, approximately 80.0% of the Office
Properties and 87.1% of the Industrial Properties are located in the Chicago
Metropolitan Area in prime business locations within established business
communities. The Properties located in the Chicago Metropolitan Area account
for approximately 88.7% of the Company's Annualized Net Rent. The remaining
Office Properties are located in the Nashville, Tennessee and Knoxville,
Tennessee metropolitan areas, and the remaining Industrial Properties are
located in the Columbus, Ohio metropolitan area. After the completion of the
Offering, the Company intends to invest in the acquisition, development and
redevelopment of office and industrial properties primarily located in the
Suburban Chicago and Chicago CBD office markets and the Chicago Metropolitan
Area warehouse/distribution market and overhead crane/manufacturing market.
The Company believes that the Properties are well-located, have excellent
highway access, attract high-quality tenants, are well-maintained and
professionally managed. Approximately 71.7% of the Office Properties, in terms
of Annualized Net Rent, are Class A properties. The Company considers Class A
office buildings to be buildings that are centrally located, professionally
managed and maintained, attract high-quality tenants, command upper-tier
rental rates and are modern structures or have been modernized to compete with
new buildings. The Industrial Properties, in terms of Annualized Net Rent,
consist of 58.5% warehouse/distribution properties and 41.5% overhead
crane/manufacturing properties. As of June 30, 1997, the Office Properties
were 88.0% leased to more than 200 tenants, and the Industrial Properties were
87.9% leased to more than 60 tenants. Management of the Company has developed
(or redeveloped), leased and managed 79.2% of the Office Properties and 81.9%
of the Industrial Properties, based on net rentable square feet.
The Properties have a diverse and stable base of tenants and have
historically provided steadily increasing rents which the Company believes is
due to the quality of the Properties, the existence of long-term leases with
contractual rent escalations and the strength of the markets in which the
Properties are located. As of June 30, 1997, approximately 58.2% of the leases
for the Properties, in terms of Annualized Net Rent, had contractual rent
increases, of which approximately 42.4% of the Annualized Net Rent was
attributable to leases with specified contractual rent increases which on
average provided for annual rent increases of 4.9% over the next three years,
and approximately 15.8% of the Annualized Net Rent was attributable to leases
with contractual rent increases related to the CPI. Furthermore, as of June
30, 1997 less than 45.4% of the Annualized Net Rent is derived from leases
scheduled to expire during the next five years. The three largest tenants in
the Properties, in terms of Annualized Net Rent, are Donnelley, Everen and
Jones Day. As of June 30, 1997, the Company's ten largest office and ten
largest industrial tenants (based upon Annualized Net Rent) had leased space
from the Company for an average of 8.9 and 3.7 years, respectively, and
accounted for 43.3% and 19.3%, respectively, of Annualized Net Rent.
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The Prime Group, Inc. was founded in 1981 by Michael W. Reschke and has been
involved in the ownership, acquisition, renovation, development, construction,
financing, marketing, leasing and management of institutional quality, income-
producing real estate properties for nearly 17 years. In 1994, Prime
contributed its retail development business and its multi-family housing
business to separate publicly-traded real estate investment trusts--Prime
Retail, Inc. (NYSE: PRT) and Ambassador Apartments, Inc. (NYSE: AAH). In May
1997, Prime contributed its senior and assisted living business to Brookdale
Living Communities, Inc. (Nasdaq: BLCI), a publicly-traded owner, operator and
developer of senior housing and a provider of senior and assisted living
services to the elderly.
Concurrently with the Common Share Offering, the Company is conducting the
Convertible Preferred Offering to Security Capital Preferred Growth, which the
Company expects to close simultaneously with the closing of the Common Share
Offering. The Common Shares offered hereby will represent 55.3% of the common
equity of the Company (58.8% if the Underwriters' over-allotment option is
exercised in full). Another 35.5% of the common equity of the Company (32.8%
if the Underwriters' over-allotment option is exercised in full) will be owned
in the form of Common Units by the Primestone Joint Venture, a joint venture
between Prime and Blackstone. The balance of 9.2% of the common equity of the
Company (8.4% if the Underwriters' over-allotment option is exercised in full)
will be held by Prime, senior management of the Company and certain others.
See "Principal Shareholders of the Company."
Prime has been involved in the office and industrial real estate business
since 1985. During this time, Prime has achieved recognition for its
commitment to excellence in terms of architecture, construction, urban
planning and design, as well as its ability to implement aggressive marketing
and leasing programs to achieve among the highest rents and occupancies within
its submarkets. Most notably, Prime successfully developed and leased the 77
West Wacker Drive Building, a recently-developed 50-story, Class A office
tower in the Chicago CBD, which started construction in April 1990 and opened
in May 1992 with commitments for long-term leases for more than 95.0% of the
net rentable office area in the building.
The Company is a fully-integrated real estate company providing property
management, leasing, marketing, acquisition, development, redevelopment,
construction, finance and other related services. The Company has
approximately 151 employees, 37 of whom are located at the Company's executive
offices in Chicago. The senior management of the Company includes the
executives of Prime who were responsible for the strategic direction,
management and day-to-day operations of Prime's office and industrial real
estate business. The Company's management personnel have substantial
experience in a full range of real estate services. The top ten senior
executives of the Company have an average of 19.3 years experience in the real
estate industry in the Chicago Metropolitan Area.
The Company's primary business strategy is to achieve its investment and
growth objectives by focusing on the acquisition, development and operation of
office and industrial real estate located in the Chicago Metropolitan Area
and, to a lesser extent, other midwestern markets. To implement this strategy,
the Company intends to (a) own, acquire, develop, redevelop, lease, manage and
operate Class A office properties, (b) acquire distressed, underperforming and
undermanaged office properties in desirable locations and improve the income
potential of such assets by raising these properties to a higher level of
operating standard through value-added renovation programs, professional
property management and aggressive leasing, retenanting and marketing efforts
and (c) own, acquire, develop, redevelop, lease, manage and operate bulk
warehouse/distribution facilities and overhead crane/manufacturing facilities.
The Company believes that it can draw upon its extensive experience and long-
term presence in the Chicago Metropolitan Area to create a strategic advantage
in competing for future development and acquisition opportunities.
The Company believes that the solid, diversified local economy in the
Chicago Metropolitan Area is creating continued office space demand and
absorption. Because of steady expansion of office employment and nearly no new
construction, the overall Class A vacancy rate has steadily declined for five
years and is expected to continue to decline. According to RCG, Class A rental
rates in the Company's largest office market, the Chicago CBD, have begun to
rise as Class A vacancy rates in the Chicago CBD have decreased from 23.1% in
1992 to 9.3% by the end of the second quarter of 1997.
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The Chicago Metropolitan Area also has experienced a very active market in
industrial space in the 1990s. As of the end of the first quarter of 1997, the
Chicago Metropolitan Area's industrial market's overall vacancy rate was 7.3%,
below the national average vacancy rate of 8.1%. In addition, 32.6% (in terms
of net rentable square feet) of the Company's Industrial Properties in the
Chicago Metropolitan Area consists of overhead crane facilities, which have a
replacement cost substantially in excess of the Company's basis in its
Properties. The Company believes that current rental rates in the overhead
crane/manufacturing market are less than the level which would justify the
construction of new overhead crane/manufacturing facilities and, therefore,
the Company believes that there will be little new competition with the
Company's overhead crane/manufacturing Properties. See "Business and
Properties--The Company's Markets."
The Company believes that the foundation for growth in cash flow per share
in future years will be from a number of sources, including contractual rent
escalations in existing leases, the leasing of all or a portion of the
existing vacant space in the Properties, the quality and strategic location of
its Properties, the acquisition, renovation (where necessary) and
repositioning of additional office and industrial properties at below
replacement cost, the strengthening of the Chicago Metropolitan Area economy,
the development of new office and industrial properties when market conditions
warrant such new development and the knowledge and experience of its senior
management team and their long-term relationships with large corporate
tenants, municipalities, landowners and institutional sellers. In addition,
the Company believes that it will be the only publicly-traded REIT primarily
focusing on both the office and industrial markets in the Chicago Metropolitan
Area. Further, upon the completion of the Offering, the Company believes it
will be conservatively capitalized with outstanding debt of approximately
25.2% of the Company's total market capitalization.
The Company was formed on July 21, 1997 as a Maryland real estate investment
trust. The Company's executive offices are located at 77 West Wacker Drive,
Suite 3900, Chicago, Illinois 60601, and its telephone number is (312) 917-
1500.
SERVICES COMPANY
The Services Company. The Services Company was formed in March 1997 under
the laws of the state of Maryland to succeed to Prime's office and industrial
property management, leasing and corporate advisory services business.
Following the consummation of the Formation Transactions, Mr. Reschke and Mr.
Curto together will own 100.0% of the voting common stock of the Services
Company, representing 5.0% of its economic value, for which they will
contribute an aggregate of $50,000. The Operating Partnership will own 100.0%
of the nonvoting Preferred Stock of the Services Company, representing 95.0%
of its economic value. The Preferred Stock of the Services Company will have
an annual dividend rate of 8.5%, will pay dividends on a cumulative and
participating basis, and will not be redeemable by the Services Company or
convertible into other securities of the Services Company. See "Structure and
Formation of the Company--Formation Transactions" and "--Formation of the
Services Company." The Operating Partnership also will hold the Note to be
issued by the Services Company. The Note is expected to have a term of ten
years, to bear interest at a rate of 11.0% per annum and to require quarterly
interest only payments in arrears. The ownership structure of the Services
Company is necessary to permit the Company to share in the Service Company's
income and also maintain its status as a REIT for federal income tax purposes.
Although the Company anticipates receiving substantially all of the economic
benefit of the businesses carried on by the Services Company by virtue of the
Company's rights to receive (i) dividends through the Operating Partnership's
investment in the Preferred Stock and (ii) interest payments on the Note held
by the Operating Partnership, the Company will not be able to elect the
Services Company's officers or directors and, consequently, will not have the
ability to control the operations of the Services Company or require the
declaration of dividends. See "Risk Factors--Managed Property Business and
Non-REIT Services--Lack of Control Over the Services Company."
In addition to succeeding to Prime's businesses, the Services Company also
will receive the contribution of certain other operations. Upon completion of
the Offering, the Company will acquire, and simultaneously contribute to the
Services Company, the Continental Management Business. The Continental
Management
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Business includes a construction business and the property management and/or
leasing operations at five properties. The Company expects to pay
approximately $5.9 million, subject to applicable purchase price adjustments,
for the Continental Management Business. The health club facility located in
the 77 West Wacker Drive Building will also be contributed to the Services
Company. Prime estimates that the replacement cost of the health club facility
is approximately $2.0 million. After completion of the Offering, the Company
will employ various individuals from the Continental Management Business and
Prime's businesses. For a description of these individuals, see "Management--
Trustees, Executive Officers and Key Employees."
The Services Company will provide management, leasing, tenant improvement
construction, painting contracting and tenant representation services to
buildings owned by others pursuant to contracts contributed to the Services
Company by the Operating Partnership. Such contracts generally provide for
management fees of 1.5% to 5.0% of collected revenue. As is customary in the
real estate industry, most of the management contracts with the building
owners to be contributed are terminable upon 30 days notice. The Services
Company's responsibilities under these contracts include providing and
coordinating accounting services, lease administration, maintenance, repair
and engineering services, management, leasing, tenant improvement
construction, painting contracting and tenant representation.
The Services Company's leasing division will provide leasing services to
other property owners for fees that will be paid as leases are executed and as
the space is occupied. In general, leasing fees range from 4.0% to 5.0% of the
lease rental amount during the first five years of the lease term and 2.0% to
2.5% for the next five years of the lease term. The Services Company's
construction management division will provide construction management services
for tenant improvements, renovations and other construction to the properties
managed by the Services Company.
The Services Company will initially have three directors: Messrs. Reschke,
Curto and Derderian. Mr. Curto will serve as the Services Company's Chairman
of the Board, Mr. Derderian will serve as the Services Company's Chief
Executive Officer, and John O. Wilson will serve as the Services Company's
President.
The real estate management and leasing industries are highly competitive.
The Services Company's major competitors for construction, leasing and
management contracts include a variety of Chicago Metropolitan Area and
national firms. The Services Company expects to continue to be competitive in
these areas based upon the quality of its employees and services and its
current market presence.
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BUSINESS OBJECTIVE AND GROWTH STRATEGIES
BUSINESS OBJECTIVE
The Company currently intends to invest primarily in the acquisition,
development and redevelopment of commercial real estate properties located in
the (i) Suburban Chicago office market, (ii) Chicago CBD office market, (iii)
Chicago Metropolitan Area warehouse/distribution market and (iv) Chicago
Metropolitan Area overhead crane/manufacturing market. The Company's primary
business objective is to achieve sustainable long-term growth in cash flow per
share and to enhance the value of its portfolio through the implementation of
effective operating, acquisition, development and financing strategies. The
Company believes that opportunities exist to increase cash flow per share by:
. contractual rent increases in existing leases;
. leasing all or a portion of the existing vacant space in the Properties;
. acquiring office and industrial properties (or entities that own or
control such properties) at or below replacement cost and at positive
spreads to its cost of capital;
. increasing rental and occupancy rates and decreasing tenant concessions
as vacancy rates in the Company's submarkets generally continue to
decline;
. developing office and industrial properties for the benefit of the
Company where such development will result in a favorable risk-adjusted
return on investment;
. expanding its property management, leasing and corporate advisory
services business; and
. using, when available, long-term, tax-exempt bonds (which typically have
lower interest costs) to finance the acquisition and renovation of
existing industrial facilities and the development of new industrial
facilities.
The Company believes that a number of factors will enable it to achieve its
business objectives, including: (a) the opportunity to lease available space
at attractive rental rates because of increasing demand and, with respect to
the Office Properties, the present limited level of new construction in the
Chicago Metropolitan Area; (b) the presence of distressed sellers and
inadvertent owners (through foreclosure or otherwise) of office and industrial
properties in the Company's submarkets, as well as the Company's ability to
acquire properties with Common Units (thereby deferring the seller's taxable
gain), all of which create enhanced acquisition opportunities; and (c) the
quality and location of the Properties.
Management believes that the Company is well-positioned to take advantage of
these opportunities because of its extensive experience in its markets, its
seasoned management team, its significant land holdings and option rights and
its ability to develop, redevelop, lease and efficiently manage office and
industrial properties. In addition, the Company believes that public ownership
and its capital structure will provide the Company with enhanced access to the
public debt and equity capital markets and new opportunities for growth. Upon
the completion of the Offering, the Company expects to have obtained the
$225.0 million Credit Facility and to have a debt-to-total market
capitalization ratio of approximately 25.2%. There can be no assurance that
any such financing will be obtained.
OPERATING STRATEGY
The Company will focus on enhancing its cash flow per share by: (a)
maximizing cash flow from its Properties through contractual rent increases,
pro-active leasing programs and effective property management; (b) managing
operating expenses through the use of in-house management, leasing, marketing,
financing, accounting, legal, construction, management and data processing
functions; (c) maintaining and developing long-term relationships with a
diverse tenant group; (d) attracting and retaining motivated employees by
providing financial and other incentives to meet the Company's operating and
financial goals; and (e) continuing to emphasize value-added capital
improvements to enhance the Properties' competitive advantages in their
submarkets.
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Contractual Increases in Rent
A substantial portion of the Company's existing portfolio is leased pursuant
to long-term leases with contractual annual rent increases, thereby providing
the Company with both stable and escalating rental revenues. By way of
example, the contractual rent increases from existing leases in the 77 West
Wacker Drive Building average approximately $630,000 per year over the next
ten years. As of June 30, 1997, approximately 58.2% of the leases for the
Properties, in terms of Annualized Net Rent, had contractual rent increases,
of which approximately 42.4% of the Annualized Net Rent was attributable to
leases with specified contractual rent increases which on average provided for
annual rent increases of 4.9% over the next three years and approximately
15.8% of the Annualized Net Rent was attributable to leases with contractual
rent increases related to the CPI. The Company believes that reporting rental
revenues on a cash basis will result in a more accurate presentation of its
actual operating activities than if rental revenues were reported on a
straight-line basis and, accordingly, expects to report funds from operations
on a cash basis. As a result, contractual rent increases will cause reported
Funds from Operations to increase.
Pro-Active Leasing; Ability to Lease Vacant Space
The Company believes that the strength of its leasing program is
demonstrated by the current occupancy status of the Properties. As of June 30,
1997, the Office Properties were approximately 88.0% leased, and the
Industrial Properties were approximately 87.9% leased. Such occupancy rates
compare to average occupancy rates at June 30, 1997 of 85.1% for the Chicago
CBD office market, 89.1% for the Suburban Chicago office market and 92.5% for
the Chicago industrial market. See "Business and Properties--General," "--
Occupancy and Rental Information," "--Office Properties," "--Industrial
Properties" and "--The Company's Office Submarkets--Chicago Metropolitan Area
Office Submarkets."
The Company believes that one of its most notable leasing accomplishments is
the 77 West Wacker Drive Building, a recently-developed 50-story office tower
located in downtown Chicago, containing approximately 944,600 square feet of
net rentable area. Construction began in April 1990 and was successfully
completed with the opening of the building in May 1992. At its opening, the
building had commitments for long-term leases for over 95.0% of its net
rentable office area. In 1995, the Company restructured its lease with Keck, a
significant tenant at the 77 West Wacker Drive Building, to decrease the Keck
Space and to reduce the rent on Keck's remaining space. In June 1997, Keck
stopped paying rent and, in connection with a settlement of the resulting
litigation, Keck has agreed to vacate its remaining space no later than
November 30, 1997. See "Business and Properties--Legal Proceedings." The
Company believes it will be able to increase cash flow per share by continuing
to lease the existing vacant space in its Properties. As of June 30, 1997, the
Company had 282,069 net rentable square feet of vacant space in its Office
Properties (including approximately 113,000 net rentable square feet
attributable to the Keck Space at the 77 West Wacker Drive Building, of which
approximately 52,000 net rentable square feet has been subsequently leased).
As of June 30, 1997, the Company also had 690,007 net rentable square feet of
vacant space in its Industrial Properties.
Long-Term Leases; Tenant Retention
A substantial portion of the Properties is leased on a long-term basis,
thereby providing the Company with a reduced level of costs and capital
expenditures due to tenant lease expirations. Approximately 56.7% of the
Company's Annualized Net Rent is attributable to leases expiring in 2002 or
beyond, and 40.5% of the Company's Annualized Net Rent is attributable to
leases expiring in 2007 or beyond. With regard to the Office Properties, as of
June 30, 1997, 65.6% of the office leases in terms of Annualized Net Rent, had
terms expiring in five years or more, resulting in an average annual turnover
for the next five years of 6.9% per annum. With regard to the Industrial
Properties, as of June 30, 1997, 34.0% of the industrial leases in terms of
Annualized Net Rent, had terms expiring in five years or more, resulting in an
average annual turnover for the next five years of 13.2% per annum. From
January 1, 1994 through June 30, 1997 the Prime Properties achieved a tenant
retention rate, based on renewals of leases with scheduled expirations, of
approximately 64.0% in terms of net rentable square feet. The Company intends,
as market conditions permit, to continue to favor longer-term leases with
contractual annual rent increases. See "Business and Properties--Lease
Expirations."
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Management of Operating Expenses
The Company believes that it has been successful in providing high-quality
and professional property management services to its tenants, while
maintaining property operating expenses and real estate taxes at or below such
expense levels for comparable properties. As the Company continues to grow
through the acquisition and development of additional office and industrial
properties, management of the Company believes that economies of scale will
allow the Company to operate its properties with increasing efficiency.
ACQUISITION STRATEGY
The Company will seek to increase its cash flow per share by acquiring
additional office and industrial properties at prices below replacement cost,
including properties that: (a) may provide attractive initial yields and
significant potential for growth in cash flow from property operations; (b)
are well-located, high quality and competitive in their respective submarkets;
(c) are located in the Company's existing submarkets and/or in other strategic
submarkets where the demand for office and industrial space exceeds available
supply; or (d) have been undermanaged or are otherwise capable of improved
performance through intensive management, marketing and leasing.
The Company plans to concentrate its acquisition activities in the Chicago
Metropolitan Area and, to a lesser extent, in other midwestern markets. The
Company believes that attractive opportunities exist to acquire office and
industrial properties in these markets at prices below replacement cost. Each
acquisition opportunity will be reviewed to evaluate whether it meets one or
more of the following criteria: (a) potential for higher occupancy levels
and/or rents as well as for lower tenant turnover and/or operating expenses;
(b) ability to generate returns in excess of the Company's weighted average
cost of capital, taking into account the estimated costs associated with
renovation and tenant turnover (i.e., tenant improvements and leasing
commissions); and (c) a purchase price at or below estimated replacement cost.
The Company believes it has certain competitive advantages that enhance its
ability to identify and complete acquisitions on a timely and efficient basis,
including: (a) management's significant local market experience with, and
knowledge of, properties, submarkets and potential tenants; (b) management's
long-standing relationships with commercial real estate brokers and
institutional and other owners of commercial real estate in the Chicago
Metropolitan Area; (c) the Company's fully-integrated real estate operations,
which allow it to quickly evaluate and respond to acquisition opportunities;
(d) the Company's ability to access relatively low-cost financing through the
capital markets; and (e) management's reputation as an experienced purchaser
of office and industrial properties with the ability to execute transactions
in an efficient and timely manner. The Company also believes it could add a
number of office and industrial properties to its portfolio without the need
for a significant increase in general and administrative expenses, due to the
Company's expertise and depth of management and the efficiencies created by
its centralized management structure.
The Company believes that many of the owners of commercial real estate
properties located in the Chicago Metropolitan Area have a low tax basis in
their properties and have the corresponding potential for the recognition of
substantial taxable gains as a result of the disposition of such properties.
Management believes that the Company's capital structure and ability to
acquire properties in exchange for Common Units, and thereby defer a seller's
potential taxable gain, will enhance the ability of the Company to consummate
transactions quickly and to structure more competitive acquisitions than other
real estate companies in the market which lack the Company's access to capital
and ability to acquire property with Common Units.
Prime has recently acquired the Prime Contribution Properties and will
contribute such Properties to the Company in connection with the Formation
Transactions. In addition, the Company has executed agreements to acquire the
Acquisition Properties. The acquisition of the Acquisition Properties by the
Company is expected to occur prior to or concurrently with the completion of
the Offering. There can be no assurance, however, that the Company will be
able to complete any property acquisitions, including the acquisitions of the
Acquisition
51
<PAGE>
Properties, or to improve the operating results of any acquired properties.
See "Business and Properties--Acquisition Properties."
DEVELOPMENT STRATEGY
As opportunities arise and where market conditions support a favorable risk-
adjusted return on investment, the Company intends to pursue opportunities for
growth through the development of new office and industrial properties. The
Company believes that the strength and experience of its management in the
development of office and industrial properties will provide it with a
competitive advantage in evaluating and pursuing opportunities to develop
additional properties. During the next few years, the Company expects that
most of its development activities will be focused on suburban office and
industrial properties in the Chicago Metropolitan Area.
Based on ongoing marketing activities and discussions with prospective
tenants, the Company expects that over the next several years there will be
significant demand from several large tenants that are unable to find large
blocks of contiguous Class A office space in downtown Chicago which may lead
to significant office development opportunities. The Company believes that its
significant land holdings and land option rights will provide it with a
distinct advantage in competing for future development opportunities.
Following the completion of the Offering, the Company will own approximately
83.4 acres and have rights to acquire approximately 157.2 acres of developable
land, which management believes could be developed with approximately 1.2
million square feet of additional office space in the Chicago CBD and
approximately 4.4 million square feet of additional industrial properties
primarily in the Chicago Metropolitan Area. The Company's option rights
include an option to acquire a development site containing approximately
58,000 square feet known as 300 N. LaSalle in downtown Chicago which, to the
extent the Company is able to obtain significant preleasing commitments for
such a project, the Company believes it could develop as an office or mixed-
use project containing up to approximately 1.2 million net rentable square
feet.
The Services Company's corporate advisory activities with third parties are
expected to give the Company further access to future development
opportunities. The Services Company also will continue to undertake build-to-
suit projects for third parties.
FINANCING STRATEGY
The Company's financing strategy and objectives are determined by the
Company's Board of Trustees. The Company presently intends to operate with a
ratio of debt-to-total market capitalization (defined as the total debt of the
Company as a percentage of the sum of the market value of issued and
outstanding Shares, including the Common Units exchangeable for Common Shares,
plus total debt) in the range of 25.0% to 40.0%. The Company also intends to
operate in a manner that will facilitate its ability to secure an investment
grade rating on future unsecured debt as soon as practicable. However, such
objectives may be altered without the consent of the Company's shareholders,
and the Company's organizational documents do not limit the amount or type of
indebtedness that the Company may incur. Upon the completion of the Offering
and the consummation of the Formation Transactions, the Company's total debt
will constitute approximately 25.2% of its total market capitalization.
The Company intends to use one or more sources of capital for future
acquisitions and development activities. These capital sources may include
undistributed cash flow, borrowings under certain acquisition facilities,
proceeds from the issuance of long-term, tax-exempt bonds and other debt or
equity securities and other bank and/or institutional borrowings. Subject to
compliance by the Company with applicable loan covenants, upon completion of
the Offering, the $225.0 million Credit Facility may be used to provide funds
for acquisitions and development activities and to provide the replacement
letters of credit for the $74.5 million of Tax-Exempt Bonds. There can be no
assurance that any such financing will be obtained.
52
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering (which are estimated to be
approximately $230.3 million for the Common Share Offering and approximately
$39.6 million for the Convertible Preferred Offering), after the deduction of
underwriting discounts and commissions applicable to the Common Shares offered
hereby, are estimated to be approximately $269.9 million ($304.4 million if
the Underwriters' over-allotment option with respect to the Common Shares is
exercised in full). The Company will use the net proceeds of the Offering to
acquire 12,380,000 Common Units (representing a 55.3% common equity interest
in the Operating Partnership) and 2,000,000 Preferred Units.
The Operating Partnership will use the funds its receives from (i) the sale
of Common Units and Preferred Units to the Company for the net proceeds of the
Offering, (ii) the sale of Common Units to the Primestone Joint Venture for
$85.0 million and (iii) the expected borrowings of $83.5 million under the New
Mortgage Notes as follows:
. $350.8 million (including prepayment fees) will be used to repay certain
mortgages and other indebtedness related to the Properties and held by
third-party lenders;
. $41.4 million to acquire the Acquisition Properties from third parties
and to pay approximately $5.9 million for the Continental Management
Business;
. $28.7 million in cash to the IBD Contributors and NAC Contributors in
connection with their contribution of the IBD Properties and NAC
Properties;
. $5.2 million to pay on behalf of Prime, or reimburse Prime for, costs
and expenses incurred by Prime in connection with the Formation
Transactions and the Offering, including registration, NASD and NYSE
listing fees of approximately $250,000, financial printing and engraving
costs of approximately $400,000, legal, accounting, due diligence and
related fees of approximately $3.9 million and certain acquisition costs
(including earnest money deposits) of approximately $0.7 million
relating to Prime Contribution Properties;
. $2.5 million to pay transfer taxes related to the Prime Properties, the
Prime Contribution Properties, the IBD Properties and the NAC
Properties;
. $1.7 million to acquire the ownership interests and subordinate debt
interests in the Property Partnerships of the Prime Properties not held
by Prime;
. $1.7 million to pay commitment fees relating to the Credit Facility and
the New Mortgage Notes; and
. $0.5 million in excess proceeds to be used for working capital.
If the Underwriters' over-allotment option with respect to the Common Shares
is exercised, the Company will use the proceeds from the exercise of the
option to acquire additional Common Units, and the Operating Partnership will
use the funds it receives from the Company for working capital and general
corporate purposes, including future acquisitions and development. See the Pro
Forma Condensed Consolidated Balance Sheet and the Pro Forma Condensed
Consolidated Statements of Operations included elsewhere in this Prospectus
for the pro forma effects of the foregoing transactions and the debt reduction
under certain assumptions described therein. See also "Structure and Formation
of the Company--Formation Transactions."
The following table sets forth certain information concerning the
indebtedness outstanding at June 30, 1997 being repaid with the net proceeds
of the Offering:
<TABLE>
<CAPTION>
INTEREST MATURITY
PROPERTIES RATE (%) DATE PRINCIPAL
---------- -------- -------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
77 West Wacker Drive Building................ 10.0% 3/98 $229.8
77 West Wacker Drive Building................ 11.0% 3/98 6.7
201 4th Avenue N............................. 7.4% 10/98 5.3
Parking facility............................. 7.6% 10/98 1.2
------
$243.0
======
</TABLE>
53
<PAGE>
DISTRIBUTION POLICY
The Company presently intends to make regular quarterly distributions to the
holders of its Common Shares and Common Units. Distributions in respect of the
Common Shares and Common Units are not permitted unless all current and any
accumulated distributions in respect of the Convertible Preferred Shares and
Preferred Units, respectively, have been paid in full. The Company intends to
declare and pay a pro rata distribution with respect to the period commencing
on the completion of the Offering and ending on December 31, 1997 based upon
$0.3375 per Common Share for a full quarter. On an annualized basis, this
would be $1.35 per Common Share, or an annual distribution rate of
approximately 6.75% based on an assumed initial public offering price per
share of $20.00 (representing the midpoint of the price range). The Company
does not intend to reduce the expected distribution per share if the
Underwriters' overallotment option is exercised, in whole or in part. The
following discussion and the information set forth in the table and footnotes
below should be read together with the financial statements and notes thereto,
the pro forma financial information and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Pro
Forma Liquidity and Capital Resources" included elsewhere in this Prospectus.
The distribution described above is expected to represent approximately
95.5% of the Company's cash available for distribution for the 12 months
ending June 30, 1998. The Company's estimate of the cash available for
distribution for the 12 months ending June 30, 1998 is based upon pro forma
Funds from Operations for the 12 months ended June 30, 1997, with certain
adjustments based on the items described below. To estimate cash available for
distribution for the 12 months ending June 30, 1998, pro forma Funds from
Operations for the 12 months ended June 30, 1997 was adjusted (a) without
giving effect to any changes in working capital resulting from changes in
current assets and current liabilities (which changes are not anticipated to
be material) or the amount of cash estimated to be used for (i) development,
acquisition or other activities and (ii) financing activities, (b) for certain
known events and/or contractual commitments that either occurred subsequent to
June 30, 1997 or during the 12 months ended June 30, 1997 but were not in
effect for the full year and (c) for certain non-GAAP adjustments consisting
of (i) adjusting historical straight-line rents as reported on a GAAP basis to
the actual amounts currently being paid or due from tenants, (ii) an estimate
of amounts anticipated for recurring tenant improvements, leasing commissions,
and capital expenditures and (iii) scheduled debt principal payments. The
Company anticipates that, except as reflected in the table below and the notes
thereto, investing and financing activities will not have a material effect on
estimated cash available for distribution. The estimate of cash available for
distribution is being made solely for the purpose of setting the initial
distribution and is not intended to be a projection or forecast of the
Company's results of operations or its liquidity, nor is the methodology upon
which such adjustments were made necessarily intended to be a basis for
determining future distributions.
Future distributions by the Company will be at the discretion of the Board
of Trustees and will depend on a number of factors, including the amount of
cash available for distribution and the Operating Partnership's financial
condition. Any decision by the Board of Trustees to reinvest the cash
available for distribution rather than to distribute such funds to the Company
will depend upon the Operating Partnership's capital requirements, the annual
distribution requirements under the REIT provisions of the Code (see "Certain
Federal Income Tax Considerations--Requirements for Qualification--Annual
Distribution Requirements") and such other factors as the Board of Trustees
deems relevant. There can be no assurance that any distributions will be made
or that the estimated level of distributions will be maintained by the
Company.
The Company anticipates that its distributions will exceed earnings and
profits for income tax reporting purposes due to non-cash expenses, primarily
depreciation and amortization, to be incurred by the Company. Therefore,
approximately 5.5% (or $0.07 per Common Share) of the distributions
anticipated to be paid by the Company for the first 12 months subsequent to
the Offering are expected to represent a return of capital for federal income
tax purposes and in such event will not be subject to federal income tax under
current law to the extent such distributions do not exceed a shareholder's
basis in his or her Common Shares. The nontaxable distributions will reduce
the shareholder's tax basis in the Common Shares and, therefore, the gain (or
loss) recognized on the sale of such Common Shares or upon liquidation of the
Company will be increased (or
54
<PAGE>
decreased) accordingly. The percentage of shareholder distributions that
represents a nontaxable return of capital may vary substantially from year to
year.
Federal income tax law requires that a REIT distribute annually at least
95.0% of its REIT taxable income. See "Certain Federal Income Tax
Considerations--Requirements for Qualification--Annual Distribution
Requirements." The amount of distributions on an annual basis necessary to
maintain the Company's REIT status based on pro forma taxable income of the
Operating Partnership for the 12 months ended December 31, 1996, as adjusted
for certain items in the following table, would have been approximately $14.8
million. The estimated cash available for distribution is anticipated to be in
excess of the annual distribution requirements applicable to REITs. Under
certain circumstances, the Company may be required to make distributions in
excess of cash available for distribution in order to meet such distribution
requirements. See "Risk Factors--Adverse Consequences of Failure to Qualify as
a REIT; Other Adverse Consequences." For a discussion of the tax treatment of
distributions to holders of Common Shares, see "Certain Federal Income Tax
Considerations."
The Company believes that its estimate of cash available for distribution
constitutes a reasonable basis for setting the initial distribution, and the
Company expects to maintain its initial distribution rate for the 12 months
subsequent to the Offering unless actual results of operations, economic
conditions or other factors differ from the assumptions used in the estimate.
The Company's actual results of operations will be affected by a number of
factors, including the revenue received from the Properties, the operating
expense of the Company, interest expense, the ability of tenants of the
Properties to meet their obligations and unanticipated capital expenditures.
Variations in the net proceeds from the Offering as a result of a change in
the initial public offering price or the exercise of the Underwriters'
overallotment option may affect the cash available for distribution and the
payout ratio of cash available for distribution and available reserves. No
assurance can be given that the Company's estimate will prove accurate. Actual
results may vary substantially from the estimate.
55
<PAGE>
ESTIMATED CASH FLOWS
The following table illustrates the adjustments made by the Company to
reflect cash flow activity (including pro forma Funds from Operations) for the
12 months ended June 30, 1997 in order to calculate estimated initial cash
available for distribution for the 12 months ending June 30, 1998 (dollar
amounts, except per share amounts, in the table and related footnotes are in
thousands unless otherwise indicated):
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
Pro forma net income before minority interests for the year ended De-
cember 31, 1996..................................................... $ 8,794
Plus pro forma net income before minority interests for the six
months ended June 30, 1997.......................................... 3,783
Less pro forma net income before minority interests for the six
months ended June 30, 1996.......................................... (5,642)
-------
Pro forma net income before minority interests for the 12 months
ended June 30, 1997................................................. 6,935
Add (deduct) non-cash items:
Pro forma depreciation and amortization for the 12 months ended
June 30, 1997(1).................................................. 16,811
Gain on sales of property(2)....................................... (674)
Other non-recurring charges(3)..................................... 6,639
-------
Pro forma Funds from Operations for the 12 months ended June 30,
1997................................................................ 29,711
Adjustments:
Net increase in contractual rental income(4)....................... 1,641
Increases from new leases(5)....................................... 4,865
Net effect of lease expirations, assuming no renewals(6)........... (5,721)
Non-recurring items(7)............................................. 2,071
-------
Estimated adjusted pro forma Funds from Operations for the 12 months
ended June 30, 1998................................................. 32,567
Adjustments:
Net effect of straight-line rents(8)............................... 239
Pro forma non-real estate amortization for the 12 months ended June
30, 1998(9)....................................................... 1,250
-------
Estimated adjusted pro forma cash flow from operating activities for
the 12 months ending June 30, 1998.................................. 34,056
Estimated capitalized tenant improvements and leasing commis-
sions(10)(11)....................................................... (1,698)
Estimated capital expenditures(11)(12)............................... (644)
Scheduled debt principal payments(13)................................ (89)
-------
Estimated cash available for distribution for the 12 months ending
June 30, 1998(14)................................................... $31,625
=======
Company's share of cash available for distribution(15)............. $17,501
=======
Minority interests' share of cash available for distribution....... $14,124
=======
Total estimated initial distribution(14)............................. $30,201
=======
Estimated initial annual distribution per share...................... $ 1.35
=======
Estimated cash available for distribution on payout ratio(16)........ 95.5%
=======
</TABLE>
- --------
(1) Pro forma depreciation and amortization of $16,390 for the year ended
December 31, 1996 plus $8,484 for the six months ended June 30, 1997 less
$8,063 for the six months ended June 30, 1996, exclusive of amortization
of deferred financing costs for each respective period. Amounts include
the Company's proportionate share of depreciation and amortization of the
Services Company for each respective period.
(2) Gain on sales of property included in pro forma net income before minority
interests for the 12 months ended June 30, 1997.
(3) Elimination of non-recurring provision for environmental remediation costs
($3,205) on certain of the Prime Properties which are the obligations of
Prime (see Note 9 to the Combined Financial Statements of the Prime
Properties for additional information) and non-recurring write-off of
deferred tenant costs ($3,434) associated with Keck, a major tenant of the
77 West Wacker Drive Building. Keck has agreed to vacate the
56
<PAGE>
Keck Space on or before November 30, 1997 (see Note 5 to the Combined
Financial Statements of the Prime Properties for additional information).
(4) Represents the incremental increase in Funds from Operations attributable
to contractual rent increases for the 12 months ending June 30, 1998 over
actual rental revenue included in pro forma Funds from Operations for the
12 months ended June 30, 1997. (Contractual rental increases are limited
to the actual number of months in which the increased rental rate will be
in effect for each lease.)
(5) Represents the incremental increase in pro forma Funds from Operations
attributable to rental revenue from new executed leases commencing after
June 30, 1996 for the 12 months ending June 30, 1998.
(6) Represents the elimination of rental revenue for the 12 months ended June
30, 1998 from: (i) leases which expired between June 30, 1996 and June 30,
1997 ($4,002); (ii) leases which will expire between July 1, 1997 and June
30, 1998 for that portion of the 12 months ending June 30, 1998 that such
leases are no longer in effect ($1,580); and (iii) elimination of rental
revenues attributable to tenants leasing on a month-to-month basis for
such period ($139). This table assumes that leases which expire prior to
June 30, 1998 will not be renewed or released during the period. As a
result of this assumption, the average occupancy rate of the Properties
for the 12-month period ending June 30, 1998 will equal approximately
83.9% versus the actual occupancy rate of the Properties as of June 30,
1997 of approximately 87.9%. (Occupancy rates as of June 30, 1997 assume
that the Keck Space was vacant.) The Company's average retention rate for
expiring leases for January 1, 1994 through June 30, 1997, in terms of
square footage, was approximately 63.9% for the Prime Properties.
(7) Represents the elimination of non-recurring expenses relating to the Prime
Properties. These costs consist of (i) legal and consulting costs
associated with environmental liability studies ($1,246) on certain of the
Prime industrial properties which environmental liabilities are the
responsibility of Prime (see Note 9 to the Combined Financial Statements
of the Prime Properties for additional information); (ii) crane
maintenance costs of a previous tenant that are now the responsibility of
a new tenant ($407); and (iii) costs associated with the litigation
against Keck ($418).
(8) Represents the net effect of adjusting straight-line rental income
included in pro forma net income from an accrual basis under GAAP to a
cash basis.
(9) Represents pro forma non-real estate amortization for the 12 months ended
June 30, 1998 consisting of (i) amortization of deferred financing and
other amortization costs included in pro forma net income before minority
interests for the 12 months ended June 30, 1997 ($707) and (ii) the
Company's share (at 95%) of goodwill amortization recorded for the
Services Company ($543).
(10) Represents management's estimate of projected non-incremental revenue-
generating tenant improvements ("TI") and leasing commissions ("LC") for
the 12-month period ending June 30, 1998. Projected TI and LC for the
Office Properties and Industrial Properties are provided in the following
table (amounts not rounded to thousands) based on the weighted average TI
and LC expenditures and retenant and renewal rates for all renewed and
retenanted space during 1994, 1995, 1996, and the six months ended June
30, 1997 for the Prime Properties, multiplied by the average annual
leased space expiring for the Office Properties and the Industrial
Properties during 1998, 1999, and 2000.
57
<PAGE>
<TABLE>
<CAPTION>
(AMOUNTS IN DOLLARS)
WEIGHTED
1994 1995 1996 1997 AVERAGE
------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
Retenanted
TI per net rentable square foot...... $10.68 $11.36 $ 9.96 $ -- $ 8.30
LC per net rentable square foot...... $ 3.98 $ 6.23 $ 2.63 $ 1.61 $ 2.81
----------
Total weighted average TI and LC.... $ 11.11
Average annual net rentable square
feet of leased space expiring dur-
ing the three 12-month periods fol-
lowing the Offering................ 190,996
----------
Total estimated annual TI and LC.... $2,121,966
Rate of retenant.................... 38%
----------
Total cost of retenants............. $ 806,347
Renewals
TI per net rentable square foot...... $ 5.24 $ 3.48 $ 0.33 $ 2.48 $ 3.11
LC per net rentable square foot...... $ 1.02 $ 4.15 $ 0.82 $ 3.82 $ 1.59
----------
Total weighted average TI and LC.... $ 4.70
Average annual net rentable square
feet of leased space expiring dur-
ing the three 12-month periods fol-
lowing the Offering................ 190,996
----------
Total estimated annual TI and LC.... $ 897,681
Rate of renewal..................... 62%
----------
Total cost of renewals.............. $ 556,562
----------
Total estimated annual TI and LC cost
of the Office Properties............. $1,362,909
INDUSTRIAL PROPERTIES:
Retenanted
TI per net rentable square foot...... $ -- $ 0.43 $ 0.16 $ -- $ 0.37
LC per net rentable square foot...... $ -- $ 0.42 $ 0.53 $ -- $ 0.44
----------
Total weighted average TI and LC.... $ 0.81
Average annual net rentable square
feet of leased space expiring dur-
ing the three 12-month periods fol-
lowing the Offering................ 681,328
----------
Total estimated annual TI and LC.... $ 551,876
Rate of retenant.................... 35%
----------
Total cost of retenants............. $ 193,157
Renewals
TI per net rentable square foot...... $ -- $ -- $ -- $ -- $ --
LC per net rentable square foot...... $ 0.58 $ 0.51 $ -- $ -- $ 0.32
----------
Total weighted average TI and LC.... $ 0.32
Average annual net rentable square
feet of leased space expiring dur-
ing the three 12-month periods fol-
lowing the Offering................ 681,328
----------
Total estimated annual TI and LC.... $ 218,025
Rate of renewal..................... 65%
----------
Total cost of renewals.............. $ 141,716
----------
Total estimated annual TI and LC cost
of the Industrial Properties......... $ 334,873
----------
Total.................................. $1,697,782
==========
</TABLE>
58
<PAGE>
(11) The Company expects to fund non-recurring capital expenditures, tenant
improvements, and leasing commissions from cash reserves, borrowings,
cash flow from operating activities or other working capital sources.
(12) The Company's historical average cost per square foot for recurring
capital expenditures not reimbursed by tenants at the Prime Properties
during the years ended December 31, 1995 and 1996 and the annualized nine
months ended September 30, 1997 was $0.08. Estimated capital expenditures
for the 12 months ended June 30, 1998 is calculated by multiplying $0.08
per square foot by the total square footage for the Office Properties and
Industrial Properties.
(13) Estimated principal payments on the mortgage notes payable.
(14) Estimated cash available for distribution represents the Company's
increase in cash for the period before any distributions in respect of
the Common Shares and Common Units. Total estimated initial distribution
represents an expected use of cash.
(15) The Company's share of estimated distributions based on its approximately
55.3% partnership interest in the Operating Partnership.
(16) Calculated as the estimated initial annual distribution divided by the
estimated cash flow available for distribution for the 12 months ending
June 30, 1998. The payout ratio of estimated adjusted pro forma Funds
from Operations (adjusted for the net effect of straight-line rents) for
the 12 months ending June 30, 1998 equals 92.1%.
Cash available for distribution is based on Funds from Operations (which is
defined by NAREIT as net income (loss) computed in accordance with GAAP,
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization (excluding amortization
of deferred financing costs)) and after adjustments for unconsolidated
partnerships and joint ventures. The calculation of adjustments to pro forma
Funds from Operations is being made solely for the purpose of setting the
initial distribution amount and is not intended to be a projection or
prediction of the Company's actual results of operations nor is the
methodology upon which such adjustments are made intended to be a basis for
determining future distributions. Management considers Funds from Operations
an appropriate measure of performance of an equity REIT because industry
analysts have accepted it as such. The Company computes Funds from Operations
in accordance with standards established by the Board of Governors of NAREIT
in its March 1995 White Paper (with the exception that the Company expects to
report rental revenues on a cash basis, rather than a straight-line GAAP
basis, which the Company believes will result in a more meaningful
presentation of its actual operating activities), which may differ from the
methodology for calculating Funds from Operations used by other office and/or
industrial REITs and, accordingly, may not be comparable to such other REITs.
Further, Funds from Operations does not represent amounts available for
management's discretionary use because of needed capital replacement or
expansion, debt service obligations, or other commitments and uncertainties.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Funds from Operations."
THE ESTIMATES OF PRO FORMA CASH FLOWS FROM OPERATING ACTIVITIES AND CASH
AVAILABLE FOR DISTRIBUTION ARE BEING MADE SOLELY FOR THE PURPOSE OF SETTING
THE INITIAL DISTRIBUTION RATE AND ARE NOT INTENDED TO BE A PROJECTION OR
FORECAST OF THE COMPANY'S RESULTS OF OPERATIONS OR OF ITS LIQUIDITY. FUNDS
FROM OPERATIONS DOES NOT REPRESENT CASH FLOW FROM OPERATIONS AS DEFINED BY
GAAP, IS NOT NECESSARILY INDICATIVE OF CASH AVAILABLE TO FUND ALL OF THE
COMPANY'S CASH NEEDS AND SHOULD NOT BE CONSIDERED AS AN ALTERNATIVE TO NET
INCOME FOR PURPOSES OF EVALUATING THE COMPANY'S OPERATING PERFORMANCE.
59
<PAGE>
DILUTION
Purchasers of the Common Shares offered hereby will experience an immediate
and substantial dilution in the pro forma net tangible book value of the
Common Shares from the initial public offering price. Net tangible book value
per share represents the Company's total tangible assets less total
liabilities divided by the total number of Common Shares outstanding. After
further giving effect to the sale by the Company of the 12,380,000 Common
Shares to be sold by the Company in the Offering (at an assumed initial public
offering price of $20.00 per share, representing the midpoint of the price
range, and after deducting underwriting discounts and commissions and
estimated expenses of the Offering to be paid by the Company), and the
application of the net proceeds as set forth for planned repayments of
indebtedness, the Company's as adjusted pro forma net tangible book value per
Common Share as of June 30, 1997 would have been $16.00, representing an
immediate increase of $55.24 in pro forma net tangible book value per share to
existing shareholders and an immediate dilution of $4.00 per share to persons
purchasing shares in the Common Share Offering. The following table
illustrates this dilution per Common Share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price(1)............................ $20.00
Pro forma net tangible book value before the Common Share
Offering(2).............................................. $(39.24)
Increase in pro forma net tangible book value attributable
to the Offering(3)....................................... 55.24
-------
Pro forma net tangible book value after the Formation Transactions
and Common Share Offering(4)....................................... 16.00
------
Dilution to new investors(5)........................................ $(4.00)
======
</TABLE>
- --------
(1) Before deducting the underwriting discounts and commissions and estimated
expenses of the Offering.
(2) Pro forma net tangible book value before the Offering is determined by
dividing the Prime Properties' negative combined net tangible book value
of approximately $140.3 million at June 30, 1997, by 3,575,000 Common
Shares issued to Prime and Mr. Patterson (assuming the exchange of Units,
issued to Prime and Mr. Patterson in exchange for the Prime Properties and
the Prime Contribution Properties in connection with the Formation
Transactions, into Common Shares on a one-for-one basis).
(3) Based upon the initial public offering price after the deduction of the
underwriting discounts and commissions and estimated expenses of the
Offering.
(4) Pro forma net tangible book value after the Formation Transactions and the
Offering is determined by dividing the Company's consolidated net tangible
book value of approximately $198.1 million at June 30, 1997 by 12,380,000
Common Shares outstanding. There is no impact on dilution attributable to
the exchange of Common Units issued to the Limited Partners due to the
effect of minority interest.
(5) Dilution is determined by subtracting pro forma net tangible book value
after giving effect to the Offering and the Formation Transactions from
the initial public offering price paid by a new investor for a Common
Share.
60
<PAGE>
The following table sets forth the total contributions to be paid to the
Company by purchasers of Common Shares sold in the Offering, the number of
Common Units to be issued to Prime in connection with the Formation
Transactions and the net tangible book value as of June 30, 1997 of the
average contribution per share based on total contributions. See "Structure
and Formation of the Company."
<TABLE>
<CAPTION>
BOOK VALUE OF
COMMON SHARES/ BOOK VALUE OF AVERAGE
COMMON UNITS ISSUED(1) TOTAL CONTRIBUTIONS CONTRIBUTIONS PER
---------------------- ------------------------- COMMON SHARE OR
SHARES PERCENT AMOUNT PERCENT COMMON UNIT
------------- ---------------------- -------- -----------------
(IN 000'S)
<S> <C> <C> <C> <C> <C>
Common Shares sold by
the
Company in the Offer-
ing.................... 12,380,000 55.3% $ 247,602 119.6% $ 20.00
Common Units acquired by
Primestone............. 4,569,893 20.4 85,000 41.1 $ 18.60
Common Units issued to
Prime(2)............... 3,575,000 16.0 (162,511)(3) (78.5) $(45.46)
Common Units issued to
non-Prime minority in-
terests................ 1,845,550 8.3 36,931 (4) 17.8 $ 20.00
------------- -------- ----------- -------
Total................... 22,371,443 100.0% $ 207,022 100.0%
============= ======== =========== =======
</TABLE>
- --------
(1) Includes Common Units exchangeable into Common Shares or, at the option of
the Company, cash. See "Structure and Formation of the Company."
(2) Common Units issued to Prime and Mr. Patterson before any Common Units are
contributed to the Primestone Joint Venture.
(3) Based upon the June 30, 1997 pro forma book value of the Prime Properties
and the Prime Contribution Properties to be contributed to the Operating
Partnership in connection with the Formation Transactions, less $22.2
million attributable to underwriting discounts and commissions and
estimated expenses of the Offering.
(4) Based upon the June 30, 1997 pro forma book value of the Contribution
Properties to be contributed to the Operating Partnership in connection
with the Formation Transactions.
61
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (based on
the historical combined financial statements of the Properties) as of June 30,
1997 and on a pro forma basis for the Company after giving effect to the
Offering and the consummation of the Formation Transactions and the use of the
estimated net proceeds from the Offering as described under "Use of Proceeds."
See the historical and pro forma financial information relating to the Company
and the Properties set forth elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------
HISTORICAL PRO FORMA
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Mortgage notes payable............................... $ 343,835 $ 89,925
Tax-exempt and taxable bonds payable................. 86,450 74,450
Credit Facility(1)................................... -- --
----------- ----------
Total debt............................................. 430,285 164,375
Partners' deficit...................................... (140,279) --
Minority interest...................................... -- 159,901
Shareholders' equity:
Preferred Shares, $.01 par value; 30.0 million shares
authorized, 2.0 million Convertible Preferred Shares
issued and outstanding.............................. -- 20
Common Shares, $.01 par value; 100.0 million shares
authorized, 12.38 million shares issued and
outstanding(2)(3)................................... -- 124
Additional paid-in capital........................... -- 197,983
----------- ----------
Total shareholders' equity............................. -- 198,127
----------- ----------
Total capitalization................................... $ 290,006 $ 522,403
=========== ==========
</TABLE>
- --------
(1) The Company has obtained a commitment for the $225.0 million Credit
Facility. Borrowings under the Credit Facility may be used to provide
funds for acquisitions and development activities and to provide the
replacement letters of credit for the $74.5 million of Tax-Exempt Bonds.
There can be no assurance that any such financing will be obtained. See
"Business Objective and Growth Strategies--Financing Strategy."
(2) Assumes no exchange of Common Units to be issued to the Limited Partners
in connection with the Formation Transactions. If all of the Common Units
(including the GP Common Units of the NAC General Partner, which are not,
by their terms, exchangeable into Common Shares but which represent common
equity interests in the Operating Partnership) were exchanged, 22,371,443
Common Shares would be outstanding.
(3) Excludes 737,000 shares of the 1,850,000 Common Shares reserved for
issuance pursuant to the Share Incentive Plan. See "Management--Share
Incentive Plan."
62
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain financial information on a pro forma
basis for the Company and on a combined historical basis for the Prime
Properties. The combined historical financial information should be read in
conjunction with the combined financial statements and notes thereto included
elsewhere in this Prospectus.
Pro forma operating information is presented as if, at June 30, 1997, (i)
the Company had sold 12.38 million shares of its Common Shares at $20.00 per
share, representing the midpoint of the price range, and contributed the net
proceeds to the Operating Partnership, (ii) the Company had sold 2.0 million
shares of its Convertible Preferred Shares at $20.00 per share, representing
the midpoint of the price range, and contributed the net proceeds to the
Operating Partnership, (iii) Prime had contributed the properties, business
and operations of the Prime Properties and the Prime Contribution Properties
to the Operating Partnership, (iv) the Operating Partnership had sold 4.57
million Common Units to the Primestone Joint Venture at a price per Common
Unit equal to the initial public offering price of the Common Shares, net of
underwriting discounts and commissions, (v) the IBD Contributors and the NAC
Contributors had contributed the Contribution Properties to the Operating
Partnership, (vi) the Operating Partnership had acquired the Acquisition
Properties, (vii) the Operating Partnership had acquired the Continental
Management Business from a third party and (viii) the Operating Partnership
had repaid debt on certain of the Prime Properties and Prime Contribution
Properties described under "Use of Proceeds." The unaudited Pro Forma
Condensed Consolidated Statements of Operations for the six months ended June
30, 1997 and for the year ended December 31, 1996 are presented as if the
above transactions occurred as of January 1, 1996. The unaudited Pro Forma
Condensed Consolidated financial statements should be read in conjunction with
all of the financial statements contained elsewhere in the Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of the
Formation and Offering have been made.
The unaudited Pro Forma Condensed Consolidated Balance Sheet and Statements
of Operations of the Company are not necessarily indicative of what the actual
financial position or results operations would have been assuming the
Formation and Offering had occurred at the dates indicated above, nor do they
purport to represent the future financial position or results of operations of
the Company.
63
<PAGE>
SUMMARY FINANCIAL DATA
THE COMPANY (PRO FORMA) AND PRIME PROPERTIES (COMBINED HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ---------------------------------------------------------
COMBINED
HISTORICAL COMBINED HISTORICAL
PRO FORMA ------------------ PRO FORMA -----------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
--------- -------- -------- --------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUE:
Rental............... $28,026 $ 16,131 $ 14,449 $53,001 $ 30,538 $ 33,251 $ 30,352 $ 28,177 $17,339
Tenant reimburse-
ments............... 10,458 7,769 6,962 19,216 14,225 14,382 12,451 10,750 5,221
Insurance settle-
ment................ -- -- -- -- -- 7,257 -- -- --
Other................ 368 689 1,439 2,778 3,397 2,715 3,170 1,527 1,435
------- -------- -------- ------- -------- -------- -------- -------- -------
Total revenue...... 38,852 24,589 22,850 74,995 48,160 57,605 45,973 40,454 23,995
------- -------- -------- ------- -------- -------- -------- -------- -------
EXPENSES:
Property operations.. 5,716 4,318 4,304 12,532 9,767 9,479 8,852 8,452 6,518
Real estate taxes.... 7,799 5,590 5,154 13,440 9,383 9,445 9,057 7,167 4,331
Depreciation and
amortization........ 8,815 6,492 6,146 17,051 12,409 12,646 11,624 11,739 7,558
Interest............. 4,709 13,587 13,512 9,291 27,080 27,671 25,985 22,827 10,936
Interest--affiliate.. -- 5,649 4,852 -- 10,137 8,563 7,402 6,335 6,699
Property management
fee--
affiliate........... -- 801 766 -- 1,561 1,496 1,388 1,106 1,384
Financing fees....... 640 640 692 1,232 1,232 -- -- -- --
General and adminis-
trative............. 2,967 1,886 1,575 7,161 4,927 4,508 3,727 3,657 1,277
Provision for envi-
ronmental
remediation costs... 3,205 3,205 -- -- -- -- -- -- --
Write-off of deferred
tenant costs........ -- -- -- 3,081 3,081 13,373 -- -- --
------- -------- -------- ------- -------- -------- -------- -------- -------
Total expenses..... 33,851 42,168 37,001 63,788 79,577 87,181 68,035 61,283 38,703
------- -------- -------- ------- -------- -------- -------- -------- -------
Income (loss) before
share of income of
investment
subsidiary,
Convertible
Preferred Share
dividend and
minority interest... 5,001 (17,579) (14,151) 11,207 (31,417) (29,576) (22,062) (20,829) (14,708)
Share of income of
investment
subsidiary.......... 182 -- -- 387 -- -- -- -- --
------- -------- -------- ------- -------- -------- -------- -------- -------
Income (loss) before
Convertible
Preferred Share
dividend and
minority interest... 5,183 (17,579) (14,151) 11,594 (31,417) (29,576) (22,062) (20,829) (14,708)
Convertible Preferred
Share dividend...... (1,400) -- -- (2,800) -- -- -- -- --
------- -------- -------- ------- -------- -------- -------- -------- -------
Income (loss) before
minority interest... 3,783 (17,579) (14,151) 8,794 (31,417) (29,576) (22,062) (20,829) (14,708)
Minority interest.... (1,690) 368 371 (3,928) 894 3,281 5,393 10,531 8,941
------- -------- -------- ------- -------- -------- -------- -------- -------
Net income (loss).... $ 2,093 $(17,211) $(13,780) $ 4,866 $(30,523) $(26,295) $(16,669) $(10,298) $(5,767)
======= ======== ======== ======= ======== ======== ======== ======== =======
Pro forma net income
per
Common Share(1)(2).. $ 0.17 $ 0.39
======= =======
OTHER OPERATING DATA:
Ratio of earnings
before minority
interest to combined
fixed charges and
Convertible
Preferred Share
dividend(3)......... 1.60 0.10 0.24 1.70 0.17 0.21 0.35 0.31 0.16
Excess of combined
fixed charges and
Convertible
Preferred Share
dividend over
earnings before
minority interest... -- $ 17,579 $ 14,151 -- $ 31,417 $29,576 $ 22,062 $ 20,829 $19,552
Ratio of Funds from
Operations to
combined fixed
charges and
Convertible
Preferred Share
dividend(4)......... 3.24 0.58 0.52 3.01 0.54 0.66 0.62 0.69 0.49
Excess of combined
fixed charges and
Convertible
Preferred Share
dividend over Funds
from Operations..... $ -- $ 8,180 $ 8,891 $ -- $ 17,367 $ 12,733 $ 12,930 $ 9,345 $11,994
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31,
-------------------- ------------------------------------------------
COMBINED HISTORICAL
COMBINED ------------------------------------------------
PRO FORMA HISTORICAL 1996 1995 1994 1993 1992
--------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate assets,
before accumulated
depreciation.......... $514,944 $295,369 $291,757 $289,558 $285,687 $281,316 $259,469
Total assets........... 550,076 318,278 325,230 343,641 356,421 357,158 327,776
Mortgages notes and
bonds payable......... 164,375 430,285 421,983 405,562 388,309 361,832 294,691
Total liabilities...... 192,048 458,557 447,927 434,993 421,257 397,539 343,098
Minority interest...... 159,901 (7,273) (6,905) (6,047) 886 (11,527) (10,297)
Shareholders' equity
(partners' deficit)... 198,127 (133,006) (115,792) (85,305) (65,722) (28,854) (5,025)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------ -----------------------------------------
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA -------------------- PRO FORMA -------------------------------
1997 1997 1996 1996 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Opera-
tions(5).............. $ 15,647 $ (8,180) $ (8,891) $ 28,086 $ (17,367) $ (12,733) $ (12,930)
Cash flows provided by
(used in):
Operating activi-
ties............... -- (2,727) (3,162) -- (3,165) (1,259) (13,875)
Investing activi-
ties............... -- (809) 1,567 -- 1,126 (9,176) (6,495)
Financing activi-
ties............... -- 2,421 3,763 -- 5,733 10,873 15,422
Office Properties:
Square footage...... 2,353,759 1,414,897 1,414,897 2,353,759 1,414,897 1,414,897 1,414,897
Occupancy (%)(6).... 88.0 86.8 88.8 91.6 92.5 95.8 93.7
Industrial Properties:
Square footage...... 5,696,355 2,462,430 2,478,030 5,651,780 2,462,430 2,551,624 2,547,388
Occupancy (%)....... 87.9 73.5 73.3 87.3 73.5 72.9 62.3
</TABLE>
- --------
(1) Pro forma net income per share equals pro forma net income divided by the
12,380 Common Shares outstanding after the Offering.
(2) The pro forma net income (loss) per Common Share based solely on the
number of shares issued in the Offering, the proceeds of which will be
used to retire debt, would be $(0.42) and $(0.49) per share for the six
months ended June 30, 1997 and the year ended December 31, 1996,
respectively, calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------- --------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma Common Shares
in the Offering issued
to retire debt......... 12,151 12,151
=================== ===================
Historical net loss..... $ (17,211) $ (30,523)
Plus pro forma reduction
in interest expense due
to repayment of indebt-
edness................. 12,160 24,550
------------------- -------------------
Pro forma net loss...... $ (5,051) $ (5,973)
=================== ===================
Pro forma net loss per
Common Shares in the
Offering issued to re-
tire debt.............. $ (0.42) $ (0.49)
=================== ===================
</TABLE>
(3) For purposes of these computations, earnings before minority interests
consist of income (loss) less income from unconsolidated investment
partnerships, plus fixed charges. Combined fixed charges and Convertible
Preferred Share dividend consist of interest costs, whether expensed or
capitalized, and amortization of debt issuance costs and Convertible
Preferred Share dividend.
(4) For purposes of these computations, Funds from Operations consist of Funds
from Operations (as defined in note 5 below) plus combined fixed charges
and Convertible Preferred Share dividend (as defined in note 3 above).
(5) As defined by NAREIT, Funds from Operations represents net income (loss)
before minority interest of holders of Common Units (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring
and sales of property, plus real estate related depreciation and
amortization (excluding amortization of deferred financing costs) and
after adjustments for unconsolidated partnerships and joint ventures. Non-
cash adjustments to Funds from Operations were as follows: in all periods,
depreciation and amortization, for pro forma 1997, provision for
environmental remediation cost, for the years ended December 31, 1996,
1995, 1994 and pro forma 1996, gains on the sale of real estate, for the
years ended December 31, 1996 and 1995 and pro forma 1996, write-off of
deferred tenant costs, for the year ended December 31, 1995, excess
proceeds from insurance claims, and for the year ended December 31, 1994,
lease termination fees. Management considers Funds from Operations an
appropriate measure of performance of an office and/or industrial REIT
because industry analysts have accepted it as such. The Company computes
Funds from Operations in accordance with standards established by the
Board of Governors of NAREIT in its March 1995 White Paper (with the
exception that the Company expects to report rental revenues on a cash
basis, rather than a straight-line GAAP basis, which the Company believes
will result in a more accurate presentation of its actual operating
activities), which may differ from the methodology for calculating Funds
from Operations used by certain other office and/or industrial REITs and,
accordingly, may not be comparable to such other REITs. Further, Funds
from Operations does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
repayment obligations, or other commitments and uncertainties. (See
"Distribution Policy"). Funds from Operations should not be considered as
an alternative for net income as a measure of profitability nor is it
comparable to cash flows provided by operating activities determined in
accordance with GAAP.
(6) The pro forma office occupancy percentage for the six months ended June
30, 1997 was calculated by treating the Keck Space as vacant because,
pursuant to a settlement agreement, Keck has agreed to vacate the space on
or before November 30, 1997. See "Business and Properties--Legal
Proceedings."
65
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Combined Financial Statements for the Prime Properties
and notes thereto appearing elsewhere in this Prospectus. The Combined
Financial Statements of the Prime Properties are comprised of the operations,
assets and liabilities of the properties described in Note 1 of the Notes to
the Combined Financial Statements of the Prime Properties and does not include
any operations, assets and liabilities of the Prime Contribution Properties,
the Contribution Properties or the Acquisition Properties. As part of the
Formation Transactions, the Properties will be contributed to the Operating
Partnership, of which the Company owns an approximate 55.3% interest. As a
result, for accounting purposes, the financial information of the Operating
Partnership and the Company will be consolidated.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Total revenue increased $1.7 million, or 7.4%, to $24.6 million for the six
months ended June 30, 1997 compared to $22.9 million for the six months ended
June 30, 1996. Rental revenue increased $1.7 million, or 11.8%, to $16.1
million in 1997 from $14.4 million in 1996. In 1997, rental revenue from the
Office Properties increased $1.1 million, or 9.1%, to $13.2 million from $12.1
million in 1996 primarily due to increased net rent per leased square foot
($20.80 in 1997 and $18.66 in 1996). In 1997, rental revenue from the
Industrial Properties increased $0.6 million, or 26.1%, to $2.9 million from
$2.3 million in 1996 primarily due to increased average percentage leased
(73.5% in 1997 and 73.1% in 1996) and increased net rent per leased square
foot ($3.21 in 1997 and $2.47 in 1996). Tenant reimbursements increased $0.8
million, or 11.4%, to $7.8 million in 1997 from $7.0 million in 1996. In 1997,
tenant reimbursements from the Office Properties increased $0.8 million, or
13.6%, to $6.7 million from $5.9 million in 1996 primarily due to the
restructuring of Keck's lease. During 1996, Keck paid no tenant reimbursements
until a final restructuring agreement was reached in late 1996. During 1997,
Keck paid $0.6 million of tenant reimbursements. Tenant reimbursements from
the Industrial Properties remained consistent at $1.1 million in both 1997 and
1996. During 1996, one of the Industrial Properties sold a parcel of land for
a gain of $0.6 million. No similar sales occurred in 1997. All other revenue
amounts remained comparable between 1997 and 1996.
Total expenses increased $5.2 million, or 14.1%, to $42.2 million for the
six months ended June 30, 1997 compared to $37.0 million for the six months
ended June 30, 1996. Property operating expenses remained consistent at $4.3
million in both 1997 and 1996. In 1997, property operating expenses from the
Office Properties and the Industrial Properties remained consistent at $4.1
million and $0.2 million, respectively, in both 1997 and 1996. Although there
were changes in occupancy in 1997, property operations were at such a level
that the changes had minimal effect on the overall property operations. In
1997, real estate tax expenses increased $0.4 million, or 7.7%, to $5.6
million from $5.2 million in 1996 primarily due to higher property assessments
in 1997. In 1997, total interest expense increased $0.8 million, or 4.3%, to
$19.2 from $18.4 million in 1996 primarily due to a $15.7 million increase in
outstanding debt in 1997 and 1996. In 1997, general and administrative
expenses increased $0.3 million, or 18.8%, to $1.9 million from $1.6 million
in 1996 primarily due to the write-off of $0.2 million of uncollected tenant
receivables from Keck. In 1997, the Industrial Properties recorded a provision
for environmental remediation costs of $3.2 million, which represents the
probable costs to be incurred for the clean-up of environmental contamination
at the properties. Prime has contractually agreed to indemnify the Company
from any environmental liabilities the Property Partnerships may incur and has
pledged $1.0 million and approximately 485,000 partnership units in an
operating partnership that can be converted to common shares of a publicly
traded real estate investment trust to cover these costs. All other expense
amounts remained comparable between 1997 and 1996.
In both 1997 and 1996, loss allocated to minority interest remained
consistent at $0.4 million primarily due to a minority interest's ownership in
the Prime Properties and loss before minority interest for the properties in
which the minority owners have an interest remained consistent in 1997 and
1996.
Net loss increased $3.4 million, or 24.6%, to $17.2 million in 1997 compared
to $13.8 million in 1996, primarily due to the changes described above.
66
<PAGE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenue decreased $9.4 million, or 16.3%, to $48.2 million for the
year ended December 31, 1996 compared to $57.6 million for the year ended
December 31, 1995 primarily due to the realization of a gain in 1995 from a
non-recurring insurance settlement payment to the Company relating to fire
damage to one of the Industrial Properties. Rental revenue decreased $2.8
million, or 8.4%, to $30.5 million in 1996 from $33.3 million in 1995. In
1996, rental revenue from Office Properties decreased $3.8 million, or 13.3%,
to $24.7 million from $28.5 million in 1995 primarily due to the restructuring
of Keck's lease. The restructuring resulted in decreased average percentage
leased (94.1% in 1996 and 94.7% in 1995) and net rent per leased square foot
($18.71 in 1996 and $21.40 in 1995). In 1996, rental revenue from Industrial
Properties increased $1.0 million, or 20.8%, to $5.8 million from $4.8 million
in 1995 primarily due to increased average percentage leased (73.2% in 1996
and 67.6% in 1995) and net rent per leased square foot ($3.18 in 1996 and
$2.77 in 1995). Tenant reimbursements decreased $0.2 million, or 1.4%, to
$14.2 million in 1996 from $14.4 million in 1995. In 1996, tenant
reimbursements from Office Properties decreased $0.4 million, or 3.2%, to
$12.1 million from $12.5 million in 1995 primarily due to the restructuring of
Keck's lease. In 1996, tenant reimbursements from Industrial Properties
increased $0.3 million, or 16.6%, to $2.1 million from $1.8 million in 1995
primarily due to the increased occupancy described above. In 1995, one of the
Industrial Properties received a final insurance settlement of $7.3 million
related to a fire that destroyed the Property. No such proceeds were received
in 1996. Other revenue increased to $2.2 million in 1996 from $1.6 million in
1995 primarily due to a $0.6 million increase in interest income. The increase
in interest income was due to a $1.0 million increase in the average balance
outstanding of amounts due from affiliates from 1995 to 1996. All other
revenue amounts remained comparable between 1996 and 1995.
Total expenses decreased $7.6 million, or 8.7%, to $79.6 million for the
year ended December 31, 1996 compared to $87.2 million for the year ended
December 31, 1995 primarily due to a decrease of $10.3 million, or 77.4%, to
$3.1 million in 1996 from $13.3 million in 1995 of the write-off by the
Company of deferred tenant costs as part of the restructuring of the Keck
lease. Property operating expenses increased $0.3 million, or 1.1%, to $9.8
million in 1996 from $9.5 million in 1995. Property operating expenses from
Office Properties remained constant at $8.2 million in both 1996 and 1995.
Although there was a decline in Office Properties' occupancy in 1996, property
operations were at such a level that a decline in occupancy had a minimal
effect on the overall property operations. In 1996, property operating
expenses from Industrial Properties decreased $0.1 million, or 7.6%, to $1.2
million from $1.3 million in 1995. In 1996, depreciation and amortization
expense decreased $0.2 million, or 1.6%, to $12.4 million from $12.6 million
in 1995, primarily due to the restructuring of Keck's lease, offset by an
increase in occupancy and additional tenant improvements at the Industrial
Properties described above. No additional costs were written off in 1996. In
1996, total interest expense increased $1.0 million, or 2.8%, to $37.2 million
from $36.2 million in 1995 primarily due to a $16.4 million increase in
outstanding debt during May 1996. Financing fees increased $1.2 million in
1996 from the same period in 1995 due to a letter of credit facility obtained
in 1996 on behalf of the Industrial Properties. In 1996, general and
administrative expenses increased $0.4 million, or 8.9%, to $4.9 million from
$4.5 million in 1995 primarily due to a $0.5 million allowance for
uncollectible tenant receivables due from the restructured lease with Keck
recorded in 1996. All other expenses remained comparable between 1996 and
1995.
In 1996, loss allocated to minority interest decreased $2.4 million, or
74.4%, to $0.9 million from $3.3 million in 1995 primarily due to a reduction
of the minority interest's ownership in the Prime Properties during 1995.
Net loss increased $4.2 million to $30.5 million in 1996 compared to a net
loss of $26.3 million in 1995, primarily due to the changes described above.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenue increased $11.6 million, or 25.2%, to $57.6 million for the
year ended December 31, 1995 compared to $46.0 million for the year ended
December 31, 1994 the booking in 1995 of a non-recurring insurance settlement
payment to the Company relating to fire damage to one of the Industrial
Properties. Rental revenue increased $2.9 million, or 9.5%, to $33.3 million
in 1995 compared to $30.4 million in 1994. In 1995,
67
<PAGE>
rental revenue from Office Properties increased $2.4 million, or 9.2%, to
$28.5 million from $26.1 million in 1994 primarily due to increased average
percentage leased (94.7% in 1995 and 92.9% in 1994) and net rent per leased
square foot ($21.40 in 1995 and $19.97 in 1994). In 1995, rental revenue from
Industrial Properties increased $0.5 million, or 11.6%, to $4.8 million from
$4.3 million in 1994 due to increased average percentage leased (67.6% in 1995
and 64.1% in 1994) and net rent per leased square foot ($2.77 in 1995 and
$2.51 in 1994). In 1995, tenant reimbursements increased $1.9 million, or
15.2%, to $14.4 million in 1995 from $12.5 million in 1994. In 1995, tenant
reimbursements from Office Properties increased $1.8 million, or 16.8%, to
$12.5 million from $10.7 million in 1994 primarily due to the increase in
occupancy described above. In 1995, tenant reimbursements from Industrial
Properties increased $0.1 million, or 5.9%, to $1.8 million from $1.7 million
in 1994 primarily due to the increased occupancy described above. In 1995, one
of the Industrial Properties received a final insurance settlement of $7.3
million related to a fire that destroyed the Property. In 1995, gain on sale
of assets increased $0.8 million to $0.8 million from $0.0 million in 1994
primarily due to a $0.9 million increase in proceeds from the sale of real
estate. Other revenue decreased to $1.6 million in 1995 from $2.8 million in
1994, primarily due to a $1.7 million lease termination fee received in 1994.
No such fee was received in 1995. All other revenue amounts remained
comparable between 1995 and 1994.
Total expenses increased $19.2 million, or 28.2%, to $87.2 million for the
year ended December 31, 1995 compared to $68.0 million for the year ended
December 31, 1994 primarily due to the write-off by the Company in 1995 of
approximately $13.3 million of deferred tenant costs as part of the
restructuring of Keck's lease which included approximately $3.1 million of
leasing commissions and tenant improvements. Property operating expenses
increased $0.6 million, or 6.7%, to $9.5 million in 1995 from $8.9 million in
1994. In 1995, property operating expenses from Office Properties increased
$0.6 million, or 8.0%, to $8.1 million from $7.5 million in 1994 primarily due
to the increase in occupancy described above. Property operating expenses from
Industrial Properties remained constant at $1.3 million in both 1995 and 1994.
Although there was an increase in Industrial Properties' occupancy in 1995,
property operations were at such a level that an increase in occupancy had
minimal effect on the overall property operations. In 1995, real estate tax
expense increased $0.4 million, or 4.4%, to $9.5 million from $9.1 million in
1994. The increase is primarily due to higher property assessments in 1995. In
1995, depreciation and amortization expense increased $1.0 million, or 8.6%,
to $12.6 million from $11.6 million in 1994, primarily due to the increase in
occupancy and additional tenant improvements at the Office Properties and
Industrial Properties described above. In 1995, total interest expense
increased $2.8 million, or 8.4%, to $36.2 million from $33.4 million in 1994
primarily due to a $17.3 million increase in outstanding debt during 1995. In
1995, general and administrative expenses increased $0.8 million, or 21.6%, to
$4.5 million from $3.7 million in 1994 primarily due to an increase in
occupancy at both the Office Properties and Industrial Properties. All other
expenses remained comparable between 1995 and 1994.
In 1995, loss allocated to minority interest decreased $2.1 million, or
38.9%, to $3.3 million from $5.4 million in 1995 primarily due a reduction of
the minority interest's ownership in the Prime Properties during 1995 and
1994.
The net loss increased $9.6 million to $26.3 million in 1995 compared to a
net loss of $16.7 million in 1994, due to the changes described above.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Offering and the Formation Transactions and the
application of the net proceeds therefrom as described in "Use of Proceeds,"
the Company expects to have reduced total indebtedness on the Properties from
$430.3 million to $164.4 million, comprised of debt secured by certain of the
Properties (the "Mortgage Debt"). The $164.4 million Mortgage Debt is expected
to be comprised of three mortgage notes payable totaling $89.9 million and 14
issues of Tax-Exempt Bonds totaling $74.5 million. See "Pro Forma Mortgage
Indebtedness." There will be a total of approximately $90,000 of scheduled
loan principal payments due during the year ending December 31, 1997. The
Company's debt-to-total market capitalization ratio will be 25.2% (24.0% if
the underwriters' overallotment option is exercised in full) of the Company's
total market capitalization.
68
<PAGE>
Pro Forma Mortgage Indebtedness. As of June 30, 1997 on a pro forma basis,
the Company expects to have outstanding approximately $164.4 million of
indebtedness secured by each of the Properties as listed below:
<TABLE>
<CAPTION>
ESTIMATED
ANNUAL DEBT MATURITY BALANCE AT
PROPERTIES INTEREST RATE (%) PRINCIPAL SERVICE DATE MATURITY
- ---------- ----------------- ------------- -------------- -------- -------------
(IN MILLIONS) (IN THOUSANDS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
NAC Properties(1) 7.36 $ 56.0 $ 4,122 10/05 $ 51.2
IBD Properties(1) 7.36 27.5 2,024 10/05 25.2
1001 Technology Way(2) 8.30 6.4 618 10/11 4.2
201 4th Avenue N.(3) 5.00 4.8 240 12/14 4.8
620 Market Street(3) 5.00 9.0 450 12/14 9.0
625 Gay Street(3) 5.00 9.0 450 12/14 9.0
4823 Old Kingston
Pike(3) 5.00 3.5 175 12/14 3.5
Chicago Enterprise Cen-
ter(3) 5.00 23.3 1,165 6/22 23.3
East Chicago Enterprise
Center(4) 5.00 15.0 750 6/22 15.0
Hammond Enterprise Cen-
ter(3) 5.00 9.9 495 6/22 9.9
------ ------- ------
Total $164.4 $10,489 $155.1
====== ======= ======
</TABLE>
- --------
(1) Represents mortgage notes payable on the NAC Properties and IBD Properties
(excluding 1001 Technology Way), which are expected to require interest-
only payments during years one through three; beginning in year four,
principal and interest payments are expected to be based on a 22-year
amortization schedule. Interest on the loan is expected to be payable at a
rate equal to seven-year U.S. Treasury Notes, plus 1.27%. Based on recent
U.S. Treasury Note rates, such interest rate is estimated to be 7.36%.
(2) Interest rate is fixed at 8.30% with annual debt service including
principal and interest.
(3) Interest rates represent floating tax-exempt bond rates at June 30, 1997
plus the related annualized credit enhancement fees and expenses. Annual
debt service represents interest and fees only.
The Credit Facility. The Company expects to obtain the Credit Facility for
up to a maximum of $225.0 million, which will be secured by first mortgages on
the Prime Properties and an assignment of management and other fees payable to
the Operating Partnership. The Company has obtained a commitment from
BankBoston, N.A. and PSCC, an affiliate of Prudential Securities Incorporated,
for the $225.0 million Credit Facility. Subject to compliance by the Company
with the applicable loan covenants, the Credit Facility may be used to provide
funds for acquisitions and development activities and to provide the
replacement letters of credit for the $74.5 million of Tax-Exempt Bonds. There
can be no assurance that such financing will be obtained.
New Mortgage Notes. The Company expects to borrow $83.5 million aggregate
principal amount under the New Mortgage Notes. The New Mortgage Notes are
expected to consist of two separate notes secured by first mortgages on
certain of the IBD Contribution Properties and the NAC Contribution
Properties, respectively, and are expected to have a term of seven years. The
New Mortgage Notes are expected to provide for interest-only payments during
years one through three; beginning in year four, principal and interest
payments are expected to be based on a 22-year amortization schedule. Interest
on the loan is expected to accrue at a rate equal to seven-year U.S. Treasury
Notes, plus 1.27%. Based on recent U.S. Treasury Note rates, such interest
rate is estimated to be 7.36%. There can be no assurance that the New Mortgage
Notes financing will be obtained on terms favorable to the Company, if at all.
Analysis of Liquidity and Capital Resources. Upon completion of the Offering
and the Formation Transactions and the use of proceeds therefrom, the Company
will have reduced its total indebtedness by approximately $265.9 million.
69
<PAGE>
The Company believes the Offering and the Formation Transactions will
improve its financial performance through changes in its capital structure,
principally the substantial reduction in its overall debt and its debt to
equity ratio. The Company anticipates that distributions will be paid from
cash available for distribution, which is expected to exceed cash historically
available for distribution as a result of the reduction in debt service
resulting from the repayment and forgiveness of indebtedness. Through the
Formation Transactions, the Company will repay and be forgiven $355.8 million
of its existing debt and add new debt of $89.9 million, reducing pro forma
1996 annual interest expense by approximately $28.1 million.
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital and net cash provided by operations. The
Properties require periodic investments of capital for tenant-related capital
expenditures and for general capital improvements. For the years ended
December 31, 1992 through December 31, 1996, the Company's recurring tenant
improvements and leasing commissions for the Prime Properties averaged $1.47
per square foot of leased space per year. The Company expects that the average
annual cost of recurring tenant improvements and leasing commissions will be
approximately $1.7 million based upon an average annual square feet for which
leases expire during the periods ending June 30, 1997 through June 30, 2000.
The Company expects the cost of general capital improvements to the Properties
to average approximately $0.6 million annually based upon an estimate of $0.08
per square foot.
The Company expects to meet its long-term liquidity requirements for the
funding of property development, property acquisitions and other non-recurring
capital improvements through long-term secured and unsecured indebtedness
(including the Credit Facility) and the issuance of additional equity
securities from the Company. The terms of the Credit Facility and the
Convertible Preferred Shares will impose restrictions on the Company's ability
to incur indebtedness and issue additional preferred shares.
HISTORICAL CASH FLOWS
Historically, the Prime Properties' principal sources of funding for
operations and capital expenditures were from debt financings. Prime incurred
net losses before extraordinary items in each of the last five years and for
the six-month periods ended June 30, 1997 and 1996. However, after adding back
depreciation and amortization, the Properties have generated positive net
operating cash flows for each of the last four years.
The Prime Properties had net cash used in operating activities of $2.7
million, $3.2 million, $3.2 million, $1.3 million and $13.9 million for the
six months ended June 30, 1997 and 1996 and the years ended December 31, 1996,
1995 and 1994, respectively. The $12.6 million decrease in net cash used in
operating activities from 1994 to 1995 is primarily due to a $5.9 million
decrease in loss before minority interest (exclusive of the write-off of
deferred tenant costs in 1995) and a $4.8 million decrease in the adjustment
related to the straight-lining of rents. The $1.9 million increase in net cash
used in operating activities from 1995 to 1996 is primarily due to a $12.1
million increase in loss before minority interest (exclusive of the write-off
of deferred tenant costs in 1996 and 1995), offset by a $8.1 million decrease
in the adjustment related to the straight-lining of rent and a $1.6 million
increase in interest added to principal on mortgage note payable-affiliate.
The $0.5 million decrease in net cash used in operating activities for the six
months ended June 30, 1997 from the six months ended June 30, 1996 was
primarily due to a $0.6 million decrease in tenant receivables from straight-
lining rent, a $0.6 million decrease in gain sale of real estate, a $0.9
million increase in interest added to principal on the mortgage note payable
to affiliates and a $4.2 million increase in other liabilities offset by a
$3.4 million increase in net loss, a $0.9 million increase in tenant
receivables, a $1.3 million increase in deferred costs and a $0.6 million
decrease in accrued interest payable.
The Prime Properties had net cash (used in) provided by investing activities
of ($0.8 million) $1.6 million, $1.1 million, ($9.2 million) and ($6.5
million) for the six months ended June 30, 1997 and 1996 and for the years
ended December 31, 1996, 1995 and 1994, respectively. The $2.7 million
increase in net cash used in investing activities from 1994 to 1995 was
primarily due to a $4.9 million increase in advances made to affiliates,
offset by a $1.3 million decrease in real estate expenditures. The $10.3
million increase in net cash provided by investing activities from 1995 to
1996 was primarily due to an $8.1 million net repayment of advances to
70
<PAGE>
affiliates, a $1.2 million increase in proceeds from sale of real estate and a
$1.0 million decrease in real estate expenditures. The $2.4 million increase
in net cash used in investing activities for the six months ended June 30,
1997 from the six months ended June 30, 1996 was primarily due to a $1.2
million decrease in proceeds from the sale of real estate and a $2.9 million
increase in real estate expenditures offset by a $1.7 million decrease in
amounts due from affiliates.
The Prime Properties had net cash provided by financing activities of $2.4
million, $3.8 million, $5.7 million, $10.9 million and $15.4 million for the
six months ended June 30, 1997 and 1996 and the years ended December 31, 1996,
1995 and 1994, respectively. The $4.5 million decrease in net cash provided by
financing activities from 1994 to 1995 was primarily due to a $3.7 million
decrease in proceeds from mortgage notes payable and a $1.3 million increase
in the repayment of mortgage notes payable. The $5.2 million decrease in net
cash provided by financing activities from 1995 to 1996 was primarily due to a
$5.4 million decrease in proceeds from mortgage notes payable, offset by a
$0.2 million decrease in distributions to partners. The $1.4 million increase
in net cash provided by financing activities for the six months ended June 30,
1997 from the six months ended June 30, 1996 was primarily due to $1.5 million
decrease in proceeds from mortgage notes payable.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations, as defined by
NAREIT, an alternative measure of performance of an equity REIT. Funds from
Operations is defined by NAREIT to mean net income (loss) determined in
accordance with GAAP, excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization (other than amortization
of deferred financing costs and depreciation of non-real estate assets) and
after adjustment for unconsolidated partnerships and joint ventures. The
Company believes that in order to facilitate a clear understanding of the
combined historical operating results of the Company, Funds from Operations
should be examined in conjunction with net income (loss) as presented in the
audited Combined Financial Statements and selected financial data included
elsewhere in this Prospectus. The Company computes Funds from Operations in
accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper (with the exception that the Company expects to
report rental revenues on a cash basis, rather than a straight-line GAAP
basis, which the Company believes will result in a more accurate presentation
of its actual operating activities), which may differ from the methodology for
calculating Funds from Operations used by other certain office and/or
industrial REITs and, accordingly, may not be comparable to such other REITs.
As a result of the Company's reporting rental revenues on a cash basis,
contractual rent increases will cause reported Funds from Operations to
increase. Further, Funds from Operations does not represent amounts available
for management's discretionary use because of needed capital replacement or
expansion, debt repayment obligations, or other commitments and uncertainties.
Funds from Operations should not be considered as an alternative to net income
(loss), as an indication of the Company's performance or to cash flows as a
measure of liquidity or the ability to pay dividends or make distributions.
INFLATION
The Company's leases with the majority of its tenants require the tenants to
pay most operating expenses, including real estate taxes and insurance, and
increases in common area maintenance expenses, which reduce the Company's
exposure to increases in costs and operating expenses resulting from
inflation.
71
<PAGE>
BUSINESS AND PROPERTIES
Unless indicated otherwise, information contained herein concerning the
economies of the Chicago Metropolitan Area, Nashville, Tennessee, Knoxville,
Tennessee, and Columbus, Ohio and office and industrial markets thereof is
derived from a report commissioned by the Company and prepared by RCG, a
nationally known real estate consulting company, and is included herein with
the consent of RCG.
GENERAL
Upon the completion of the Offering and the consummation of the Formation
Transactions, the Company (through the Operating Partnership) will own 16
Office Properties encompassing an aggregate of approximately 2.4 million net
rentable square feet, 44 Industrial Properties encompassing an aggregate of
approximately 5.7 million net rentable square feet, one industrial property
under construction, one parking facility with 398 parking spaces and one
retail center. The Properties are owned in fee simple by the respective
Property Partnerships. Twelve of the 16 Office Properties and 38 of the 44
Industrial Properties are located in the Chicago Metropolitan Area. In the
Chicago Metropolitan Area, the most notable Office Property is the 77 West
Wacker Drive Building, a premier 50-story landmark office tower in downtown
Chicago, which contains approximately 944,600 net rentable square feet. The
building has won numerous awards, including, in 1993, the Sun-Times Real
Estate Development of the Year and the Best New Building Award from Friends of
Downtown. Three Office Properties are located in Knoxville, Tennessee, one
Office Property is located in downtown Nashville, Tennessee, six Industrial
Properties are located in the Columbus, Ohio metropolitan area, the parking
facility is located in Knoxville, Tennessee and the retail center is located
in Suburban Chicago. As of June 30, 1997, the Office Properties were
approximately 88.0% leased to more than 200 tenants, and the Industrial
Properties were approximately 87.9% leased to more than 60 tenants.
Management has developed (or redeveloped), leased and managed 37 of the 44
Industrial Properties (79.2%, in terms of net rentable square feet) and 12 of
the 16 Office Properties (81.9%, in terms of net rentable square feet). In the
course of such development and redevelopment, the Company has acquired
experience across a broad range of development and redevelopment projects. For
example, the Company has developed both Office Properties, such as the 77 West
Wacker Drive Building, and Industrial Properties, such as the Contribution
Properties. The Company also has redeveloped both Office Properties, such as
201 4th Avenue N. in Nashville, and Industrial Properties, such as the Chicago
Enterprise Center, the East Chicago Enterprise Center and the Hammond
Enterprise Center, in the Chicago Metropolitan Area. The Company believes that
all of its Properties are well-maintained and, based on recent engineering
reports, do not require significant capital improvements.
Upon the consummation of the Formation Transactions, in addition to its
interests in the Office Properties and Industrial Properties, the Company will
own approximately 83.4 acres and have the rights to acquire approximately
157.2 acres of developable land (including rights to acquire one development
site located in the Chicago CBD containing approximately 58,000 square feet).
Management believes that the developable land and development site could be
developed with approximately 1.2 million square feet of additional office
space in the Chicago CBD and approximately 4.4 million square feet of
additional industrial properties, primarily in the Chicago Metropolitan Area.
See "--Land for Development." The Company also will have (a) an option to
acquire one additional industrial property, 901 Technology Way, in the
Libertyville Business Park, from certain of the IBD Contributors and (b) a 15-
year right of first offer to develop (or develop and acquire an ownership
interest in) all or any portion of 360 acres of undeveloped office and
industrial land in the Huntley Business Park currently owned and controlled by
an affiliate of Prime, subject to a participation interest in such property
held by a third-party lender. The right of first offer will apply if it is
determined by Prime that the parcel can be best utilized through the
construction of an office or industrial development to be owned and leased to
third parties by Prime or held by Prime for sale to a third party. See "--Land
for Development and Option Properties."
In general, the Office Properties are leased to tenants on a net basis with
tenants obligated to pay their proportionate share of real estate taxes,
insurance, utility and operating expenses or on a full service basis, with the
landlord responsible for the payment of taxes, insurance and operating
expenses up to the amount incurred during the tenant's first year of occupancy
("Base Year") or a negotiated amount approximating the tenant's pro rata share
of real estate taxes, insurance and operating expenses ("Expense Stop"). The
tenant pays its pro rata share of increases in expenses above the Base Year or
Expense Stop. Most of the leases for the Industrial Properties are written on
a net basis, with tenants paying their proportionate share of real estate
taxes, insurance, utility and operating expenses.
72
<PAGE>
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Prime Properties that
comprise a portion of the Office Properties since 1994 (based upon an average
of all renovations and renewal lease transactions during the respective
periods):
PRIME PROPERTIES-OFFICE PROPERTIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTH
------------------------- PERIOD ENDED
1994 1995 1996 JUNE 30, 1997
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Number of lease transactions during
period(1)........................... 12 22 15 10
Rentable square feet during peri-
od(1)............................... 34,225 77,359 30,513 34,264
Net Rent ($)(2)...................... 14.05 15.72 13.14 13.44
Tenant Improvements ($)(3)........... 8.47 5.42 6.16 1.59
Leasing Commissions ($)(4)........... 2.77 2.10 1.92 1.04
Effective Net Rent ($)(5)............ 12.79 14.94 12.04 12.98
Occupancy rate at end of period
(%)(6).............................. 94% 96% 93% 87%
</TABLE>
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(2) Equals aggregate net rent received over their respective terms from all
lease transactions during the period, divided by the number of months of
such lease, multiplied by 12, divided by the total net rentable square
feet leased under all lease transactions during the period.
(3) Equals actual tenant improvements. The decrease from 1996 to June 30, 1997
is predominantly due to five of the six transactions being renewals which
incur minimal tenant improvement costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Equals aggregate net rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the number of months of such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
(6) This table includes Keck's occupancy for the years ended December 31, 1995
and 1994 and, under the restructured lease, for the year ended December
31, 1996.
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Industrial Properties
managed by the Company (i.e., all of the Industrial Properties other than the
Contribution Properties and the Prime Contribution Properties) since 1994
(based upon an average of all lease transactions during the respective
periods):
PRIME PROPERTIES-INDUSTRIAL PROPERTIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, SIX MONTH
------------------------ PERIOD ENDED
1994 1995 1996 JUNE 30, 1997
------- ------- ------ -------------
<S> <C> <C> <C> <C>
Number of lease transactions during
period(1)............................ 2 5 2 3
Rentable square feet during peri-
od(1)................................ 121,362 236,027 41,440 149,421
Net Rent ($)(2)....................... 2.95 2.60 1.82 2.23(2)
Tenant Improvements ($)(3)............ -- 0.28 0.16 --
Leasing Commissions ($)(4)............ 0.58 0.45 0.53 --
Effective Net Rent ($)(5)............. 2.84 2.45 1.72 2.23(5)
Occupancy rate at end of period (%)... 68% 72% 75% 74%
</TABLE>
- --------
(1) Includes only industrial tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(2) Equals aggregate net rent received over their respective terms from all
lease transactions during the period, divided by the number of months of
such lease, multiplied by 12, divided by the total net rentable square
feet leased under all lease transactions during the period.
(3) Equals actual tenant improvements.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Equals aggregate net rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the number of months of such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
73
<PAGE>
THE OFFICE AND INDUSTRIAL PROPERTIES
The following table sets forth certain information relating to each of the
Properties as of June 30, 1997, unless indicated otherwise. After completion
of the Formation Transactions, the Company (through the Operating Partnership)
will own a 100% interest in all of the Office Properties and the Industrial
Properties.
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED EFFECTIVE NET
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET RENT PER
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3) SQ. FT.($)(4)
- -------- -------- ----------- -------- ---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICE PROPER-
TIES:
77 West Wacker Chicago, IL 1992 944,556 84.6 18,263 22.84 15,367 19.22(6)
Drive(5)........
1990 Algonquin
Road/
2000-2060 Algon-
quin Road
(Salt Creek Of-
fice
Center)(7)(8)... Schaumburg, IL 1979/1986 125,922 90.9 1,153 10.07 1,141 9.97
1699 E.
Woodfield Road
(Citibank Office
Plaza)(9)....... Schaumburg, IL 1979 105,400 95.2 932 9.29 922 9.19
555 Huehl Northbrook, IL 1987 74,000 100.0 529 7.15 522 7.05
Road(10)........
201 4th Avenue Nashville, TN 1968/1985 250,566 90.1 1,987 8.80 1,870 8.28(6)
N...............
620 Market Knoxville, TN 1988 93,711 91.4 895 10.45 805 9.40(6)
Street..........
625 Gay Street.. Knoxville, TN 1988 91,426 90.0 701 8.52 589 7.16(6)
4823 Old Knoxville, TN 1988 34,638 100.0 305 8.80 257 7.43(6)
Kingston Pike...
941-961 Weigel Elmhurst, IL 1989/1994 123,077 100.0 1,571 12.76 1,559 12.66
Drive(10).......
4100 Madison Hillside, IL 1978 24,536 51.2 39 3.07 37 2.97
Street(10)......
350 N. Mannheim Hillside, IL 1977/1987 4,850 -- -- -- -- --
Road(10)........
1600-1700 167th Calumet City, IL 1981 65,394 53.1 431 12.41 427 12.31
Street(10)......
4343 Commerce Lisle, IL 1989 170,708 88.9 2,622 17.28 2,607 17.18
Court(10).......
1301 E. Tower Schaumburg, IL 1992 50,400 100.0 524 10.41 519 10.31
Road(10)........
280 Shuman Naperville, IL 1979 65,001 98.8 648 10.09 642 9.99
Blvd.(7)........
<CAPTION>
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE
FEET PER PROPERTY
PROPERTY AS OF 6/30/97
- -------- ------------------------
<S> <C>
OFFICE PROPER-
TIES:
77 West Wacker Donnelley (25.6%)
Drive(5)........ Everen (25.5%)
Jones Day (11.8%)
1990 Algonquin
Road/
2000-2060 Algon-
quin Road
(Salt Creek Of-
fice
Center)(7)(8)... Silicon Graphics
(19.4%)
1699 E.
Woodfield Road
(Citibank Office
Plaza)(9)....... McGladrey &
Pullen (47.5%)
Merrill Lynch (11.3%)
555 Huehl
Road(10)........ Rank Video (100.0%)
201 4th Avenue
N............... SunTrust Bank (49.0%)
620 Market Morton, Lewis, King &
Street.......... Kreig (31.7%)
FNB Financial (20.7%)
625 Gay Street.. Healthsource (28.3%)
4823 Old
Kingston Pike... Talbots (68.1%)
941-961 Weigel Household Financial
Drive(10)....... Corporation (100.0%)(11)
4100 Madison Nardi Group (27.3%)
Street(10)...... Narco Construction
(20.9%)
350 N. Mannheim
Road(10)........ Vacant
1600-1700 167th
Street(10)...... Unger-Sirovatka (11.1%)
4343 Commerce Computer Associates
Court(10)....... (25.3%)
EquiFax (17.2%)
Hinshaw, Culbertson
(11.1%)
1301 E. Tower Household Credit
Road(10)........ Services (100.0%)(12)
280 Shuman EBY-Brown (35.4%)
Blvd.(7)........ Devtech Associates
(14.3%)
General Electric (10.1%)
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3)
- -------- -------- ----------- --------- ---------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
2205-2255 Enter-
prise
Drive(7)....... Westchester, IL 1987 129,574 91.4 1,174 9.91 1,162
--------- ----- ------ ------
Office Proper- 2,353,759 88.0 31,774 15.34 28,426
ties Subtotal..
--------- ----- ------ ------
INDUSTRIAL PROP-
ERTIES:
Warehouse/Distribution
Facilities:
425 E. Algonquin Arlington Heights, IL 1978 304,506 100.0 946 3.11 836
Road...........
1001 Technology Libertyville, IL 1996 212,831 100.0 841 3.95 819
Way(10)........
3818 Grandville/
1200 Northwest-
ern(10) ....... Gurnee, IL 1961/1990 345,232 100.0 1,041 3.02 1,007
306-310 Era Northbrook, IL 1984 36,495 100.0 393 10.77 389
Drive(10)(13)..
2160 McGaw
Road(9)........ Obetz, OH 1974 310,100 100.0 458 1.48 427
4849 Groveport
Road(9)........ Obetz, OH 1968 132,100 100.0 288 2.18 274
2400 McGaw
Road(9)........ Obetz, OH 1972 86,400 100.0 191 2.21 183
5160 Blazer Me-
morial
Parkway
(9)(14)........ Dublin, OH 1983 85,962 64.5 348 6.28 343
600 London Delaware, OH 1981 52,441 100.0 110 2.11 105
Road(9)........
1401 S. Jeffer- Chicago, IL 1965/1985 17,265 100.0 89 5.15 87
son(10)........
1051 N. Kirk Batavia, IL 1990 120,004 100.0 474 3.95 462
Road(10).......
4211 Madison Hillside, IL 1977/1992 90,334 100.0 349 3.87 340
Street(10).....
200 E. Fullerton Carol Stream, IL 1968/1995 66,254 100.0 248 3.75 242
Avenue(10).....
350 Randy Carol Stream, IL 1974 25,200 87.5 129 5.85 127
Road(10).......
4248, 4250 and
4300 Madison
Street(10)..... Hillside, IL 1980 127,129 100.0 597 4.70 585
370 Carol Elmhurst, IL 1977/1994 60,290 100.0 256 4.25 250
Lane(10).......
<CAPTION>
TENANTS LEASING
10% OR MORE OF
ANNUALIZED NET RENTABLE
EFFECTIVE NET SQUARE
RENT PER FEET PER PROPERTY
PROPERTY SQ. FT.($)(4) AS OF 6/30/97
- -------- ------------- ----------------------------
<S> <C> <C>
2205-2255 Enter-
prise
Drive(7)....... 9.81 Census Bureau (14.5%)
National Restaurant
Enterprise (12.6%)
Cherry Communications
(12.3%)
Office Proper- 13.72
ties Subtotal..
INDUSTRIAL PROP-
ERTIES:
Warehouse/Distribution
Facilities:
425 E. Algonquin 2.75(6) Berlin Packaging (34.2%)
Road........... AM International (26.2%)
International Components
(20.8%)
Barnes & Reineke (18.9%)
1001 Technology 3.85 Rank Video (76.0%)
Way(10)........ Arlington Industries (23.9%)
3818 Grandville/
1200 Northwest-
ern(10) ....... 2.92 Rank Video (100.0%)
306-310 Era 10.67 Roche/NICL (62.3%)
Drive(10)(13).. SLJ/Lionstone (37.7%)
2160 McGaw
Road(9)........ 1.38 Spartan Warehouse (100.0%)
4849 Groveport Premier Auto Glass Corp
Road(9)........ 2.08 (100.0%)
2400 McGaw
Road(9)........ 2.11 S.P. Richards (100.0%)
5160 Blazer Me-
morial
Parkway
(9)(14)........ 6.18 Cross Medical (32.2%)
Alkon (32.3%)
600 London 2.01 Schneider National, Inc.
Road(9)........ (100.0%)
1401 S. Jeffer- 5.05 Federal Express Corp
son(10)........ (100.0%)
1051 N. Kirk 3.85 Houghton Mifflin Co., Inc.
Road(10)....... (100.0%)
4211 Madison 3.77 Dynamic Manufacturing Co.
Street(10)..... (71.2%)
Aratex Services, Inc.
(28.8%)
200 E. Fullerton 3.65 Spraying Systems
Avenue(10)..... (100.0%)(15)
350 Randy 5.75 Data Instruments (37.5%)
Road(10)....... Micro Energy (12.5%)
Miller Pharmaceutical Group
(12.5%)
Mar-Cole Music Center
(12.5%)
Installation Services
(12.5%)
4248, 4250 and
4300 Madison
Street(10)..... 4.60 Best Buy Co., Inc. (40.1%)
Micron Industries (28.9%)
Friction Automotive (12.3%)
370 Carol 4.15
Lane(10)....... Semblex Corp (100.0%)
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED EFFECTIVE NET
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET RENT PER
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3) SQ. FT.($)(4)
- -------- -------- -------------- -------- ---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
388 Carol Elmhurst, IL 1979 40,920 88.4 180 4.97 176 4.87
Lane(10)........
342-346 Carol Elmhurst, IL 1989 67,935 100.0 294 4.32 287 4.22
Lane(10)........
343 Carol
Lane(10)........ Elmhurst, IL 1989 30,084 100.0 202 6.71 199 6.61
4160-4190 Madison
Street(10)...... Hillside, IL 1974/1992 79,532 100.0 318 4.00 310 3.90
11039 Gage Ave-
nue(10)......... Franklin Park, IL 1965/1993 21,935 100.0 107 4.90 105 4.80
11045 Gage Ave-
nue(10)......... Franklin Park, IL 1970/1992 140,815 100.0 535 3.80 521 3.70
550 Kehoe
Blvd(10)........ Carol Stream, IL 1997 44,575 100.0 292 6.55 288 6.45
475 Superior Ave-
nue(7).......... Munster, IN 1989 450,000 100.0 1,258 2.80 1,213 2.70
Overhead
Crane/Manufacturing
Facilities:
1301 Ridgeview
Drive(10)(18)... McHenry, IL 1995 217,600 100.0 1,031 4.74 1,009 4.64
515 Huehl Road/
500
Lindberg(10).... Northbrook, IL 1988 201,244 100.0 822 4.08 801 3.98
455 Academy
Drive(10)(19)... Northbrook, IL 1976 105,444 100.0 406 3.85 395 3.75
4411 Marketing
Place(9)........ Groveport, OH 1984 65,804 100.0 227 3.45 220 3.35
Chicago
Enterprise
Center.......... Chicago, IL 1916/1991-1996
13535-A S.
Torrence
Avenue......... 384,806 37.9 321 2.20 321 2.20
13535-B S.
Torrence
Avenue......... 239,752 100.0 649 2.71 432 1.80
13535-C S.
Torrence
Avenue......... 99,333 81.9 210 2.59 106 1.31
13535-D S.
Torrence
Avenue......... 77,325 100.0 236 3.05 213 2.75
13535-E S.
Torrence
<CAPTION>Avenue......... 57,453 15.3 30 3.42 25 2.85
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE
FEET PER PROPERTY
PROPERTY AS OF 6/30/97
- -------- ----------------------------
<S> <C>
388 Carol
Lane(10)........ Ameritech (88.4%)
342-346 Carol 3-D Exhibits (70.5%)
Lane(10)........ Old Kent Financial Corp.
(29.5%)
343 Carol Matsushita Industrial
Lane(10)........ Equipment (100.0%)
4160-4190 Madison
Street(10)...... Evans, Inc. (46.0%)
Dynamic Manufacturing
(32.3%)
Charles A. Levy (21.7%)(16)
11039 Gage Ave- Boston Coach Illinois Corp.
nue(10)......... (100.0%)
11045 Gage Ave-
nue(10)......... Echlin, Inc. (100.0%)(17)
550 Kehoe
Blvd(10)........ Associated Material (100.0%)
475 Superior Ave-
nue(7).......... General Electric (100.0%)
Overhead
Crane/Manufacturing
Facilities:
1301 Ridgeview
Drive(10)(18)... Motorola (100.0%)
515 Huehl Road/
500
Lindberg(10).... Rank Video (100.0%)
455 Academy National Service Industries
Drive(10)(19)... (100.0%)
4411 Marketing
Place(9)........ Wes-Tran Corp. (100.0%)
Chicago
Enterprise
Center..........
13535-A S.
Torrence
Avenue......... Co-Steel Lasco (37.9%)
13535-B S.
Torrence
Avenue......... Welded Tube Company (100.0%)
13535-C S.
Torrence
Avenue......... Sterling Steel (81.9%)
13535-D S.
Torrence
Avenue......... Alpha Processing (100.0%)
13535-E S.
Torrence
Avenue......... Signode (13.9%)
13535-F S.
Torrence
Avenue......... 44,800 100.0 146 3.25 129 2.87
13535-G S.
Torrence
Avenue......... 54,743 -- -- -- -- --
13535-H S.
Torrence
Avenue......... 73,612 56.3 75 1.82 71 1.72(6)
13535-F S.
Torrence
Avenue......... Signode (100.0%)
13535-G S.
Torrence
Avenue......... Vacant
13535-H S.
Torrence
Avenue......... Performance Minerals (42.4%)
Jet Vac, Inc. (13.9%)
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED EFFECTIVE NET
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET RENT PER
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3) SQ. FT.($)(4)
- -------- -------- -------------- --------- ---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
East Chicago
Enterprise
Center........... East Chicago, IN 1917/1991-1997
Building 2 (4407
Railroad
Avenue)......... 169,435 -- -- -- -- --
Building 3 (4407 291,550 100.0 1,423 4.88 1,273 4.37(6)
Railroad
Avenue).........
Building 4 (4407
Railroad
Avenue)......... 87,483 98.1 286 3.33 277 3.23
4440 Railroad
Avenue(20)...... 40,000 100.0 299 7.47 287 7.17
4635 Railroad
Avenue.......... 14,070 -- -- -- -- --
Hammond
Enterprise
Center........... Hammond, IN 1920-1952
4507 Columbia
Avenue.......... 256,595 98.8 572 2.26 226 .89(6)
4527 Columbia
Avenue(22)...... 16,701 62.8 56 5.36 56 5.36
4531 Columbia
Avenue.......... 250,266 74.1 274 1.48 253 1.36
--------- ------ ------
Industrial Prop- 5,696,355 87.9 17,007 3.40 15,669 3.13
erties Subtotal..
--------- ------ ------
Portfolio Total.. 8,050,114 87.9 48,781 6.89 44,095 6.23
========= ====== ======
OTHER PROPERTIES
398 Unit Parking
Facility......... Knoxville, TN 1981
371-385 N. Gary
Avenue(10)(24)... Carol Stream, IL 1978 11,276
801 Technology Libertyville, IL 1997 68,824 -- -- -- -- --
Way(25)..........
<CAPTION>
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE
FEET PER PROPERTY
PROPERTY AS OF 6/30/97
- -------- ------------------------
<S> <C>
East Chicago
Enterprise
Center...........
Building 2 (4407
Railroad
Avenue)......... Vacant
Building 3 (4407 Acutus-Gladwin (47.1%)
Railroad Metro Metals (52.9%)
Avenue).........
Building 4 (4407
Railroad
Avenue)......... Illiana Steel (98.1%)
4440 Railroad
Avenue(20)...... Inland Steel (100.0%)
4635 Railroad
Avenue.......... Vacant
Hammond
Enterprise
Center...........
4507 Columbia
Avenue.......... A.M. Castle (47.3%)
Slitting Services
(37.8%)(21)
HECO (12.7%)
4527 Columbia The Prime Group, Inc.
Avenue(22)...... (24.2%)(23)
Town & Country (20.4%)
Great Lakes Engineering
LLC
(16.6%)
4531 Columbia
Avenue.......... HECO (41.6%)
Bar Processing (32.5%)
Industrial Prop-
erties Subtotal..
Portfolio Total..
OTHER PROPERTIES
398 Unit Parking
Facility.........
371-385 N. Gary
Avenue(10)(24)...
801 Technology
Way(25).......... Vacant
</TABLE>
- ----
(1) Annualized Net Rent is the monthly net rent due under the lease as
determined in accordance with GAAP, annualized for all leases in effect
on June 30, 1997. Net rent is the amount due under the lease without
including operating expenses, taxes and other similar reimbursements due
from the tenant.
(2) Annualized Net Rent per square foot represents Annualized Net Rent
divided by net rentable square feet for leases in effect at June 30,
1997.
(3) Annualized Effective Net Rent represents total net rent to be received
over their respective terms from all leases in effect at June 30, 1997
minus all Tenant Expenditures for all such leases, divided by the terms
in months for such leases, multiplied by 12. Tenant Expenditures for
Acquisition and Contribution Properties have been estimated at $0.10 per
square foot for leases in effect at June 30, 1997.
(4) Annualized Effective Net Rent per square foot represents Annualized
Effective Net Rent at June 30, 1997 divided by net rentable square feet
leased at June 30, 1997.
(5) One of the Company's other significant tenants at the 77 West Wacker
Drive Building, Keck, has agreed to vacate the Keck Space on or before
November 30, 1997 pursuant to a settlement agreement. Accordingly, the
Keck Space is assumed vacant for purposes of the calculations in this
table. See "--The Company's Office Submarkets--77 West Wacker Drive
Building" and "--Legal Proceedings."
(6) For the purpose of this table, the historical Tenant Expenditures for
these Properties developed by Prime have been adjusted for management's
estimate of costs that can be reused for future tenants (77 West Wacker
Drive Building--$24.65 per leased square foot, other Office Properties--
$5.12 per leased square foot and Industrial Properties--$4.20 per leased
square foot).
77
<PAGE>
(7) These Properties are Acquisition Properties.
(8) This property complex is comprised of 1990 Algonquin Road (a two-story
office building) and 2000-2060 Algonquin Road (seven single-story office
buildings), but is treated as one Office Property.
(9) These Properties are Prime Contribution Properties.
(10) These Properties are Contribution Properties.
(11) Household Financial Corporation has a right of first refusal to purchase
941-961 Weigel Drive.
(12) Household Credit Services has both a right of first refusal to purchase
1301 E. Tower Road and a purchase option exercisable prior to December
30, 2001 at fair market value.
(13) Roche/NICL Ltd. has a right of first refusal to purchase 306 Era Drive.
(14) This Property is a mixed use Industrial/Office Property that has been
classified as an Industrial Property.
(15) Spraying Systems has a right of first refusal for 200 E. Fullerton
Avenue.
(16) This lease expired on August 31, 1997 and has not been renewed.
(17) Echlin, Inc. has a right of first refusal to purchase 11045 Gage Avenue.
(18) Motorola has an option to purchase 1301 Ridgeview Drive for $10,375,000
on May 31, 2000, the end of the initial lease term, $11,620,040 on May
31, 2003, the end of the first option period, $13,014,488 on May 31,
2006, the end of the second option period and $14,576,297 on May 31,
2009, the end of the third option period.
(19) National Service Industries, Inc., has a right of first refusal to
purchase the industrial building at 455 Academy Drive, and the land
adjacent thereto.
(20) This property is an office building adjacent to the East Chicago
Enterprise Center.
(21) This space was leased to A.M. Castle on August 1, 1997 for $2.39 per
square foot, at which time A.M. Castle increased its existing space from
121,000 square feet to 218,589 square feet.
(22) This property is an office building within the Hammond Enterprise Center.
(23) The Company will assume this lease upon the completion of the Offering.
(24) This is a retail center.
(25) This industrial property that is under construction and is expected to be
completed during the fourth quarter of 1997. The Property is being
purchased for cash from certain of the IBD Contributors.
78
<PAGE>
SUMMARY LAND PARCEL INFORMATION
Following the completion of the Offering, the Company will own approximately
83.4 acres and have rights to acquire approximately 157.2 acres of developable
land (including rights to acquire one development site located in the Chicago
CBD containing approximately 58,000 square feet) which management believes
could be developed with approximately 1.2 million square feet of additional
office space in the Chicago CBD and approximately 4.4 million square feet of
additional industrial properties primarily in the Chicago Metropolitan Area.
The following table provides additional information with respect to these
undeveloped parcels:
<TABLE>
<CAPTION>
OWNERSHIP
DESCRIPTION LOCATION SIZE STATUS
- ----------- -------- ---- ---------
<S> <C> <C> <C>
425 E. Algonquin Road... Arlington Heights, IL 3.7 Acres Own
Chicago Enterprise Cen-
ter.................... Chicago, IL 51.2 Acres Own
East Chicago Enterprise
Center................. East Chicago, IN 9.1 Acres Own
Hammond Enterprise Cen-
ter.................... Hammond, IN 8.2 Acres Own
455 Academy Drive(1).... Northbrook, IL 2.5 Acres Own
Libertyville Business
Park(2)................ Libertyville, IL 48.5 Acres Under Contract
1301 Ridgeview
Drive(3)............... McHenry, IL 13.0 Acres Second Option
4849 Groveport Road..... Obetz, OH 4.2 Acres Own
600 London Road......... Delaware, OH 4.5 Acres Own
300 N. LaSalle(4)....... Chicago, IL 58,025 Sq. Ft. Option
NAC Properties(5)....... Carol Stream, IL/Batavia, IL 94.4 Acres Under Contract
</TABLE>
- --------
(1) National Services Industries, Inc., the current tenant of the industrial
building at 455 Academy Drive, has a right of first refusal to purchase
this land.
(2) The Company is obligated to purchase this land for $7.4 million (subject
to certain purchase price adjustments) within three years following the
consummation of the Formation Transactions and the completion of the
Offering.
(3) Motorola has an option to lease or purchase this land, exercisable on or
before August 1, 1998.
(4) The Company has a ten-year option to purchase this Chicago CBD development
site at 95.0% of the fair market value at the time of the exercise of the
option.
(5) The Company is obligated to purchase 20.0 acres of this property per year,
starting on the first anniversary of the consummation of the Formation
Transactions and the completion of the Offering, for $3.00 per square
foot, or approximately $2.5 million for each 20.0 acres.
For additional information regarding these parcels, see "--Land for
Development and Option Properties."
OCCUPANCY AND RENTAL INFORMATION
The following table sets forth the average percentage leased and average
annual base rent per leased square foot for the Prime Properties for the six
months ended June 30, 1997 and for the past three calendar years:
<TABLE>
<CAPTION>
AVERAGE AVERAGE ANNUAL BASE
PERCENTAGE RENT PER RENTABLE
YEAR LEASED(%)(1) SQUARE FOOT($)(2)
---- ------------ -------------------
<S> <C> <C>
Office:
June 30, 1997(3).......................... 89.6 20.86
December 31, 1996......................... 94.1 18.71
December 31, 1995......................... 94.7 21.40
December 31, 1994......................... 92.9 19.97
Industrial:
June 30, 1997............................. 73.5 3.21
December 31, 1996......................... 73.2 3.18
December 31, 1995......................... 67.6 2.77
December 31, 1994......................... 64.1 2.51
</TABLE>
- --------
(1) Average of aggregate percentage leased for the beginning and end of the
period ending on date indicated.
(2) Total Base Rent for the period ending on the date indicated divided by the
average of the aggregate rentable square feet leased for the beginning and
end of such period.
(3) Reflects the Keck Space as vacant.
79
<PAGE>
LEASE EXPIRATIONS
The following table sets out a schedule of the lease expirations for the
Prime Properties that are Office Properties for each of the ten years
beginning with July 1, 1997, assuming that none of the tenants exercises
renewal options or termination rights:(1)
<TABLE>
<CAPTION>
AVERAGE ANNUAL
PERCENTAGE OF RENT PER NET
TOTAL LEASED ANNUAL RENTABLE SQUARE
NET RENTABLE SQUARE FEET NET RENT FOOT
NUMBER OF AREA SUBJECT TO REPRESENTED UNDER EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRING EXPIRING BY EXPIRING LEASES EXPIRING
EXPIRATION LEASES LEASES(SQ. FT.) LEASES(%) ($000) LEASES($)
------------- --------- --------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
7/1/97-12/31/97......... 9 35,636 2.90 392 10.99
1998.................... 17 93,421 7.61 892 9.55
1999.................... 15 51,205 4.17 481 9.40
2000.................... 12 72,276 5.89 598 8.28
2001.................... 12 47,535 3.87 433 9.12
2002.................... 9 74,396 6.06 891 11.98
2003.................... 2 25,175 2.05 271 10.76
2004.................... 2 58,981 4.80 655 11.11
2005.................... 1 12,637 1.03 129 10.18
2006.................... 1 4,485 0.37 46 10.29
2007+................... 10 752,060 61.25 17,362 23.09
--- --------- ------ ------
90 1,227,807 100.00 22,150 18.04
=== ========= ====== ======
</TABLE>
- --------
(1) Properties included are the 77 West Wacker Drive Building, 201 4th Avenue
N., 620 Market Street, 625 Gay Street and 4823 Old Kingston Pike.
The following table sets out a schedule of the lease expirations for the
Prime Properties that are Industrial Properties for each of the ten years
beginning with July 1, 1997, assuming that none of the tenants exercises
renewal options or termination rights:(1)
<TABLE>
<CAPTION>
AVERAGE ANNUAL
NET PERCENTAGE OF RENT PER
RENTABLE TOTAL LEASED ANNUAL NET NET RENTABLE
AREA SUBJECT SQUARE FEET RENT UNDER SQUARE FOOT
NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRING LEASES EXPIRING LEASES EXPIRING
EXPIRATION LEASES (SQ. FT.) LEASES(%) ($000) LEASES($)
------------- --------- ------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
7/1/97-12/31/97(2)...... 2 40,279 2.22 300 7.46
1998.................... 2 149,979 8.28 347 2.32
1999.................... 4 218,371 12.06 463 2.12
2000.................... 4 303,966 16.79 793 2.61
2001.................... 3 67,210 3.71 209 3.10
2002.................... 1 2,766 0.15 13 --
2003.................... 1 239,752 13.24 649 2.71
2004.................... -- -- -- -- --
2005.................... 3 247,102 13.65 780 3.16
2006.................... 1 31,240 1.73 58 1.86
2007+................... 5 510,139 28.17 1,911 3.75
--- --------- ------ -----
26 1,810,804 100.00 5,523 3.05
=== ========= ====== =====
</TABLE>
- --------
(1) Properties included are the Industrial Properties in the Chicago
Enterprise Center, East Chicago Enterprise Center and Hammond Enterprise
Center and 425 E. Algonquin Road, as well as the office buildings at the
East Chicago Enterprise Center and the Hammond Enterprise Center.
(2) Excludes the 1997 expiration of space formerly leased by Slitting Services
which was relet to A.M. Castle on August 1, 1997 for $2.39 per square foot
at which time A.M. Castle increased its leased space of 121,000 square
feet from $1.95 to $2.39 per square foot. In 2013, the entire A.M. Castle
lease expires, including this 97,100 square foot space.
80
<PAGE>
The following table sets out a schedule of the lease expirations for the
Acquisition Properties, Prime Contribution Properties and Contribution
Properties that are Office Properties for each of the ten years beginning with
July 1, 1997, assuming that none of the tenants exercises renewal options or
termination rights:(1)
<TABLE>
<CAPTION>
NET PERCENTAGE OF ANNUAL AVERAGE ANNUAL
RENTABLE TOTAL LEASED NET RENT PER NET
AREA SUBJECT SQUARE FEET RENT UNDER RENTABLE SQUARE FOOT
NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRING LEASES EXPIRING LEASES EXPIRING
EXPIRATION LEASES (SQ. FT.) LEASES (%) ($000) LEASES ($)
- ------------- --------- ------------ -------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
7/1/97-12/31/97......... 11 60,588 7.18 1,035 17.08
1998.................... 25 92,200 10.93 1,242 13.47
1999.................... 26 209,749 24.86 2,618 12.48
2000.................... 34 112,350 13.31 1,238 11.02
2001.................... 18 114,847 13.61 1,050 9.14
2002.................... 15 102,908 12.19 1,069 10.39
2003.................... 4 104,113 12.34 926 8.90
2004.................... 3 41,729 4.94 331 --
2005.................... 1 5,400 0.64 114 21.05
2006.................... -- -- -- -- --
2007+................... -- -- -- -- --
--- ------- ------ -----
137 843,884 100.00% 9,623 11.40
=== ======= ====== =====
</TABLE>
- --------
(1) Properties included are 1990 Algonquin Road, 2000-2060 Algonquin Road,
1699 E. Woodfield Road, 941-961 Weigel Drive, 4100 Madison Street, 350 N.
Mannheim Road, 1600-1700 167th Street, 4343 Commerce Court, 555 Huehl
Road, 1301 E. Tower Road, 280 Shuman Boulevard and 2205-2255 Enterprise
Drive.
The following table sets out a schedule of the lease expirations for the
Acquisition Properties, Prime Contribution Properties and Contribution
Properties that are Industrial Properties for each of the ten years beginning
with July 1, 1997, assuming that none of the tenants exercises renewal options
or termination rights:(1)
<TABLE>
<CAPTION>
NET PERCENTAGE OF ANNUAL AVERAGE ANNUAL
RENTABLE TOTAL LEASED NET RENT PER NET
AREA SUBJECT SQUARE FEET RENT UNDER RENTABLE SQUARE FOOT
NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRING LEASES EXPIRING LEASES EXPIRING
EXPIRATION LEASES (SQ. FT.) LEASES (%) ($000) LEASES ($)
- ------------- --------- ------------ -------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
7/1/97-12/31/97......... 3 85,361 2.67 236 2.76
1998.................... 5 467,847 14.64 1,314 2.81
1999.................... 9 675,950 21.15 2,279 3.37
2000.................... 7 427,403 13.37 1,918 4.49
2001.................... 10 931,418 29.15 3,386 3.64
2002.................... -- -- -- -- --
2003.................... 3 232,181 7.27 1,015 4.37
2004.................... 1 60,290 1.89 256 4.25
2005.................... 2 108,335 3.39 299 2.76
2006.................... 1 44,575 1.39 292 6.55
2007+................... 2 162,184 5.08 489 3.02
--- --------- ------ ------
43 3,195,544 100.00% 11,484 3.59
=== ========= ====== ======
</TABLE>
- --------
(1) Properties included are the 1001 Technology Way, 3818 Grandville/1200
Northwestern, 306-310 Era Drive, 2160 McGaw Road, 4849 Groveport Road,
2400 McGaw Road, 5160 Blazer Memorial Parkway, 600 London Road, 1401 S.
Jefferson, 1051 N. Kirk Road, 4211 Madison Street, 200 E. Fullerton
Avenue, 350 Randy Road, 4248, 4250 and 4300 Madison Street, 370 Carol
Lane, 388 Carol Lane, 342-346 Carol Lane, 343 Carol Lane, 4160-4190
Madison Street, 11039 Gage Avenue, 11045 Gage Avenue, 550 Kehoe Boulevard
and 475 Superior Avenue.
81
<PAGE>
The following table set forth detailed lease expiration information for each
of the Properties for leases in place as of July 1, 1997, assuming that none of
the tenants exercise renewal options or terminations rights, if any, at or
prior to the schedule expirations:
OFFICE PROPERTIES
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
--------------------------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ------- ------- ------- ------- ------- ------- ------- ---- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
77 West Wacker
Drive
Square Footage
of Expiring
Leases.......... -- 24,662 1,424 22,067 12,844 55,055 25,175 22,576 -- 4,485 631,159 799,447
Percentage of
Total Leased
Sq. Ft. (%)..... -- 3.08 0.18 2.76 1.61 6.89 3.15 2.82 -- 0.56 78.95 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... -- 251,627 17,871 165,868 166,054 745,532 270,914 206,993 -- 46,147 16,392,310 $18,263,316
Annualized Net
Rent per Square
Foot ($)........ -- 10.20 12.55 7.52 12.93 13.54 10.76 9.17 -- 10.29 25.97 $ 22.84
Percentage of
Total Annualized
Net Rent (%).... -- 1.38 0.10 0.91 0.91 4.08 1.48 1.13 -- 0.25 89.76 100.00%
Number of Leases
Expiring........ -- 4 1 2 2 4 2 1 -- 1 9 26
1699 E. Woodfield
Road (Citibank
Office Plaza)
Square Footage
of Expiring
Leases.......... 3,651 965 6,417 6,841 6,691 63,849 11,909 -- -- -- -- 100,323
Percentage of
Total Leased
Sq. Ft. (%)..... 3.64 0.96 6.40 6.82 6.67 63.64 11.87 -- -- -- -- 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... 23,512 4,534 66,069 34,635 51,702 631,078 120,937 -- -- -- -- $ 932,467
Annualized Net
Rent per Square
Foot ($)........ 6.44 4.70 10.30 5.06 7.73 9.88 10.16 -- -- -- -- $ 9.29
Percentage of
Total Annualized
Net Rent (%).... 2.52 0.49 7.09 3.71 5.54 67.68 12.97 -- -- -- -- 100.00%
Number of Leases
Expiring........ 2 1 3 3 2 6 1 -- -- -- -- 18
2000-2060 Algon-
quin Road (Salt
Creek Office Cen-
ter)
Square Footage
of Expiring
Leases.......... 4,889 13,002 10,521 34,134 15,726 6,600 6,110 -- -- -- -- 90,982
Percentage of
Total Leased
Sq. Ft. (%)..... 5.37 14.29 11.56 37.52 17.28 7.25 6.72 -- -- -- -- 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... 50,178 129,147 92,962 384,738 146,174 50,124 64,882 -- -- -- -- $ 918,205
Annualized Net
Rent per Square
Foot ($)........ 10.26 9.93 8.84 11.27 9.30 7.59 10.62 -- -- -- -- $ 10.09
Percentage of
Total Annualized
Net Rent (%).... 5.46 14.07 10.12 41.90 15.92 5.46 7.07 -- -- -- -- 100.00%
Number of Leases
Expiring........ 2 8 7 9 3 1 1 -- -- -- -- 31
1990 Algonquin
Road (Salt Creek
Office Center)
Square Footage
of Expiring
Leases.......... -- 2,238 10,609 1,103 7,510 1,999 -- -- -- -- -- 23,459
Percentage of
Total Leased
Sq. Ft. (%)..... -- 9.54 45.22 4.70 32.01 8.52 -- -- -- -- -- 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... -- 10,291 117,901 10,752 74,643 21,117 -- -- -- -- -- $ 234,704
Annualized Net
Rent per Square
Foot ($)........ -- 4.60 11.11 9.75 9.94 10.56 -- -- -- -- -- $ 10.00
Percentage of
Total Annualized
Net Rent (%).... -- 4.38 50.23 4.58 31.80 9.00 -- -- -- -- -- 100.00%
Number of Leases
Expiring........ -- 1 2 1 2 1 -- -- -- -- -- 7
555 Huehl Road
Square Footage
of Expiring
Leases.......... -- -- -- -- -- -- 74,000 -- -- -- -- 74,000
Percentage of
Total Leased
Sq. Ft. (%)..... -- -- -- -- -- -- 100.00 -- -- -- -- 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... -- -- -- -- -- -- 528,954 -- -- -- -- $ 528,954
Annualized Net
Rent per Square
Foot ($)........ -- -- -- -- -- -- 7.15 -- -- -- -- $ 7.15
Percentage of
Total Annualized
Net Rent (%).... -- -- -- -- -- -- 100.00 -- -- -- -- 100.00%
Number of Leases
Expiring........ -- -- -- -- -- -- 1 -- -- -- -- 1
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003
------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
201 4th Avenue N.
Square Footage
of Expiring
Leases......... 30,476 13,993 2,789 23,611 19,428 1,988 --
Percentage of
Total Leased
Sq. Ft. (%).... 13.50 6.20 1.24 10.46 8.60 0.88 --
Annualized Net
Rent of
Expiring Leases
($)............ 339,347 156,943 22,704 207,586 144,684 17,647 --
Annualized Net
Rent per Square
Foot ($)....... 11.13 11.22 8.14 8.79 7.45 8.88 --
Percentage of
Total
Annualized Net
Rent (%)....... 17.07 7.90 1.14 10.44 7.28 0.89 --
Number of Leases
Expiring....... 6 3 3 5 4 1 --
620 Market Street
Square Footage
of Expiring
Leases......... 1,760 24,435 8,212 1,820 9,308 10,359 --
Percentage of
Total Leased
Sq. Ft. (%).... 2.06 28.54 9.59 2.13 10.87 12.10 --
Annualized Net
Rent of
Expiring Leases
($)............ 19,616 244,537 64,867 16,380 80,415 79,117 --
Annualized Net
Rent per Square
Foot ($)....... 11.15 10.01 7.90 9.00 8.64 7.64 --
Percentage of
Total
Annualized Net
Rent (%)....... 2.19 27.32 7.25 1.83 8.99 8.84 --
Number of Leases
Expiring....... 1 2 4 1 3 2 --
625 Gay Street
Square Footage
of Expiring
Leases......... 3,400 25,832 13,382 24,778 2,314 5,894 --
Percentage of Total
Leased Sq. Ft.
(%)............ 4.13 31.40 16.27 30.12 2.81 7.16 --
Annualized Net
Rent of
Expiring Leases
($)............ 32,610 205,137 137,189 208,657 17,335 41,889 --
Annualized Net
Rent per Square
Foot ($)....... 9.59 7.94 10.25 8.42 7.49 7.11 --
Percentage of
Total
Annualized Net
Rent (%)....... 4.65 29.27 19.57 29.77 2.47 5.98 --
Number of Leases
Expiring....... 2 4 4 4 1 1 --
4823 Old Kingston
Pike
Square Footage
of Expiring
Leases......... -- 4,499 25,398 -- 3,641 1,100 --
Percentage of Total
Leased Sq. Ft.
(%)............ -- 12.99 73.32 -- 10.51 3.18 --
Annualized Net
Rent of
Expiring Leases
($)............ -- 34,116 238,679 -- 24,943 7,178 --
Annualized Net
Rent per Square
Foot ($)....... -- 7.58 9.40 -- 6.58 6.53 --
Percentage of
Total
Annualized Net
Rent (%)....... -- 11.19 78.28 -- 8.18 2.35 --
Number of Leases
Expiring....... -- 4 3 -- 2 1 --
4343 Commerce
Court
Square Footage
of Expiring
Leases......... 47,144 41,517 29,976 12,549 1,479 7,012 12,094
Percentage of
Total Leased
Sq. Ft. (%).... 31.06 27.36 19.75 8.27 0.97 4.62 7.97
Annualized Net
Rent of
Expiring Leases
($) 901,536 643,953 504,024 208,200 20,460 132,252 211,579
Annualized Net
Rent per Square
Foot ($)....... 19.12 15.51 16.81 16.59 13.83 18.86 17.49
Percentage of
Total
Annualized Net
Rent (%) 34.38 24.56 19.22 7.94 0.78 5.04 8.07
Number of Leases
Expiring....... 4 5 5 3 2 2 1
1600-1700 167th
Street
Square Footage
of Expiring
Leases......... -- 6,299 4,996 5,944 4,922 7,136 --
Percentage of
Total Leased
Sq. Ft. (%).... -- 18.15 14.40 17.13 14.19 20.57 --
Annualized Net
Rent of
Expiring Leases
($) -- 77,359 41,821 62,160 48,840 86,752 --
Annualized Net
Rent per Square
Foot ($)....... -- 12.28 8.37 10.46 9.92 12.16 --
Percentage of
Total
Annualized Net
Rent (%) -- 17.97 9.71 14.44 11.34 20.15 --
Number of Leases
Expiring....... -- 4 2 4 2 1 --
</TABLE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-------------------------------------------------
2004 2005 2006 2007+ TOTAL
-------- -------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
201 4th Avenue N.
Square Footage
of Expiring
Leases......... -- 12,637 -- 120,901 225,823
Percentage of
Total Leased
Sq. Ft. (%).... -- 5.60 -- 53.54 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ -- 128,676 -- 969,903 $ 1,987,490
Annualized Net
Rent per Square
Foot ($)....... -- 0 -- 8.02 $ 8.80
Percentage of
Total
Annualized Net
Rent (%)....... -- 6.47 -- 48.80 100.00%
Number of Leases
Expiring....... -- 1 -- 1 24
620 Market Street
Square Footage
of Expiring
Leases......... 29,735 -- -- -- 85,629
Percentage of
Total Leased
Sq. Ft. (%).... 34.73 -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ 390,051 -- -- -- $ 894,983
Annualized Net
Rent per Square
Foot ($)....... 13.12 -- -- -- $ 10.45
Percentage of
Total
Annualized Net
Rent (%)....... 43.58 -- -- -- 100.00%
Number of Leases
Expiring....... 1 -- -- -- 14
625 Gay Street
Square Footage
of Expiring
Leases......... 6,670 -- -- -- 82,270
Percentage of Total
Leased Sq. Ft.
(%)............ 8.11 -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ 58,048 -- -- -- $ 700,865
Annualized Net
Rent per Square
Foot ($)....... 8.70 -- -- -- $ 8.52
Percentage of
Total
Annualized Net
Rent (%)....... 8.28 -- -- -- 100.00%
Number of Leases
Expiring....... 1 -- -- -- 17
4823 Old Kingston
Pike
Square Footage
of Expiring
Leases......... -- -- -- -- 34,638
Percentage of Total
Leased Sq. Ft.
(%)............ -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ -- -- -- -- $ 304,916
Annualized Net
Rent per Square
Foot ($)....... -- -- -- -- $ 8.80
Percentage of
Total
Annualized Net
Rent (%)....... -- -- -- -- 100.00%
Number of Leases
Expiring....... -- -- -- -- 10
4343 Commerce
Court
Square Footage
of Expiring
Leases......... -- -- -- -- 151,771
Percentage of
Total Leased
Sq. Ft. (%).... -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($) -- -- -- -- $ 2,622,004
Annualized Net
Rent per Square
Foot ($)....... -- -- -- -- $ 17.28
Percentage of
Total
Annualized Net
Rent (%) -- -- -- -- 100.00%
Number of Leases
Expiring....... -- -- -- -- 22
1600-1700 167th
Street
Square Footage
of Expiring
Leases......... -- 5,400 -- -- 34,697
Percentage of
Total Leased
Sq. Ft. (%).... -- 15.56 -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($) -- 113,670 -- -- $ 430,602
Annualized Net
Rent per Square
Foot ($)....... -- 21.05 -- -- $ 12.41
Percentage of
Total
Annualized Net
Rent (%) -- 26.40 -- -- 100.00%
Number of Leases
Expiring....... -- 1 -- -- 14
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
--------------------------------------------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
--------- --------- --------- --------- --------- --------- --------- ------- -------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4100 Madison
Street
Square Footage
of Expiring
Leases......... -- -- 739 -- 11,812 -- -- -- -- -- -- 12,551
Percentage of
Total Leased
Sq. Ft. (%).... -- -- 5.89 -- 94.11 -- -- -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ -- -- 3,991 -- 34,548 -- -- -- -- -- -- $ 38,539
Annualized Net
Rent per Square
Foot ($)....... -- -- 5.40 -- 2.92 -- -- -- -- -- -- $ 3.07
Percentage of
Total
Annualized Net
Rent (%) -- -- 10.36 -- 89.64 -- -- -- -- -- -- 100.00%
Number of Leases
Expiring....... -- -- 1 -- 2 -- -- -- -- -- -- 3
941-961 Weigel
Drive
Square Footage
of Expiring
Leases......... -- -- 123,077 -- -- -- -- -- -- -- -- 123,077
Percentage of
Total Leased
Sq. Ft. (%).... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ -- -- 1,571,076 -- -- -- -- -- -- -- -- $ 1,571.076
Annualized Net
Rent per Square
Foot ($)....... -- -- 12.76 -- -- -- -- -- -- -- -- $ 12.76
Percentage of
Total
Annualized Net
Rent (%)....... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring....... -- -- 1 -- -- -- -- -- -- -- -- 1
1301 E. Tower
Road
Square Footage
of Expiring
Leases......... -- -- -- -- 50,400 -- -- -- -- -- -- 50,000
Percentage of
Total Leased
Sq. Ft (%)..... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ -- -- -- -- 525,412 -- -- -- -- -- -- $ 524,412
Annualized Net
Rent per Square
Foot ($)....... -- -- -- -- 10.41 -- -- -- -- -- -- $ 10.41
Percentage of
Total
Annualized Net
Rent (%)....... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases
Expiring....... -- -- -- -- 1 -- -- -- -- -- -- 1
280 Shuman Boule-
vard
Square Footage
of Expiring
Leases......... 2,124 6,328 6,533 24,635 1,586 -- -- 22,988 -- -- -- 64,194
Percentage of
Total Leased
Sq. Ft (%)..... 3.31 9.86 10.18 38.38 2.47 -- -- 35.81 -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ 33,564 79,381 75,388 271,954 15,819 -- -- 171,925 -- -- -- $ 648,031
Annualized Net
Rent per Square
Foot ($)....... 15.80 12.54 11.54 11.04 9.97 -- -- -- -- -- -- $ 10.09
Percentage of
Total
Annualized Net
Rent (%)....... 5.18 12.25 11.63 41.97 2.44 -- -- 26.53 -- -- -- 100.00%
Number of Leases
Expiring....... -- 2 1 7 1 -- -- 1 -- -- -- 13
2205-2255 Enter-
prise Drive
Square Footage
of Expiring
Leases......... 2,780 21,851 16,881 27,144 14,721 16,312 -- 18,741 -- -- -- 118,430
Percentage of
Total Leased
Sq. Ft (%)..... 2.35 18.45 14.25 22.92 12.43 13.77 -- 15.82 -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ 25,837 297,528 145,044 265,123 133,416 147,492 -- 159,507 -- -- -- $ 1,173,947
Annualized Net
Rent per Square
Foot ($)....... 9.29 13.62 8.59 9.77 9.06 9.04 -- 8.51 -- -- -- $ 9.91
Percentage of
Total
Annualized Net
Rent (%)....... 2.20 25.34 12.36 22.58 11.36 12.56 -- 13.59 -- -- -- 100.00%
Number of Leases
Expiring....... 2 4 4 7 3 4 -- 2 -- -- -- 26
OFFICE SUBTOTALS
Square Footage
of Expiring
Leases......... 96,224 185,621 260,954 184,626 162,382 177,304 129,288 100,710 18,037 4,485 752,060 2,071,691
Percentage of
Aggregate
Leased Sq. Ft
(%)............ 4.64 8.96 12.60 8.91 7.84 8.56 6.24 4.86 0.87 0.22 36.30 100.00%
Annualized Net
Rent of
Expiring Leases
($).......... 1,426,200 2,134,553 3,099,586 1,836,053 1,483,445 1,960,178 1,197,266 986,524 242,346 46,147 17,362,213 $31,774,511
Annualized Net
Rent per Square
Foot ($)....... 14.82 11.50 11.88 9.94 9.14 11.06 9.26 9.80 13.44 10.29 23.09 $ 15.34
Percentage of
Total
Annualized Net
Rent (%)....... 4.49 6.72 9.75 5.78 4.67 6.17 3.77 3.10 0.76 0.15 54.64 100.00%
Number of Leases
Expiring....... 20 42 41 46 30 24 6 6 2 1 10 228
</TABLE>
- ------
(1)Represents lease expiration data from July 1, 1997 to December 31, 1997.
84
<PAGE>
INDUSTRIAL PROPERTIES
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
--------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ------- ------- ---- ------- ---- ---- ---- ------- ---- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Warehouse/Distribution
Facilities:
425 E. Algonquin Road
Square Footage of Ex-
piring Leases......... -- -- 57,404 -- -- -- -- -- 247,102 -- -- 304,506
Percentage of Total
Leased Sq. Ft. (%).... -- -- 18.85 -- -- -- -- -- 81.15 -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- 166,657 -- -- -- -- -- 779,610 -- -- $ 946,267
Annualized Net Rent per
Square Foot ($)....... -- -- 2.90 -- -- -- -- -- 3.16 -- -- $ 3.11
Percentage of Total
Annualized Net Rent
(%)................... -- -- 17.61 -- -- -- -- -- 82.39 -- -- 100.00%
Number of Leases Expir-
ing................... -- -- 1 -- -- -- -- -- 3 -- -- 4
1001 Technology Way
Square Footage of Ex-
piring Leases ........ -- -- -- -- 212,831 -- -- -- -- -- -- 212,831
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- 840,589 -- -- -- -- -- -- $ 840,589
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- 3.59 -- -- -- -- -- -- $ 3.59
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- -- 2 -- -- -- -- -- -- 2
3818 Grandville
Square Footage of Ex-
piring Leases ........ -- -- -- -- 189,900 -- -- -- -- -- -- 189,900
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- 489,942 -- -- -- -- -- -- $ 489,942
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- 2.58 -- -- -- -- -- -- $ 2.58
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- -- 1 -- -- -- -- -- -- 1
1200 Northwestern
Square Footage of Ex-
piring Leases ........ -- -- -- -- 155,332 -- -- -- -- -- -- 155,332
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- 551,429 -- -- -- -- -- -- $ 551,429
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- 3.55 -- -- -- -- -- -- $ 3.55
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- -- 1 -- -- -- -- -- -- 1
306-310 Era Drive
Square Footage......... -- 22,721 13,774 -- -- -- -- -- -- -- -- 36,495
Percentage of Total
Leased Sq. Ft. (%).... -- 62.26 37.74 -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- 320,218 72,849 -- -- -- -- -- -- -- -- $ 393,067
Annualized Net Rent per
Square Foot ($)....... -- 14.09 5.29 -- -- -- -- -- -- -- -- $ 10.77
Percentage of Total
Annualized Net Rent
(%)................... -- 81.47 18.53 -- -- -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- 1 1 -- -- -- -- -- -- -- -- 2
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-----------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ------- ---- --------- ------- ---- ------- ---- ---- ---- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1301 Ridgeview Drive
Square Footage of Ex-
piring Leases ........ -- -- -- 217,600 -- -- -- -- -- -- -- 217,600
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- 1,030,568 -- -- -- -- -- -- -- $1,030,568
Annualized Net Rent per
Square Foot ($)....... -- -- -- 4.74 -- -- -- -- -- -- -- $ 4.74
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- 1 -- -- -- -- -- -- -- 1
515 Huehl Road/500 Lind-
berg
Square Footage of Ex-
piring Leases ........ -- -- -- -- -- -- 201,244 -- -- -- -- 201,244
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- -- -- 100.00 -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- -- -- 821,580 -- -- -- -- $ 821,580
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- -- -- 4.08 -- -- -- -- $ 4.08
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- -- -- 100.00 -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- -- -- -- 1 -- -- -- -- 1
455 Academy Drive
Square Footage of Ex-
piring Leases......... -- -- -- -- 105,444 -- -- -- -- -- -- 105,444
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- 405,648 -- -- -- -- -- -- $ 405,648
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- 3.85 -- -- -- -- -- -- $ 3.85
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- -- 1 -- -- -- -- -- -- 1
Chicago Enterprise Cen-
ter(2)
13535-A S. Torrence Ave-
nue
Square Footage of Ex-
piring Leases......... -- 145,941 -- -- -- -- -- -- -- -- -- 145,941
Percentage of Total
Leased Sq. Ft. (%) ... -- 100.00 -- -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- 321,072 -- -- -- -- -- -- -- -- -- $ 321,072
Annualized Net Rent per
Square Foot ($)....... -- 2.20 -- -- -- -- -- -- -- -- -- $ 2.20
Percentage of Total
Annualized Net Rent
(%)................... -- 100.00 -- -- -- -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- 1 -- -- -- -- -- -- -- -- -- 1
13535-B S. Torrence Ave-
nue
Square Footage of Ex-
piring Leases......... -- -- -- -- -- -- 239,752 -- -- -- -- 239,752
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- -- -- 100.00 -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- -- -- 648,634 -- -- -- -- $ 648,634
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- -- -- 2.71 -- -- -- -- $ 2.71
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- -- -- 100.00 -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- -- -- -- 1 -- -- -- -- 1
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ---- ------- ------- ------- ---- ---- ---- ---- ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
13535-C S. Torrence Ave-
nue
Square Footage of Ex-
piring Leases......... -- -- -- 81,328 -- -- -- -- -- -- -- 81,328
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- 210,299 -- -- -- -- -- -- -- $ 210,299
Annualized Net Rent
per Square Foot ($)... -- -- -- 2.59 -- -- -- -- -- -- -- $ 2.59
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Number of Leases Ex-
piring................ -- -- -- 1 -- -- -- -- -- -- -- 1
13535-D S. Torrence
Avenue
Square Footage of
Expiring Leases....... -- -- 77,325 -- -- -- -- -- -- -- -- 77,325
Percentage of Total
Leased Sq. Ft. (%).... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- 235,532 -- -- -- -- -- -- -- -- $ 235,532
Annualized Net Rent
per Square Foot ($)... -- -- 3.05 -- -- -- -- -- -- -- -- $ 3.05
Percentage of Total
Annualized Net Rent
(%)................... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Number of Leases Ex-
piring................ -- -- 1 -- -- -- -- -- -- -- -- 1
13535-E/13535-F S.
Torrence Avenue
Square Footage of
Expiring Leases...... -- -- -- -- 53,600 -- -- -- -- -- -- 53,600
Percentage of Total
Leased Sq. Ft. (%)... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($).. -- -- -- -- 175,667 -- -- -- -- -- -- $ 175,667
Annualized Net Rent
per Square Foot ($).. -- -- -- -- 3.28 -- -- -- -- -- -- $ 3.28
Percentage of Total
Annualized Net Rent
(%).................. -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases
Expiring............. -- -- -- -- 1 -- -- -- -- -- -- 1
13535--H S. Torrence
Avenue
Square Footage of
Expiring Leases...... -- -- -- -- 10,200 -- -- -- -- 31,240 -- 41,440
Percentage of Total
Leased Sq. Ft. (%)... -- -- -- -- 24.61 -- -- -- -- 100.00 -- 100.00%
Annualized Net Rent of
Expiring Leases ($).. -- -- -- -- 17,255 -- -- -- -- 58,046 -- $ 75,301
Annualized Net Rent
per Square Foot ($).. -- -- -- -- 1.69 -- -- -- -- 1.86 -- $ 1.82
Percentage of Total
Annualized Net Rent
(%).................. -- -- -- -- 22.91 -- -- -- -- 100.00 -- 100.00%
Number of Leases
Expiring............. -- -- -- -- 1 -- -- -- -- 1 -- 2
East Chicago Enterprise
Center (2)
4440 Railroad Avenue
Square Footage of
Expiring Leases...... 40,000 -- -- -- -- -- -- -- -- -- -- 40,000
Percent of Total
Leased Sq. Ft. (%)... 100.00 -- -- -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($).. 298,746 -- -- -- -- -- -- -- -- -- -- $ 298,746
Annualized Net Rent
per Square Foot ($).. 7.47 -- -- -- -- -- -- -- -- -- -- $ 7.47
Percentage of Total
Annualized Net Rent
(%).................. 100.00 -- -- -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring............. 1 -- -- -- -- -- -- -- -- -- -- 1
Building 3 (4407
Railroad Avenue)
Square Footage of
Expiring Leases...... -- -- -- -- -- -- -- -- -- -- 291,550 291,550
Percentage of Total
Leased Sq. Ft. (%)... -- -- -- -- -- -- -- -- -- -- 100.00 100.00%
Annualized Net Rent of
Expiring Leases ($).. -- -- -- -- -- -- -- -- -- -- 1,422,636 $1,422,636
Annualized Net Rent
per Square Foot ($).. -- -- -- -- -- -- -- -- -- -- 4.88 $ 4.88
Percentage of Total
Annualized Net Rent
(%).................. -- -- -- -- -- -- -- -- -- -- 100.00 100.00%
Number of Leases
Expiring............. -- -- -- -- -- -- -- -- -- -- 2 2
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
---------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ------- ------ ------- ------ ------ ---- ---- ---- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Building 4 (4407
Railroad Avenue)
Square Footage of
Expiring Leases...... -- -- -- 85,799 -- -- -- -- -- -- -- 85,799
Percentage of Total
Leases Sq. Ft. (%)... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($).. -- -- -- 285,653 -- -- -- -- -- -- -- $285,653
Annualized Net Rent
per Square Foot ($).. -- -- -- 3.33 -- -- -- -- -- -- -- $ 3.33
Percentage of Total
Annualized Net Rent
(%).................. -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring............. -- -- -- 1 -- -- -- -- -- -- -- 1
Hammond Enterprise Cen-
ter
4507 Columbia Avenue
Square Footage of
Expiring Leases...... -- -- 2,280 32,657 -- -- -- -- -- -- 218,589 253,526
Percentage of Total
Leased Sq. Ft. (%)... -- -- 0.90 12.88 -- -- -- -- -- -- 86.22 100.00%
Annualized Net Rent of
Expiring Leases ($).. -- -- 4,970 78,681 -- -- -- -- -- -- 488,195 $571,846
Annualized Net Rent
per Square Foot ($).. -- -- 2.18 2.41 -- -- -- -- -- -- 2.23 $ 2.26
Percentage of Total
Annualized Net Rent
(%).................. -- -- 0.87 13.76 -- -- -- -- -- -- 85.37 100.00%
Number of Leases
Expiring............. -- -- 1 1 -- -- -- -- -- -- 3 5
4531 Columbia Avenue
Square Footage of
Expiring Leases...... -- -- 81,362 104,182 -- -- -- -- -- -- -- 185,544
Percentage of Total
Leased Sq. Ft. (%)... -- -- 43.85 56.15 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Lease ($)... -- -- 55,651 218,030 -- -- -- -- -- -- -- $273,681
Annualized Net Rent
per Square Foot ($).. -- -- .68 2.09 -- -- -- -- -- -- -- $ 1.48
Percentage of Total
Annualized Net
Rent (%)............. -- -- 20.33 79.67 -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring............. -- -- 1 1 -- -- -- -- -- -- -- 2
4527 Columbia Avenue
Square Footage of
Expiring Leases....... 279 4,038 -- -- 3,410 2,766 -- -- -- -- -- 10,493
Percentage of Total
Leased Sq. Ft. (%).... 2.66 38.48 -- -- 32.50 26.36 -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... 1,741 26,287 -- -- 15,584 12,641 -- -- -- -- -- $ 56,253
Annualized Net Rent
per Square Foot ($)... 6.24 6.51 -- -- 4.57 4.57 -- -- -- -- -- $ 5.36
Percentage of Total
Annualized Net Rent
(%)................... 3.09 46.73 -- -- 27.70 22.47 -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. 1 1 -- -- 1 1 -- -- -- -- -- 4
4411 Marketing Place
Square Footage of
Expiring Leases....... -- -- -- 65,804 -- -- -- -- -- -- -- 65,804
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- 226,800 -- -- -- -- -- -- -- $226,800
Annualized Net Rent
per Square Foot ($)... -- -- -- 3.45 -- -- -- -- -- -- -- $ 3.45
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- -- 1 -- -- -- -- -- -- -- 1
2160 McGaw Road
Square Footage of
Expiring Leases....... -- 310,100 -- -- -- -- -- -- -- -- -- 310,100
Percentage of Total
Leased Sq. Ft. (%).... -- 100.00 -- -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- 457,848 -- -- -- -- -- -- -- -- -- $457,848
Annualized Net Rent
per Square Foot ($)... -- 1.48 -- -- -- -- -- -- -- -- -- $ 1.48
Percentage of Total
Annualized Net Rent
(%)................... -- 100.00 -- -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- 1 -- -- -- -- -- -- -- -- -- 1
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
--------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ---- ------ ---- ------- ---- ------- ---- ------- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2400 McGaw Road
Square Footage of
Expiring Leases....... -- -- -- -- -- -- -- -- 86,400 -- -- 86,400
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- -- -- -- -- 100.00 -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- -- -- -- -- 191,352 -- -- $191,352
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- -- -- -- -- 2.21 -- -- $ 2.21
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- -- -- -- -- 100.00 -- -- 100.00%
Number of Leases
Expiring.............. -- -- -- -- -- -- -- -- 1 -- -- 1
4849 Groveport Road
Square Footage of
Expiring Leases....... -- -- -- -- -- -- -- -- -- -- 132,100 132,100
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- -- -- -- -- -- -- 100.00 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- -- -- -- -- -- -- 287,688 $287,688
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- -- -- -- -- -- -- 2.18 $ 2.18
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- -- -- -- -- -- -- 100.00 100.00%
Number of Leases
Expiring.............. -- -- -- -- -- -- -- -- -- -- 1 1
600 London Road
Square Footage of
Expiring Leases....... 52,441 -- -- -- -- -- -- -- -- -- -- 52,441
Percentage of Total
Leased Sq. Ft. (%).... 100.00 -- -- -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... 110,400 -- -- -- -- -- -- -- -- -- -- $110,400
Annualized Net Rent per
Square Foot ($)....... 2.11 -- -- -- -- -- -- -- -- -- -- $ 2.11
Percentage of Total
Annualized Net Rent
(%)................... 100.00 -- -- -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. 1 -- -- -- -- -- -- -- -- -- -- 1
5160 Blazer Memorial
Parkway
Square Footage of
Expiring Leases....... -- -- -- -- 27,680 -- 27,787 -- -- -- -- 55,467
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- 49.90 -- 50.10 -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- 188,112 -- 160,035 -- -- -- -- $348,147
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- 6.80 -- 5.76 -- -- -- -- $ 6.28
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- 54.03 -- 45.97 -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- -- -- 1 -- 1 -- -- -- -- 2
1401 S. Jefferson Street
Square Footage of
Expiring Leases....... -- -- 17,265 -- -- -- -- -- -- -- -- 17,265
Percentage of Total
Leased Sq. Ft. (%).... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- 88,944 -- -- -- -- -- -- -- -- $ 88,944
Annualized Net Rent per
Square Foot ($)....... -- -- 5.15 -- -- -- -- -- -- -- -- $ 5.15
Percentage of Total
Annualized Net Rent
(%)................... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- 1 -- -- -- -- -- -- -- -- 1
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
---------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ------- ------- ------- ------- ---- ------ ---- ---- ---- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1051 N. Kirk Road
Square Footage of
Expiring Leases....... -- 120,004 -- -- -- -- -- -- -- -- -- 120,004
Percentage of Total
Leased Sq. Ft. (%).... -- 100.00 -- -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- 474,012 -- -- -- -- -- -- -- -- -- $474,012
Annualized Net Rent per
Square Foot ($)....... -- 3.95 -- -- -- -- -- -- -- -- -- $ 3.95
Percentage of Total
Annualized Net Rent
(%)................... -- 100.00 -- -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- 1 -- -- -- -- -- -- -- -- -- 1
4211 Madison Street
Square Footage of
Expiring Leases....... -- -- 26,035 -- 64,299 -- -- -- -- -- -- 90,334
Percentage of Total
Leased Sq. Ft. (%).... -- -- 28.82 -- 71.18 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- 108,084 -- 241,116 -- -- -- -- -- -- $349,200
Annualized Net Rent per
Square Foot ($)....... -- -- 4.15 -- 3.75 -- -- -- -- -- -- $ 3.87
Percentage of Total
Annualized Net Rent
(%)................... -- -- 30.95 -- 69.05 -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- 1 -- 1 -- -- -- -- -- -- 2
200 E. Fullerton Avenue
Square Footage of
Expiring Leases....... -- -- 66,254 -- -- -- -- -- -- -- -- 66,254
Percentage of Total
Leased Sq. Ft. (%).... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- 248,448 -- -- -- -- -- -- -- -- $248,448
Annualized Net Rent per
Square Foot ($)....... -- -- 3.75 -- -- -- -- -- -- -- -- $ 3.75
Percentage of Total
Annualized Net Rent
(%)................... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- 1 -- -- -- -- -- -- -- -- 1
350 Randy Road
Square Footage of
Expiring Leases....... -- 3,150 3,150 3,150 9,450 -- 3,150 -- -- -- -- 22,050
Percentage of Total
Leased Sq. Ft. (%).... -- 14.29 14.29 14.29 42.86 -- 14.29 -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- 13,944 21,720 13,512 46,584 -- 33,332 -- -- -- -- $129,092
Annualized Net Rent per
Square Foot ($)....... -- 4.43 6.90 4.29 4.93 -- 10.58 -- -- -- -- $ 5.85
Percentage of Total
Annualized Net Rent
(%)................... -- 10.80 16.83 10.47 36.09 -- 25.82 -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- 1 1 1 1 -- 1 -- -- -- -- 5
4248, 4250 and 4300 Mad-
ison Street
Square Footage of
Expiring Leases....... 15,680 11,872 62,847 36,730 -- -- -- -- -- -- -- 127,129
Percentage of Total
Leased Sq. Ft. (%).... 12.33 9.34 49.44 28.89 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... 52,844 47,484 323,818 173,280 -- -- -- -- -- -- -- $597,426
Annualized Net Rent per
Square Foot ($)....... 3.37 4.00 5.15 4.72 -- -- -- -- -- -- -- $ 4.70
Percentage of Total
Annualized Net Rent
(%)................... 8.85 7.95 54.20 29.00 -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. 1 1 2 1 -- -- -- -- -- -- -- 5
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
--------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ---- ------- ------- ------ ---- ---- ------- ---- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
370 Carol Lane
Square Footage of
Expiring Leases....... -- -- -- -- -- -- -- 60,290 -- -- -- 60,290
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- -- -- -- 100.00 -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- -- -- -- 256,224 -- -- -- $256,224
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- -- -- -- 4.25 -- -- -- $ 4.25
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- -- -- -- 100.00 -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- -- -- -- -- -- 1 -- -- -- 1
388 Carol Lane
Square Footage of
Expiring Leases....... -- -- -- 36,184 -- -- -- -- -- -- -- 36,184
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- 179,760 -- -- -- -- -- -- -- $179,760
Annualized Net Rent per
Square Foot ($)....... -- -- -- 4.97 -- -- -- -- -- -- -- $ 4.97
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- -- 1 -- -- -- -- -- -- -- 1
342-346 Carol Lane
Square Footage of
Expiring Leases....... -- -- -- 67,935 -- -- -- -- -- -- -- 67,935
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- 293,736 -- -- -- -- -- -- -- $293,736
Annualized Net Rent per
Square Foot ($)....... -- -- -- 4.32 -- -- -- -- -- -- -- $ 4.32
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- -- 2 -- -- -- -- -- -- -- 2
343 Carol Lane
Square Footage of
Expiring Leases....... -- -- -- -- -- -- -- -- -- -- 30,084 30,084
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- -- -- -- -- -- -- 100.00 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- -- -- -- -- -- -- 201,744 $201,744
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- -- -- -- -- -- -- 6.71 $ 6.71
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- -- -- -- -- -- -- 100.00 100.00%
Number of Leases
Expiring.............. -- -- -- -- -- -- -- -- -- -- 1 1
4150-4190 Madison Street
Square Footage of
Expiring Leases....... 17,240 -- 36,625 -- 25,667 -- -- -- -- -- -- 79,532
Percentage of Total
Leased Sq. Ft. (%).... 21.68 -- 46.05 -- 32.27 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... 72,516 -- 157,412 -- 88,037 -- -- -- -- -- -- $317,965
Annualized Net Rent per
Square Foot ($)....... 4.21 -- 4.30 -- 3.43 -- -- -- -- -- -- $ 4.00
Percentage of Total
Annualized Net Rent
(%)................... 22.81 -- 49.51 -- 27.69 -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. 1 -- 1 -- 1 -- -- -- -- -- -- 3
</TABLE>
91
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-----------------------------------------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
-------- --------- --------- --------- --------- ------ --------- ------- --------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11039 Gage Avenue
Square Footage
of Expiring
Leases.......... -- -- -- -- -- -- -- -- 21,935 -- -- 21,935
Percentage of
Total Leased
Sq. Ft. (%)..... -- -- -- -- -- -- -- -- 100.00 -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............. -- -- -- -- -- -- -- -- 107,376 -- -- $ 107,376
Annualized Net
Rent per Square
Foot ($)........ -- -- -- -- -- -- -- -- 4.90 -- -- $ 4.90
Percentage of
Total
Annualized Net
Rent (%)........ -- -- -- -- -- -- -- -- 100.00 -- -- 100.00%
Number of Leases
Expiring........ -- -- -- -- -- -- -- -- 1 -- -- 1
11045 Gage Avenue
Square Footage
of Expiring
Leases.......... -- -- -- -- 140,815 -- -- -- -- -- -- 140,815
Percentage of
Total Leased
Sq. Ft. (%)..... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............. -- -- -- -- 534,612 -- -- -- -- -- -- $ 534,612
Annualized Net
Rent per Square
Foot ($)........ -- -- -- -- 3.80 -- -- -- -- -- -- $ 3.80
Percentage of
Total
Annualized Net
Rent (%)........ -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases
Expiring........ -- -- -- -- 1 -- -- -- -- -- -- 1
550 Kehoe Boule-
vard
Square Footage
of Expiring
Leases.......... -- -- -- -- -- -- -- -- -- 44,575 -- 44,575
Percentage of
Total Leased
Sq. Ft. (%)..... -- -- -- -- -- -- -- -- -- 100.00 -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............. -- -- -- -- -- -- -- -- -- 291,972 -- $ 291,972
Annualized Net
Rent per Square
Foot ($)........ -- -- -- -- -- -- -- -- -- 6.55 -- $ 6.55
Percentage of
Total
Annualized Net
Rent (%)........ -- -- -- -- -- -- -- -- -- 100.00 -- 100.00%
Number of Leases
Expiring........ -- -- -- -- -- -- -- -- -- 1 -- 1
475 Superior Ave-
nue
Square Footage
of Expiring
Leases.......... -- -- 450,000 -- -- -- -- -- -- -- -- 450,000
Percentage of
Total Leased
Sq. Ft. (%)..... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............. -- -- 1,258,200 -- -- -- -- -- -- -- -- $ 1,258,200
Annualized Net
Rent per Square
Foot ($)........ -- -- 2.80 -- -- -- -- -- -- -- -- $ 2.80
Percentage of
Total
Annualized Net
Rent (%)........ -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring........ -- -- 1 -- -- -- -- -- -- -- -- 1
INDUSTRIAL
SUBTOTALS
Square Footage
of Expiring
Leases......... 125,640 617,826 894,321 731,369 998,628 2,766 471,933 60,290 355,437 75,815 672,323 5,006,348
Percent of Total
Leased Sq. Ft.
(%)............ 2.51 12.34 17.86 14.61 19.95 0.06 9.43 1.20 7.10 1.51 13.43 100.00%
Annualized Net
Rent of
Expiring
Leases ($)..... 536,247 1,660,865 2,742,285 2,710,319 3,594,575 12,641 1,663,581 256,224 1,078,338 350,018 2,400,263 $17,005,356
Annualized Net
Rent per Square
Foot ($)....... 4.27 2.69 3.07 3.71 3.60 4.57 3.53 4.25 3.03 4.62 3.57 $ 3.40
Percentage of
Total
Annualized Net
Rent (%)....... 3.15 9.77 16.13 15.94 21.14 0.07 9.78 1.51 6.34 2.06 14.11 100.00%
Number of Leases
Expiring....... 5 7 13 11 13 1 4 1 5 2 7 69
</TABLE>
92
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-----------------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICE SUBTOTALS
Square Footage
of Expiring
Leases.......... 96,224 185,621 260,954 184,626 162,382 177,304 129,288 100,710 18,037
Percentage of
Total Leased Sq.
Ft. (%)......... 4.64 8.96 12.60 8.91 7.84 8.56 6.24 4.86 0.87
Annualized Net
Rent of Expiring
Leases ($)...... 1,426,200 2,134,553 3,099,586 1,836,053 1,483,445 1,960,178 1,197,266 986,524 242,346
Annualized Net
Rent per Square
Foot ($)........ 14.82 11.50 11.88 9.94 9.14 11.06 9.26 9.80 13.44
Percentage of
Total Annualized
Net Rent (%).... 4.49 6.72 9.75 5.78 4.67 6.17 3.77 3.10 0.76
Number of Leases
Expiring........ 20 42 41 46 30 24 6 6 2
PORTFOLIO TOTAL
Square Footage
of Expiring
Leases.......... 221,864 803,447 1,155,275 915,995 1,161,010 180,070 601,221 161,000 373,474
Percentage of
Total Leased Sq.
Ft. (%)......... 3.13 11.35 16.32 12.94 16.40 2.54 8.49 2.27 5.28
Annualized Net
Rent of Expiring
Leases ($)...... 1,962,447 3,795,418 5,841,871 4,546,372 5,078,020 1,972,819 2,860,847 1,242,748 1,320,684
Annualized Net
Rent per Square
Foot ($)........ 8.85 4.72 5.06 4.96 4.37 10.96 4.76 7.72 3.54
Percentage of
Total Annualized
Net Rent (%).... 4.02 7.78 11.98 9.32 10.41 4.04 5.86 2.55 2.71
Number of Leases
Expiring........ 25 49 54 57 43 25 10 7 7
</TABLE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------------
2006 2007+ TOTAL
------- ---------- -----------
<S> <C> <C> <C>
OFFICE SUBTOTALS
Square Footage
of Expiring
Leases.......... 4,485 752,060 2,071,691
Percentage of
Total Leased Sq.
Ft. (%)......... 0.22 36.30 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... 46,147 17,362,213 $31,774,511
Annualized Net
Rent per Square
Foot ($)........ 10.29 23.09 $ 15.34
Percentage of
Total Annualized
Net Rent (%).... 0.15 54.64 100.00%
Number of Leases
Expiring........ 1 10 228
PORTFOLIO TOTAL
Square Footage
of Expiring
Leases.......... 80,300 1,424,383 7,078,039
Percentage of
Total Leased Sq.
Ft. (%)......... 1.13 20.12 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... 396,165 19,762,476 $48,779,867
Annualized Net
Rent per Square
Foot ($)........ 4.93 13.87 $ 6.89
Percentage of
Total Annualized
Net Rent (%).... 0.81 40.51 100.00%
Number of Leases
Expiring........ 3 17 297
</TABLE>
- ----
(1) Represents lease expirations data from July 1, 1997 to December 31, 1997.
(2) This table excludes three Industrial Properties and one Office Property
that had no leases in effect at July 1, 1997: (i) 13535-G S. Torrence
Avenue, (ii) East Chicago Enterprise Center Building 2, (iii) 4635
Railroad Avenue and (iv) 350 N. Mannheim Road.
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TENANT INFORMATION
The Company's tenants include significant corporate and other commercial
enterprises representing a range of industries including, among others,
commercial and financial printing, legal services, investment brokerage,
manufacturing, banking, insurance, consulting and finance. The following table
set forth information as to the Company's ten largest office and industrial
tenants based upon annual net rental revenue for the twelve months ended June
30, 1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
TENANT COMPANY'S
ANNUAL TOTAL
NET RENTAL NET RENTAL INITIAL LEASE LEASE EXPIRATION
REVENUE($)(1) REVENUES(%) DATE DATE
------------- ------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Office Tenants
Donnelley.............. 6,158,276 12.62 July 1, 1992 June 30, 2007
Everen................. 6,009,902 12.32 June 1, 1992 May 31, 2007
Jones Day.............. 3,559,291 7.30 July 6, 1992 June 30, 2007
Household Finance...... 1,571,076 3.22 September 1, 1989 August 31, 1999
SunTrust Bank.......... 992,931 2.04 March 1, 1968 February 28, 2008
Computer Associates.... 850,068 1.74 January 4, 1988 January 3, 1998
Household Credit Serv-
ices.................. 524,412 1.08 January 1, 1992 December 31, 2001
The Prime Group, Inc... 511,445 1.05 June 8, 1992 May 31, 2002
Equifax................ 474,017 0.97 October 1, 1988 September 30, 1998
McGladrey & Pullen..... 465,580 0.95 November 1, 1989 October 31, 2002
----------- -------
Total............... $21,116,998 43.29%
=========== =======
<CAPTION>
PERCENTAGE OF
TENANT COMPANY'S
ANNUAL TOTAL
NET RENTAL NET RENTAL INITIAL LEASE LEASE EXPIRATION
REVENUE($)(1) REVENUES(%) DATE DATE
------------- ------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Industrial Tenants
Rank Video............. 3,160,432 6.48 December 1, 1989 October 30, 2001
General Electric....... 1,258,200 2.58 February 21, 1989 February 20, 1999
Motorola............... 1,030,568 2.11 July 1, 1995 June 30, 2000
Metro Metals........... 887,263 1.82 November 15, 1995 November 30, 2015
Welded Tube............ 648,634 1.33 July 1, 1993 June 30, 2003
Acutus-Gladwin......... 535,373 1.10 March 1, 1997 February 28, 2017
Echlin................. 534,612 1.10 April 1, 1991 March 31, 2001
Houghton Mifflin....... 474,012 0.97 March 1, 1996 February 28, 2006
Spartan Warehouse...... 457,848 0.94 January 1, 1993 May 31, 1998
Major Corp./National
Service Industries ... 405,648 0.83 June 1, 1996 October 30, 2001
----------- -------
Total............... $ 9,392,590 19.26%
=========== =======
</TABLE>
- --------
(1) Determined in accordance with GAAP.
OFFICE PROPERTIES
Approximately 71.7% of the Office Properties (based on net rentable square
feet) are Class A office buildings. The Office Properties contain an aggregate
of approximately 2.4 million net rentable square feet in 16 buildings. Twelve
of the Office Properties are located in the Chicago Metropolitan Area, one in
Nashville, Tennessee and three in Knoxville, Tennessee. As of June 30, 1997,
the Office Properties had an occupancy rate of 88.0%. The Office Properties
range in size from one to 50 stories and are easily accessible from major
highways and major airports. Management believes that the location, quality of
construction and amenities at the
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<PAGE>
Office Properties as well as the Company's reputation for providing a high
level of tenant service have enabled the Company to attract and retain a
national tenant base. Management believes that as a result of these factors,
the Office Properties in the Chicago Metropolitan Area achieve among the
highest rent, occupancy and tenant retention rates when compared to other
properties within their respective submarkets.
Approximately 68.8% of the Company's Annualized Net Rent from the Office
Properties is attributable to leases expiring in the year 2002 or beyond and
approximately 54.6% of such income is attributable to leases expiring in the
year 2007 or beyond. In terms of square footage and Annualized Net Rent, the
average annual turnover for the next five years is only 9.2% and 6.9% per
annum, respectively. In addition, several of the Company's largest Office
Property tenants, such as Donnelley, Everen and Jones Day have signed long-
term leases with contractual rent escalations, which provide an average annual
increase in base rents of 2.5% through 2007.
INDUSTRIAL PROPERTIES
Like the Office Properties, the Industrial Properties were designed and
developed to provide above-standard quality and meet the long-term needs of
tenants. While many of the Industrial Properties are occupied by a single
tenant, they have been designed (or redesigned) for multitenant operations and
most can be reconfigured for such use, if necessary. The Industrial Properties
are located in the Chicago Metropolitan Area and the Columbus, Ohio
metropolitan area and are primarily comprised of one-story buildings ranging
in size from approximately 14,100 to 450,000 square feet. Certain of the
Industrial Properties feature supporting office space for management and
administrative functions.
Most of the Industrial Property leases are written on a net basis (i.e., the
tenant has responsibility for its proportionate share of all operating costs,
real estate taxes and common area expenses) with initial terms of three to 20
years and options to renew for up to an additional five to ten years at the
then current fair market value. Approximately 34.0% of the Company's
Annualized Net Rent from the Industrial Properties is attributable to leases
expiring in the year 2002 or beyond and approximately 14.1% of such income is
attributable to leases expiring in the year 2007 or beyond. In terms of square
footage and Annualized Net Rent, the average annual turnover for the next five
years is 13.4% and 13.2% per annum, respectively. The leases generally provide
for rent increases based on specific contractual rent escalations. Several of
the Company's largest Industrial Property tenants, such as Welded Tube Company
and Metro Metals, have signed long-term leases with contractual rent
escalations, which provide an average annual increase in Annualized Net Rent
of 3.2% through 2003.
Certain of the Industrial Properties can support additional development and,
subject to substantial pre- leasing, the Company may develop approximately 4.4
million additional square feet. The Company anticipates that any such
development would be funded at least partially with amounts available under
the Credit Facility. There can be no assurance, however, that the Company will
be able to successfully develop any of the Industrial Properties or obtain
financing for any such development on terms favorable to the Company. See
"Risk Factors--Real Estate Financing Risks--Ability to Obtain Permanent
Financing" and "--No Limitation on Debt."
DEVELOPMENT, LEASING AND MANAGEMENT ACTIVITIES
Since 1981, Prime has developed (or redeveloped) over 10.0 million square
feet of office and industrial space, primarily located in the Chicago
Metropolitan Area, Texas and Tennessee for its own portfolio. Development and
redevelopment activities include site selection, land entitlement, project
design and construction, marketing, leasing, finance, build-to-suit projects,
base building and tenant construction. The Company has successfully developed
numerous sophisticated development projects for some of the nation's most
prominent corporations both in the Chicago Metropolitan Area and around the
country. The Company's extensive experience has enabled it to form key
alliances with major corporate tenants, landowners and contractors in the
Chicago Metropolitan Area. The Company's relationships with tenants and users
has enabled it to receive fees in connection with its role as developer of
various projects, or, in several cases, such as the 77 West Wacker Drive
Building, to develop the land for its own account where such development may
result in an attractive risk-adjusted return on investment. In connection with
the Formation Transactions, the Company will succeed to Prime's rights in and
to Prime's office and industrial development, leasing and management business.
95
<PAGE>
The Company will provide its own development, leasing and property
management services for the Properties. The Company's staff of approximately
151 employees will provide these services from the Company's headquarters in
Chicago, Illinois and through on-site staff at the Properties. The Services
Company may provide building management services for independent building
owners for terms that vary in length and which generally provide for
management fees of 1.5% to 5.0% of collected revenue and reimbursement of
expenses. The Services Company also will provide third-party development
services for third parties at market rates.
CONTRIBUTION PROPERTIES
The Company has entered into agreements to acquire the Contribution
Properties prior to or upon completion of the Offering. Acquisition of these
properties is subject to the satisfactory completion of certain closing
conditions. Although each of the acquisitions is expected to be completed
prior to or upon completion of the Offering, there is no assurance that any of
the Contribution Properties will be acquired. Upon the completion of the
Offering and the consummation of the Formation Transactions, the 28
Contribution Properties are expected to be acquired by the Company from the
Contributors, which include several companies founded and managed by
management of the Company. The Company expects to finance the acquisition cost
(approximately $53.5 million in the aggregate) through the assumption of
indebtedness, other borrowings and the issuance of Common Units to certain of
the Contributors.
The Contribution Properties include 20 Industrial Properties and seven
Office Properties. The Contribution Properties encompass an aggregate of
approximately 2.6 million net rentable square feet, of which 97.1% was leased
as of June 30, 1997. Major tenants of the Contribution Properties include Rank
Video, Motorola, Household Finance, Equifax and National Service Industries.
Rank Video, a British videotape company, completely occupies two of the
Industrial Properties (and approximately 76.0% of a third) and has located its
U.S. corporate headquarters in the Office Property. Other tenants include
National Service Industries and Motorola, which have each established large
production facilities in the Properties they lease. The Contribution
Properties are all located in Suburban Chicago. For a further description of
these Properties, see "--Other Chicago Metropolitan Area Office Buildings,"
"--Warehouse/Distribution Industrial Submarket--Description of Chicago
Metropolitan Area Warehouse Distribution Properties," "Overhead
Crane/Manufacturing Industrial Submarket--Description of Chicago Metropolitan
Area Overhead Crane/Manufacturing Properties" and
"--Industrial Properties."
Certain of the NAC Properties in Carol Stream and Batavia, Illinois, as well
as 455 Academy Drive and 1301 Ridgeview Drive, can support additional
development. The NAC Properties include approximately 94.4 additional acres,
455 Academy Drive includes approximately 2.5 additional acres, and 1301
Ridgeview Drive includes approximately 13.0 additional acres for development.
There can be no assurance, however, that the Company will be able to
successfully develop any of the land or obtain financing for any such
development on terms favorable to the Company. Additionally, in connection
with the acquisition of the Contribution Properties (i) the Company is
obligated to purchase an additional 48.5 acres of land in Libertyville,
Illinois in the event that an existing contract for the sale of such property
is terminated and (ii) the Company has an option to purchase one industrial
property, known as 901 Technology Way, in Libertyville, Illinois, for a
purchase price of ten times the pro forma net operating income, but not less
than the development cost nor more than 120.0% of the development cost. See
"--Land for Development and Option Properties" and "Risk Factors--Real Estate
Financing Risks" and "--No Limitation on Debt."
ACQUISITION PROPERTIES
The Company has entered into agreements to acquire the Acquisition
Properties prior to or upon completion of the Offering. Acquisition of each of
these properties is subject to the satisfactory completion of certain closing
conditions. Although each of the acquisitions is expected to be completed
prior to or upon completion of the Offering, there is no assurance that any of
the Acquisition Properties will be acquired. The Company expects to finance
the acquisition cost (approximately $41.4 million in the aggregate) with the
proceeds of the Offering. Unless otherwise indicated, all calculations and
information contained in this Prospectus give pro forma effect to the
acquisition of the Acquisition Properties.
96
<PAGE>
The Acquisition Properties consist of an aggregate of approximately 0.8
million net rentable square feet, of which 97.0% was leased as of June 30,
1997. Major tenants of the facilities include General Electric, Silicon
Graphics and Ticor Title Insurance.
PRIME CONTRIBUTION PROPERTIES
Concurrently with the completion of the Offering, the Prime Contribution
Properties will be acquired by the Company from Prime.
On July 24, 1997, Prime acquired 1699 E. Woodfield Road, one of the Prime
Contribution Properties, which is a Class A office building located in
Schaumburg, Illinois. This building has approximately 105,400 net rentable
square feet, of which 95.2% was leased as of June 30, 1997. The building's
tenants include Citibank, Merrill Lynch and McGladrey & Pullen.
On July 31, 1997, Prime acquired six Industrial Properties located in the
Columbus, Ohio metropolitan area. These properties range in size from 52,000
to 310,000 net rentable square feet and encompass an aggregate of
approximately 732,800 net rentable square feet, of which 95.8% was leased as
of June 30, 1997. Five of these Properties are warehouse/distribution
facilities, and one is a light industrial manufacturing or "flex space"
facility. Major tenants of the facilities include Spartan Warehouse, Premier
Autoglass, S.P. Richards, Alkon Corporation, Danninger Medical, Wes-Tran Corp.
and Schneider National. The Company believes that these Properties are well-
located for warehousing and distribution in the Columbus, Ohio market. For a
further description of these Properties, see "--The Company's Industrial
Submarkets--Columbus Industrial Submarket--Description of Columbus Industrial
Properties."
THE COMPANY'S MARKETS
Because of the Company's primary focus on the Chicago Metropolitan Area,
general economic information on the Chicago Metropolitan Area is presented
below, followed by discussions of the submarkets in which the Company has
Properties, including the Chicago Metropolitan Area office and industrial
markets, as well as Nashville, Tennessee, Knoxville, Tennessee and Columbus,
Ohio. The Company has relied, with permission, on research of the Company's
submarkets performed by RCG, a nationally recognized expert in real estate
consulting and urban economics. The discussion of such submarkets below and
under the caption "Prospectus Summary--The Company's Markets--Chicago
Metropolitan Area" is based upon the findings of RCG. While the Company
believes that these estimates of economic trends are reasonable, there can be
no assurance that these trends will in fact continue.
Information contained in this section contains "forward-looking statements"
relating to the future performance of the economies of the Chicago
Metropolitan Area, Nashville, Tennessee, Knoxville, Tennessee, and Columbus,
Ohio and office and industrial markets thereof. Actual results may differ
materially from those set forth herein as the result of a number of factors,
including, without limitation, the national and regional economic climate
(which may be adversely affected by business layoffs or downsizing, industry
slowdowns, relocations of business, changing demographics, infrastructure
quality and governmental budgetary constraints) and priorities and conditions
in the national, regional and Chicago Metropolitan Area office and industrial
markets (such as oversupply of or reduced demand for office or industrial
space, and increased telecommuting).
The Chicago Metropolitan Area--General Overview. The Company currently owns
or has an interest in office and industrial properties in the suburban and
downtown submarkets of the Chicago Metropolitan Area. The Company believes
that the Chicago Metropolitan Area has been and will continue to be an
excellent market in which to own and operate office and industrial properties
over the long term. The Company believes that this area is attractive for a
number of reasons, including:
. The Chicago Metropolitan Area contains the largest number of jobs of any
MSA in the United States, and is the third most populous MSA, with an
estimated population of over 7.7 million;
. Chicago's manufacturing sector has continued to expand, and the services
sector of the Chicago Metropolitan Area economy has grown even faster,
and has outpaced the manufacturing sector in
97
<PAGE>
additional employment both in absolute terms and as a proportion of the
local economy. This development has diversified Chicago's employment
base, which already leads the nation in four (manufacturing, wholesale
trade and retail trade, transportation, communications and utilities and
construction) out of the seven major employment sectors;
. Employment sectors requiring the use of office and industrial properties
continue to expand with the Chicago Metropolitan Area's continuing
growth and diversification of industries; and
. Since 1992, there has been no increase in the inventory of Chicago CBD
office space and only a slight increase in the inventory of Suburban
Chicago office space.
Chicago is the nation's largest and one of its fastest-growing economies in
terms of absolute job growth. The Chicago Metropolitan Area had approximately
4.0 million jobs as of April 1997, which ranks it as the nation's largest
metropolitan economy. In addition, during the last five years, from April 1992
through April 1997, Chicago ranked second nationwide in terms of total jobs
added. The Chicago Metropolitan Area economy grew by 389,400 jobs over the
last five years compared to first-ranked Atlanta, which added 407,300 jobs and
third-ranked Phoenix, which added 354,800 new jobs over the same period. The
following charts indicate the five largest MSAs in the United States for both
total employment and growth in employment for the last five years.
LOGO
98
<PAGE>
The strengths of Chicago's economy include its transportation system, highly
diverse economy, strong high-technology sector, growing international trade
and high per capita income. For example, Chicago retains its preeminent role
in transportation as the location of the world's busiest airport, the hub of
the nation's rail system and the primary port connecting the Great Lakes with
the Mississippi River and the Gulf of Mexico. While Chicago has been (and
continues to be) a national center of heavy manufacturing, Illinois recently
surpassed Massachusetts in high-technology employment and merchandise exports
and is behind only California, New York and Texas, according to a 1997 ranking
by AEA. Furthermore, Chicago, as the home of the CBOT, the CME and the CBOE,
has become the international center of options, futures and commodity trading
and an important center of international finance. In addition, according to
RCG, the Chicago Metropolitan Area's median household income in 1996 was
$59,895, 28.3% above the national average. Based on the foregoing, the Company
believes that the Chicago Metropolitan Area's long-term outlook is positive.
The Chicago Metropolitan Area's top companies include such national leaders
as Sears, Motorola, Ameritech, Allstate, UAL Corporation (United Airlines),
Waste Management, Baxter International, McDonald's, Abbott Laboratories,
Walgreen's, Sara Lee, Donnelley, Arthur Andersen, Amoco and First Chicago NBD.
Regional Financial Associates ("RFA") estimates the Chicago Metropolitan
Area's gross metropolitan product ("GMP") in 1996 will expand 2.3% per year
through the year 2000. The economic fundamentals and steady growth of both the
Midwest and the Chicago Metropolitan Area lead the Company to expect continued
strength in this market.
The Company believes that the solid, diversified local economy in the
Chicago Metropolitan Area is creating continued office space demand and
absorption. Because of the steady expansion of office employment and nearly no
new construction, the overall Class A vacancy rate has steadily declined for
five years and is expected to continue to decline. According to RCG, Class A
rental rates in the Company's largest office market, the Chicago CBD, have
risen as Class A vacancy rates have decreased from 23.1% in 1992 to 9.3% by
the end of the second quarter of 1997.
The Chicago Metropolitan Area also has experienced a very active market in
industrial space in the 1990s. As of the second quarter of 1997, the Chicago
Metropolitan Area's industrial market overall vacancy rate was 7.5%, below the
national average vacancy rate of 8.1%. In addition, 32.6% (in terms of net
rentable square feet) of the Company's Industrial Properties in the Chicago
Metropolitan Area consist of overhead crane facilities which have a relatively
expensive replacement cost substantially in excess of the Company's basis in
its Properties. The Company believes that current rental rates in the overhead
crane/manufacturing submarket are less than the level which would justify the
construction of new overhead crane/manufacturing facilities and, therefore,
the Company believes that there will be little new competition in this area
with the Company's overhead crane/manufacturing Properties.
Increasing Employment. The Chicago Metropolitan Area economy experienced
significant recessionary conditions during the 1989-1993 period. While the
Chicago Metropolitan Area entered the recession earlier than other parts of
the nation, in part due to cutbacks in the manufacturing sector, it also
entered the economic recovery before many other areas. As of April 1997, the
Chicago Metropolitan Area experienced a net increase in employment of
approximately 66,500 jobs, representing an approximately 1.7% increase for the
previous twelve months. Of the total, approximately 38,800 jobs (approximately
58.3% of the total) were created in the services sector. Total employment was
approximately 4.0 million as of April 1997, according to the Bureau of Labor
Statistics. RCG expects an average increase of approximately 50,000 jobs
annually through 1999, representing an annual growth rate of approximately
1.1% to 1.4%.
The Chicago Metropolitan Area's unemployment rate has steadily decreased
from its 1992 peak and is currently below the national average unemployment
rate. The national unemployment rate as of April 1997 was approximately 4.9%
versus approximately 4.7% in the Chicago Metropolitan Area. By comparison, the
1992 unemployment rates for the United States and Illinois were both
approximately 7.4%. According to the Bureau of Labor Statistics, unemployment
in the Chicago Metropolitan Area has been declining for the last five years.
According to RCG, the unemployment rate in the Chicago Metropolitan Area will
probably remain lower than the unemployment rate for the nation as a whole
through the year 2000.
99
<PAGE>
Growing Service Economy. Chicago's economy is highly diversified.
Traditionally strong industries such as manufacturing and transportation
continue to be vibrant sectors of the economy, and increasingly, knowledge-
based industries are growing at a rapid pace. The dynamic growth of knowledge-
based industries is evident in the strong growth in subsectors within the
services and finance, insurance and real estate ("FIRE") sectors. During the
year ended April 1997, the services sector, which grew from 25.1% of the total
employment base in 1987 to 31.1% in 1997, grew at a rate of 3.2% compared to a
rate of 3.4% nationally. The following graph illustrates the growing
diversification of Chicago's economic base.
LOGO
Growth was particularly strong in the following knowledge-based services
employment subsectors: educational services (5.6%), engineering and management
(5.3%) and business services (4.6%). Tourism-related services also enjoyed
strong growth, with employment in amusement and recreation up 5.2% and hotel
employment up 3.7%. RCG expects that the recent $675.0 million expansion of
the McCormick Place Convention Center will boost visitor volume and tourism-
related services in Chicago. In addition, Chicago has a large legal services
industry. A number of the largest law firms in the U.S. are based in Chicago,
in a concentration second only to New York.
Growth in knowledge-based industries is also occurring in the financial
services industry. As the home of the CBOT, the CME and the CBOE, Chicago is
the international center of options, futures and commodity trading and an
important center of international finance. The CBOT is the world's oldest and
largest futures and options exchange. In February 1997, the CBOT opened its
new 60,000 square foot trading facility, which combined with its existing
facility, makes it the largest trading facility in the world. The CME,
consisting of twin 40-story office towers with one of the world's largest
trading floors is by far the world's largest financial marketplace in terms of
open interest futures and options (open interest represents the positions
outstanding at the close of trading). With the increasing use of options, the
CBOE has grown to become the world's largest options exchange and the second
largest securities exchange in the U.S. Currently, the CBOE captures the
largest share of the U.S. options market and as of December 31, 1996, the
CBOE's options trades accounted for more
100
<PAGE>
than 47.0% of equity options trading, 95.0% of index options trading and 65.0%
of all options trading nationwide.
Reflecting the importance of Chicago as a center of derivative finance,
employment in the FIRE sector, especially security and commodity broker jobs,
is highly concentrated in Chicago. Employment in these sectors grew
significantly during the year ended April 1997. During such period, employment
in the security and commodity brokers industry increased 2.8%, and employment
in the security brokers and dealers industry increased 3.5%. The high
concentration of financial services employment has significant spillover
effects in other industries, such as business services and publishing. For
example, Donnelley, one of the nation's largest financial publishers, is a
Fortune 500 company headquartered in Chicago at the Company's 77 West Wacker
Drive Building.
The Company believes that strong employment growth in the services and FIRE
sectors is a good sign for the Chicago office market, because employment
growth in these two sectors is a major source of demand for office space,
particularly in the Company's largest market of the Chicago CBD.
Growing Manufacturing Sector. Chicago has historically been, and continues
to be, associated with heavy manufacturing, and it has the second fastest
growing manufacturing employment base nationwide. Much of the fast growth is
occurring in high-wage, high-technology industries, which are relocating and
expanding in the Chicago Metropolitan Area, due to its large pool of educated
workers and affordable cost of living. Illinois recently surpassed
Massachusetts in high-technology employment and is behind only California, New
York and Texas, according to a 1997 ranking by the AEA. Similarly, Illinois is
also ranked fourth for high-technology merchandise exports, according to the
AEA survey. Because of the continued strong presence of heavy manufacturing
and the increased presence of high-technology manufacturing, Chicago's
manufacturing employment base has expanded at an average rate of 1.2% during
the last five years, compared to national growth of 0.2% over the same period.
Similarly, during the year ended April 1997, Chicago's manufacturing
employment increased 1.6% compared to a national rate of 0.1%. During the last
year, the fastest growing manufacturing subsectors have all been high-
technology subsectors such as electronics and other electric equipment (3.3%),
medical instruments (2.2%) and electronic components (2.1%). Several large
high-technology companies are headquartered in Chicago, including Motorola.
The Company believes this growth in high-technology manufacturing, which is
reflected in the Company's tenant base, has strengthened the submarkets in
which the Properties are located, including the Schaumburg submarket, because
Schaumburg contains the headquarters of Motorola, the third-largest tenant of
the Company's Industrial Properties.
While high technology is a fast-growing segment of the manufacturing
industry in Chicago, the steel industry, which contains several of the
Company's largest industrial tenants, remains a stable and important local
industry. Many of the manufacturing subsectors associated with steel
manufacturing and fabrication, such as metal forging and stamping,
metalworking machinery and fabricated metal products, are highly concentrated
in the Chicago Metropolitan Area. Inland Steel Industries and Acme Metals are
the largest local steel processors. Several large steel fabricators are also
based in the Chicago Metropolitan Area, including Tempel Steel Company, a
manufacturer of magnetic steel laminations, and A.M. Castle, a processor of
specialty metals. A.M. Castle is a tenant of the Company's Hammond Enterprise
Center.
Other Sectors. The retail and wholesale trade sectors have enjoyed moderate
growth over the last year. During the year ended April 1997, trade employment
was up 1.1%, compared to 2.8% nationwide. Growth in the retail sector has been
particularly strong, increasing 2.1% during the last year. Sears, a Fortune
500 retail company headquartered in the Chicago Metropolitan Area, is growing
rapidly. Other large retailers headquartered in the Chicago Metropolitan Area
are Walgreen's and Spiegel Inc.
Reflecting its role as a major international trade center, the Chicago
Metropolitan Area has a high concentration of transportation-related
employment. Air transportation is particularly concentrated in the Chicago
Metropolitan Area, because of the size and volume of activity of Chicago
O'Hare International Airport. Chicago
101
<PAGE>
O'Hare International Airport has handled more passengers and aircraft
operations than any other airport in the world for the past 30 years. As the
hub of the nation's rail system and the primary port linking the Great Lakes
with the Mississippi River and the Gulf of Mexico, the Chicago Metropolitan
Area also has a high concentration of employment in trucking and warehousing
and transportation services. Employment growth in these two sectors was up a
strong 5.0% and 7.1%, respectively, as of the year ended April 1997.
The Company believes that all three of the sectors described above,
manufacturing, retail and wholesale trade and transportation are important
indicators of demand for warehouse/distribution space.
Forecasted Employment Growth. RCG forecasts that the Chicago Metropolitan
Area employment base will continue to grow at a moderate rate of 1.1% to 1.4%
per year during the next three years, with an absolute growth of approximately
50,000 jobs per year on average. RCG believes that the strongest job growth
will continue to occur in services, finance and manufacturing (particularly
high-technology manufacturing). The following graph illustrates the employment
trends and forecasts for the Chicago Metropolitan Area and the United States.
LOGO
THE COMPANY'S OFFICE SUBMARKETS
Chicago Metropolitan Area Office Submarkets
Reflecting the large size of the metropolitan economy, the Chicago
Metropolitan Area was one of the top office markets nationwide in the second
quarter of 1997. The overall metropolitan area office market is third in size,
but the Chicago CBD office market ranks second only to New York's combined
Midtown and Downtown office markets.
102
<PAGE>
The Chicago Metropolitan Area office market has improved significantly over
the last five years; the vacancy rate has declined from 19.3% in 1992 to a low
of 13.2% in the second quarter of 1997. As the largest financial and business
center in the Midwest and the international center of derivative finance, the
Chicago Metropolitan Area has a large and growing office employment sector.
Strong growth in office employment sectors has contributed greatly to the
improved health of the Chicago Metropolitan Area office market. During the
five years from April 1992 to April 1997, office employment (defined as
employment in FIRE and business services) grew by 97,500, ranking the Chicago
Metropolitan Area first among all metropolitan areas nationwide in terms of
office employment growth over the last five years. The Chicago CBD office
market consists of 108.7 million net rentable square feet, in the aggregate,
and the Suburban Chicago office market consists of 79.7 million net rentable
square feet, in the aggregate.
Chicago Metropolitan Area office market vacancy rates have declined steadily
over the last five years; the vacancy rate has declined from a high of 19.3%
in 1993 to a low of 13.2% in the second quarter of 1997. The greatest gains in
the Chicago Metropolitan Area have occurred in the Class A office market,
where the vacancy rate has fallen from a high of 20.5% in 1992 to 9.3% in 1996
and has fallen further recently to 8.5% in the second quarter of 1997. The
Class A office market has had strong net absorption of approximately 2.1
million square feet per year since 1992. The total office market has averaged
net absorption of only 2.2 million square feet per year since 1992, which
reflects the movement of tenants of Class B and Class C space into Class A
spaces, where the rents have remained moderate. However, rents have recently
been increasing at an accelerating pace. The following tables illustrate
historical and forecasted conditions in the Chicago Metropolitan Area overall
office market and Class A office market, respectively.
TOTAL CHICAGO METROPOLITAN AREA OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 190,329 190,534 190,490 189,899 188,849 188,342 189,139 189,549 189,599
New Construction 3,893 205 230 0 216 0 797 1,410 800
Conversion/Demolition 0 0 274 591 1,266 507 507 1,000 750
Net Absorption -- 1,257 3,510 2,721 1,322 1,059 2,650 3,150 2,700
Occupied Stock 153,596 154,853 158,363 161,084 162,406 163,465 165,056 168,206 170,906
Vacancy Rate 19.3% 18.7% 16.9% 15.2% 14.0% 13.2% 12.7% 11.3% 9.9%
Source: RCG
CHICAGO METROPOLITAN AREA CLASS A OFFICE MARKET (000SF)
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 73,544 73,749 73,979 73,979 74,195 74,195 74,992 76,402 77,202
New Construction 3,893 205 230 0 216 0 797 1,410 800
Net Absorption 759 2,116 2,678 2,425 1,639 591 1,700 1,800 1,400
Occupied Stock 58,452 60,568 63,246 65,671 67,310 67,900 69,010 70,810 72,210
Vacancy Rate 20.5% 17.9% 14.5% 11.2% 9.3% 8.5% 8.0% 7.3% 6.5%
</TABLE>
Source: RCG
Chicago Central Business District Office Submarket
The Company owns and operates the 77 West Wacker Drive Building in the
Chicago CBD submarket.
The Chicago CBD submarket encompasses Chicago's downtown area. The Chicago
CBD submarket is the primary location within the city for financial
institutions, business services companies, law firms and government agencies.
In addition, a number of major corporations have a significant presence in the
Chicago CBD submarket, including Donnelley, Leo Burnett, Helene Curtis,
Wrigley, Everen, Morton International, Aon, Blue Cross/Blue Shield, Quaker
Oats, Amoco and First Chicago NBD.
103
<PAGE>
The Chicago CBD office market has improved since 1993, when the office
vacancy rate peaked at 19.6%. In the second quarter of 1997, the overall
Chicago CBD office vacancy rate fell to 14.9%.
RCG believes that the improvement in the Chicago CBD office market is the
result of both strong growth in office employment and the lack of new
construction in the Chicago CBD office market since 1992. During the first
half of 1997, several large tenants, including Commonwealth Edison, the State
of Illinois and Andersen Consulting, leased significant space in the Chicago
CBD. In addition, the Class A office market has been the main beneficiary of
strong office employment growth. As a result, Class A vacancy rates in the
Chicago CBD have declined from a high of 23.1% in 1992 to a low of 9.3% in the
second quarter of 1997.
RCG forecasts a further decline in vacancy rates in the Chicago CBD office
market in 1997 and 1998, due to expected continued strong growth in office
employment, lack of construction of new office space and the conversion of
Class C buildings to other uses. Other than a build-to-suit office building
for Blue Cross/Blue Shield, no new office space is expected during the next
three years, and RCG believes, based on a three-year construction cycle for
large office buildings in the Chicago CBD, that there is little likelihood of
new office space in the Chicago CBD before the year 2001.
The following graph illustrates the historical and forecasted declines in
Chicago CBD office vacancy rates.
LOGO
An additional factor contributing to the decline in office vacancy rates is
the conversion of office buildings to other uses. Since 1994, the Chicago CBD
office stock has shrunk by over two million square feet, due to conversions
and demolitions. Older Class C office buildings are being converted, largely
to residential units and hotels. During the first half of 1997, three
conversions resulted in the removal of 507,000 square feet of office space
from the Chicago CBD market. The Chicago Department of Planning and
Development has reported that over 20 conversion projects are either under
construction or being planned. In addition, one of the tax increment financing
districts for the Chicago CBD was amended in February 1997 to enlarge the area
covered by the district and to set aside approximately $300.0 million for the
renovation of the infrastructure and building stock in the older, eastern
portion of the Chicago CBD. Because of the new redevelopment subsidies, the
continuing increases in housing renovation and the expanding demand for hotel
space, RCG expects an acceleration in the rate of conversions of older office
buildings to other uses and a decline in vacancy rates in the overall Chicago
CBD office market. The following tables illustrate historical and forecasted
conditions in the Chicago CBD overall office market and Class A office market,
respectively.
104
<PAGE>
TOTAL CHICAGO CBD OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 111,329 111,329 111,055 110,464 109,198 108,691 108,691 107,691 106,941
New Construction 3,893 0 0 0 0 0 0 0 0
Conversion/Demolition 0 0 274 591 1,266 507 507 1,000 750
Net Absorption N/A (334) 1,334 179 813 661 1,700 1,750 1,500
Occupied Stock 89,843 89,509 90,843 91,022 91,836 92,496 93,536 95,286 96,786
Vacancy Rate 19.3% 19.6% 18.2% 17.6% 15.9% 14.9% 13.9% 11.5% 9.5%
Source: RCG
CHICAGO CBD CLASS A OFFICE MARKET (000SF)
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 43,915 43,915 43,915 43,915 43,915 43,915 43,915 43,915 43,915
New Construction 3,893 0 0 0 0 0 0 0 0
Net Absorption 759 1,230 1,669 1,493 1,230 439 800 800 600
Occupied Stock 33,771 35,000 36,669 38,163 39,392 39,831 40,192 40,992 41,592
Vacancy Rate 23.1% 20.3% 16.5% 13.1% 10.3% 9.3% 8.5% 6.7% 5.3%
Source: RCG
Central Loop Submarket
The Central Loop is the largest submarket in the Chicago CBD and the center
of Chicago's downtown financial district, with a tenant base that consists
primarily of financial institutions, business services companies, law firms,
major corporations and government agencies. The 77 West Wacker Drive Building
is located within the Central Loop.
The Central Loop office vacancy rate declined from a high of 18.2% in 1993
to 15.5% in the second quarter of 1997. The vacancy rate also dropped
substantially in the first half of 1997. The Central Loop Class A vacancy rate
is 9.1%, which is lower than the overall Chicago CBD Class A vacancy rate of
9.3%. The Central Loop had a high amount of net absorption for the first half
of 1997, due in large part to large leases by Commonwealth Edison, Andersen
Consulting and the law firm of O'Donnell, Wicklun, Pigozzi and Peterson.
The Central Loop has had no new additions to office space since 1992, and
although Class A rents are rising, RCG does not expect any new construction of
office space in the Central Loop before 2001. RCG expects the Central Loop,
because of its large base of financial, legal, corporate and government
tenants, to remain a strong submarket. The following table and graph
illustrate historical and forecasted conditions in the Central Loop Class A
office market.
CENTRAL LOOP CLASS A OFFICE SUBMARKET (000SF)
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 18,999 18,999 18,999 18,999 18,999 18,999 18,999 18,999 18,999
New Construction 2,841 0 0 0 0 0 0 0 0
Net Absorption 3,901 114 931 665 323 171 350 360 240
Occupied Stock 15,066 15,180 16,111 16,776 17,099 17,270 17,449 17,809 18,049
Vacancy Rate 20.7% 20.1% 15.2% 11.7% 10.0% 9.1% 8.2% 6.3% 5.0%
</TABLE>
Source: RCG
105
<PAGE>
LOGO
Because the book value of the 77 West Wacker Drive Building will be in
excess of 10.0% of the Company's total assets and the gross revenues for the
77 West Wacker Drive Building for the year ended December 31, 1996 were in
excess of 10.0% of the Company's aggregate gross revenues, additional
information regarding this Property is presented hereafter.
77 West Wacker Drive Building. The Company developed, leases, manages and
owns the 77 West Wacker Drive Building, a Class A high-rise, multitenant
corporate office building situated in what the Company considers to be a
premier location in the Chicago CBD. The 77 West Wacker Drive Building was
completed in 1992 to high-quality specifications to address the anticipated
demands of the submarket's tenants. The building, upon its completion, opened
with commitments for long-term leases for over 95.0% of its net rentable
office area even though office space occupancy rates in the Central Loop
submarket averaged 79.3% in 1992. The building has received awards for its
design, structural engineering, lighting and general merit, including the Sun-
Times Real Estate Development of the Year Award for 1993, Chicago's most
prestigious real estate industry award, and the Best New Building Award from
the Friends of Downtown. The Company believes the 77 West Wacker Drive
Building has a premier location in the Chicago CBD submarket for a number of
reasons, including convenience of access to mass transportation, views from
the building and close proximity to hotels, restaurants and other attractions
of downtown Chicago.
The building is comprised of 50 floors, encompassing an aggregate of
approximately 944,600 net rentable square feet, of which 84.6% was leased as
of June 30, 1997. The building has an exterior curtain wall of silver
reflective glass enclosed in a grid of white granite and is topped by a
"Grecian temple," which creates distinctive tenant spaces on the 49th and 50th
floors. The exterior is lighted at night by 540 high-intensity lamps which
accentuate the building's position on Chicago's downtown skyline. One design
feature of the 77 West Wacker Drive Building is its floor plates, which
provide highly efficient, column free space for tenants. The building was
designed and constructed with above-standard floor loadings and floor-to-
ceiling heights to accommodate the weight and raised floors requirements of
computers and other equipment. The building's floors are climate controlled in
16 zones, thus increasing tenant comfort, allowing for separate thermostat
controls for areas housing temperature sensitive equipment and reducing costs
for after-hour operations. In this area, the building has been recognized by
the American Society of Heating, Refrigeration and Air-Conditioning Engineers
for its energy-efficient heating, ventilating and air conditioning systems,
which reduce operating costs for both the Company and its tenants. The
building was designed for tenant efficiency and convenience and features a
very high ratio of elevators to rentable square feet, as well as 24-hour on-
site security and management, and convenient on-site facilities, such as a
health club and dining facilities. Management believes that because of these
and other high-quality features, the 77 West Wacker Drive Building continues
to attract long-term major corporate tenants at rates above those of other
facilities in the Chicago CBD and neighboring submarkets.
106
<PAGE>
Major tenants of the facility include the headquarters of Donnelley, a
financial printer, the headquarters of Everen, a securities firm, and Jones
Day, a law firm. These tenants have been tenants in the building since its
opening. Certain legal action has been taken against Keck, another significant
tenant in the 77 West Wacker Drive Building, to obtain possession of the Keck
Space. A settlement agreement was entered with Keck that provides that the
Keck Space will be vacated no later than November 30, 1997. Unless otherwise
noted, all the occupancy and vacancy rates, Annualized Net Rent and Annualized
Effective Net Rent for the 77 West Wacker Drive Building on or after June 30,
1997 set forth in this Prospectus have excluded Keck's occupancy.
The annual net rent, in accordance with GAAP, per leased square foot of the
77 West Wacker Drive Building for the years ended December 31, 1992, 1993,
1994, 1995 and 1996 was $22.26, $20.79, $21.19, $21.56 and $20.39,
respectively.
The 77 West Wacker Drive Building had a percentage leased rate of 90.5%,
95.3%, 97.0%, 99.6% and 93.6% for each of the five years ended December 31,
1992 through 1996. As of June 30, 1997, Donnelley occupied approximately 25.6%
of the Property's net rentable square feet. The lease for this space commenced
on July 1, 1992 for occupancy of 241,569 square feet. Pursuant to its lease,
Donnelley is obligated to pay net rent per square foot of $29.90 in 1997
(escalating at a rate of 2.5% per annum through June 30, 2007), for an
aggregate of $7,222,913. The current lease term is subject to two ten-year
options to renew at 95% of fair market value basis. As of June 30, 1997,
Everen occupied approximately 25.5% of the Property's net rentable square
feet. The lease for this space commenced on June 1, 1992 for occupancy of
241,225 square feet. Pursuant to its lease, Everen is obligated to pay net
rent per square foot of $29.43 in 1997 (escalating at an annual rate of 200%
of the change in the CPI but not to exceed 2.5% per annum on a cumulative
compounded basis through June 30, 2007), for an aggregate of $7,099,252. The
current lease term is subject to two five-year options to renew at 95% of fair
market value basis. Everen has an option to terminate the lease effective
approximately June 1, 2002, upon two years prior written notice, and upon
payment of a termination fee calculated at more than $37,900,167. As of June
30, 1997, Jones Day occupied approximately 11.8% of the Property's net
rentable square feet. The lease for this space commenced on August 1, 1992 for
occupancy of 111,706 square feet. Pursuant to its lease, Jones Day is
obligated to pay net rent per square foot of $27.32 in 1997 (escalating at an
average rate of 3.2% per annum through April 30, 2007), for an aggregate of
$3,051,808. The current lease term is subject to two five-year options to
renew at 95% of fair market value basis.
Management believes that because of the high quality and strategic location
of the 77 West Wacker Drive Building, it has had higher occupancy, tenant
retention and rental rates than other properties within this submarket. The
vacancy rate of office buildings in the Chicago CBD submarket was
approximately 15.9% for 1996 as compared to approximately 8.8% for the 77 West
Wacker Drive Building for 1996. The average net rental rate in the Chicago CBD
submarket during the second quarter of 1997 was approximately $11.94 per
square foot for Class A office buildings compared to an average net rental
rate of $18.50 per square foot plus three percent per annum for the 77 West
Wacker Drive Building as of June 30, 1997. The Company is aware of the
construction of only one new office building in the Chicago CBD, the new
headquarters for Blue Cross/Blue Shield, a major insurance company. To the
Company's knowledge, no other new construction is being undertaken in the near
future in the Chicago CBD submarket.
The following table sets forth for the 77 West Wacker Drive Building for
each of the ten years following the completion of the Offering: (i) the number
of tenants whose leases will expire, (ii) the total net rentable square feet
covered by such leases, (iii) the percentage of total leased net rentable
square feet represented by such leases, (iv) the annual net rent represented
by such leases and (v) the average annual net rent per net rentable square
foot represented by such leases.
107
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE OF AVERAGE ANNUAL
RENTABLE TOTAL LEASED ANNUAL NET NET RENT PER NET
AREA SUBJECT SQUARE FEET RENT UNDER RENTABLE SQUARE FOOT
NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY
YAR OF LEASEE EXPIRING LEASES EXPIRING LEASES EXPIRING
XPIRATIONE LEASES (SQ. FT.) LEASES (%) ($000) LEASES ($)
- ------------- --------- ------------ -------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
7/1/97-12/31/97......... -- -- -- -- --
1998.................... 4 24,662 3.09 252 10.20
1999.................... 1 1,424 0.18 18 12.55
2000.................... 2 22,067 2.76 166 7.52
2001.................... 2 12,844 1.61 166 12.93
2002.................... 4 55,055 6.89 746 13.54
2003.................... 2 25,175 3.15 271 10.76
2004.................... 1 22,576 2.82 207 9.17
2005.................... -- -- -- -- --
2006.................... 1 4,485 0.56 46 10.29
2007+................... 9 631,159 78.94 16,392 25.97
--- ------- ------ ------
26 799,447 100.00 18,264 22.84
=== ======= ====== ======
</TABLE>
The Company's tax basis in the 77 West Wacker Drive Building for federal
income tax purposes as of December 31, 1996 was approximately $221.0 million
(net of accumulated depreciation and reductions in depreciable basis). The
Property is depreciated using the modified accelerated cost recovery system
straight-line method, based on an estimated useful life ranging from five
years to 39 years, depending upon the date of certain capitalized improvements
to the Property. For the year ended December 31, 1996, the estimated average
depreciation rate for this Property under the modified accelerated cost
recovery system was 3.3%. For the 12- month period ending June 30, 1997, the
Company was assessed property taxes on this Property at an effective annual
rate of approximately 9.3%. Property taxes on this Property for the 12-month
period ending June 30, 1997 totaled approximately $7.0 million, which
represents 1995 taxes paid in 1996. Management does not believe that any
capital improvements made during the 12-month period immediately following the
Offering should result in an increase in annual property taxes.
In the Company's opinion, this Property is adequately covered by insurance.
Chicago Metropolitan Area Suburban Office Submarket
The Company will own and operate twelve Office Properties in the Suburban
Chicago office submarket, with approximately 938,862 aggregate net rentable
square feet.
The Suburban Chicago office submarket consists of the suburbs surrounding
the City of Chicago. The suburban market is comprised of four distinct
submarkets. Besides the Office Properties attached to the Industrial
Properties, the Company owns Office Properties in both the north and northwest
suburbs of Chicago.
The north and northwest suburbs have served as the primary alternative
choice for large corporations which choose not to locate in the Chicago CBD,
and currently, although the Chicago CBD retains its traditional dominance as
the primary home of the Chicago Metropolitan Area's governmental, financial
and legal communities, the north and northwest suburbs contain the
headquarters of several of the Chicago Metropolitan Area's most prominent
companies, ranging from Motorola (in Schaumburg) and McDonald's (in Oak Brook)
to Allstate Insurance, Baxter International, W.W. Grainger and Abbott
Laboratories (in Lake County) and Sears, Ameritech and Siemens (in the
northwest suburbs).
The Suburban Chicago office market has experienced a dramatic decline in
office vacancy rates, from a high of 19.3% in 1992 to 10.9% in the second
quarter of 1997. The Suburban Chicago Class A office market vacancy rate of
7.3% in the second quarter of 1997 is lower than that of the market as a
whole. RCG believes that this better performance is the result of the movement
of tenants from Class B and Class C space into Class A space,
108
<PAGE>
because during the last five and a half years, Suburban Chicago Class A net
absorption has averaged over 800,000 square feet per year, compared to a total
net absorption of 1.3 million square feet per year in the Suburban Chicago
office market.
RCG believes that Class A office rents in Suburban Chicago have risen to the
point where construction of new Class A office space is economically feasible.
A total of ten new office buildings, with an aggregate of 796,800 net rentable
square feet (representing approximately 1.0% of the existing net rentable
square feet in the Suburban Chicago office market) are scheduled to be
completed during 1997. Nine new office buildings with an aggregate of 1.4
million net rentable square feet are scheduled to be completed in 1998.
Several other office buildings are being planned, but are not scheduled to be
completed before 1999.
RCG believes that the outlook for the Suburban Chicago office market is
strong. RCG believes that, because office employment growth is expected to
remain in the 2.0% range, overall vacancy rates in the Suburban Chicago office
market may rise slightly but will remain relatively low, despite the addition
of new office space. Because of the disparity between the Class A and Class B
office markets, the Company believes that there are increasingly more
development and redevelopment opportunities in Suburban Chicago. The following
graph and tables illustrate Suburban Chicago vacancy rates and historical and
forecasted conditions in the Suburban Chicago office market.
LOGO
SUBURBAN CHICAGO OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 79,000 79,205 79,435 79,435 79,651 79,651 80,448 81,858 82,658
New Construction 0 205 230 0 216 0 797 1,410 800
Net Absorption 0 1,591 2,176 2,542 509 398 950 1,400 1,200
Occupied Stock 63,753 65,344 67,520 70,062 70,571 70,969 71,521 72,921 74,121
Vacancy Rate 19.3% 17.5% 15.0% 11.8% 11.4% 10.9% 11.1% 10.9% 10.3%
</TABLE>
Source: RCG
109
<PAGE>
SUBURBAN CHICAGO CLASS A OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 29,629 29,629 29,834 30,064 30,064 30,280 30,077 32,487 33,287
New Construction 0 205 230 0 216 0 797 1,410 800
Net Absorption 1,133 887 1,009 932 410 151 900 1,000 800
Occupied Stock 24,681 25,568 26,577 27,509 27,918 28,070 28,818 29,818 30,618
Vacancy Rate 16.7% 14.3% 11.6% 8.5% 7.8% 7.3% 7.3% 8.2% 8.0%
</TABLE>
Source: RCG
SUBURBAN CHICAGO OFFICE SUBMARKETS: RECENT VACANCY RATE STATISTICS
<TABLE>
<CAPTION>
Change
N.R.A. % Vacant 4Q96-
Submarket 2Q97 2Q97 1Q97 4Q96 2Q97
--------- ---------- ----- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Lake Shore 4,210,145 13.4% 13.4% 13.0% 0.3%
North Suburbs 5,088,456 6.3% 6.2% 6.7% -0.4%
SCHAUMBURG 21,595,252 10.7% 10.9% 12.6% -1.8%
O'Hare 12,847,991 13.0% 13.1% 13.9% -0.9%
OAK BROOK 26,276,766 10.1% 10.3% 9.4% 0.7%
West Cook 1,276,779 14.3% 13.7% 12.9% 1.4%
South Suburbs 2,395,264 12.9% 12.8% 13.3% -0.4%
Lake County 6,070,883 10.5% 12.5% 12.8% -2.3%
Suburban Total 79,761,536 10.9% 11.1% 11.4% -0.6%
</TABLE>
Source: RCG
Schaumburg Submarket
The Company will own and operate three Office Properties in the Schaumburg
submarket, two of which are Acquisition Properties and one of which is a
Contribution Property. The Schaumburg submarket encompasses the communities of
Schaumburg, Hoffman Estates, Itasca, Mt. Prospect, Rolling Meadows and
Arlington Heights in northwest Cook County and is located 20 to 30 minutes
west of Chicago O'Hare International Airport. The Schaumburg submarket serves
as the headquarters for some of the Chicago Metropolitan Area's top companies,
such as Motorola and Sears. In addition, several other major office employers
have large facilities in the Schaumburg submarket, including Ameritech, U.S.
Robotics (now 3Com) and Siemens.
The Schaumburg office submarket has the second highest concentration of
office space in the Suburban Chicago office market. During the 1980s,
Schaumburg emerged as a popular business location, and approximately 70.0% of
the submarket's current inventory of 18.8 million square feet of Class A and
Class B office space was built during the 1980s. The Schaumburg Class A office
submarket has experienced the largest decline in vacancy rates of any office
submarket in the Chicago metropolitan area; the Schaumburg Class A office
vacancy rate declined from a high of 20.1% in 1992 to 5.5% in the second
quarter of 1997. During 1996, the Schaumburg submarket recorded the largest
amount of leasing activity of any suburban submarket. Ameritech and U.S.
Robotics (now 3Com) leased large spaces in 1996. In the first half of 1997,
several major tenants, including Prudential Insurance, leased large amounts of
office space. In the second quarter of 1997, the Schaumburg submarket's
overall office vacancy rate declined to 10.7%, less than half of its 1992
vacancy rate of 23.9%. RCG believes that the low vacancy rates in the
Schaumburg Class A office market are beginning to affect vacancy rates to the
Class B market, which still has a relatively high vacancy rate of 16.7% in the
second quarter of 1997.
Absorption of office space in Schaumburg has been extremely strong for the
past four years and has averaged 360,000 and 500,000 square feet per year,
respectively, in the overall and Class A markets. However,
110
<PAGE>
there has been very little new construction. During the last five years, only
two buildings totaling 110,000 square feet were constructed. RCG believes that
only six office buildings with an aggregate of approximately 384,000 net
rentable square feet will be completed during 1997 and 1998. Two other
proposed buildings are likely to be completed in early 1999.
RCG believes that the outlook for the Schaumburg office market is strong.
Demand for office space is expected to remain strong, but will be constrained
by the lack of new supply of Class A office space. RCG forecasts that Class A
vacancy rates will remain low through 1998. RCG believes that the overall
vacancy rates for the office submarket will slowly decline below 10.0% by
1999. The following tables and graph illustrate historical and forecasted
conditions in the Schaumburg overall and Class A office markets.
SCHAUMBURG SUBMARKET CLASS A OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 10,175 10,175 10,230 10,285 10,285 10,285 10,434 10,719 10,919
New Construction 0 55 55 0 0 0 149 235 200
Net Absorption (51) 265 536 439 206 144 250 250 175
Occupied Stock 8,130 8,394 8,931 9,370 9,575 9,719 9,825 10,075 10,250
Vacancy Rate 20.1% 17.5% 12.7% 8.9% 6.9% 5.5% 5.8% 6.0% 6.1%
</TABLE>
Source: RCG
LOGO
Description of Schaumburg Properties
The Company has three Office Properties in the Schaumburg submarket. Each is
easily accessible from Interstate 355 and Interstate 90, which are major
highways providing access to downtown Chicago. Also, these Properties have
convenient access to Chicago O'Hare International Airport, which is
approximately 10 miles away.
1699 E. Woodfield Road. 1699 E. Woodfield Road, also known as the Citibank
Office Plaza, is a five-story Class A office building located in Schaumburg,
across from the Woodfield Mall, a large regional shopping center. The building
is situated on a 5.2 acre parcel of land and includes 410 spaces for surface
parking. It was
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built in 1979 and renovated from 1991 to 1997. It has approximately 105,400
net rentable square feet of office space, of which 95.2% was leased as of June
30, 1997. The building's exterior is clad in pebbled white quartz set in
precast concrete, with bronze-tinted thermopaned windows. The building's
tenants include Citibank, Merrill Lynch and McGladrey & Pullen, the nation's
seventh largest accounting firm.
1990 Algonquin Road and 2000-2060 Algonquin Road. 1990 Algonquin Road and
2000-2060 Algonquin Road constitute a complex of office buildings in
Schaumburg known as the Salt Creek Office Center. The Salt Creek Office Center
comprises one two-story office building and seven single-story office
buildings situated on approximately ten acres of land. The two-story building
is 1990 Algonquin Road, and the seven single-story buildings are 2000-2060
Algonquin Road. The complex includes 478 spaces of surface parking. It was
built in phases from 1979 through 1986. The buildings have masonry exterior
walls with tinted glass windows. The complex has approximately 125,900 net
rentable square feet of office space, of which 90.9% was leased as of June 30,
1997. The buildings are close to, and visible from, Interstate 355 and a ten-
minute drive from O'Hare International Airport. Tenants include Silicon
Graphics and Ticor Title Insurance.
1301 E. Tower Road. 1301 E. Tower Road is a single-story Class B office
building located in Schaumburg, Illinois. The building is situated on a 6.0-
acre parcel of land and includes 23 spaces for surface parking. It was built
in 1992. It has approximately 50,000 net rentable square feet of office space,
of which 100.0% was leased as of June 30, 1997. The building has three docks
and is located near Interstate highways 90 and 290. Household Credit Services
leases the entire building. Household Credit Services has both a right of
first refusal to purchase 1301 E. Tower Road and a purchase option exercisable
prior to December 30, 2001 at fair market value. The Company is aware of
certain environmental contamination at this facility. See "--Governmental
Regulations--Environmental Matters."
Oak Brook Office Submarket
The Company will own and operate five Office Properties in the Oak Brook
submarket, one of which is an Acquisition Property to be acquired upon the
consummation of the Formation Transactions and four of which are Contribution
Properties. The Oak Brook office submarket encompasses the communities of Oak
Brook, Lombard, Downers Grove and Elmhurst in eastern DuPage County. The Oak
Brook submarket was the first suburban office market developed outside of
downtown Chicago that attracted large firms and corporate headquarters in
large numbers. Some of the Oak Brook submarket's largest employers are Waste
Management, McDonalds and Spiegel.
The Oak Brook office submarket has the largest concentration of office space
in the Suburban Chicago office market. The Oak Brook Class A vacancy rate
declined from 17.1% in 1992 to 8.1% in the second quarter of 1997. In the
first half of 1997, several major tenants, including Ameritech, Wausau
Insurance, Deutsche Financial, Raytheon Engineers and Constructors, Rockwell
International and Donnelley, leased large amounts of office space. In the
second quarter of 1997, the Oak Brook submarket's overall office vacancy rate
declined to 8.1%, compared to a vacancy rate of over 16.0% in 1992 and well
below the peak vacancy rate of 24.7% in 1986. Unlike some other submarkets,
Class B and Class C buildings within the Oak Brook office submarket are also
experiencing strong leasing activity; the office vacancy rates for Class B and
Class C office buildings for the second quarter of 1997 were 10.9% and 12.3%,
respectively.
As the largest and one of the most popular of the suburban office markets,
the Oak Brook market has experienced and continues to experience a high volume
of new construction relative to other suburban submarkets. During 1997, four
buildings totaling approximately 476,000 square feet are scheduled to be
completed. Another five buildings totaling approximately 805,000 square feet
are expected to be completed during 1998.
RCG believes that the outlook for the Oak Brook office submarket is strong.
RCG expects that after the delivery of a large supply of office space during
1998, vacancy will decline. RCG also expects Class A vacancy
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rates in Oak Brook to range between 7.0% and 8.0% through 1999 with Class B
vacancy rates remaining slightly higher. The following tables and graph
illustrate historical and forecasted conditions in the Oak Brook overall and
Class A and Class B office markets.
OAK BROOK SUBMARKET CLASS A OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
----- ----- ----- ----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 9,550 9,550 9,915 9,915 10,159 10,159 10,635 11,440 11,840
New Construction 247 0 365 0 244 0 476 805 400
Net Absorption 316 535 779 30 136 (61) 500 600 475
Occupied Stock 7,917 8,452 9,231 9,261 9,397 9,336 9,897 10,497 10,972
Vacancy Rate 17.1% 11.5% 6.9% 6.6% 7.5% 8.1% 6.9% 8.2% 7.3%
</TABLE>
Source: RCG
OAK BROOK SUBMARKET CLASS B OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 10,566 10,759 10,759 10,759 10,759 10,759 10,759 10,759 10,759
New Construction 0 193 0 0 0 0 0 0 0
Net Absorption (190) 235 430 43 215 (53) 75 50 75
Occupied Stock 8,717 8,951 9,382 9,425 9,640 9,587 9,715 9,765 9,840
Vacancy Rate 17.5% 16.8% 12.8% 12.4% 10.4% 10.9% 9.7% 9.2% 8.5%
</TABLE>
Source: RCG
LOGO
Description of Oak Brook Properties
941-961 Weigel Drive. 941-961 Weigel Drive is a single-story Class B office
building located in Elmhurst, Illinois. The building is situated on a 10.6-acre
parcel of land. It was built in 1989. It has approximately 123,000
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net rentable square feet of office space, of which 100.0% was leased as of
June 30, 1997. The building is six miles southwest of O'Hare International
Airport, near Interstate highways 88, 290 and 294. The building is leased
entirely by Household Finance Corp., which has a right of first refusal to
purchase the building under certain circumstances.
280 Shuman Boulevard. 280 Shuman Boulevard is a two-story Class B office
building located in Naperville, Illinois. The building is situated on a 5.5-
acre parcel of land and includes 218 spaces for surface parking. It was built
in 1979. It has approximately 65,000 net rentable square feet of office space,
of which 98.8% was leased as of June 30, 1997. The building has a masonry
exterior with a 6,000 square foot two-story, sky-lit atrium. The building is
approximately one mile from Interstate highway 88. The building's tenants
include General Electric and Nexgen Software.
4343 Commerce Court. 4343 Commerce Court is a seven-story Class A office
building located in Lisle, Illinois. The building is situated on a 7.4-acre
parcel of land and includes 559 spaces for surface parking. It was built in
1989 and renovated in 1995. It has approximately 171,000 net rentable square
feet of office space, of which 88.9% was leased as of June 30, 1997. The
building has bronze-tinted ribbon windows and features a striking ten-story
glass atrium. The building's tenants include Computer Associates, the Federal
Bureau of Investigation and Hinshaw & Culbertson, a large Chicago law firm.
4100 Madison Street. 4100 Madison Street is a two-story Class B office
building located in Hillside, Illinois. The building is situated on a 2.3-acre
parcel of land and includes 86 spaces for surface parking. It was completely
renovated from 1978 to 1994. It has approximately 25,000 net rentable square
feet of office space, of which 51.2% was leased as of June 30, 1997. The
building's tenants include the Nardi Group and Narco Construction.
350 N. Mannheim Road. 350 N. Mannheim Road is a single-story Class B office
building located in Hillside, Illinois. The building is situated on a 0.7-acre
parcel of land and includes 51 spaces for surface parking. It was built in
1977 and renovated in 1988. It has approximately 4,900 net rentable square
feet of office space and was vacant as of June 30, 1997. The building is five
miles from O'Hare International Airport.
Other Chicago Metropolitan Area Office Properties
2205-2255 Enterprise Drive. 2205-2255 Enterprise Drive is a complex of six
single-story Class B office buildings located in Westchester, Illinois. The
complex is situated on a 9.7-acre parcel of land and includes 518 spaces for
surface parking. It was built in 1987. It has approximately 130,000 net
rentable square feet of office space, of which 91.4% was leased as of June 30,
1997. The buildings' tenants include the regional office for the U.S. Census
Bureau and National Restaurant Enterprise, the owner and operator of over 200
Burger King restaurants in the Midwest and Southeast. The complex is located
less than two miles from each of Interstate highways 88, 290 and 294.
555 Huehl Road. 555 Huehl Road is a two-story Class A office building
located in Northbrook, Illinois. It was built in 1987 and has approximately
74,000 net rentable square feet of office space, of which 100% was leased as
of June 30, 1997 and contains three interior docks. The building is leased
entirely by Rank Video, a video duplication company, as its corporate
headquarters. The building also houses Rank Video's U.S. computer and
communication centers.
1600-1700 167th Street. 1600-1700 167th Street is a complex of two single-
story Class B office buildings located in Calumet City, Illinois. The building
is situated on a 5.2-acre parcel of land. It was built in 1981 and remodeled
in 1982. It has approximately 65,000 net rentable square feet of office space,
of which 53.1% was leased as of June 30, 1997. The building has a masonry and
brick exterior and ceiling skylights. The building's tenants include Conrail
Corp., IBM and the General Services Administration.
Nashville and Knoxville Office Submarkets
The Company owns and operates four Office Properties and owns a parking
facility in Tennessee. The Company believes that the inclusion of the
Tennessee Properties in the portfolio of Properties provides some
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measure of balance in the portfolio from an exclusive focus on the Chicago
Metropolitan Area, and provides valuable contacts in and information about
these growing markets to the Company.
The Nashville Office Market
The Company owns and operates one Office Property in the Nashville office
submarket. Nashville, the capital of the state of Tennessee, has a population
of approximately 1.1 million and is home to a number of major employers,
including Vanderbilt University, Gaylord Entertainment and Kroger. According
to RCG, during the five years from April 1992 to April 1997, employment growth
in Nashville averaged 3.7% per year compared to a 2.3% average annual rate for
the nation as a whole. For the year ended in April 1997, total employment
growth in Nashville decreased to 1.3% compared with the national growth rate
of 2.2%. RCG believes that weaker Nashville growth resulted from cyclical
weakness in the manufacturing sector. Office employment in Nashville grew at
an average annual rate of 5.0% from April 1992 to April 1997, compared to a
3.2% average annual rate for the nation as a whole. For the year ended April
1997, office employment grew 3.4%, compared with the national growth rate of
3.1%.
Description of Nashville Property
201 4th Avenue N. 201 4th Avenue N. is a 20-story office building centrally
located in downtown Nashville. It was built in 1968, renovated in 1985,
acquired by Prime in 1993 and further redeveloped. It has approximately
250,600 net rentable square feet of office space, of which 90.1% was leased as
of June 30, 1997. The building is the regional headquarters of SunTrust Bank,
which leases approximately 49.0% of the net rentable square footage.
The Knoxville Office Market
The Company owns three Office Properties and a parking facility in the
Knoxville office submarket. Each of the Knoxville Office Properties was
developed by Prime and is among the highest quality buildings in Knoxville.
Knoxville has a diverse economy and real estate market and has benefited
from, among other things, the presence of the University of Tennessee, the
Tennessee Valley Authority and several large apparel manufacturers, as well as
the proximity of the U.S. Department of Energy's Oak Ridge facility.
Knoxville's economy has grown rapidly and steadily during the 1990s. From
April 1992 to April 1997, employment growth in Knoxville averaged 2.1% per
year compared with an average national employment growth rate of 2.3%. For the
year ended April 1997, Knoxville employment declined 0.1% and office
employment declined 0.3%. RCG believes that these declines are temporary and
were primarily the result of a large 2.4% decline in the manufacturing sector.
Description of Knoxville Properties
620 Market Street. 620 Market Street, also known as One Centre Square, is a
six-story Class A office building located in downtown Knoxville. Prime built
One Centre Square in 1988, and the same year, the building won the First Place
Certificate of Merit for Quality Construction from the Associated Builders and
Contractors. The building has approximately 93,700 net rentable square feet of
office space, of which 91.4% was leased as of June 30, 1997. One Centre Square
shares the Knoxville parking facility with Two Centre Square. Major tenants
include Morton, Lewis, King & Kreig, a major local law firm, which leases
approximately 31.7% of the building and FNB Financial Corp., a bank, which
leases approximately 20.7% of the building.
625 Gay Street. 625 Gay Street, also known as Two Centre Square, is a six-
story Class A office building located in downtown Knoxville adjacent to One
Centre Square. Prime built Two Centre Square in 1988, and in 1989, the
building, along with One Centre Square, won the Grand Certificate of Merit for
Quality Construction from the Associated Builders and Contractors. It has
approximately 91,400 net rentable square feet of office space, of which
approximately 90.0% was leased as of June 30, 1997. Two Centre Square shares
the Knoxville parking facility with One Centre Square. Major tenants of the
building include Healthsource, a health maintenance organization, and
PaineWebber.
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4823 Old Kingston Pike. 4823 Old Kingston Pike is a three-story Class A
office building located in western Knoxville, in the premium
residential/office neighborhood in Knoxville. Prime built 4823 Old Kingston
Pike in 1988, and the building, like the Company's other Office Properties in
Knoxville, is one of the highest-quality buildings in Knoxville. It has
approximately 34,600 net rentable square feet of office space, of which
approximately 100.0% was leased as of June 30, 1997. Talbots operates one of
its two national telemarketing centers in 4823 Old Kingston Pike and leases
approximately 68.1% of the office space.
Knoxville Parking Facility. The Company also owns a 398-space parking
facility in downtown Knoxville. The parking facility was built in 1981 and
acquired by Prime in 1987. It services the One Centre Square and Two Centre
Square buildings.
THE COMPANY'S INDUSTRIAL SUBMARKETS
Chicago Metropolitan Area Industrial Submarkets--General Overview
The Company owns and operates 38 Industrial Properties in the Chicago
Metropolitan Area. Seventeen Industrial Properties are Prime Properties
located in four industrial parks which were acquired by Prime between 1988 and
1992 and subsequently substantially renovated, and six Industrial Properties
are Contribution Properties, which will be acquired upon the consummation of
the Formation Transactions. The industrial parks acquired from Prime are
located in East Chicago, Indiana; Hammond, Indiana; the city of Chicago; and
Arlington Heights, Illinois.
The Chicago Metropolitan Area's manufacturing employment, already the
highest of any metropolitan area in the nation, is also the second-fastest
growing. According to RCG, Chicago's manufacturing employment base has
expanded at an average rate of 1.2% during the last five years, compared to
national growth of 0.2% over the same period. Similarly, during the year ended
April 1997, Chicago's manufacturing employment increased 1.6%, compared to a
national rate of 0.1%, and growth in manufacturing in the Chicago Metropolitan
Area is expected by RCG to outpace the nation over the next several years.
Chicago has one of the nation's largest industrial markets, second only to
Los Angeles in terms of the total square footage of its vacant and occupied
stock of industrial space. Chicago's industrial vacancy rate of 7.5% in the
second quarter of 1997 (which reflects conditions in both overhead
crane/manufacturing facilities and warehouse/distribution facilities) was
lower than the national average industrial vacancy rate of 8.1%.
The Chicago Metropolitan Area industrial market benefits from strong
manufacturing and trade-related demand. The Chicago Metropolitan Area is the
nation's largest metal-processing market and one of the nation's major
manufacturing centers. In addition, both the Chicago Metropolitan Area's
central location and its highly efficient and extensive, well-integrated
transportation system contribute to the high volume of trade conducted through
the area's distribution system. Located mid-way between the East and West
coasts and between Canada and Mexico, with the world's busiest airport, the
hub of the nation's rail system and the primary port connecting the Great
Lakes with the Mississippi River and the Gulf of Mexico, Chicago plays a
preeminent role in U.S. trade and transportation. The following table and
graph illustrate historical and forecasted conditions in the Chicago
Metropolitan Area overall industrial market and vacancy rates in and additions
to the Chicago Metropolitan Area industrial market.
TOTAL CHICAGO METROPOLITAN AREA INDUSTRIAL MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock -- -- 858,378 870,377 888,264 898,298 906,264 918,264 928,264
New Construction -- -- -- 11,999 17,887 10,034 18,000 12,000 10,000
Net Absorption -- -- -- 26,169 9,373 7,065 13,000 11,000 12,000
Occupied Stock -- -- 788,678 814,847 824,220 831,285 837,220 848,220 860,220
Vacancy Rate 8.5% 8.4% 8.1% 6.4% 7.2% 7.5% 7.6% 7.6% 7.3%
</TABLE>
Source: RCG
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LOGO
The Chicago Metropolitan Area industrial market comprises over 898.0 million
square feet of space. Demand for industrial space has been strong over the
last two years, with net absorption averaging approximately 17.5 million
square feet per year. Gross leasing activity, which RCG considers a good
measure of demand, has also been robust. During the first half of 1997, gross
leasing activity in the Chicago Metropolitan Area was nearly double 1996's
level and close to the peak of 45.1 million square feet in 1995. Although the
vacancy rate increased to 7.5% in the second quarter of 1997, RCG believes
that this reflects new space coming into the market, rather than a weakness in
demand. The greatest vacancy rates were in larger buildings of over 100,000
square feet. The following graph illustrates gross leasing activity in the
Chicago Metropolitan Area.
LOGO
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The Industrial Parks. The industrial parks acquired from Prime consist of
certain industrial properties commonly referred to as the Enterprise Centers,
which consist of overhead crane/manufacturing facilities and one
warehouse/distribution facility. The East Chicago Enterprise Center (the
"ECEC"), Hammond Enterprise Center (the "HEC") and Chicago Enterprise Center
(the "CEC") are primarily composed of high bay, heavy overhead crane warehouse
facilities. The fourth park, 425 East Algonquin Road, also known as the
Arlington Heights Enterprise Center (the "AHEC"), contains a
warehouse/distribution facility. Each of the parks also contains a small
portion of office space available for lease. For a description of the office
space available for lease, see "--Description of Chicago Metropolitan Area
Overhead Crane/Manufacturing Properties." The AHEC, CEC and ECEC contain
acreage sufficient for the construction of build-to-suit opportunities: up to
80,000 square feet at the AHEC; 670,000 square feet at the CEC; and 250,000
square feet at the ECEC.
The industrial parks were acquired by Prime between 1988 and 1992, and all
four had previously been utilized as single tenant sites. Upon acquiring the
Properties, Prime redeveloped the parks to reposition them as multi-tenant
facilities. Among the improvements Prime made to the parks were the separation
of utilities, installation of demising walls, exterior wall and roof repair
(or replacement), repair of uneven floors, insulation, lighting,
paint/signage/graphics, reconfiguration of site lay-outs and construction of
railroad spurs to service the sites. The industrial parks were redeveloped
using funds provided by the issuance of Tax-Exempt Bonds. For a description,
see "--Tax-Exempt Bonds."
The ECEC, CEC and HEC are located in close proximity to the steel industry
of northwest Indiana and contain primarily tenants who service the steel
industry. These tenants are primarily steel processors, who perform functions
formerly performed by more vertically integrated steel companies before the
downsizing of those companies. These steel processors purchase steel from
steel producers and process it for end users in various ways, including
slitting, cutting, leveling, straightening, strengthening and
electrogalvanizing the steel. Other tenants include a manufacturer of steel
roll strapping, a refurbisher of steel mill generators, a steel caster repair
and maintenance firm and a metallurgist. The AHEC is located in the northwest
suburb of Arlington Heights and contains a wide variety of tenants. Each of
these Industrial Properties has convenient access to Interstate highways and
the ECEC, CEC and HEC is each served by rail. The Company is aware of
environmental contamination at certain of the industrial parks. For a
description, see "--Government Regulations--Environmental Matters."
Warehouse/Distribution Industrial Submarket
The Company owns four warehouse/distribution Industrial Properties located
in Suburban Chicago, which contain an aggregate of approximately 899,100
rentable square feet. At June 30, 1997, the Company's warehouse/distribution
Industrial Properties were 100.0% leased to more than five tenants.
The strength of trade in the industrial market is reflected in the growth of
transportation services at 5.5% per year for the last five years. Chicago
remains the hub of the nation's rail system, and trucking and warehousing
employment has grown significantly during the last five years, increasing 5.0%
to 11.0% per year since 1992.
RCG believes that the warehouse/distribution submarket is strong. After four
consecutive years of declining vacancy rates, the vacancy rate in this
submarket increased to 11.4% in the second quarter of 1997. RCG believes that
this reflects new space coming into the market, rather than a weakness in
demand. Gross leasing activity, which RCG considers a good measure of demand,
is particularly strong, averaging over 20.0 million square feet per year for
the last five years. RCG believes that while demand in this market continues
to be strong, increases in new construction will keep the vacancy rate from
declining significantly in the near term. The following graph illustrates
vacancy rates in and additions to the Chicago Metropolitan Area
warehouse/distribution submarket.
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LOGO
Description of Chicago Metropolitan Area Warehouse/Distribution Properties
475 Superior Avenue. 475 Superior Avenue is a distribution facility located
in Munster, Indiana. The building is situated on an approximately 31-acre
parcel of land. It was built in 1989. It has approximately 450,000 net
rentable square feet of space, of which 100.0% was leased as of June 30, 1997.
The facility is served by 58 truck docks and three rail spurs which connect to
the CSX railroad. The facility is approximately two miles from Interstate 80.
The facility is 100% leased by GE Appliances, which has located one of its
eight national distribution centers in the facility. GE Appliances' lease
expires on March 31, 1999; certain tax abatements for local property taxes
also expire in 1999. The facility includes approximately 11 acres of vacant
land.
3818 Grandville/1200 Northwestern. 3818 Grandville/1200 Northwestern is a
warehouse/distribution facility built in 1990 and located in Gurnee, Illinois.
The building has approximately 345,000 net rentable square feet of space, of
which 100.0% was leased as of June 30, 1997, located on an approximately 15.0
acre parcel of land. The building has ten exterior docks. Rank Video leases
the entire facility.
425 E. Algonquin Road. 425 E. Algonquin Road, also known as the Arlington
Heights Enterprise Center, is a warehouse/distribution facility located in
Arlington Heights, Illinois. It was built in 1978 for a single user and
acquired by Prime in 1992. Prime redeveloped the AHEC by demising the facility
into four separate spaces in order to convert the single-user building into a
multitenant facility. The building has approximately 304,500 net rentable
square feet of space, of which 100.0% was leased as of June 30, 1997, located
on an approximately 17 acre parcel of land. The existing facility may be
expanded by an additional 80,000 square feet to 385,000 square feet by
expansion along the southern portion of the property. This expansion option is
currently being marketed as a build-to-suit opportunity for prospective
tenants. The building has 23 truck docks and excellent access to the local
Interstate highways. Major tenants include Berlin Packaging Corp., a personal
products packaging company, AM International, Inc., an office machine supply
company, and International Components Corp., which uses its space for
distribution and some light assembly for Motorola.
1001 Technology Way. 1001 Technology Way is a warehouse/distribution
facility built in 1996 and located in Libertyville, Illinois. The building has
approximately 212,800 net rentable square feet of space, of which 100.0% was
leased as of June 30, 1997. Located on an approximately 13.1 acre parcel of
land, the building has 15 exterior docks. Major tenants include Rank Video.
11045 Gage Avenue. 11045 Gage Avenue is a distribution facility located in
Franklin Park, Illinois. The building is situated on a 7.0-acre parcel of land
and includes 211 spaces for surface parking. It was built in 1970
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and renovated in 1992. It has approximately 141,000 net rentable square feet
of space, of which 100.0% was leased as of June 30, 1997. The building has
nine docks and is near Interstate highway 294. Echlin Inc., which leases the
entire facility, has a right of first refusal to purchase the building.
4248, 4250 and 4300 Madison Street. 4248, 4250 and 4300 Madison Street is a
distribution facility located in Hillside, Illinois. The building is situated
on a 4.7-acre parcel of land and includes 105 spaces for surface parking. It
was built in 1980 and renovated in 1994. It has approximately 127,000 net
rentable square feet of office space, of which 100.0% was leased as of June
30, 1997. The building has eleven docks and is located five miles from O'Hare
International Airport, near Interstate highways 88, 290 and 294. The
building's tenants include Micron Industries and Best Buy Co., Inc.
1051 N. Kirk Road. 1051 N. Kirk Road is a distribution facility located in
Batavia, Illinois. The building is situated on a 8.9-acre parcel of land and
includes 52 spaces for surface parking. It was built in 1990. It has
approximately 120,000 net rentable square feet of space, of which 100.0% was
leased as of June 30, 1997. The building has 12 docks. Houghton Mifflin Co.,
Inc. leases the entire facility.
4211 Madison Street. 4211 Madison Street is a distribution facility located
in Hillside, Illinois. The building is situated on a 3.4-acre parcel of land
and includes 120 spaces for surface parking. It was built in 1977 and
renovated in 1993. It has approximately 90,000 net rentable square feet of
space, of which 100.0% was leased as of June 30, 1997. The building has nine
docks and is located five miles from O'Hare International Airport, near
Interstate highways 88, 290 and 294. The building's tenants are Dynamic
Manufacturing Co. and Aratex Services, Inc.
4160-4190 Madison Street. 4160-4190 Madison Street is a distribution
facility located in Hillside, Illinois. The building is situated on a 3.9-acre
parcel of land and includes 86 spaces for surface parking. It was built in
1973 and renovated in 1992. It has approximately 80,000 net rentable square
feet of space, of which 100.0% was leased as of June 30, 1997. The building
has eight docks and is five miles from O'Hare International Airport. The
building's tenants include Dynamic Manufacturing Co. and Evans, Inc.
342-346 Carol Lane. 342-346 Carol Lane is a distribution facility located in
Elmhurst, Illinois. The building is situated on a 3.6-acre parcel of land and
includes 151 spaces for surface parking. It was built in 1989 and remodeled in
1995. It has approximately 68,000 net rentable square feet of space, of which
100.0% was leased as of June 30, 1997. The building has six docks and is six
miles southwest of O'Hare International Airport, near Interstate highways 88,
290 and 294. The building's tenants include Old Kent Financial Corporation and
3-D Exhibits Inc.
200 E. Fullerton Avenue. 200 E. Fullerton Avenue is a distribution facility
located in Carol Stream, Illinois. The building is situated on a 4.5-acre
parcel of land and includes 122 spaces for surface parking. It was built in
1993 and renovated in 1995. It has approximately 66,000 net rentable square
feet of space, of which 100.0% was leased as of June 30, 1997. Spraying
Systems Co., which has a right of first refusal to purchase the facility,
leases the entire facility.
370 Carol Lane. 370 Carol Lane is a distribution facility located in
Elmhurst, Illinois. The building is situated on a 2.8-acre parcel of land and
includes 39 spaces for surface parking. It was built in 1977 and renovated in
1994. It has approximately 60,000 net rentable square feet of distribution and
office space, of which 100.0% was leased as of June 30, 1997. The building has
four docks and is six miles southwest of O'Hare International Airport, near
Interstate highways 88, 290 and 294. Semblex Corp. leases the entire facility.
550 Kehoe Boulevard. 550 Kehoe Boulevard is a distribution facility located
in Carol Stream, Illinois. The building is situated on a 3.4-acre parcel of
land and includes 102 spaces for surface parking. It was built in 1996. It has
approximately 45,000 net rentable square feet of space, of which 100.0% was
leased as of June 30, 1997. Associated Material leases the entire facility.
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388 Carol Lane. 388 Carol Lane is a distribution facility located in
Elmhurst, Illinois. The building is situated on a 2.0-acre parcel of land and
includes 24 spaces for surface parking. It was built in 1979 and remodeled in
1982. It has approximately 41,000 net rentable square feet of space, of which
88.4% was leased as of June 30, 1997. The building has two docks and is six
miles southwest of O'Hare International Airport, near Interstate highways 88,
290 and 294. Ameritech leases substantially all of the facility.
306-310 Era Drive. 306-310 Era Drive is a warehouse/distribution facility
built in 1984 and located in Northbrook, Illinois. The building has
approximately 36,500 net rentable square feet of space, of which 100.0% was
leased as of June 30, 1997. Located on an approximately 2.09 acre parcel of
land, the building has three interior docks. The facility is 62.3% leased by
Roche/NICL Ltd., which has installed a high end clinical testing laboratory on
the Property. Roche/NICL Ltd. has a right of first refusal to purchase such
facility.
343 Carol Lane. 343 Carol Lane is a distribution facility located in
Elmhurst, Illinois. The building is situated on a 2.1-acre parcel of land and
includes 57 spaces for surface parking. It was built in 1989. It has
approximately 30,000 net rentable square feet of space, of which 100.0% was
leased as of June 30, 1997. The building is six miles southwest of O'Hare
International Airport, near Interstate highways 88, 290 and 294. Matsushita
Industrial Equipment leases the entire facility.
350 Randy Road. 350 Randy Road is a distribution facility located in Carol
Stream, Illinois. The building is situated on a 1.9-acre parcel of land and
includes 55 spaces for surface parking. It was built in 1974. It has
approximately 25,000 net rentable square feet of space, of which 87.5% was
leased as of June 30, 1997. The building's tenants include Micro Energy Inc.
and Miller Pharmacal Group, Inc.
11039 Gage Avenue. 11039 Gage Avenue is a distribution facility located in
Franklin Park, Illinois. The building is situated on a 1.6-acre parcel of land
and includes 18 spaces for surface parking. It was built in 1965 and renovated
in 1993. It has approximately 22,000 net rentable square feet of space, of
which 100.0% was leased as of June 30, 1997. The building is located near
Interstate highway 294. Boston Coach Illinois Corp. leases the entire
facility.
1401 S. Jefferson Street. 1401 S. Jefferson Street is a distribution
facility located in Chicago. The building is situated on a 0.6-arce parcel of
land. It was built in 1965 and renovated in 1985. It has approximately 17,300
net rentable square feet of space, of which 100.0% was leased as of June 30,
1997. The building has two docks. Federal Express Corp. leases the entire
facility.
801 Technology Way. 801 Technology Way is a distribution facility located in
the Libertyville Business Park in Libertyville, Illinois. It is a single-story
building scheduled to be completed in the fourth quarter of 1997. The exterior
is pre-cast concrete with tinted glass windows with blue aluminum accents. The
building has approximately 68,800 net rentable square feet. Moore USA, which
recently signed a lease to rent approximately 43,600 square feet of the
facility, will be the building's first tenant; the remaining space is being
actively marketed to other prospective tenants.
371-385 N. Gary Avenue. 371-385 N. Gary Avenue is a retail facility located
in Carol Stream, Illinois. The building is situated on a 1.3-acre parcel of
land and includes 48 spaces for surface parking. It was built in 1978 and
remodeled in 1992. It has approximately 11,000 net rentable square feet of
space, of which 64.6% was leased as of June 30, 1997. The building's tenants
include American General Finance.
Overhead Crane/Manufacturing Industrial Submarket
The Company owns 19 overhead crane/manufacturing Industrial Properties
located in the Chicago Metropolitan Area, which contain an aggregate of
approximately 2.7 million rentable square feet. At June 30, 1997, the
Company's overhead crane/manufacturing Industrial Properties were 75.7% leased
to more than 20 tenants. RCG believes that the manufacturing submarket is
strong. In the second quarter of 1997, the manufacturing vacancy rate declined
to 7.5%. RCG believes that the decline resulted from a relatively moderate
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pace of construction of manufacturing space, which allowed the continuing
demand to shrink the available supply of manufacturing space. Gross leasing
activity, which RCG considers a good measure of demand, has averaged
approximately 14.6 million square feet between December 1991 and December
1996. RCG believes that the manufacturing submarket will continue to
experience moderate to strong growth in demand, which in conjunction with
moderate levels of new construction, will result in stable vacancy rates in
the near term. The following graph illustrates vacancy rates in and additions
to the Chicago Metropolitan Area manufacturing submarket.
LOGO
Three of the overhead crane/manufacturing facilities are manufacturing
facilities located in the north suburbs of the Chicago Metropolitan Area. The
remaining overhead crane/manufacturing facilities are located in three of the
industrial parks, the ECEC, CEC and HEC, each of which contain both
manufacturing and overhead crane buildings. The market for overhead crane
buildings in the Chicago Metropolitan Area is closely tied to the local steel-
processing industry, the nation's largest, which produces 23.0% of the
nation's steel output. Over the past few years, major steel companies have
outsourced certain steel processing operations, such as those performed in the
Company's overhead crane buildings, and smaller companies, which have proven
able to process steel at a lower cost, have fulfilled some of the demand for
this outsourced steel processing. These developments have increased the demand
for overhead crane facilities that can accommodate such operations. The
Company believes this development is a positive signal of future demand for
large crane buildings in this market. The Company also believes that its
overhead crane buildings are well-positioned to take advantage of this demand,
due to, among other things, the relatively high cost of constructing
appropriate replacement buildings in that submarket.
RCG believes that the overhead crane market, which has a vacancy rate of
less than 4.0%, is strong. The vacancy rate is low primarily because during
the last five years, strong industrial output, particularly of large durable,
steel-intensive products like automobiles, has increased the demand for
overhead crane facilities to handle the processing and distribution of steel.
In addition, while demand has grown for these facilities during the last ten
to 15 years, particularly in markets like Chicago, which is the nation's
largest steel-processing market, few overhead crane buildings have been built
during the last seven years. Because of high land costs and greater structural
reinforcing required for overhead crane facilities as opposed to more
conventional manufacturing
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facilities, the cost to erect a 100,000 square-foot building with 20-ton
cranes is approaching $60.00 per square foot, and RCG estimates that the rents
required to justify new construction are currently close to $8.00 per square
foot compared to a market rent of $3.25 to $4.50 per square foot for the
Company's Properties.
Description of Chicago Metropolitan Area Overhead Crane/Manufacturing
Properties
The Company's overhead crane/manufacturing Properties in the Chicago
Metropolitan Area industrial market consist of certain of the Contribution
Properties and the ECEC, HEC and CEC.
1301 Ridgeview Drive. 1301 Ridgeview Drive is a manufacturing facility built
in 1995 and located in McHenry, Illinois. It has approximately 217,600 net
rentable square feet of space, of which 100% was leased as of June 30, 1997.
Located on an approximately 20.0 acre parcel of land, the Company has an
option to purchase 13.0 acres of land adjacent to this Property. The building
has 18 exterior docks, rail access and excellent access to the local highway
system. The Property is occupied by Cellular Infrastructure Group, a division
of Motorola, which has installed a high-tech manufacturing and assembly
facility. Motorola has an option to lease or purchase this land, exercisable
on or before August 1, 1998.
515 Huehl Road/500 Lindberg. 515 Huehl Road/500 Lindberg is a manufacturing
facility built in 1988 and located in Northbrook, Illinois. The building has
approximately 201,200 net rentable square feet of space, of which 100% was
leased as of June 30, 1997. Located on an approximately 7.9 acre parcel of
land, the building has two interior docks and eight exterior docks. Rank Video
uses the entire building for its video duplication and packaging facility,
which currently operates around the clock seven days a week.
455 Academy Drive. 455 Academy Drive is a manufacturing facility built in
1976 and located in Northbrook, Illinois. The building has approximately
105,400 net rentable square feet of space, of which 100% was leased as of June
30, 1997. Located on an approximately 6.7 acre parcel of land, the existing
facility may be expanded by an additional 50,000 square feet to approximately
155,000 square feet. The building has four interior docks. This Property is
occupied by National Service Industries, which uses it as a production,
warehouse and distribution center for commercial lighting reflectors. National
Service Industries has a right of first refusal to purchase this Property. The
Company is aware of environmental contamination at this Property and will
receive indemnification for such contamination from National Service
Industries. For a description, see "--Government Regulations--Environmental
Matters."
Chicago Enterprise Center. The CEC is an overhead crane facility located on
the south side of Chicago. The facility consists of four main buildings of
overhead crane steel processing space and four light manufacturing/warehouse
buildings situated on approximately 113.0 acres of land. The crane facilities
contain overhead cranes with a lifting capacity of 7.5 tons to 40.0 tons. The
warehouse buildings are suited for light manufacturing and distribution. The
facility was built in multiple phases from 1916 through 1991 and was acquired
and redeveloped by Prime in 1990. The facility has approximately 1.0 million
net rentable square feet of space, of which 62.0% was leased as of June 30,
1997. The existing facility may be expanded by an additional 670,000 square
feet of manufacturing and distribution space to approximately 1.7 million
square feet. The CEC has convenient access to all of the steel mills in
northwest Indiana, as well as all Interstate highways in the area. It is
located within one mile of a four-way entrance/exit ramp to the Calumet
Expressway and within four miles of a four-way entrance/exit ramp to
Interstate 90. The facility is also served by the Norfolk & Southern, EJ&E,
Conrail and Indiana Harbor Belt railways. Major tenants include Co-Steel
Lasco, Inc., Welded Tube Company, Alpha Processing, Inc. and Sterling Steel
Services, Inc., which are all steel processing companies.
East Chicago Enterprise Center. The ECEC is an overhead crane facility
located in East Chicago, Indiana. The facility consists of three main
buildings of overhead crane steel processing space, one warehouse building and
one office building situated on approximately 41.3 acres of land. The crane
facilities contain high bays and overhead cranes with lifting capacities
ranging from five tons to 100 tons. The warehouse building is a single-story,
free standing metal clad building with approximately 14,100 net rentable
square feet. The facility was built in multiple phases from 1917 through 1952
and was acquired by Prime in 1988. Prime redeveloped facilities at
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the ECEC by insulating and heating certain facilities, installing new roofs,
refinishing floors and purchasing new cranes. The ECEC (excluding the office
building) has approximately 548,468 net rentable square feet of industrial
space, of which 67.1% was leased as of June 30, 1997. The existing facility
contains a 9.1 acre parcel of land on which the Company may construct an
additional 250,000 square feet of manufacturing and distribution space. The
ECEC has convenient access to all of the steel mills in northwest Indiana, as
well as all Interstate highways in the area. The facility is located within
two miles of an entrance to Interstate 90 and within five miles of a four-way
entrance/exit ramp to Interstate 80/94. It is also served by rail, and the
three industrial buildings have rail spurs located within the crane bay areas,
providing access to the Indiana Harbor Belt railroad. Major tenants include
Acutus-Gladwin, Metro Metals and Illiana Steel, which are all steel processing
companies.
Hammond Enterprise Center. The HEC is an overhead crane facility located in
Hammond, Indiana. The facility consists of two buildings of overhead crane
steel processing space and one office building situated on approximately 37
acres of land. It was built in multiple phases from 1920 through 1952 and was
acquired and redeveloped by Prime in 1989. The HEC (excluding the office
building) has approximately 506,900 net rentable square feet of industrial
space, of which 86.6% was leased as of June 30, 1997. The HEC has convenient
access to all of the steel mills in northwest Indiana, as well as Interstate
highways in the area. It is located within one half-mile of an entrance to
Interstate 90 and within four miles of a four-way entrance/exit ramp to
Interstate 90. It is also served by rail, and the two industrial buildings
have rail spurs located within the crane bay areas providing access to the CSX
railroad. Major tenants include HECO, A.M. Castle and Bar Processing.
4440 Railroad Avenue. 4440 Railroad Avenue is a single-story office building
located adjacent to the East Chicago Enterprise Center in East Chicago,
Indiana. It was built in 1917, renovated in 1991 and has approximately 40,000
net rentable square feet of office space, of which 100% was leased as of June
30, 1997. The building is leased entirely by Inland Steel as the headquarters
for its human resources department.
4527 Columbia Avenue. 4527 Columbia Avenue is a single-story office building
located within the Hammond Enterprise Center in Hammond, Indiana. It was built
in phases from 1920 through 1952 and has approximately 16,700 net rentable
square feet of office space, of which 62.8% was leased as of June 30, 1997.
Tenants of the building include the Company, Town & Country and Great Lakes
Engineering LLC.
The Columbus Metropolitan Area Industrial Market
The Company owns and operates six Industrial Properties in the Columbus
industrial market. Columbus, the capital of the state of Ohio, has a
population of approximately 1.5 million and is home to a number of major
employers, including The Ohio State University, CompuServe and The Limited,
and to a large manufacturing facility of Lucent Technologies.
Columbus' employment base has expanded at an average rate of 2.6% during the
last five years, compared to national growth of 2.0% over the same period.
However, during the year ended April 1997, Columbus' employment grew 1.3%
compared to 2.3% for the nation as a whole.
The Columbus industrial market, which is comprised of approximately 92.0
million square feet of industrial space, had a vacancy rate of 5.1% as of the
second quarter of 1997, which was lower than the national average industrial
vacancy rate of 8.1%. RCG believes that the outlook for the Columbus
industrial market is strong, with an industrial vacancy rate of 6.0% to 7.0%
over the next three years.
Employment in the transportation, communications and public utilities sector
increased by 2.8% during the year ended April 1997, reflecting, in part,
expansion in cargo shipping operations at Rickenbacker International Airport
and Port Columbus International Airport. Although manufacturing employment was
down slightly for
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the year ended April 1997, according to RCG, several large companies,
including Kraft Foods, AK Steel, Coca-Cola, Crane Plastics Company and General
Castings Company (a manufacturer of iron castings and provider of machine shop
services) have proposed expansions in the Columbus, Ohio metropolitan area.
Forecasted Employment Growth. RCG forecasts that the Columbus metropolitan
area employment base will continue to grow at a moderately strong rate of 1.8%
to 2.2% per year during the next three years, with growth in the services
sector accelerating in the next two to three years.
Description of Columbus, Ohio Properties
2160 McGaw Road. 2160 McGaw Road is a warehouse/distribution building built
in 1974 and located in Obetz, Ohio. The building has approximately 310,100 net
rentable square feet of space, of which 100.0% was leased as of June 30, 1997,
located on an approximately 18.1 acre parcel of land. Spartan Warehouse leases
the entire facility.
4849 Groveport Road. 4849 Groveport Road is a warehouse/distribution
building built in 1968 and located in Obetz, Ohio. The building has
approximately 132,100 net rentable square feet of space, of which 100.0% was
leased as of June 30, 1997, located on an approximately 11.7 acre parcel of
land. Approximately 4.2 acres of this land can be further developed. Premier
Auto Glass Corp. leases the entire facility.
2400 McGaw Road. 2400 McGaw Road is a warehouse/distribution building built
in 1972 and located in Obetz, Ohio. The building has approximately 86,400 net
rentable square feet of space, of which 100.0% was leased as of June 30, 1997,
located on an approximately 6.1 acre parcel of land. S.P. Richards leases the
entire facility.
5160 Blazer Memorial Parkway. 5160 Blazer Memorial Parkway is a light
industrial warehouse/distribution/office or "flex" building built in 1983 and
located in Dublin, Ohio. The building has approximately 86,000 net rentable
square feet of space, of which 64.5% was leased as of June 30, 1997, located
on an approximately 10.0 acre parcel of land. Major tenants include Alkon
Corporation and Cross Medical. Most of the leased space in this Property is
currently used as office space, but could be converted to light industrial or
warehouse use.
4411 Marketing Place. 4411 Marketing Place is a manufacturing building built
in 1984 and located in Groveport, Ohio. The building has approximately 65,800
net rentable square feet of space, of which 100.0% was leased as of June 30,
1997, located on an approximately 5.4 acre parcel of land. Wes Tran Corp.
leases the entire facility.
600 London Road. 600 London Road is a warehouse/distribution building built
in 1980 and located in Delaware, Ohio. The building has approximately 52,440
net rentable square feet of space, of which 100.0% was leased as of June 30,
1997, located on an approximately 9.2 acre parcel of land. Approximately 4.5
acres of this land can be further developed. Schneider National Inc. leases
the entire facility.
LAND FOR DEVELOPMENT AND OPTION PROPERTIES
The Company has significant experience in the development of both Office
Properties, such as the 77 West Wacker Drive Building, and Industrial
Properties, such as the Contribution Properties. The Company expects to
continue to develop properties, both for "build-to-suit" projects and under
pre-leasing arrangements. The Company already owns several prime parcels of
developable land in the Chicago Metropolitan Area. Following the completion of
the Offering, the Company will own approximately 83.4 acres and have rights to
acquire approximately 157.2 acres of developable land (including rights to
acquire one development site located in the Chicago CBD containing
approximately 58,000 square feet), which management believes could be
developed with approximately 1.2 million square feet of additional office
space in the Chicago CBD and approximately
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4.4 million square feet of additional industrial properties primarily in the
Chicago Metropolitan Area. The following table provides additional information
with respect to these undeveloped parcels:
<TABLE>
<CAPTION>
OWNERSHIP
DESCRIPTION LOCATION SIZE STATUS
----------- -------- ---- --------------
<S> <C> <C> <C>
425 E. Algonquin Road... Arlington Heights, IL 3.7 Acres Own
Chicago Enterprise Cen-
ter.................... Chicago, IL 51.2 Acres Own
East Chicago Enterprise
Center................. East Chicago, IN 9.1 Acres Own
Hammond Enterprise Cen-
ter.................... Hammond, IN 8.2 Acres Own
455 Academy Drive(1).... Northbrook, IL 2.5 Acres Own
Libertyville Business
Park(2)................ Libertyville, IL 48.5 Acres Under contract
1301 Ridgeview
Drive(3)............... McHenry, IL 13.0 Acres Second Option
4849 Groveport Road..... Obetz, OH 4.2 Acres Own
600 London Road......... Delaware, OH 4.5 Acres Own
300 N. LaSalle(4)....... Chicago, IL 58,025 Sq. Ft. Option
NAC Properties(5)....... Carol Stream, IL/Batavia, IL 94.4 Acres Under Contract
</TABLE>
- --------
(1) National Service Industries, the current tenant of the industrial building
at 455 Academy Drive, has a right of first refusal to purchase such
building which includes this land.
(2) The Company is obligated to purchase this land for $7.4 million (subject
to certain purchase price adjustments), within three years following the
consummation of the Formation Transactions and the completion of the
Offering.
(3) Motorola has an option to lease or purchase this land, exercisable on or
before August 1, 1998.
(4) The Company has a ten-year option to purchase this Chicago CBD development
site at 95.0% of the fair market value at the time of the exercise of the
option.
(5) The Company is obligated to purchase 20.0 acres of this property per year,
starting on the first anniversary of the consummation of the Formation
Transactions and the completion of the Offering, for $3.00 per square
foot, or approximately $2.5 million for each 20.0 acres.
The Company has successfully developed land both for its own portfolio and
for other parties. For example, in 1991, Prime developed a build-to-suit
project and in 1996 sold a parcel of land formerly attached to the CEC, and in
1996, sold a parcel of land formerly attached to the ECEC. The Company
believes that it has developed close working relationships with quality
subcontractors in its markets, and that its reputation in its current markets
for developing properties for its own account and others has aided and will
aid it in working with potential clients and tenants on a "build-to-suit" or
pre-lease basis.
Following are descriptions of certain developable parcels of land which the
Company owns or has an option to purchase. For a description of the parcels of
land attached to Properties, see the descriptions of those Properties above.
Libertyville Business Park. Libertyville Business Park is a site located in
the north suburb of Libertyville, Illinois. The Company has entered into an
agreement with the current owner to purchase the entire 48.5 acre undeveloped
portion of the site over the next three years. The parcel is suitable for
industrial development, is zoned for the development of an approximately 1.1
million square feet of office or industrial space and is located adjacent to
several buildings, including 801 Technology Way, 901 Technology Way and 1001
Technology Way, which were developed by certain members of management.
901 Technology Way. 901 Technology Way is an industrial building located in
the Libertyville Business Park in Libertyville, Illinois. It is a single-story
building developed by certain members of management and completed in early
1997. The building is pre-cast concrete and has tinted glass windows with blue
aluminum accents. The building has approximately 68,800 net rentable square
feet. 901 Technology Way has one tenant, Production Associates, a display
company, which leases approximately 12,000 square feet, or approximately 18.3%
of the net rentable square feet, for use as a light production and
warehouse/distribution center. The
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building is being actively marketed by the owner to prospective tenants. Upon
completion of the Offering, the Company will receive an option to purchase the
building, which is currently owned by one of the Contributors. The option on
the property is exercisable for three years or until 16 days after the leasing
of substantially all of the property to a non-affiliate of the Contributor.
Under the terms of the option, the Company may buy the property for a purchase
price of the product of ten times the pro forma net operating income from the
property for the following 12 months. The purchase price may be no less than
the direct out-of-pocket cost to develop and construct the property and no
more than 120.0% of such cost.
300 N. LaSalle. 300 N. LaSalle is a site located in the Chicago CBD and
currently contains a parking facility. Prime owns the site. Upon the
consummation of the Formation Transactions, Prime will grant the Company a
ten-year option to purchase this site consisting of approximately 58,000
square feet for a purchase price equal to 95.0% of the then fair market value
of such site. The parcel is in the heart of downtown Chicago and is a highly
suitable site for a variety of developments. In management's opinion, this
site is suitable for the development of a major office or mixed-use project
containing up to 1.2 million rentable square feet of space.
Huntley Property. The Company has a 15-year right of first offer to develop
(or develop and acquire an ownership interest in) all or any portion of 360
acres of undeveloped office and industrial land in the Huntley Business Park
currently owned and controlled by an affiliate of Prime subject to a
participation interest in such property held by a third-party lender. The
right of first offer will apply to the extent that Prime determines that such
parcel shall be utilized for the construction of an office or industrial
facility to be owned and leased to third parties by Prime or held by Prime for
sale to a third party.
The following are properties which the Company has an obligation to purchase
under certain circumstances.
300 Craig Place. 300 Craig Place is a distribution facility located in
Hillside, Illinois. The building is situated on a 9.2-acre parcel of land near
Interstate highways 88, 290 and 294. The facility is five miles south of
O'Hare International Airport and was built in 1997. It has approximately
163,000 net rentable square feet of space, of which 100.0% was leased as of
June 30, 1997. The building's tenants include Storopak, Inc. This property is
currently owned by an affiliate of the NAC General Partner. The Company is
obligated to purchase this property for approximately $7.5 million if this
property is leased on certain terms within 180 days following the consummation
of the Formation Transactions and the completion of the Offering.
2050 Hammond Drive. 2050 Hammond Drive is a distribution facility located in
Schaumburg, Illinois. The building is situated on a 3.2-acre parcel of land,
12 miles northwest of O'Hare International Airport, near Interstate highways
90 and 290. The facility was built in 1985 and has approximately 66,600 net
rentable square feet of space, of which 100.0% was leased as of June 30, 1997.
Autotype USA leases the entire facility. This property is currently owned by
an affiliate of the NAC General Partner and a third party partner. The Company
is obligated to purchase this property for approximately $3.1 million if the
consent of a third party partner is obtained within 180 days following the
consummation of the Formation Transactions and the completion of the Offering.
5600 Proviso Drive. 5600 Proviso Drive is a distribution facility located in
Berkeley, Illinois. The building is situated on a 9.4-acre parcel of land,
near Interstate highway 290 and was built in 1985 and renovated in 1994. It
has approximately 219,000 net rentable square feet, of which 100.0% was leased
as of June 30, 1997. Banta Corp. leases the entire facility. This property is
currently owned by an affiliate of the NAC General Partner and a third party
partner. The Company is obligated to purchase this property for approximately
$8.0 million if the consent of the third party partner is obtained with 180
days following the consummation of the Formation Transactions and the
completion of the Offering.
130 E. Rawls Road. 130 E. Rawls Road is a distribution facility located in
Des Plaines, Illinois. The facility is situated on a 3.5-acre parcel of land,
near Interstate highway 90 and was expanded and remodeled in 1988. The
facility has approximately 71,400 net rentable square feet, of which 100.0%
was leased as of June 30, 1997. Reynolds Fasteners, Inc. leases the entire
facility. This property is currently owned by an affiliate of the
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NAC General Partner. The Company is obligated to purchase this property for
approximately $2.5 million if this property is leased on certain terms within
180 days following the consummation of the Formation Transactions and the
completion of the Offering.
COMPETITION
The Company may be competing with other owners and developers that may have
greater resources and more experience than the Company. Additionally, the
number of competitive properties in any particular market or submarket in
which the Properties are located could have a material adverse effect on both
the Company's ability to lease space at the Properties or any newly-acquired
property and on the rents charged at the Properties. The Company believes that
the Offering, the Credit Facility and the Company's access as a public company
to the capital markets to raise funds during periods when conventional sources
of financing may be unavailable or prohibitively expensive will provide the
Company with substantial competitive advantages. Further, the Company believes
that its capital structure and ability to acquire properties in exchange for
Common Units, and thereby defer a seller's potential taxable gain, will
enhance the ability of the Company to consummate transactions quickly and to
structure more competitive acquisitions than other real estate companies in
the market which lack the Company's access to capital and ability to acquire
property with Common Units. See "Business Objective and Growth Strategies--
Acquisition Strategy." The Company believes that the number of real estate
developers has decreased as a result of the recessionary market conditions and
tight credit markets during the early 1990s as well as the reluctance on the
part of more conventional financing sources to fund development and
acquisition projects. In addition, the Company believes that it will be one of
a limited number of publicly-traded real estate companies primarily focusing
on the office and industrial market in the Chicago Metropolitan Area.
TAX-EXEMPT BONDS
The development or redevelopment of certain of the Industrial Properties and
the Office Properties in Tennessee were financed in part by proceeds from the
issuance of the Tax-Exempt Bonds. The Tax-Exempt Bonds are credit enhanced by
letters of credit. Subject to compliance by the Company with the applicable
loan covenants, upon completion of the Offering, the $225.0 million Credit
Facility may be used to provide funds for acquisitions and development
activities and to provide the replacement letters of credit for the $74.5
million of Tax-Exempt Bonds. The Company expects that the interest rate with
respect to such Tax-Exempt Bonds will fluctuate with changes in market
interest rates.
INSURANCE
Management believes that the Properties are covered by adequate
comprehensive liability, rental loss, and all-risk insurance, provided by
reputable companies, with commercially reasonable deductibles, limits and
policy specifications customarily carried for similar properties. There are,
however, certain types of losses which may be either uninsurable or not
economically insurable, such as losses due to floods, riots or acts of war.
Should an uninsured loss occur, the Company could lose both its invested
capital in, and anticipated profits from, the property.
GOVERNMENT REGULATIONS
Many laws and governmental regulations are applicable to the Properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Costs of Compliance with Americans with Disabilities Act. Under the ADA, all
public accommodations and commercial facilities are required to meet certain
federal requirements related to access and use by disabled persons. These
requirements became effective in 1992. Compliance with the ADA requirements
could require removal of access barriers, and noncompliance could result in
the imposition of fines by the federal government
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or an award of damages to private litigants. Although the Company believes
that the Properties are substantially in compliance with these requirements,
the Company may incur additional costs to comply with the ADA. Although the
Company believes that such costs will not have a material adverse effect on
the Company, if required changes involve a greater amount of expenditures than
the Company currently anticipates, the Company's ability to make expected
distributions could be adversely affected.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations relating to the protection of the environment, an
owner or operator of real property may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in such
property. These laws often impose liability without regard to whether the
owner or operator was responsible for, or even knew of, the presence of such
hazardous or toxic substances. The costs of investigation, removal or
remediation of such substances may be substantial, and the presence of such
substances may adversely affect the owner's or operator's ability to rent or
sell the property or to borrow using such property as collateral and may
expose such owner or operator to liability resulting from any release of or
exposure to such substances. Persons who arrange for the disposal or treatment
of hazardous or toxic substances at another location also may be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person. Certain environmental laws impose liability for release of asbestos-
containing materials into the air, and third parties may also seek recovery
from owners or operators of real properties for personal injury associated
with asbestos-containing materials and other hazardous or toxic substances. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be considered an owner or
operator of such properties or as having arranged for the disposal or
treatment of hazardous or toxic substances and therefore potentially liable
for removal or remediation costs, as well as certain other related costs,
including governmental penalties and injuries to persons and property.
All of the Properties were subject to Phase I or similar environmental
assessments by independent environmental consultants in connection with the
formation of the Company. Phase I assessments are intended to discover
information regarding, and to evaluate the environmental condition of, the
surveyed property and surrounding properties. Phase I assessments generally
include an historical review, a public records review, an investigation of the
surveyed site and surrounding properties, and preparation and issuance of a
written report, but do not include soil sampling or subsurface investigations.
The Company is aware of environmental contamination at certain of the older
Industrial Properties, which are already in remediation programs sponsored by
the appropriate state environmental agencies. Prime has contractually agreed
to retain liability, and indemnify the Company, for environmental remediation
with regard to these Industrial Properties, which environmental consultants
have estimated will cost, in the aggregate, approximately $3.2 million.
Investigation of the CEC by Prime and its environmental consultants revealed
contamination from petroleum underground storage tanks located on the
Property. In August 1996, Prime submitted the CEC into the Illinois Site
Remediation Program of the Illinois Environmental Protection Agency (the
"IEPA"). The environmental consultants prepared a site assessment and
submitted it to the IEPA as the basis for a remedial action plan, as required
by the IEPA. They estimate that the remedial action will cost approximately
$2.5 million. In August 1996, the Company filed suit against a former tenant,
seeking past and future costs of remediation associated with the presence of
hazardous substances at the CEC. Substantial settlement negotiations between
Prime and the tenant have been conducted recently. In June 1997, Prime filed
suit against one of its former environmental consultants for negligence in
failing to disclose the presence of the petroleum underground storage tanks at
the CEC. The former consultant has not yet responded in court.
Investigation of the ECEC by Prime and its environmental consultants
revealed contamination on the Property. In March 1997, Prime submitted the
ECEC into the Indiana Department of Environmental Management ("IDEM")
Voluntary Remediation Program. Upon completion of any necessary remediation
approved by IDEM, the Company will receive a Covenant Not to Sue from the
Governor of Indiana. The environmental consultants estimate that the remedial
action will cost approximately $371,000.
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In addition, IDEM has requested that the owner of the ECEC participate,
along with numerous other property owners, in the development of a Natural
Resources Damage Assessment (the "Assessment") for the Grand Calumet River and
Indiana Harbor Canal System in northwest Indiana. No lawsuit has been filed or
threatened, and no claim for specified damages has been received in connection
with this matter. The Company anticipates that the Assessment will take more
than twelve months to complete and that prior to that time, the quantity of
environmental damage, if any, and the identity of the parties responsible for
any damage will remain unknown. Until additional information is known, the
likelihood that this matter could result in a liability cannot be determined.
Investigation of the HEC by Prime and its environmental consultants revealed
contamination on the Property. In March 1997, Prime submitted the HEC into the
IDEM Voluntary Remediation Program. Upon completion of any necessary
remediation approved by IDEM, the Company will receive a Covenant Not to Sue
from the Governor of Indiana. The environmental consultants estimate that the
remedial action will cost approximately $295,000.
The Company also is aware of contamination at 455 Academy Drive, one of the
Contribution Properties. The current tenant of the Property, National Service
Industries, has provided the Company with an indemnity for all of the costs of
environmental remediation regarding the Property caused by National Service
Industries either knowingly or unknowingly.
The Company also is aware of contamination at 1301 E. Tower Road, one of the
NAC Properties. The Property has been submitted into a remediation program
sponsored by the Illinois Environmental Protection Agency. The Company's
environmental consultants estimate that the remedial action will cost
approximately $200,000.
The Company believes that the other Properties are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances. The Company has not been
notified by any governmental authority, and is not otherwise aware, of any
material noncompliance, liability or claim relating to hazardous or toxic
substances in connection with any of its other Properties. None of the
Company's environmental assessments of the Properties has revealed any
environmental liability that, after giving effect to the contractual
indemnities described above, the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liability. Nonetheless, it is possible that the Company's assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no
assurance that (i) future laws, ordinances or regulations will not impose any
material environmental liability or (ii) the current environmental condition
of the Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks) or by third parties unrelated to the Company. If
compliance with the various laws and regulations, now existing or hereafter
adopted, exceeds the Company's budgets for such items, the Company's ability
to make expected distributions to shareholders could be adversely affected.
Other Regulations. The Properties are also subject to various federal, state
and local regulatory requirements, such as state and local fire and life
safety requirements. Failure to comply with these requirements could result in
the imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
material compliance with all such regulatory requirements. However, there can
be no assurance that these requirements will not be changed or that new
requirements will not be imposed which would require significant unanticipated
expenditures by the Company and could have an adverse effect on the Company's
Funds from Operations and expected distributions.
Except as described in this Prospectus, there are no other laws or
regulations which have a material effect on the Company's operations, other
than typical state and local laws affecting the development and operation of
real property, such as zoning laws. See "Risk Factors--Environmental Risks,"
"Certain Provisions of Maryland Law and of the Company's Declaration of Trust
and Bylaws," "Partnership Agreement," "Certain Federal Income Tax
Considerations" and "ERISA Considerations."
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MANAGEMENT AND EMPLOYEES
The Operating Partnership has been structured as the entity through which
the Company will conduct substantially all of its operations. The Services
Company has been structured as an entity through which the Company will
conduct substantially all of its management, leasing, acquisition and
development activities and related operations. The Company generally has full,
exclusive and complete responsibility and discretion in the management and
control of the Operating Partnership, but not of the Services Company.
The Company (primarily through the Operating Partnership and the Services
Company) initially will employ approximately 151 persons. The Company, the
Operating Partnership and the Services Company will employ substantially all
of the professional employees of Prime that are currently engaged in asset
management and administration. The Company, the Operating Partnership and the
Services Company believe that relations with their employees are good.
LEGAL PROCEEDINGS
Neither the Company nor any of the Properties is subject to any material
litigation nor, to the Company's knowledge, is any material litigation
threatened against any of them, other than routine litigation arising in the
ordinary course of business, which is expected to be covered by liability
insurance. Legal action has been taken against Keck to obtain the possession
of the Keck Space. A settlement agreement has been entered with Keck that
provides for the dismissal with prejudice of the legal action and requires,
pursuant to court order, that Keck will vacate certain of the Keck Space
immediately and will vacate all of the Keck Space by no later than November
30, 1997. In addition, Keck has paid $500,000 as past due rent in connection
with the settlement. The Company has also sued various parties in connection
with environmental remediation at one of its Industrial Properties. See "--
Government Regulations--Environmental Matters."
PRIME ASSETS NOT ACQUIRED BY THE COMPANY
Prime will retain substantial other assets and liabilities, including
certain commercial and residential real estate interests, which will not be
transferred to the Company in the Formation Transactions. These assets are
either not office or industrial properties or were determined to be
inconsistent with the Company's investment objectives. The excluded assets
include (i) minority limited partnership interests in two partnerships which
own two industrial buildings one of which properties is located in
Massachusetts and the other of which properties, located in Chicago, Illinois,
is subject to a condemnation proceeding, and (ii) an approximately 2,650-acre
development site in Huntley, Illinois which has land available for office and
industrial development, which consists of approximately 2,290 acres which are
zoned for residential and other non-offices and industrial uses and
approximately 360 acres of which is zoned for office and industrial use and
subject to a right of first offer described herein, (iii) an approximately
12,000 square foot distribution facility located at 341 Enterprise Drive in
Powell, Ohio and (iv) the 300 N. LaSalle property, which is subject to an
option by the Company to purchase. See "--Land for Development and Option
Properties--Huntley Property." The development or transfer by Prime of all or
any portion of the 2,650 acres of the Huntley property is subject to obtaining
a third-party lender's prior consent.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of investment objectives and policies,
financing policies, conflict of interest policies and other policies with
respect to certain other activities of the Company. The policies with respect
to these activities have been determined by the Board of Trustees of the
Company and may be amended or revised from time to time at the discretion of
the Board of Trustees without a vote of the shareholders of the Company,
except that (i) the Company cannot change its policy of holding its assets and
conducting its business only through the Operating Partnership and other
subsidiaries, (ii) changes in certain policies with respect to conflicts of
interest must be consistent with legal requirements and (iii) the Company
cannot take any action intended to terminate the Company's status as a REIT
without the approval of the holders of a majority of the Common Shares
entitled to vote thereon and outstanding at the time, voting together as a
single class. No assurance can be given that the Company's investment
objectives will be attained or that the value of the Company will not
decrease.
INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objectives are to provide regular quarterly cash
dividends to its shareholders and achieve long-term capital appreciation
through increases in cash flow from the Company's properties. The Company will
seek to accomplish these objectives through the ownership and the enhanced
operation of the Properties, the selective acquisition and development of
additional office and industrial properties and, where appropriate,
renovations and expansions of these properties. See "Business Objective and
Growth Strategies--Acquisition Strategies." One of the key criteria for new
investments will be that they offer the opportunity for growth in Funds from
Operations per Common Share. All of the Company's investment activities will
be conducted through the Operating Partnership and the Property Partnerships,
although the Company also may hold temporary cash investments from time to
time pending investment or distribution to shareholders. The Company will not
have any limit on the amount or percentage of assets invested in any Property.
The Company may purchase or lease properties for long-term investment,
expand and improve the properties presently owned, or sell such properties, in
whole or in part, when circumstances warrant. The Company also may participate
with other entities in property ownership, through partnerships or other types
of co-ownership arrangements.
While the Company emphasizes equity real estate investments, it may in its
discretion invest in mortgages, stock of other REITs and other real estate
interests. Such mortgage investments may include participating or convertible
mortgages. The Company does not currently intend to invest in the securities
of other issuers except in connection with the Company's acquisitions of
indirect interests in properties (normally through partnership interests in
special purpose partnerships owning title to properties) and investments in
short-term income producing investments. Any such investments in the
securities of other issuers will be subject to the asset valuation of
ownership limitations and gross income tests necessary for REIT qualification
for federal income tax purposes. Further, equity investments by the Company
may be subject to existing mortgage financing and other indebtedness which
have priority over the equity interest of the Company. See "Certain Federal
Income Tax Considerations--Requirements for Qualification." In any event, the
Company does not intend that its investment in securities will require it to
register as an "investment company" under the Investment Company Act of 1940,
as amended, and the Company would intend to divest securities before any such
registration would be required.
FINANCING STRATEGY
The Company will be conservatively capitalized immediately subsequent to the
Offering; the Company's total debt will constitute approximately 25.2% of its
total market capitalization. The Company expects to operate with a debt-to-
total market capitalization ratio in the range of 25.0% to 40.0%. The Company
has based its debt policy on the relationship between its debt and its total
market capitalization, rather than the book value of its assets or other
historical measures that typically have been employed by publicly traded
REITs, because management believes that market capitalization more accurately
reflects the Company's ability to borrow money and meet its debt service
requirements. In this regard, the Company believes that most industry analysts
relate share prices of real estate companies directly to the cash flow
generated by the assets of these companies, and that lenders to real estate
companies generally utilize cash flow related measures, as opposed to book
values, in
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establishing collateral values, loan to value ratios and estimated debt
capacities. Market capitalization is, however, more variable than book value
of assets or other historical measures. Because market capitalization is a
function of the market price of the Company's Common Shares, the Company's
ratio of debt-to-total market capitalization may be affected by changes in
that market price, which are beyond the control of the Company. Although the
organizational documents of the Company do not limit the amount or percentage
of indebtedness that the Company may incur, the Company may from time to time
modify its debt policy in light of then current economic conditions, relative
costs of debt and equity capital, the market values of its properties, general
conditions in the market for debt and equity securities, fluctuations in the
fair market prices of the Common Shares, growth and acquisition opportunities
and other factors. Accordingly, the Company may increase or decrease its debt-
to-total market capitalization ratio above or below the limit described above.
See "Risk Factors--Real Estate Financing Risks--Company's Ability to Increase
Its Debt Could Adversely Affect the Company's Cash Flows." If the Board of
Trustees determines that additional funding is required, the Company may raise
such funds through additional equity offerings, debt financing, retention of
cash flow (subject to provisions in the Code concerning taxability of
undistributed REIT taxable income) or a combination of these methods.
In the event that the Board of Trustees determines to raise additional
equity capital, it has the authority, without shareholder approval, to issue
additional shares of Common Shares or Preferred Shares of the Company in any
manner and on such terms and for such consideration it deems appropriate,
including in exchange for property. Existing shareholders would have no
preemptive right to purchase shares issued in any offering and any such
offering might cause a dilution of a shareholder's ownership interest in the
Company.
It is anticipated that any additional borrowings will be made through the
Operating Partnership, the Property Partnerships or new property partnerships;
however, the Company itself may incur indebtedness, which may be re-loaned to
the Operating Partnership. Indebtedness incurred by the Company may be in the
form of bank borrowings, secured or unsecured, and publicly or privately
placed debt instruments. Indebtedness incurred by the Operating Partnership,
the Property Partnerships or any new property partnership may be in the form
of purchase money obligations to the sellers of properties, long-term, tax-
exempt bonds or other publicly or privately placed debt instruments, financing
from banks, institutional investors or other lenders, any of which
indebtedness may be unsecured or may be secured by mortgages or other
interests in the property owned by the Operating Partnership, the Property
Partnerships or any new property partnership. Such indebtedness may be
recourse to all or any part of the property of the Company, the Operating
Partnership, any Property Partnership or any new property partnership, or may
be limited to the particular property to which the indebtedness relates. The
proceeds from any borrowings by the Company, the Operating Partnership, any
Property Partnership or any new property partnership may be used for the
payment of distributions, for working capital, to refinance existing
indebtedness or to finance acquisitions, expansions or development of new
properties; provided, that the Company cannot borrow to pay distributions to
shareholders except through the Operating Partnership.
CONFLICTS OF INTEREST POLICIES
The Company has adopted certain policies and entered into various agreements
designed to reduce conflicts of interest involving the owners and management
of the Company. For a discussion of such conflicts, see "Risk Factors--
Conflicts of Interest; Benefits to Prime."
Michael W. Reschke, the Chairman of the Board of the Company and the
principal stockholder of Prime, will continue to devote a considerable portion
of his time to the management of Prime's continuing commercial real estate
operations. Pursuant to the Non-Compete Agreement, Mr. Reschke and Prime have
agreed that, so long as Prime and/or its affiliates own a 5.0% or greater
economic interest in the Company or Mr. Reschke is Chairman of the Board of
the Company, neither Mr. Reschke nor Prime (including its affiliates) will own
or manage office or industrial properties (except any ownership resulting from
foreclosure of indebtedness). Excluded from the foregoing restrictions are all
properties in which Prime had an interest prior to the Formation Transactions
and Prime's or Mr. Reschke's ownership of less than 5.0% of any class of
securities listed on a national securities exchange or on the Nasdaq National
Market. See "Certain Relationships and Related Transactions--Non-Compete
Agreement."
In addition, Stephen J. Nardi, an affiliate of the NAC General Partner, will
be a trustee of the Company. Neither the Company nor the NAC General Partner
may (other than in accordance with the Put Option
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Agreement) withdraw from the Operating Partnership or transfer its general
partner interest, nor may another general partner be admitted to the Operating
Partnership without the consent of the other general partner.
Richard S. Curto will enter an employment agreement that contains
noncompetition provisions designed to reduce potential conflicts of interest.
These provisions prohibit Mr. Curto from engaging directly or indirectly in
the development or acquisition of office properties during the period he is
employed with the Company and for an additional 24-month period following any
termination of such employment either by the Company for cause or by Mr. Curto
voluntarily. See "Management."
As holders of Common Units, the Limited Partners and the NAC General Partner
may suffer different and more adverse tax consequences than the Company upon
the sale or refinancing of the properties and therefore the Limited Partners
and the NAC General Partner, on the one hand, and the Company, on the other
hand, may have different objectives regarding the appropriate pricing and
timing of any sale or refinancing of such properties. The decision to proceed
with any such sale or refinancing will be made by the Board of Trustees. The
Partnership Agreement provides that the Company has no obligation to consider
the separate interests of the Limited Partners or the NAC General Partner,
including tax consequences to the Limited Partners or the NAC General Partner,
in deciding whether to sell a property. However, the Company has entered into
tax indemnification agreements with the NAC General Partner and the IBD
Contributors. So long as the tax indemnity continues for either the NAC
General Partner or the IBD Contributors and Prime is responsible to the
Company for such indemnity, the Company will use its best efforts to not
create such tax liability due to a refinancing or debt repayment with regard
to the relevant Properties and to utilize Section 1031 tax-free exchanges to
the extent any of the relevant Properties is sold. See "Risk Factors--
Conflicts of Interest; Benefits to Prime" and "Certain Relationships and
Related Transactions--Tax Indemnification Agreements."
The Declaration of Trust provides that each trustee will be obligated to
offer to the Company any opportunity which comes to such trustee and which the
Company could reasonably be expected to have an interest in pursuing. The
Declaration of Trust also provides that any contract or transaction between
the Company and any trustee or any entity in which the trustee has a material
financial interest would not be voidable solely because of such trustee's
interest if (a) it is approved after disclosure of the interest, by an
affirmative vote of a majority of disinterested trustees or by the affirmative
vote of a majority of the votes cast by disinterested shareholders or (b) it
is fair and reasonable to the Company.
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves (and when not sufficient,
access to borrowings) in amounts the Board of Trustees determines to be
adequate to meet normal contingencies in connection with the operation of the
Company's business and investments.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer its shares of beneficial interest or
other equity or debt securities in exchange for property and to repurchase or
otherwise reacquire its shares or any other securities and may engage in such
activities in the future. Similarly, the Company may offer additional
interests in the Operating Partnership that are exchangeable into Common
Shares or, at the Company's option, cash, in exchange for property. The
Company also may make loans to the Operating Partnership. The Company expects
to issue Common Shares to holders of interests in the Operating Partnership
upon exchange thereof, subject to certain restrictions and limitations. Any
election by the Company with respect to Common Units held by Prime or any
other officer or trustee of the Company will be made with the approval of the
independent trustees. Except in connection with the Formation Transactions,
the Company has not issued or caused to be issued Common Shares, interests in
the Operating Partnership or other securities. The Company has not made loans
to any entities or persons, including its officers and trustees. The Company
has not engaged in trading, underwriting or agency distribution or sale of
securities of other issuers and does not intend to do so. At all times, the
Company intends to make investments in such manner as to be consistent with
the requirements of the Code for the Company to qualify as a REIT unless,
because of changing circumstances or changes in the Code (or in the Treasury
Regulations), the Board of Trustees with the consent of the holders of the
majority of the votes entitled to be cast on such matter, determines that it
is no longer in the best interests of the Company to qualify as a REIT.
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MANAGEMENT
TRUSTEES, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning each of the
Company's trustees, executive officers and key employees serving in such
capacities upon completion of the Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael W. Reschke...... 41 Chairman of the Board, Trustee
Richard S. Curto........ 45 President and Chief Executive Officer, Trustee
W. Michael Karnes....... 51 Executive Vice President and Chief Financial Officer
Robert J. Rudnik........ 43 Executive Vice President, General Counsel and
Secretary
Jeffrey A. Patterson.... 38 Executive Vice President and Chief Investment Officer
Kevork M. Derderian..... 46 President--Office Division
Edward S. Hadesman...... 64 President--Industrial Division
John O. Wilson.......... 43 President--Prime Group Realty Services, Inc.
Donald H. Faloon........ 50 Executive Vice President--Development
Philip A. Hoffer........ 47 Senior Vice President--Real Estate Operations
Steven R. Baron......... 48 Senior Vice President--Marketing and Leasing/CBD
Office
Faye I. Oomen........... 48 Senior Vice President--Development and Leasing--
Suburban Office
Christopher "Kit" J. 31 Senior Vice President--Industrial Operations
Sultz..................
Tucker B. Magid......... 32 Senior Vice President--Industrial Development
S. Craig Nardi.......... 32 Senior Vice President--Industrial Marketing and
Leasing
Murray J. Alscher....... 41 Senior Vice President--Acquisitions
James F. Hoffman........ 35 Vice President--Associate General Counsel
Kathryn A. Deane........ 49 Vice President--Controller
Donald E. Anderson...... 55 Vice President--Industrial Property
Management/Redevelopment
Phillip E. Waters....... 38 Vice President--Marketing and Leasing
Rolanda H. Derderian.... 42 Vice President--Real Estate Tax Specialist
Patrick L. McGaughy..... 56 Vice President--Assistant Treasurer
James F. Runnion........ 53 Vice President--Asset Management
Scott D. McKibben....... 28 Vice President--Acquisitions
Stephen J. Nardi(1)..... 64 Trustee Designee
James R. Thompson(1).... 61 Independent Trustee Designee
Jacque M. Ducharme(1)... 48 Independent Trustee Designee
Christopher J. 35 Independent Trustee Designee
Nassetta(1)............
Thomas J. Saylak(1)(2).. 37 Independent Trustee Designee
</TABLE>
- --------
(1) Prior to or upon the effectiveness of the Registration Statement that
contains this Prospectus, the Company will nominate and elect this person
to serve as a trustee of the Company.
(2) This person has been designated by Blackstone to be elected as a trustee.
Michael W. Reschke. Michael W. Reschke serves as the Chairman of the Board
of Trustees of the Company. Mr. Reschke founded Prime in 1981 and, since that
time, has acted as Prime's Chairman and Chief Executive Officer. Mr. Reschke
is also Chairman of the Executive Committee of Prime and is Chairman of the
Board of Prime Retail, Inc. and Brookdale Living Communities, Inc. and a
member of the Board of Directors of Ambassador Apartments, Inc. For the last
17 years, Mr. Reschke has directed and managed the acquisition, development,
finance, construction, leasing, marketing, renovation and property management
activities of Prime. Mr. Reschke is licensed to practice law in the State of
Illinois and is a certified public accountant. Mr. Reschke is a member of the
Chairman's Roundtable and the Executive Committee of the National Realty
Committee and is a full member of the Urban Land Institute. Mr. Reschke also
serves on the Board of Visitors of the University of Illinois Law School.
Richard S. Curto. Richard S. Curto serves as President, Chief Executive
Officer and Trustee of the Company. Mr. Curto joined Prime in May 1994 and,
since that time, has served as Executive Vice President.
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Since joining Prime, Mr. Curto has been responsible for the capital markets
transactions and other project-related financings of Prime. From September
1981 to April 1994, Mr. Curto was employed by Kemper Financial Services, a $65
billion money management firm overseeing the activities of the lending and
equity investment group related to real property, most recently serving as
Senior Vice President. Mr. Curto held various positions with Northwestern
Mutual Life Insurance Co. in the Real Estate Department prior to 1981. Mr.
Curto is a member of the Urban Land Institute and the National Realty
Committee.
W. Michael Karnes. W. Michael Karnes serves as Executive Vice President and
Chief Financial Officer of the Company. From July 1997 to immediately prior to
the Offering, Mr. Karnes was employed by Prime as an Executive Vice President.
From April 1996 to June 1997, Mr. Karnes served as Senior Executive Vice
President, Finance and Chief Financial Officer of Capstar Hotel Company. From
1994 to April 1996, Mr. Karnes served as Senior Vice President and Chief
Financial Officer of Tucker Properties Corporation, a publicly-traded REIT.
From 1991 to 1994, Mr. Karnes served as Senior Vice President, Finance and
Administration for Banyan Management Corp., a company that provides management
services for five public REITs and three master limited partnerships. Prior to
that, from 1989 to 1991, Mr. Karnes served as Chief Operating Officer of
Miglin-Beitler, Inc., a private real estate development, management and
leasing firm.
Robert J. Rudnik. Robert J. Rudnik serves as Executive Vice President,
General Counsel and Secretary of the Company. Mr. Rudnik joined Prime in April
1984 and, since that time, has served as Executive Vice President, General
Counsel and Secretary of Prime, responsible for all legal, insurance and human
resource matters for Prime. Mr. Rudnik continues to serve in such capacity for
Prime and serves as General Counsel and Secretary for Brookdale Living
Communities, Inc.
Jeffrey A. Patterson. Jeffrey A. Patterson serves as Executive Vice
President and Chief Investment Officer of the Company. From 1989 to
immediately prior to the Offering, Mr. Patterson was Executive Vice President
of Prime, with primary responsibility for the acquisition, financing and
redevelopment of office and mixed-use properties. Mr. Patterson also was asset
manager for Prime's office properties and has provided real estate advisory
services for several major institutional investors related to office
buildings. Prior to joining Prime, Mr. Patterson served as Director of
Development in Tishman Speyer Properties' Chicago office and as a Senior
Financial Analyst at the Metropolitan Life Insurance Company's Real Estate
Investment Group. Mr. Patterson is an associate member of the Urban Land
Institute.
Kevork M. Derderian. Kevork M. Derderian serves as President--Office
Division of the Company. From 1989 to immediately prior to the Offering, Mr.
Derderian was employed by Continental Offices Ltd. ("Continental"), most
recently serving as its President and Chief Executive Officer. At Continental,
he oversaw all business operations, including office property management,
leasing and construction. Continental managed in excess of $650.0 million in
properties. Mr. Derderian is a member of the Urban Land Institute and BOMA
International and a member of the board of the U.S. Green Buildings Council.
Mr. Derderian is the husband of Ms. Rolanda Derderian, the Vice President--
Real Estate Tax Specialist of the Company.
Edward S. Hadesman. Edward S. Hadesman serves as President--Industrial
Division of the Company. In such capacity, Mr. Hadesman is responsible for the
acquisition, development, operation of the properties and the management
personnel of the Industrial Division. Prior to joining the Company, Mr.
Hadesman was the President and Chief Executive of Industrial Building and
Development Company ("IBD"), which he formed in 1965. IBD owned, operated,
leased and managed in excess of 1.1 million square feet and developed and
constructed over 1.6 million square feet, consisting primarily of high quality
warehouse, distribution, manufacturing and office buildings. Mr. Hadesman, as
founder and President of IBD, personally supervised all aspects of IBD's
business, including development, leasing, acquisition and management.
John O. Wilson. John O. Wilson serves as President--Prime Group Realty
Services, Inc. of the Company. From January 1995 to immediately prior to the
Offering, Mr. Wilson served as President of Prime's Corporate Real Estate
Services department. Over a 15-year period prior to joining Prime, Mr. Wilson
served as President and Chief Executive Officer of Realsource, Inc., a
regional real estate service firm, which he co-founded in 1981.
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Mr. Wilson's responsibilities included overseeing all aspects of property
marketing, corporate client services and the implementation of management
plans. Prior to 1981, Mr. Wilson was an officer in the Chicago office of
Cushman & Wakefield. He is a Charter Member of the Chicago Office Leasing
Brokers Association and The International Development and Research Council.
Donald H. Faloon. Donald H. Faloon serves as Executive Vice President--
Development of the Company. From January 1989 to immediately prior to the
Offering, Mr. Faloon was employed by Prime in its commercial development
activities. Previous responsibilities for Prime included overseeing Prime's
Diagonal Mar project in Barcelona, Spain and serving as Executive Project
Manager for the 77 West Wacker Drive Building. Prior to joining Prime, Mr.
Faloon had 17 years of experience in the management of real estate development
at Homart Development Co. and Urban Investment and Development Co.
Philip A. Hoffer. Philip A. Hoffer serves as Senior Vice President--Real
Estate Operations of the Company. From February 1996 to immediately prior to
the Offering, Mr. Hoffer was Vice President and Chief Operating Officer of
Continental, where he was responsible for all real estate operations including
asset management, construction and leasing for the owned and third party
portfolio. From 1989 to 1996, Mr. Hoffer served as Chief Operating Officer for
Insignia/Frain Camins & Swartchild, where he oversaw third party institutional
property management and leasing for 13 million square feet of office,
industrial and retail space located in Chicago and Los Angeles. He has over 15
years of experience in real estate development, management, construction and
brokerage in Chicago, California and New York. Past responsibilities also
include serving as project manager for the 676 North Michigan Avenue Building
in Chicago.
Steven R. Baron. Steven R. Baron serves as Senior Vice President--Marketing
and Leasing/CBD Office of the Company. From December 1996 to immediately prior
to the Offering, Mr. Baron was employed by Prime as Senior Vice President
responsible for commercial development and sales at a 2650-acre planned
development in Huntley, Illinois. From February 1996 to December 1996, he
served as Senior Vice President of Benjamin E. Sherman & Sons, a real estate
company, where he oversaw the management portfolio and leasing activity. From
February 1994 to December 1995, he was the Managing Director of PM Realty
Group's Midwest Division where he oversaw the leasing and management
portfolio. From 1988 to 1994, Mr. Baron was employed by Prime as Executive
Vice President responsible for the leasing and marketing of the 77 West Wacker
Drive Building. Mr. Baron is a licensed real estate broker and is an
instructor at Kellogg School of Management where he lectures on commercial
real estate development, leasing and marketing.
Faye I. Oomen. Faye I. Oomen serves as Senior Vice President--Development
and Leasing--Suburban Office of the Company. From 1978 to immediately prior to
the Offering, Ms. Oomen was employed by Continental, most recently serving as
Vice President of Leasing and Construction. She has over 23 years of
experience in real estate leasing, marketing and development. At Continental,
she negotiated more than 200 leasing transactions for more than 1.5 million
square feet of Continental's portfolio, including Continental Towers,
Continental Office Plaza, Regency Office Plaza and The Marquette Building. She
also was responsible for development and base building construction at One
Financial Place and Continental Towers. She has received numerous awards,
including being named the 1995 Sun-Times Suburban Property Representative of
the Year.
Christopher "Kit" J. Sultz. Christopher J. Sultz serves as Senior Vice
President--Industrial Operations of the Company. From June 1994 to immediately
prior to the Offering, Mr. Sultz was employed by Prime in its Industrial
Division as Vice President--Asset Management. Prior to joining Prime, Mr.
Sultz was employed by Coopers & Lybrand, LLP from August 1991 to June 1994 in
its real estate consulting practice. Mr. Sultz is a certified public
accountant.
Tucker B. Magid. Tucker B. Magid serves as Senior Vice President--Industrial
Development of the Company. In such capacity, he is responsible for overseeing
the development activities of the industrial division. From 1991 to
immediately prior to the Offering, Mr. Magid was Senior Vice President of IBD,
where he was responsible for the management, leasing and operations of the
approximately 1.2 million square foot industrial portfolio and development of
the Motorola Building and Libertyville Business Park. Mr. Magid is a member of
the Association of Industrial Real Estate Brokers ("AIREB").
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S. Craig Nardi. S. Craig Nardi serves as Senior Vice President--Industrial
Marketing and Leasing of the Company. From 1989 to immediately prior to the
Offering, Mr. Nardi served as Vice President of Operations of The Nardi Group
Ltd., a corporate real estate development firm, and as Executive Vice
President of Nardi Asset Management, the property management arm of The Nardi
Group Ltd. Prior to joining The Nardi Group Ltd. and Nardi Asset Management,
Mr. Nardi worked as a real estate broker in New York City. Mr. Nardi is a
member of the International Association of Corporate Real Estate Executives
("NACORE"), the National Association of Industrial and Office Parks ("NAIOP")
and the Elmhurst Economic Development Corporation ("EEDC"). Mr. Nardi is the
son of Stephen J. Nardi, the Vice Chairman of the Board and a Trustee of the
Company.
Murray J. Alscher. Murray J. Alscher serves as Senior Vice President--
Acquisitions for the Company. From April 1997 to immediately prior to the
Offering, Mr. Alscher acted as a consultant to Prime in its acquisition
efforts. From November 1996 to April 1997, Mr. Alscher was a self-employed
real estate consultant. From May 1983 through November 1996, Mr. Alscher was
employed (most recently as Senior Vice President) by Metropolitan Structures,
a private real estate investment, development and management company, where he
was responsible for investment, development and asset management matters.
James F. Hoffman. James F. Hoffman serves as Vice President--Associate
General Counsel of the Company. From January 1991 to immediately prior to the
Offering, Mr. Hoffman served as Assistant General Counsel of Prime. Prior to
his employment with Prime, Mr. Hoffman was an associate with the law firm of
Mayer, Brown & Platt from September 1987 to December 1990.
Kathryn A. Deane. Kathryn A. Deane serves as Vice President-Controller of
the Company. From March 1997 to immediately prior to the Offering, Ms. Deane
was Chief Financial Officer of Continental. From August 1995 to February 1997,
Ms. Deane was Vice President of Operational Accounting and Vice President of
Investor Relations for Equity Group Investments, Inc. and its affiliate EGI
Capital Markets, LLC. From January 1992 to August 1995, Ms. Deane was Director
of Finance and Administration for Lowe Construction and Management Co., Inc.
Ms. Deane is a certified public accountant and is a member of the Illinois CPA
Society and Chicago Building Owners and Managers Association ("BOMA").
Donald E. Anderson. Donald E. Anderson serves as Vice President--Industrial
Property Management/Redevelopment of the Company. From 1992 to immediately
prior to the Offering, Mr. Anderson was employed by Prime as the Manager of
the Property Management and Redevelopment section of its Industrial
Development Group. Mr. Anderson's primary responsibilities at Prime involved
the oversight and redevelopment of Prime's four industrial parks: the AHEC,
CEC, ECEC and HEC. From 1983 to 1992 Mr. Anderson was employed by JMB Realty
as Vice President of Construction and Acquisition Review.
Phillip E. Waters. Phillip E. Waters serves as the Vice President--Marketing
and Leasing for the Company. From January 1995 to immediately prior to the
Offering, Mr. Waters was employed by Prime as the Director of Marketing of its
Industrial Development Group. Mr. Waters' primary responsibilities at Prime
involved the development and implementation of a marketing program for
industrial properties, the repositioning of properties as multitenant
facilities and the formation of build-to-suit projects. From 1990 to 1995, Mr.
Waters worked for the M-B Sales Division of the Havi Group, creating private
partnerships for a multifamily redevelopment project. Mr. Waters is a licensed
real estate broker in Illinois and Indiana. He serves on the Board of
Directors of the Northwest Indiana Forum, a regional development group, and
the East Chicago Chamber of Commerce.
Rolanda H. Derderian. Rolanda H. Derderian serves as the Vice President--
Real Estate Tax Specialist of the Company. From 1976 to immediately prior to
the Offering, Ms. Derderian served as Vice President and Chief Information
Officer of Continental. Ms. Derderian's primary responsibilities at
Continental involved real estate tax defense strategies and computer system
design and implementation. Ms. Derderian serves as Co-Chairman of the Real
Estate Tax Committee of the Chicago Development Council. She is the wife of
Mr. Kevork Derderian, the President--Office Division of the Company.
Patrick L. McGaughy. Patrick L. McGaughy serves as Vice President--Assistant
Treasurer of the Company. From 1992 to immediately prior to the Offering, Mr.
McGaughy was employed by Prime as Controller
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of its commercial development and management division. From 1989 to 1992, Mr.
McGaughy served as Chief Financial Officer of Sudler Marling, Inc., and prior
thereto, as Vice President and Controller of Rubloff, Inc.
Mr. McGaughy is a certified public accountant.
James F. Runnion. James F. Runnion serves as Vice President--Asset
Management of the Company. From October 1991 to immediately prior to the
Offering, Mr. Runnion was employed by Prime as Vice President--Management with
primary responsibility for the 77 West Wacker Drive Building. Prior to joining
Prime, Mr. Runnion had 19 years of experience in the development, leasing and
management of commercial office properties. Mr. Runnion holds the Real
Property Administrator designation from BOMA.
Scott D. McKibben. Scott D. McKibben serves as Vice President--Acquisitions
of the Company. From 1994 to immediately prior to the Offering, Mr. McKibben
was employed by Continental, most recently serving as Development Analyst,
where his primary responsibilities included conducting financial analyses for
over $300 million in commercial and medical office and land development
projects and assisting in arranging the financing of several prospective land
development projects. From 1993 through 1994, Mr. McKibben was employed by
Marshall Erdman & Associates, where his primary responsibilities included
analyzing development opportunities. Mr. McKibben received his Juris Doctorate
degree from University of Wisconsin--Madison Law School in May 1994 and is a
licensed Illinois real estate broker.
Stephen J. Nardi. Stephen J. Nardi has agreed to serve as a Trustee of the
Company and will be appointed a Trustee and Vice Chairman of the Board prior
to or upon the effectiveness of the Registration Statement that contains this
Prospectus. For the past thirty-five years Mr. Nardi has served as President
and Chief Executive Officer of The Nardi Group Ltd., a corporate real estate
development firm which has designed, built and managed millions of square feet
of properties throughout the Chicago Metropolitan Area and other parts of the
country, and which has a portfolio of over 1.9 million square feet of
office/industrial property in the Chicago Metropolitan Area. Mr. Nardi is a
member of the Chicago Real Estate Board, the National Association of Realtors,
the Society of Industrial and Office Realtors ("SIOR"), NAIOP and the Urban
Land Institute. Mr. Nardi is the father of S. Craig Nardi, the Senior Vice
President--Industrial Marketing and Leasing of the Company.
Governor James R. Thompson. James R. Thompson has agreed to serve as a
Trustee of the Company and will be appointed a Trustee prior to or upon the
effectiveness of the Registration Statement that contains this Prospectus.
Governor Thompson is the Chairman of the law firm of Winston & Strawn and has
been a partner with the firm since 1991. Prior to joining Winston & Strawn,
Governor Thompson served as the Governor of Illinois from 1977-1991. Governor
Thompson serves on the board of directors of FMC Corporation, the Chicago
Board of Trade, Jefferson Smurfit Group (Dublin), International Advisory
Council of the Bank of Montreal, Pechiney International, Prime Retail, Inc.,
Union Pacific Resources Company, Hollinger International, Inc. and American
National Can Co. Governor Thompson received his Juris Doctorate degree from
the Northwestern University Law School.
Jacque M. Ducharme. Jacque M. Ducharme has agreed to serve as a Trustee of
the Company and will be appointed a Trustee prior to or upon the effectiveness
of the Registration Statement that contains this Prospectus. Since 1972, Mr.
Ducharme has been employed by Julien J. Studley, Inc., a real estate corporate
and tenant services firm, where he currently serves as Senior Executive Vice
President and is the Chicago and Midwest Regional Manager. His clients include
some of the largest companies in the Chicago Metropolitan Area, including
Quaker Oats, Arthur Andersen and First Chicago. Mr. Ducharme is a past
president of the Chicago Office Leasing Brokers Association.
Christopher J. Nassetta. Christopher J. Nassetta has agreed to serve as a
Trustee of the Company and will be appointed a Trustee prior to or upon the
effectiveness of the Registration Statement that contains this Prospectus.
From October 1995 to the present, Mr. Nassetta has acted as the Executive Vice
President and Chief Operating Officer of Host Marriott Corporation, where he
is responsible for acquisitions, real estate operations, asset management,
lodging partnerships and administration and serves on its Executive Committee.
From October 1991 through October 1995, Mr. Nassetta served as President of
Bailey Capital Corporation, a real estate
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investment and advisory firm that he co-founded, where he oversaw all
operations. Prior to founding Bailey Capital Corporation, Mr. Nassetta was
employed by The Oliver Carr Company, a commercial real estate company, for
seven years, where he served as Development Director, Vice President and
Regional Partner and ultimately Chief Development Officer, as well as serving
on its management committee. Mr. Nassetta serves on the McIntire School of
Commerce Advisory Board for the University of Virginia.
Thomas J. Saylak. Thomas J. Saylak has agreed to serve as a Trustee of the
Company and will be appointed a Trustee prior to or upon the effectiveness of
the Registration Statement that contains this Prospectus. Mr. Saylak is
presently a Senior Managing Director of The Blackstone Group and of Blackstone
Real Estate Advisors ("BREA"). Since joining BREA in 1993, Mr. Saylak's major
accomplishments include creating the Interstone Hotel acquisitions joint
venture, as well as leading the multi-billion dollar restructurings of two
large regional mall owners, Edward J. DeBartolo Corp. and Cadillac Fairview,
Inc. Prior to joining BREA, from 1987 to 1993, Mr. Saylak was a principal in
Trammell Crow Ventures, the investment advisory arm of Trammell Crow Company,
a real estate development and management firm, where he completed over $3.0
billion of real estate acquisitions and financings and led the firm's
Distressed Portfolio Initiative. Mr. Saylak currently serves as a director of
Interstate Hotel Corporation and Cadillac Fairview, Inc. Mr. Saylak also
serves on the Executive Committee of the National Realty Committee and is a
charter member of The Columbia Real Estate Forum.
COMMITTEES OF THE BOARD OF TRUSTEES
Audit Committee. Promptly following the closing of the Offering, the Board
of Trustees of the Company will establish an Audit Committee that will
initially consist of three Independent Trustees. The Audit Committee will be
established to make recommendations concerning the engagement of independent
public accountants, to review with the independent accountants the plans and
results of the audit engagement, to approve professional service provided by
the independent public accountants, to review the independence of the
independent public accountants, to consider the range of audit and non-audit
fees and to review the adequacy of the Company's internal accounting controls.
Executive Committee. Promptly following the closing of the Offering, the
Board of Trustees of the Company will establish an Executive Committee.
Subject to the Company's conflicts of interest policies, the Executive
Committee may be granted certain authority to acquire and dispose of real
property and the power to authorize, on behalf of the full Board of Trustees,
the execution of certain contracts and agreements, including those related to
the borrowing of money by the Company, and, consistent with the Partnership
Agreement, to cause the Operating Partnership to take such actions. The
Executive Committee will initially consist of Michael W. Reschke and Richard
S. Curto.
Executive Compensation Committee. Promptly following the closing of the
Offering, the Board of Trustees of the Company will establish an Executive
Compensation Committee to determine compensation for the Company's executive
officers and to implement and administer the Company's Share Incentive Plan.
The Executive Compensation Committee will initially consist of two or more
Independent Trustees.
COMPENSATION OF TRUSTEES
The Company intends to pay its trustees who are not employees of the Company
or affiliated with Prime or the Company a fee for their services as trustees.
They will receive annual compensation of $26,000 plus a fee of $1,000 for
attendance at each meeting of the Board of Trustees and $500 for attendance at
each committee meeting, and will receive reimbursement of all travel and
lodging expenses related to their attendance at both board and committee
meetings. Each non-employee trustee also will receive a grant of options to
purchase 5,000 Common Shares under the Company's Share Incentive Plan, which
will vest at the rate of 33.3% per year over the next three years commencing
on the first anniversary of their date of grant and will have a term of ten
years. See "--Share Incentive Plan." Further, the Company has entered a
consulting agreement with Mr. Nardi, pursuant to which he is to be granted
options for an aggregate of 75,000 Common Shares upon completion of the
Offering. Such options will vest at the rate of 33.3% per year over three
years commencing on the first
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anniversary of their date of grant and will have a term of ten years. See
"Certain Relationships and Related Transactions--Consulting Agreement with
Stephen J. Nardi."
EXECUTIVE COMPENSATION
The Company was organized in July 1997, did not conduct any prior operations
and, accordingly, did not pay any compensation to its executive officers for
the year ended December 31, 1996. The following table sets forth the annual
base salary for the year following completion of the Offering that the Company
intends to establish for the Chairman of the Board, the Chief Executive
Officer and the four other persons who are expected to be the most highly
compensated executive officers of the Company during that period. In addition
to base salaries, the Executive Compensation Committee may authorize the
payment of cash bonuses based upon performance.
<TABLE>
<CAPTION>
ANNUAL
NAME TITLE BASE SALARY
---- ----- -----------
<S> <C> <C>
Michael W. Reschke...... Chairman of the Board of Trustees $150,000
Richard S. Curto........ President and Chief Executive Officer $275,000
W. Michael Karnes....... Executive Vice President and Chief Financial Officer $200,000
Jeffrey A. Patterson.... Executive Vice President and Chief Investment Officer $200,000
Kevork M. Derderian..... President--Office Division $200,000
Edward S. Hadesman...... President--Industrial Division $200,000
</TABLE>
EMPLOYMENT AGREEMENTS
The Company will enter employment agreements with each of the executive
officers named in the table above. These agreements provide that the executive
officers shall devote substantially all of their business time to the
operation of the Company, except Mr. Reschke, who shall only be required to
devote such time as he deems necessary to fulfill his duties and obligations
to the Company as Chairman of the Board. The agreements establish the initial
base salaries set forth in the table above and provide for an initial term of
three years, which, in the case of Messrs. Reschke's, Curto's and Hadesman's
agreements only, are automatically extended for an additional year after
expiration of the initial term and any extension period unless either the
Company provides the applicable officer with at least six months prior written
notice or the applicable officer provides the Company with at least thirty
days prior written notice, that such term shall not be extended. The
agreements also contain (i) an agreement not to solicit, attempt to hire or
hire any employee or client of the Company or solicit or attempt to lease
space to or lease space to any tenant of the Company for two years following
termination of employment and (ii) with the exception of Mr. Derderian's
agreement, non-compete provisions restricting the executive officers from
developing, acquiring or operating office or industrial properties (within a
ten mile radius of any facility of the Company) for two years following
termination of employment if the employment is terminated either by the
Company for cause or by the executive officer voluntarily (with certain
limited exceptions in the case of Mr. Hadesman's agreement).
The agreements also set forth the potential bonuses to which the executive
officers are entitled. In the case of Messrs. Reschke, Curto, Karnes,
Patterson and Hadesman, they are each entitled to receive a discretionary
bonus based on achievement of such corporate and individual goals and
objectives as may be established by the Board of Trustees or its Compensation
Committee. In the case of Mr. Derderian, he is entitled to receive a bonus in
an amount of up to 100% of his base salary determined pursuant to the
following formula: (i) up to 75% of his base salary based upon the extent to
which actual Funds from Operations (as defined in his agreement) exceed the
projected budget for Funds from Operations and (ii) up to 25% of his base
salary based on achievement of such corporate and individual goals and
objectives as may be established by the Board of Trustees or its Compensation
Committee.
If any agreement is terminated by the Company (i) without cause (as defined
in the agreements), (ii) by the executive following the occurrence of a
"change of control" and a resulting "diminution event" (as defined in the
agreements) or (iii)(a) in the case of Mr. Reschke's agreement, by Mr. Reschke
if he is removed as a director
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of the Company or (b) in the case of Mr. Curto's agreement, by the Company the
event of Mr. Curto's disability (as defined in the agreement), the applicable
executive shall be entitled to a lump sum termination payment. With respect to
Messrs. Reschke and Curto, such payment will be (x) an amount equal to two
times their then current annual base salary, if the termination is by the
Company without cause or following Mr. Reschke's or Mr. Curto's disability or
(y) an amount equal to two times the applicable average base salary and bonus
for the two prior years, if the termination is by Mr. Reschke or Mr. Curto, as
the case may be, due to the occurrence of a change of control and diminution
event. With respect to each of Mr. Karnes and Mr. Patterson, such payment will
be an amount equal to the greater of 100.0% of his then current base salary
and 100.0% of his aggregate base salary for the remainder of the term of his
employment agreement, if the termination is either by the Company without
cause or by the executive due to the occurrence of a change of control and
resulting diminution event (or in the case of Mr. Karnes only, a relocation of
his office outside the Chicago metropolitan area). With respect to each of Mr.
Derderian and Mr. Hadesman, such payment will be (xx) an amount equal to the
product of (A) his then current base salary plus his last annualized bonus
multiplied by (B) a fraction, the numerator of which is the number of days
remaining in the term of his employment agreement at the time of termination
(but in no event less than 365 in the case of Mr. Derderian's agreement) and
the denominator of which is 365, if the termination is by the Company without
cause or (yy) an amount equal to the product of two times the sum of his then
current base salary plus his last annualized bonus, if the termination is by
the executive due to the occurrence of a change of control and resulting
diminution event. See "Certain Relationships and Related Transactions."
In addition, the employment agreement with Mr. Karnes provides for a grant
to Mr. Karnes of 10,000 Common Shares.
SHARE INCENTIVE PLAN
The Company has established a Share Incentive Plan (the "Share Incentive
Plan") for the purpose of attracting and retaining trustees, executive
officers and other key employees. The Share Incentive Plan is administered by
the Compensation Committee and permits the grant of stock options, stock
appreciation rights, restricted stock, restricted units and performance units
to officers and other key employees of the Company, its subsidiaries, the
Operating Partnership, the Services Company and Company-owned partnerships.
The Share Incentive Plan also permits the grant of stock options to
nonemployee Trustees. Although the Share Incentive Plan permits the
Compensation Committee to grant a wide variety of awards, it does not obligate
the Compensation Committee to do so. The variety of awards authorized under
the Share Incentive Plan is intended to give the Compensation Committee
flexibility to adapt the Company's compensation structure to changes in the
business and regulatory environment.
Under the Share Incentive Plan, up to 1.85 million Common Shares may be
issued or transferred to Participants. The maximum aggregate number of Common
Shares and Share equivalent units that may be subject to awards granted during
any calendar year to any one participant under the Share Incentive Plan,
regardless of the type of awards, will be 200,000. This limit will apply
regardless of whether such compensation is paid in Common Shares or in cash.
If any award is canceled, terminates, expires or lapses for any reason, any
Common Shares subject to such award will again be available for grant under
the Share Incentive Plan, except that such Common Shares will still be counted
for purposes of the annual individual award limit described above. In the
event of any change in capitalization of the Company, such as a share split,
or a corporate transaction, such as a merger or consolidation or any
reorganization, or any partial or complete liquidation of the Company, an
adjustment may be made in the number and class of Common Shares that may be
delivered under the Share Incentive Plan, in the number and class of and/or
price of Common Shares subject to outstanding awards, and in the annual
individual award limit set forth above, as may be determined to be appropriate
and equitable by the Compensation Committee to prevent dilution or enlargement
of rights.
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The Compensation Committee currently anticipates granting options under the
Share Incentive Plan to purchase Common Shares. The Compensation Committee may
grant "incentive stock options" (within the meaning of Section 422 of the
Code) and/or nonqualified stock options to employees of the Company and its
corporate subsidiaries. Other employees, including employees of the Operating
Partnership and the Services Company, and nonemployee directors may only
receive nonqualified stock options. The exercise price of any option will be
at least equal to 100% of the fair market value of a Common Share on the date
the option is granted. Each option will expire no later than the tenth
anniversary of the date of grant.
Upon completion of the Offering, the Compensation Committee will grant
options to purchase Common Shares (the "Initial Grants") to the following key
officers and employees of the Company: Michael W. Reschke (175,000); Richard
S. Curto (175,000); W. Michael Karnes (70,000); Robert J. Rudnik (85,000);
Jeffrey A. Patterson (85,000); Kevork M. Derderian (70,000); Edward S.
Hadesman (70,000); John O. Wilson (30,000); Donald H. Faloon (40,000); Philip
A. Hoffer (30,000); Steven R. Baron (30,000); Faye I. Oomen (30,000); Tucker
B. Magid (22,500); Christopher J. Sultz (22,500); S. Craig Nardi (20,000);
James F. Hoffman (18,000); Kathryn A. Deane (7,500); Donald E. Anderson
(15,000); Philip E. Waters (15,000); Rolanda H. Derderian (12,500); Patrick L.
McGaughy (10,000); James F. Runnion (15,000); Murray J. Alscher (10,000);
Scott D. McKibben (5,000); and certain other employees (50,000).
The Initial Grants will vest, subject to certain conditions being met, at a
rate of 33.3% per year over three years commencing on the first anniversary of
their date of grant and will have a term of ten years. The exercise price of
the options issued pursuant to the Initial Grants will be the initial public
offering price of the Common Shares. The exercise price for any option is
generally payable in cash or, in certain circumstances, by the surrender, at
the fair market value on the date on which the option is exercised, of Common
Shares.
All unvested options held by an optionee will automatically be forfeited if
the optionee leaves employment for any reason other than the optionee's death
or disability on or after the first anniversary of their date of grant. Upon a
"change in control" (as defined in the Share Incentive Plan), all unvested
options will vest. The rights of any participants to exercise a option may not
be transferred in any way other than by will or applicable laws of descent and
distribution.
The Compensation Committee also anticipates that it will grant options for
an aggregate of 5,000 Common Shares to each of its independent trustees, and
75,000 Common Shares to Mr. Nardi pursuant to his consulting agreement, that
will vest at the rate of 33.3% per year over three years commencing on the
first anniversary of their date of grant and will have a term of ten years.
The exercise price of these options will be the initial public offering price
of the Common Shares. The exercise price for any of these options will
generally be payable in cash or, in certain circumstances, by the surrender,
at the fair market value on the date on which the option is exercised, of
Common Shares.
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The following table contains information concerning the grant of options to
occur on the completion of the Offering under the Company's Share Incentive
Plan. The table also lists potential realizable values of such options on the
basis of assumed annual compounded share appreciation rates of 5.0% and 10.0%
over the life of the options.
SHARE OPTION GRANTS IN CONNECTION WITH THE FORMATION TRANSACTIONS
<TABLE>
<CAPTION>
POTENTIAL
NUMBER OF REALIZABLE VALUE AT
SECURITIES ASSUMED
UNDERLYING ANNUAL RATES OF
OPTIONS EXERCISE OR SHARE PRICE
GRANTED BASE PRICE EXPIRATION APPRECIATION
(#)(1) PER SHARE(2) DATE(3) FOR OPTION TERM(4)
---------- ------------ ---------- -------------------
(IN THOUSANDS)
5% 10%
--------- ---------
<S> <C> <C> <C> <C> <C>
Michael W. Reschke....... 175,000 $20.00 $ 2,202 $ 5,577
Richard S. Curto......... 175,000 20.00 2,202 5,577
W. Michael Karnes........ 70,000 20.00 881 2,231
Jeffrey A. Patterson..... 85,000 20.00 1,069 2,709
Kevork M. Derderian...... 70,000 20.00 881 2,231
Edward S. Hadesman....... 70,000 20.00 881 2,231
</TABLE>
- --------
(1) The options granted will vest in three equal installments on the first,
second and third anniversaries of the date of the grant.
(2) The option price will be equal to the initial public offering price of the
Common Shares.
(3) The expiration date of the options will be ten years after the date of the
grant.
(4) The potential realizable value is reported net of the option price, but
before the income taxes associated with exercise. These amounts represent
assumed annual compounded rates of appreciation at 5.0% and 10.0% only from
the date of grant to the expiration date of the option.
INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Declaration of Trust contains a provision permitted under Maryland law
eliminating (with limited exceptions) each trustee's personal liability for
monetary damages for breach of any duty as a trustee. In addition, the
Declaration of Trust and Bylaws authorize the Company to indemnify its present
and former trustees and officers and to pay or reimburse expenses for such
individuals in advance of the final disposition of a proceeding to the maximum
extent permitted from time to time under Maryland law. Maryland law provides
that indemnification of a person who is a party, or threatened to be made a
party, to legal proceedings by reason of the fact that such a person is or was
a trustee, officer, employee or agent of a corporation, or is or was serving as
a trustee, officer, employee or agent of a corporation or other firm at the
request of a corporation, against expenses, judgments, fines and amounts paid
in settlement, is mandatory in certain circumstances and permissive in others,
subject to authorization by the Board of Trustees.
The Company intends to enter into indemnification agreements with each of the
Company's trustees and certain of its executive officers. The indemnification
agreements will require, among other things, that the Company indemnify such
trustees and officers to the fullest extent permitted by law, and advance to
the trustees and officers all related expenses, subject to reimbursement if it
is subsequently determined that indemnification is not permitted. The Company
also must indemnify and advance all expenses incurred by trustees and officers
seeking to enforce their rights under the indemnification agreements and cover
trustees and officers under the Company's trustees' and officers' liability
insurance. Although the form of indemnification agreement offers substantially
the same scope of coverage afforded by provisions in the Declaration of Trust
and Bylaws, it provides greater assurance to trustees and officers that
indemnification will be available, because as a contract, it cannot be
unilaterally modified by the Board of Trustees or by the shareholders to
eliminate the rights it provides.
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Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers or persons controlling the
registrant pursuant to the foregoing provisions, 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 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 trustee, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, 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 and will be governed by the final adjudication of such
issue.
STRUCTURE AND FORMATION OF THE COMPANY
The Company was formed on July 21, 1997. The Operating Partnership and the
Services Company were formed in March 1997.
FORMATION TRANSACTIONS
Prior to or simultaneous with the completion of the Offering, the Company,
the Operating Partnership, the Services Company, the NAC General Partner and
the Limited Partners will engage in the Formation Transactions designed to
enable the Company to continue and expand the office and industrial real
estate operations of Prime, consolidate the ownership interests in the
Properties and the office and industrial development, leasing and property
management business of Prime, facilitate the Offering, enable the Company to
qualify as a REIT for federal income tax purposes commencing with its taxable
year ending December 31, 1997, and preserve certain tax advantages for the
existing owners of the Properties.
The Company, the Operating Partnership, the Services Company and the
Property Partnerships will engage in the following series of transactions with
Prime and certain other parties:
. The Company will contribute the $269.9 million of the estimated net
proceeds from the Offering (after the deduction of underwriting discounts
and commissions but before payment of costs and expenses incurred in
connection with the Formation Transactions and the Offering) to the
Operating Partnership in exchange for 12,380,000 GP Common Units and
2,000,000 Preferred Units. The Company will be the managing general
partner of the Operating Partnership. See "Partnership Agreement--
Distributions" and "Description of Shares of Beneficial Interest--
Convertible Preferred Shares" and "--Common Shares."
. Prime will contribute to the Operating Partnership (i) its ownership
interests in the Property Partnerships that own the Prime Properties and
Prime Contribution Properties, (ii) its rights to purchase the
subordinate mortgage encumbering the Property Partnership that owns the
77 West Wacker Drive Building from certain third-party lenders and its
rights to acquire certain third parties' ownership interests in the
Property Partnerships that own the Prime Properties and (iii)
substantially all of its assets and liabilities relating to its office
and industrial development, leasing and management business. The
foregoing assets had an aggregate deficit book value of approximately
$140.3 million (as determined at June 30, 1997 in accordance with GAAP).
In exchange, Prime will receive 3,465,000 Common Units, representing a
15.5% limited partnership interest in the Operating Partnership (with an
aggregate value of $69.3 million). As described below, Prime will
contribute 3,375,000 of such Common Units to the Primestone Joint
Venture, resulting in the direct ownership by Prime of a 0.5% limited
partnership interest in the Operating Partnership. The Operating
Partnership will pay approximately $1.9 million in transfer taxes related
to Prime's contribution of the assets described herein and will pay on
behalf of Prime, or reimburse Prime for, approximately $5.2 million of
expenses incurred by it in connection with the Formation Transactions and
the Offering. In addition, Mr. Patterson is contributing his interest in
the assets of the office and industrial division of Prime. In exchange,
Mr. Patterson will receive 110,000 Common Units, representing
approximately a 0.5% limited partnership interest in the Operating
Partnership.
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. The NAC Contributors will contribute the NAC Properties to the Operating
Partnership. In exchange, the NAC Contributors will receive 927,100 GP
Common Units, representing a 4.1% general partnership interest in the
Operating Partnership (with an aggregate value of $18.5 million). In
addition, the Operating Partnership will pay the NAC Contributors
approximately $23.5 million in cash and will pay approximately $0.4
million in transfer taxes related to transfer of the NAC Properties.
. The IBD Contributors will contribute to the Operating Partnership their
ownership interests in the IBD Properties in exchange for 919,450 Common
Units representing a 4.1% limited partnership interest in the Operating
Partnership and having an aggregate value of $18.4 million. In addition,
the Operating Partnership will pay the IBD Contributors approximately
$5.2 million in cash, will assume approximately $6.4 million in debt and
will pay approximately $0.2 million in transfer taxes related to the
transfer of the IBD Properties.
. Prime, BRE/Primestone Investment L.L.C., a Delaware limited liability
company, and BRE/Primestone Management Investment L.L.C., a Delaware
limited liability company (each of which is an affiliate of Blackstone),
will form the Primestone Joint Venture to invest in LP Common Units. To
capitalize the Primestone Joint Venture, Prime will contribute to the
Primestone Joint Venture 3,375,000 of the Common Units it receives in
exchange for its contributions to the Operating Partnership. Blackstone
will contribute $45.0 million in cash to the Primestone Joint Venture. In
exchange for such capital contributions, Prime will receive a 60.0%
interest and Blackstone will receive a 40.0% interest. The Primestone
Joint Venture will also borrow $40.0 million and use the proceeds of such
loan and the cash contributed by Blackstone to purchase 4,569,893 LP
Common Units from the Operating Partnership, at a price per Common Unit
equal to the per share initial public offering price of the Common
Shares, net of an amount equal to the underwriting discount applicable to
the Common Shares offered hereby, simultaneously with the other Formation
Transactions. As a result, the Primestone Joint Venture will own, in the
aggregate, 7,944,893 Common Units, representing a 35.5% limited
partnership interest in the Operating Partnership. In connection with the
purchase of the LP Common Units, Blackstone has designated Mr. Saylak to
be elected as one of the Company's trustees. The consummation of the
Primestone Joint Venture is subject to various conditions precedent.
There can be no assurance that such conditions precedent will be met. See
"Certain Relationships and Related Transactions--The Primestone Joint
Venture".
. The Operating Partnership is expected to borrow $83.5 million under the
New Mortgage Notes that are secured by certain of the Contribution
Properties. The Company currently has no commitment for such financing,
and there can be no assurance that such financing will be available to
the Company on favorable terms, if at all.
. The Operating Partnership will repay third-party lenders approximately
$350.8 million (including prepayment fees) of obligations of the Property
Partnerships or indebtedness encumbering the Properties.
. The Operating Partnership will utilize the Credit Facility to replace the
outstanding letters of credit which secure the payment of principal and
interest on the $74.5 million of certain Tax-Exempt Bonds. Upon the
replacement of the outstanding letters of credit, Prime will receive the
return of approximately $15.0 million of cash and $7.2 million of certain
securities previously pledged by Prime as additional collateral to secure
certain of its guarantee obligations in connection with the existing
letters of credit.
. The Operating Partnership will pay approximately $41.4 million to acquire
the Acquisition Properties and approximately $5.9 million to acquire the
Continental Management Business from third parties. The purchase price
for the Acquisition Properties and the Continental Management Business
were in each case negotiated in arm's-length transactions with third
parties based on a multiple of the net operating income of each of the
Acquisition Properties and the Continental Management Business,
respectively.
. The Operating Partnership will pay approximately $1.7 million in cash to
third parties for the balance of the ownership interests and subordinate
debt interests relating to certain of the Prime Properties.
. The Operating Partnership will pay approximately $1.7 million in fees to
obtain the Credit Facility and the New Mortgage Notes.
. The Operating Partnership will contribute the Continental Management
Business, the health club facility located in the 77 West Wacker Drive
Building and the office and industrial development, leasing and
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property management business of Prime to the Services Company in exchange
for (i) 100% of the Preferred Stock of the Services Company and (ii) the
Note. Messrs. Reschke and Curto will contribute an aggregate of $50,000
for 100% of the Services Company's voting common stock. The Operating
Partnership is expected to receive approximately 95.0% of the economic
benefits of the operations of the Services Company by virtue of payments
on the Note and distributions in respect of its ownership of the Preferred
Stock.
As a result of the foregoing transactions, the Company will own 12,380,000
Common Units, representing approximately a 55.3% general partner interest in
the Operating Partnership and will own 2.0 million Preferred Units. The NAC
General Partner will own 927,100 Common Units, representing a 4.1% general
partnership interest in the Operating Partnership, the Primestone Joint
Venture will own 7,944,893 Common Units representing a 35.5% limited partner
interest in the Operating Partnership, the IBD Contributors will own 919,450
Common Units, representing an approximate 4.1% limited partnership interest in
the Operating Partnership, Mr. Patterson will own 110,000 Common Units,
representing an approximate 0.5% limited partnership interest in the Operating
Partnership and Prime will own 90,000 Common Units, representing an
approximate 0.5% limited partnership interest in the Operating Partnership.
The Company will be the managing general partner and retain management control
over the Operating Partnership.
Pursuant to the Partnership Agreement and subject to certain conditions,
each Common Unit held by a Limited Partner may be exchanged for one Common
Share or, at the option of the Company, cash equal to the fair market value of
a Common Share at the time of exchange. However, neither Prime nor the
Contributors may exchange any Common Units for Common Shares if actual or
constructive ownership of such Common Shares would violate the Ownership Limit
with respect to the Common Shares. See "Description of Shares of Beneficial
Interest--Restrictions on Ownership and Transfer."
The Limited Partners have agreed not to exchange their Common Units for
Common Shares if, upon such exchange, the Operating Partnership will cease to
qualify as a partnership for federal income tax purposes or the Company will
not continue to qualify as a REIT.
REASONS FOR THE ORGANIZATION OF THE COMPANY
The Company believes that the benefits of the Formation Transactions
outweigh the detriments to the Company. The benefits of the Company's REIT
status and structure include the following:
. Access to Capital. The Company's structure will, in the Company's
judgment, provide it with greater access to capital for refinancing and
growth. Sources of capital include the Common Shares sold in the Offering
and possible future issuances of debt or equity through public offerings
or private placements. The financial strength of the Company should
enable it to obtain financing at better rates and on better terms than
would otherwise be available to the Property Partnerships, some of which
are single asset entities.
. Growth of the Company. The Company's structure will allow shareholders,
and the Limited Partners through their ownership of Common Units, an
opportunity to participate in the growth of the real estate market
through an ongoing business enterprise. In addition to the existing
portfolio of Properties, the Company gives shareholders and the Limited
Partners an interest in all future development by the Company and in the
office and industrial development, leasing and property management
business being contributed by the Company to the Services Company.
. Liquidity. The equity interests in the Property Partnerships are
typically not marketable. The Company's structure allows shareholders,
and the Limited Partners, the opportunity to liquidate their capital
investment through the disposition of Common Shares or Common Units.
Pursuant to the Partnership Agreement and subject to certain conditions,
each LP Common Unit held by the Limited Partners may be exchanged for one
Common Share (subject to adjustment) or, at the option of the Company,
cash equal to the fair market value of a Common Share at the time of
exchange. However, the Limited Partners have agreed not to exchange any
LP Common Units for Common Shares if actual or constructive ownership
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of such Common Shares would violate the Ownership Limit with respect to
the Common Shares. See "Description of Shares of Beneficial Interest--
Restrictions on Ownership and Transfer." Further, the Limited Partners
have agreed not to, among other things, sell or exchange any Common Units,
without the consent of Prudential Securities Incorporated, on behalf of
the Underwriters, for their respective Holding Periods.
. Tax Deferral. The Formation Transactions provide to the Limited Partners
and the NAC General Partner the opportunity to defer the tax consequences
that would arise from a sale or contribution of their interests in the
Properties and other assets to the Company or to a third party.
COMPARISON OF COMMON SHARES AND COMMON UNITS
Conducting the Company's operations through the Operating Partnership allows
the Limited Partners and the NAC General Partner to defer certain tax
consequences by contributing their interests in Properties to the Operating
Partnership and also offers favorable methods of accessing capital markets and
acquiring additional properties. Common Units in the Operating Partnership
will be held by the Limited Partners, the NAC General Partner and the Company.
Each Common Unit was designed to result in a distribution per Common Unit
equal to a distribution per Common Share (assuming the Company distributes to
its shareholders all amounts it receives as distributions from the Operating
Partnership). Distributions in respect of the Common Shares and Common Units
are not permitted unless all current and any accumulated distributions in
respect of the Convertible Preferred Shares and Preferred Units, respectively,
have been paid in full. Pursuant to the Partnership Agreement and subject to
certain conditions, each Common Unit held by the Limited Partners may be
exchanged for one Common Share (subject to adjustment) or, at the option of
the Company, cash equal to the fair market value of a Common Share at the time
of exchange. However, the Limited Partners may not exchange any Common Units
for Common Shares if actual or constructive ownership of such Common Shares
would violate the Ownership Limit with respect to the Common Shares. See
"Description of Shares of Beneficial Interest--Restrictions on Ownership and
Transfer." The Limited Partners have agreed not to, among other things, sell
or exchange any Common Units, without the consent of Prudential Securities
Incorporated, on behalf of the Underwriters, for the applicable Holding
Periods.
There are, however, certain differences between the ownership of Common
Shares and Common Units, including:
. Voting Rights. Holders of Common Shares will elect the Board of Trustees
of the Company, which, as the general partner of the Operating
Partnership, controls the business of the Operating Partnership. Holders
of Common Units may not elect trustees of the Company.
. Transferability. The Common Shares sold in the Offering will be freely
transferable under the Securities Act by holders who are not affiliates
of the Company or the Underwriters. The Common Units and the Common
Shares for which they are exchangeable are subject to transfer
restrictions under applicable securities laws and under the Partnership
Agreement, including the required consent of the general partners to the
admission of any new limited partner. See "Shares Eligible for Future
Sale" for a description of the Registration Rights Agreement applicable
to holders of Common Units.
. Distributions. Because the relative tax bases of the contributions by the
public investors and the Limited Partners are expected to be different,
it is possible that the public investors' distribution will include a
return of capital that exceeds that of the Limited Partners. See "Certain
Federal Income Tax Considerations."
ADVANTAGES AND DISADVANTAGES OF THE FORMATION TRANSACTIONS TO UNAFFILIATED
SHAREHOLDERS
The potential advantages of the Formation Transactions to unaffiliated
shareholders of the Company include their ability to participate, through
ownership of the Company, in the cash flow of the Properties and all future
office and industrial property acquisitions and developments by the Company.
The potential disadvantages of such transactions to unaffiliated shareholders
of the Company may be several, including the impact of shares available for
future sale, substantial and immediate dilution in the tangible book value per
share and the lack of arm's-length negotiations to determine the terms of the
transfers of certain of the Properties to the Company and the Operating
Partnership. See "Risk Factors."
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BENEFITS OF THE FORMATION TRANSACTIONS AND THE OFFERING
Prime and certain of its affiliates will receive certain material benefits
in connection with the Formation Transactions and the Offering, including the
following:
Benefits to Prime
. Assuming that each Common Unit held by Prime has a value equal to that of
a Common Share and that the initial public offering price of the Common
Shares offered hereby is $20.00, representing the midpoint of the price
range, and all of the 3,465,000 Common Units issued in the Formation
Transactions are exchanged for Common Shares, Prime will receive 15.5% of
the Common Shares (or 14.3% if the Underwriters' over-allotment option is
exercised in full).
. Prime will receive the return of approximately $15.0 million of cash and
$7.2 million of securities previously pledged as additional collateral by
Prime to secure its limited recourse guarantee obligations to the issuers
of the letters of credit which secure the payment of principal and
interest of the Tax-Exempt Bonds. Such collateral will be returned to
Prime upon the completion of the Offering and the replacement of such
letters of credit by the Operating Partnership.
. Prime will realize an immediate increase in the net tangible book value
of its investment in the Company of $55.24 per Common Unit upon the
completion of the Offering. The assets to be transferred by Prime in the
Formation Transactions had an aggregate deficit book value of
approximately $140.3 million (as determined at June 30, 1997 in
accordance with GAAP).
. Prime will no longer be liable as a general partner of the Property
Partnerships that own certain of the Properties. In addition, Prime will
be released from various limited recourse guaranties and obligations to
indemnify the lenders in connection with the Tax-Exempt Bonds encumbering
certain of the Properties and $60.0 million of other debt.
. The Operating Partnership will pay on behalf of Prime, or reimburse Prime
for, approximately $5.2 million of expenses incurred by or on behalf of
Prime in connection with the Formation Transactions and the Offering.
. Prime will defer certain tax consequences to it from certain of the
Formation Transactions through the contribution to the Operating
Partnership of its interests in the Properties and the business related
thereto for Common Units.
. Prime will obtain improved liquidity of its investment in its office and
industrial real estate business as a result of the Formation Transactions
through the ownership of Common Units, which are exchangeable for Common
Shares or cash, at the option of the Company.
Benefits to IBD Contributors
. The IBD Contributors will receive $5.2 million in cash.
. The IBD Contributors will have improved liquidity of their interests in
the Properties and increased diversification of their investment.
. Indebtedness on the IBD Properties in the aggregate net amount of
approximately $33.9 million will be repaid.
. The IBD Contributors will defer certain tax consequences of taxable
disposition or refinancings of assets through the creation of the
Operating Partnership and the contribution of their interests in the
Properties to the Operating Partnership in exchange for Common Units
having an aggregate value of $18.4 million (assuming a value of the
Common Units equal to the initial public offering price of the Common
Shares).
. The IBD Contributors will enter a tax indemnification agreement with the
Company providing, in certain circumstances, the reimbursement by the
Company of taxes payable by the IBD Contributors resulting from the sale
or refinancing of the IBD Properties.
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Benefits to the NAC Contributors and the NAC General Partner
. The NAC Contributors will receive $23.5 million in cash.
. Stephen J. Nardi, an affiliate of the NAC General Partner, will enter a
two-year consulting agreement with the Company and will be nominated and
elected a trustee of the Company.
. Indebtedness on the NAC Properties in the aggregate net amount of
approximately $56.0 million will be repaid.
. The NAC General Partner will defer certain tax consequences of taxable
disposition or refinancings of assets through the creation of the
Operating Partnership and the contribution of their interests in the
Properties to the Operating Partnership in exchange for Common Units
having an aggregate value of $18.5 million (assuming a value of the
Common Units equal to the initial public offering price of the Common
Shares).
. The NAC General Partner will enter a tax indemnification agreement with
the Company providing for, in certain circumstances, the reimbursement by
the Company of taxes payable by the NAC General Partner resulting from
the sale or refinancing of the NAC Properties.
. The NAC General Partner will enter the Put Option Agreement providing the
NAC General Partner the ability to require the Company to repurchase its
interests in the Operating Partnership for cash.
DETERMINATION AND VALUATION OF OWNERSHIP INTERESTS
Determination and Valuation of Ownership Interests. The Company's percentage
interest in the Operating Partnership was determined based upon the percentage
of estimated cash available for distribution required to pay estimated cash
distributions to shareholders, resulting in an annual distribution rate equal
to 6.75% of an assumed initial public offering price of the Common Shares of
$20.00 per share, representing the midpoint of the price range. The
Contributors will receive cash of $28.7 million and 1,846,550 Common Units
based on the negotiated value of the Contribution Properties, and the
remaining interest in the Operating Partnership having a value of
approximately $71.5 million (before giving effect to the Primestone Joint
Venture transactions) will be allocated to Prime and Mr. Patterson in
connection with the Formation Transactions. The parameters and assumptions
used in deriving the estimated cash available for distribution are described
under the caption "Distribution Policy."
In connection with the Offering, the Company did not obtain appraisals with
respect to the market value of any of the Properties or other assets that the
Company will own immediately after completion of the Offering and the
Formation Transactions or an opinion as to the fairness of the allocation of
Common Units among the Company and the Limited Partners. The initial public
offering price will be determined based on the estimated cash available for
distribution and the factors discussed under the caption "Underwriting,"
rather than a property by property valuation based on historical cost or
current market value. This methodology has been used because the Underwriters
and management believe it is appropriate to value the Company as an ongoing
business rather than with a view to values that could be obtained from a
liquidation of the Company or of the individual Properties. In this regard,
the Company believes that most analysts, purchasers of shares of REIT capital
stock and lenders to real estate companies value real estate companies
primarily based on the cash flow generated by their assets. See
"Underwriting."
ACQUISITION OF THE PROPERTIES AND THE BUSINESS FROM PRIME
The Operating Partnership will acquire Prime's interests in the Properties
and the office and industrial development, leasing and property management
business of Prime pursuant to an agreement relating to the Formation
Transactions with Prime (the "Formation Agreement"). The obligations of Prime
to transfer under their agreement is or will be conditioned upon the
completion of the Offering, the closing under the other agreements and normal
and customary conditions to the closing of real estate transactions. The
Formation Agreement also contains representations and warranties to the
Operating Partnership concerning the operation of the Prime Properties and
environmental matters and certain other covenants, representations and
warranties
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customarily found in real estate purchase agreements. Claims for
indemnification for any breach under the Formation Agreement could be made by
the Company for two years from the completion of the Offering. In the event
that any of such representations or warranties is breached, the Company's
recovery will be limited to the value of the Common Units received by Prime in
the Formation Transactions. See "Risk Factors--Conflicts of Interest; Benefits
to Prime."
FORMATION OF THE SERVICES COMPANY
The Services Company was formed in March 1997 under the laws of the state of
Maryland to succeed to the office and industrial property management, leasing
and corporate advisory services business of Prime. Following the consummation
of the Formation Transactions, Messrs. Reschke and Curto together will own
100% of the voting common stock of the Services Company, for which they will
contribute an aggregate of $50,000. The Operating Partnership will own 100.0%
of the Preferred Stock of the Services Company and the Note to be issued by
the Services Company in an initial principal amount of approximately $4.2
million. The Preferred Stock of the Services Company will have a dividend rate
of 8.5%, will pay dividends on a cumulative and participating basis, and will
not be redeemable by the Services Company or convertible into other securities
of the Services Company. The ownership structure of the Services Company is
necessary to permit the Company to share in the Service Company's income and
also maintain its status as a REIT for federal income tax purposes. Although
the Company anticipates that it will receive substantially all of the economic
benefit of the business carried on by the Services Company (by virtue of the
Company's right to receive (i) dividends through the Operating Partnership's
investment in the Preferred Stock and (ii) interest payments on the Note held
by the Operating Partnership), the Company will not be able to elect the
Services Company's officers or directors and, consequently, will not have the
ability to control the operations of the Services Company. The Operating
Partnership and the Services Company will enter the Management Contracts in
connection with the Formation Transactions pursuant to which the Services
Company will render development, leasing and property management services for
third parties. See "Risk Factors--Managed Property Business and Non-REIT
Services--Lack of Control Over the Services Company," "The Company" and
"Certain Relationships and Related Transactions."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In addition to the Formation Transactions which are described in the section
entitled "Structure and Formation of the Company," the following transactions
have occurred or will occur simultaneously with the completion of the
Offering.
FORMATION AGREEMENT
Concurrently with the completion of the Offering and pursuant to the
Formation Agreement, Prime will contribute to the Operating Partnership,
subject to certain liabilities, (i) all of its ownership interests in the
Prime Properties and the Prime Contribution Properties, (ii) its rights to
purchase the subordinate mortgage encumbering the Property Partnership that
owns the 77 West Wacker Drive Building from certain third-party lenders and
its rights to acquire certain third parties' ownership interests in the
Property Partnerships that own the Prime Properties and (iii) substantially
all of the assets and liabilities relating to its office and industrial
development, leasing and management business in exchange for an aggregate of
3,465,000 Common Units, representing a 15.5% limited partnership interest in
the Operating Partnership (with an aggregate value of approximately $69.3
million). The obligations of Prime to transfer the Prime Properties and other
interests will be conditioned upon the completion of the Offering, the closing
under the other agreements and normal and customary conditions to the closing
of real estate transactions, including the consents of various lenders. Prime
has agreed to pay the transfer taxes relating to the transfer to the Company
of the Prime Properties and Prime Contribution Properties to the extent such
taxes exceed $2.5 million. The Formation Agreement also contains
representations and warranties to the Operating Partnership concerning the
operation of the Prime Properties and environmental matters and certain other
covenants, representations and warranties customarily found in real estate
purchase agreements. Claims for indemnification for any breach by Prime under
the Formation Agreement could be made by the Company for two years from the
completion of the Offering. In the event of any such breach by Prime, the
Company's recovery will be limited to the value of the Common Units received
by Prime in the Formation Transactions. See "Risk Factors--Conflicts of
Interest; Benefits to Prime."
PARTNERSHIP AGREEMENT
The Company, the NAC General Partner and the Limited Partners have entered
into the Partnership Agreement which sets forth the terms of such partnership
and establishes the Company as the managing general partner of the Operating
Partnership with primary responsibility and discretion in the management and
control of the Operating Partnership. For a summary description of the
Partnership Agreement, see "Partnership Agreement."
EXCHANGE RIGHTS AND REGISTRATION RIGHTS
For a description of certain exchange and registration rights held by the
Limited Partners, see "Shares Eligible for Future Sale--Exchange Rights and
Registration Rights."
THE PRIMESTONE JOINT VENTURE
Pursuant to a contribution agreement relating to the Primestone Joint
Venture, immediately following the Offering, Prime will contribute to the
Primestone Joint Venture 3,375,000 of the Common Units it receives in exchange
for its contributions to the Operating Partnership. Blackstone will contribute
$45.0 million in cash to the Primestone Joint Venture. In exchange, Prime will
receive a 60.0% interest, and Blackstone will receive a 40.0% interest in the
Primestone Joint Venture. The Primestone Joint Venture will also borrow $40.0
million from a financial institution and use such loan proceeds together with
the $45.0 million contributed by Blackstone to purchase 4,569,893 Common Units
from the Operating Partnership, at a price per Common Unit equal to the per
share initial public offering price of the Common Shares, net of an amount
equal to the underwriting discounts and commissions applicable to the Common
Shares, simultaneously with the other Formation Transactions. As a result, the
Primestone Joint Venture will own, in the aggregate, 7,944,893 Common Units,
representing a 35.5% limited partnership interest in the Operating
Partnership. It is anticipated that PSCC, an affiliate of Prudential
Securities Incorporated, will make the $40.0 million loan to the Primestone
Joint Venture, which loan will be secured by all of the Common Units held by
the Primestone Joint Venture. In connection with the purchase of the Common
Units, Blackstone has designated Mr. Saylak to be elected one of the
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Company's trustees. Blackstone will have the right after 30 months following
the completion of the Offering, or earlier under certain circumstances, to
require Prime or the Primestone Joint Venture to purchase or redeem
Blackstone's interest in the Primestone Joint Venture. After 30 months
following the completion of the Offering, or earlier upon the occurrence of
certain events, Prime may require Blackstone to sell its interests in the
Primestone Joint Venture to Prime or the Primestone Joint Venture. Up to 50.0%
of the price payable upon the exercise of Prime's call right may, under certain
circumstances, be made by the delivery of Common Units or Common Shares. After
three years following the completion of the Offering or a Change in Control
Event (as defined in the agreement forming the Primestone Joint Venture),
either Prime or Blackstone may withdraw from Primestone and require a pro rata
distribution of such party's respective interest.
The Company has granted the Primestone Joint Venture registration rights for
the Common Shares it receives from exchanging Common Units. Blackstone, and
Prime with the consent of Blackstone, are permitted, under the agreement
forming the Primestone Joint Venture, to pledge their interests in the
Primestone Joint Venture to third-party lenders. Any such lender, which is
expected to be PSCC, an affiliate of Prudential Securities Incorporated, may
become a partner in the Primestone Joint Venture, in the event of a default
under the respective loan documents and upon the foreclosure of such pledge and
assumption of certain obligations, with all the rights of the party to whose
interest they have succeeded.
IBD CONTRIBUTION AGREEMENT
The IBD Contributors and Prime have entered the IBD Contribution Agreement
pursuant to which the IBD Contributors will contribute to the Operating
Partnership their interests in the IBD Contribution Properties. In exchange,
the IBD Contributors will receive an aggregate of 919,450 Common Units of
limited partnership interest, representing an aggregate 4.1% limited
partnership interest in the Operating Partnership and cash of $5.2 million.
Pursuant to the IBD Contribution Agreement, certain of the IBD Contributors
have elected to have a portion of the Common Units they will receive in the
foregoing exchange subject to an arrangement pursuant to which upon the earlier
of (i) the exchange of the subject Common Units for Common Shares and sale
thereof by the holder not earlier than two years following the completion of
the Offering or (ii) the third anniversary date of the completion of the
Offering, either (x) Prime shall transfer to such holder an amount in cash or
Common Units (based on the then current market price) equal to the excess, if
any, of an annual pre-tax return of 16.8% on the subject Common Units to the
date of transfer over the actual return on such Common Units during such period
or (y) such holder shall transfer to Prime an amount in cash or Common Units
(based on the then current market price) equal to the excess, if any, of the
actual return on such Common Units over an annual pre-tax return of 19.8% on
such Common Units.
NAC CONTRIBUTION AGREEMENT; PUT OPTION AGREEMENT
The NAC Contributors, Prime, the Company and the Operating Partnership have
entered the NAC Contribution Agreement pursuant to which the NAC Contributors
will contribute to the Operating Partnership their interests in the NAC
Contribution Properties. In exchange, the NAC Contributors will receive 927,100
GP Common Units, representing a 4.1% general partnership interest in the
Operating Partnership, and cash of $23.5 million. All of the GP Common Units
will be held by the NAC General Partner.
After 21 months following the completion of the Offering, pursuant to a
certain Put Option Agreement, the NAC General Partner will have the right to
cause the Operating Partnership and the Company to purchase for cash at least
50.0% of the NAC General Partner's GP Common Units at a price per Common Unit
equal to 95.0% of the then current per share market value of the Common Shares.
Further, after 32 months following the completion of the Offering, the NAC
General Partner shall have the right to cause the Operating Partnership and the
Company to purchase for cash all, but not less than all, of the NAC General
Partner's then-remaining GP Common Units at a price per Common Unit equal to
95.0% of the then current per share market value of the Common Shares.
TAX INDEMNIFICATION AGREEMENTS
The Operating Partnership has entered a tax indemnification agreement with
the IBD Contributors pursuant to which the Operating Partnership is required to
indemnify the IBD Contributors for, among other things,
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income or gain which they might realize upon the refinancing or sale by the
Operating Partnership of the Properties they contributed. Under the terms of
such agreement, the Operating Partnership will indemnify the IBD Contributors
for certain tax liabilities based on income or gain which an IBD Contributor is
required to include in its gross income for federal or state income tax
purposes. The percentage of the tax liabilities which the Operating Partnership
is required to indemnify is 100% for the taxable years ending on or before
December 31, 1998, and declines by 10.0% each year thereafter until December
31, 2007. The Operating Partnership is not required to indemnify the IBD
Contributors for income or gain realized by them after the taxable year ended
December 31, 2007. Prime has entered an agreement with the Operating
Partnership pursuant to which Prime has agreed to indemnify the Operating
Partnership for any amounts paid by the Operating Partnership to the IBD
Contributors pursuant to such agreement; provided, that Prime shall be liable
to the Operating Partnership for such amounts only to the extent that the
Operating Partnership used its best efforts to avoid such tax liability
(including exploring the opportunity for a tax-free exchange under Section 1031
of the Code for the transaction that gave rise to the obligation under such
agreement).
The Operating Partnership has also entered a tax indemnification agreement
with certain principals of the NAC Contributors, pursuant to which the
Operating Partnership is required to indemnify such principals of the NAC
Contributors for, among other things, income or gain which they might realize
upon the refinancing or sale by the Operating Partnership of the NAC
Properties. Under the terms of such agreement, the Operating Partnership will
indemnify such principals of the NAC Contributors for certain tax liabilities
based on income or gain which such a principal is required to include in its
gross income for federal, applicable state and certain local income tax
purposes. The Operating Partnership is not required to indemnify the NAC
Contributors for income or gain realized by them for any taxable year beginning
after the tenth anniversary of the date upon which the NAC General Partner is
no longer a general partner in the Operating Partnership. Prime has also
entered an agreement with the Operating Partnership pursuant to which Prime has
agreed to indemnify the Operating Partnership for any amounts paid by the
Operating Partnership to such principals of the NAC Contributors pursuant to
such agreement; provided, that Prime shall be liable to the Operating
Partnership for such amounts only to the extent that the Operating Partnership
used its best efforts to avoid such tax liability (including exploring the
opportunity for a tax-free exchange under Section 1031 of the Code for the
transaction that gave rise to the obligation under such agreement).
NON-COMPETE AGREEMENT BETWEEN PRIME AND MICHAEL W. RESCHKE
The Company, Prime and Michael W. Reschke, Chairman of the Board and a
Trustee of the Company, will enter a Non-Compete Agreement that will provide
that, so long as Prime and/or its affiliates own a 5.0% or greater economic
interest in the Company or Mr. Reschke is Chairman of the Board of the Company,
neither Mr. Reschke nor Prime (including its affiliates) will own or manage
office or industrial properties (except any ownership resulting from
foreclosure of indebtedness). Excluded from the foregoing restrictions are all
properties in which Prime had an interest prior to the Formation Transactions
and Prime's or Mr. Reschke's ownership of less than 5.0% of any class of
securities listed on a national securities exchange or on the Nasdaq National
Market.
CONSULTING AGREEMENT WITH STEPHEN J. NARDI
The Company will also enter into a consulting agreement with Stephen J.
Nardi, a Trustee Designee of the Company. The consulting agreement will be for
a term of two years and will require Mr. Nardi to devote substantially all of
his time and energy to performing consulting services on behalf of the Company.
In addition to the initial base fee of $200,000 per annum, Mr. Nardi will be
entitled to receive additional incentive compensation in an amount up to 100%
of his base fee based on achievement of such corporate and individual goals and
objectives as may be established by the Board of Trustees or its Compensation
Committee. The consulting agreement contains non-compete provisions restricting
Mr. Nardi from developing, acquiring or operating office or industrial
properties for two years following termination of the consulting agreement. In
addition, upon completion of the Offering and pursuant to the consulting
agreement, the Compensation Committee will grant Mr. Nardi 75,000 options to
purchase Common Shares.
OPTION TO PURCHASE AND RIGHT OF FIRST OFFER
Following the consummation of the Formation Transactions and the completion
of the Offering, the Company will have a ten-year option to purchase a property
at 300 N. LaSalle in the Chicago CBD from Prime.
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300 N. LaSalle contains approximately 58,000 square feet suitable for
development. The Company will have an option to purchase the property at 95.0%
of the then fair market value of the property.
The Company also will have a 15-year right of first offer to develop (or
develop and acquire an ownership interest in) all or any portion of 360 acres
of undeveloped office and industrial land in the Huntley Business Park in
Huntley, Illinois. The right of first offer will apply to the extent that
Prime determines that such parcel shall be utilized for the construction of an
office or industrial facility to be owned and leased to third parties by Prime
or held by Prime for sale to a third party. The site is subject to a
participation interest held by an unaffiliated third-party lender.
The foregoing option and right of first offer may be exercised only with the
approval of the Company's independent trustees.
The Company also will have obligations to purchase 2050 Hammond Drive for
approximately $3.1 million and 5600 Proviso Drive for approximately $8.0
million. These properties are each owned by joint ventures between an
affiliate of the NAC General Partner and a third-party. The Company will be
obligated to purchase 2050 Hammond Drive or 5600 Proviso Drive if the
respective third party partner gives its consent to the purchase within 180
days following the consummation of the Formation Transactions and the
completion of the Offering.
The Company also will have obligations to purchase 300 Craig Place for
approximately $7.5 million and 130 E. Rawls Road for approximately $2.5
million. The properties are each owned by an affiliate of the NAC General
Partner. The Company will be obligated to purchase 300 Craig Place or 130 E.
Rawls Road if the respective property is leased on certain terms within 180
days following the consummation of the Formation Transactions and the
completion of the Offering.
PATTERSON CONTRIBUTION AGREEMENT
Jeffrey A. Patterson, Executive Vice President and Chief Investment Officer
of the Company, and Prime have entered a contribution agreement pursuant to
which Mr. Patterson has agreed to contribute his interests in the assets of
the office and industrial division of Prime to the Operating Partnership in
exchange for 110,000 Common Units.
LEASES WITH PRIME AFFILIATES
Certain entities in which Prime has a controlling ownership interest have
leased space in the 77 West Wacker Drive Building. These entities include (i)
Brookdale Living Communities, Inc., which is leasing approximately 13,500
square feet for five years, pursuant to a lease which commenced October 1,
1997 and (ii) The Prime Group, Inc., which will lease approximately 22,600
square feet for five years, pursuant to a lease which will commence on
November 1, 1997. These leases each contain standard market rental terms.
SALE OF COMMON SHARES TO MR. RESCHKE
Prior to the Offering, the Company sold 100 unregistered Common Shares to
Michael W. Reschke for $10 per share, or an aggregate consideration of $1,000.
Such Common Shares were purchased by Mr. Reschke solely to facilitate the
organization of the Company. Upon completion of the Offering, all of the
shares so acquired by Mr. Reschke will be redeemed by the Company for an
aggregate redemption price of $1,000.
OTHER TRANSACTIONS
Prime has in the past provided asset and property management, leasing,
acquisition, renovation, development, construction management, legal and
administrative services for the Property Partnerships owning certain of the
Properties. Prime received fees relating to these services in the amounts of
$2,277, $2,698, $2,533 (in thousands) for the years ended December 31, 1996,
1995 and 1994, respectively. Following the Offering, all such services with
respect to the Properties will be performed by personnel of the Company.
The Operating Partnership will pay on behalf of Prime, or reimburse Prime,
for approximately $5.2 million of expenses incurred in connection with the
Formation Transactions and the Offering.
The Company is aware of contamination at certain of the Industrial
Properties. Prime has contractually agreed to retain liability for, and
indemnify the Company for, environmental costs with regard to these
Properties.
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PARTNERSHIP AGREEMENT
The following summary of the Amended and Restated Agreement of Limited
Partnership of Prime Group Realty, L.P. (the "Partnership Agreement"), and the
descriptions of certain provisions set forth elsewhere in this Prospectus, are
qualified in their entirety by reference to the Partnership Agreement, which
is filed as an exhibit to the Registration Statement of which this Prospectus
is a part. See "Additional Information."
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. The Company will be the
managing general partner of, and will initially hold approximately 55.3% of
the economic interests in, the Operating Partnership. The Company will conduct
substantially all of its business through the Operating Partnership, except
for office and industrial development, leasing and property management
services, which will be conducted through the Services Company in order to
preserve the Company's REIT status. The Operating Partnership will own a 95.0%
economic interest in the Services Company through the ownership of 100.0% of
the Services Company's Preferred Stock and the Note. Generally, pursuant to
the Partnership Agreement, the Company, as the managing general partner of the
Operating Partnership, will have full, exclusive and complete responsibility
and discretion in the management and control of the Operating Partnership,
including the ability to cause the Operating Partnership to enter into certain
major transactions, including acquisitions, dispositions and refinancings and
to cause changes in the Operating Partnership's line of business and
distribution policies.
The Limited Partners in their capacities as limited partners of the
Operating Partnership will have no authority to transact business for, or
participate in the management or decisions of, the Operating Partnership,
except as provided in the Partnership Agreement and as required by applicable
law. However, any decision of the Operating Partnership to effect certain
amendments to the Partnership Agreement, to take title to any property other
than in the name of the Operating Partnership or a Property Partnership or, to
institute any proceeding for bankruptcy or make a general assignment for the
benefit of creditors generally would require the consent of a majority in
interest of the Common Units (including the interests of the Company, which
will represent approximately 55.3% of the total partner interests upon
completion of the Offering). Further, the Operating Partnership may not be
dissolved prior to December 31, 2050 (which is the expiration of the Operating
Partnership's term) without the consent of a majority in interest of the LP
Common Units so long as the Limited Partners hold more than 10.0% of the
Common Units. The Limited Partners have no right to remove the Company or the
NAC General Partner from their respective capacities as general partners of
the Operating Partnership.
INDEMNIFICATION
To the extent permitted by law, the Partnership Agreement provides for
indemnification of the Company, as managing general partner, its officers and
trustees and such other persons as the Company may designate to the same
extent indemnification is provided to officers and trustees of the Company in
the Declaration of Trust, and limits the liability of the Company and its
officers and trustees to the Operating Partnership to the same extent
liability of officers and trustees of the Company is limited under the
Declaration of Trust.
TRANSFERABILITY OF INTERESTS
Except for a transaction described in the following two paragraphs, the
Partnership Agreement provides that neither the Company nor the NAC General
Partner (other than in accordance with the Put Option Agreement) may withdraw
from the Operating Partnership or transfer or assign its general partner
interest in the Operating Partnership, nor may another general partner be
admitted to the Operating Partnership, without the consent of the other
general partner. A Limited Partner may transfer its interests in the Operating
Partnership to a transferee subject to certain conditions, including that such
transferee assumes all obligations of the transferor Limited Partner and
provided further that such transfer does not cause a termination of the
Operating Partnership for federal or state income tax purposes and does not
cause the Company to cease to comply with requirements under the Code for
qualification as a REIT. Pursuant to the Partnership Agreement, except as
described below under
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"--Limited Partner Exchange Rights," Prime, the Primestone Joint Venture and
the IBD Contributors have agreed not to transfer, assign, sell, encumber or
otherwise dispose of the Common Units evidencing their Common Units, or any
Common Shares issued upon exchange of such Common Units, for a period of two
years and one year, respectively, from the completion of the Offering without
the consent of the Company and Prudential Securities Incorporated, as
representative of the Underwriters, other than to (i) the Company, (ii) family
members, (iii) Affiliates (as defined in the Partnership Agreement), (iv)
shareholders, members, partners or beneficiaries and (v) a charitable
beneficiary or charitable foundation, in each case, provided the transferee
agrees to assume the obligations of the transferor.
EXTRAORDINARY TRANSACTIONS
The Partnership Agreement provides that the Company may not generally engage
in any merger, consolidation or other combination with or into another person
or sale of all or substantially all of its assets, or any reclassification,
recapitalization or change of outstanding Common Shares (a "Business
Combination"), unless the holders of LP Common Units will receive, or have the
opportunity to receive, the same consideration per Common Unit as holders of
Common Shares receive per Common Share in the transaction; if holders of LP
Common Units will not be treated in such manner in connection with a proposed
Business Combination, the Company may not engage in such transaction unless
Limited Partners holding more than 50.0% of the LP Common Units vote to
approve the Business Combination. In addition, as provided in the Operating
Partnership Agreement, the Company will not consummate a Business Combination
in which the Company conducted a vote of the shareholders unless the matter
would have been approved had holders of LP Common Units been able to vote
together with the shareholders on the transaction. The foregoing provision of
the Partnership Agreement would under no circumstances enable or require the
Company to engage in a Business Combination which required the approval of the
Company's shareholders if the Company's shareholders did not in fact give the
requisite approval. Rather, if the Company's shareholders did approve a
Business Combination, the Company would not consummate the transaction unless
(i) the Company as managing general partner first conducts a vote of holders
of Common Units (including the Company and the NAC General Partner) on the
matter, (ii) the Company votes the Common Units held by it in the same
proportion as the shareholders of the Company voted on the matter at the
shareholder vote and (iii) the result of such vote of the Common Unit holders
(including the proportionate vote of the Company's Common Units) is that had
such vote been a vote of shareholders, the Business Combination would have
been approved by the shareholders. As a result of these provisions of the
Operating Partnership, a third party may be inhibited from making an
acquisition proposal that it would otherwise make, or the Company, despite
having the requisite authority under its Declaration of Trust, may not be
authorized to engage in a proposed Business Combination.
ISSUANCE OF ADDITIONAL COMMON UNITS
As managing general partner of the Operating Partnership, the Company has
the ability to cause the Operating Partnership to issue additional Common
Units representing general and limited partnership interests in the Operating
Partnership, including preferred Common Units of limited partnership
interests.
CAPITAL CONTRIBUTIONS
The Partnership Agreement provides that if the Operating Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Operating Partnership from borrowings or capital
contributions, the Company may borrow such funds from a financial institution
or other lender or through public or private debt offerings and lend such
funds to the Operating Partnership on comparable terms and conditions as are
applicable to the Company's borrowing of such funds. As an alternative to
borrowing funds required by the Operating Partnership, the Company may
contribute the amount of such required funds as an additional capital
contribution to the Operating Partnership. The Partnership Agreement and the
Share Incentive Plan also provide that in the event the Company issues
additional shares of beneficial interest (including any issuance of Common
Shares pursuant to the Company's Share Incentive Plan), the Company is
required to contribute to the Operating Partnership as an additional capital
contribution any net proceeds from such issuance in exchange for
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additional partnership interests with preferences and rights corresponding to
the beneficial interests so issued. If the Company so contributes additional
capital to the Operating Partnership, the Company's partnership interest in
the Operating Partnership will be increased on a proportionate basis.
Conversely, the partnership interests of the Limited Partners will be
decreased on a proportionate basis in the event of additional capital
contributions by the Company. See "Policies With Respect to Certain
Activities--Financing Policies."
AWARDS UNDER SHARE INCENTIVE PLAN
If options granted in connection with the Share Incentive Plan are exercised
at any time or from time to time, the Partnership Agreement requires the
Company to contribute to the Operating Partnership as an additional
contribution the exercise price received by the Company in connection with the
issuance of Common Shares to such exercising participant. Upon such
contribution the Company will be issued a number of Common Units in the
Operating Partnership equal to the number of Common Shares so issued, subject
to certain adjustments.
DISTRIBUTIONS
The Partnership Agreement sets forth the manner in which the net cash flow
of the Operating Partnership (which includes operating revenues and proceeds
from sales or refinancings less certain expenditures) will be distributed with
respect to the Preferred Units and the Common Units. Pursuant to the
Partnership Agreement, each Preferred Unit will entitle the Company as holder
to receive, prior to the payment by the Operating Partnership of distributions
with respect to the Common Units, a cash distribution in an amount equal to
the dividend declared or paid in respect of a Convertible Preferred Share. The
Partnership Agreement further provides that net cash revenues available after
the declaration or payment of distributions with respect to the Preferred
Units will be distributed ratably to the holders of the Common Units from time
to time (but not less frequently than quarterly) in an aggregate amount
determined by the Company.
OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT and to avoid any federal income or excise tax
liability. The Partnership Agreement provides that the net operating cash
revenues of the Operating Partnership, as well as net sales and refinancing
proceeds, will be distributed from time to time as determined by the Company
(but not less frequently than quarterly) pro rata in accordance with the
partners' respective percentage interests. Pursuant to the Partnership
Agreement, the Operating Partnership will assume and pay when due, or
reimburse the Company for payment of, all expenses it incurs relating to the
ownership and operation of, or for the benefit of, the Operating Partnership
and all costs and expenses relating to the operations of the Company.
LIMITED PARTNER EXCHANGE RIGHTS
Subject to certain conditions, each LP Common Unit held by a Limited Partner
may be exchanged for one Common Share (subject to adjustment) or, at the
option of the Company, cash equal to the fair market value of a Common Share
at the time of exchange. However, no Limited Partner may exchange any LP
Common Units for Common Shares if such entity's actual or constructive
ownership of such Common Shares would violate the Ownership Limit with respect
to the Common Shares. See "Description of Shares of Beneficial Interest--
Restrictions on Ownership and Transfer." Following the expiration of the
foregoing restrictions, any Common Shares issued to the Limited Partners upon
exchange of their respective LP Common Units may be sold in the public market
pursuant to the registration statements which the Company will be obligated to
file pursuant to the exercise of registration rights that have been granted by
the Company or available exemptions from registration. See "Shares Eligible
for Future Sale."
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REGISTRATION RIGHTS
For a description of certain registration rights held by the Limited
Partners, see "Shares Eligible for Future Sale--Exchange Rights and
Registration Rights."
TAX MATTERS
Pursuant to the Partnership Agreement, the Company will be the "tax matters
partner" of the Operating Partnership and, as such, will have authority to
make certain tax decisions under the Code on behalf of the Operating
Partnership.
The net income or net loss of the Operating Partnership generally will be
allocated to each class of Partners in accordance with the relative aggregate
percentage interests of each such class, and within each class, to the
Partners in accordance with their respective percentage interests in such
class, subject to compliance with the provisions of Sections 704(b),
respecting allocations generally, and 704(c), respecting allocations with
respect to contributed properties, of the Code and the applicable Treasury
Regulations. For further discussion of such allocations, see "Certain Federal
Income Tax Considerations--Income Taxation of the Partnerships and Their
Partners."
DUTIES AND CONFLICTS
Except as otherwise set forth in "Policies with Respect to Certain
Activities--Conflicts of Interest Policies" and "Management--Employment
Agreements," any Limited Partner may engage in other business activities
outside the Operating Partnership, including business activities that directly
compete with the Operating Partnership.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2050 or until sooner dissolved and terminated upon the
dissolution, bankruptcy, insolvency or termination of the Company (unless the
Limited Partners elect to continue the Operating Partnership), the election of
the Company with the consent of a majority in interest of the Limited
Partners, the sale or other disposition of all or substantially all the assets
of the Operating Partnership or by operation of law.
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PRINCIPAL SHAREHOLDERS OF THE COMPANY
The following table sets forth certain information regarding the beneficial
ownership of the Common Shares and Common Units immediately following the
consummation of the Offering and the Formation Transactions, by (a) each
person known by the Company to be the beneficial owner of more than 5.0% of
the Common Shares, (b) each trustee of the Company, (c) each executive officer
of the Company and (d) all trustees and executive officers of the Company as a
group. Unless otherwise indicated in the footnotes, all of such interests are
owned directly, and the indicated person or entity has sole voting and
investment power. The number of shares represents the number of Common Shares
or Common Units the person holds. The extent to which a person holds Common
Shares as opposed to Common Units is set forth in the notes to the following
table. The Partnership Agreement provides that the LP Common Units may be
exchanged, subject to certain limitations and only after the first year
following completion of the Offering, for Common Shares or, at the option of
the Company, cash equal to the fair market value of a Common Share at the time
of exchange. Each of the Limited Partners has agreed not to sell or exchange
any LP Common Units, without the consent of Prudential Securities
Incorporated, on behalf of the Underwriters, for the applicable Holding
Periods. See "Partnership Agreement--Limited Partner Exchange Rights."
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES/
COMMON UNITS PERCENTAGE OF PERCENTAGE OF ALL
NAME BENEFICIALLY OWNED COMMON SHARES(1) COMMON SHARES(2)
---- ------------------------ ---------------- -----------------
<S> <C> <C> <C>
The Primestone Joint
Venture(3)............. 7,944,893 39.09% 37.05%
The Prime Group,
Inc.(3)................ 4,856,936 28.18 22.65
Michael W.
Reschke(3)(4).......... 4,856,936 28.18 22.65
Richard S. Curto(4)(5).. -- -- --
W. Michael Karnes(4).... 10,000 0.08 0.05
Robert J. Rudnik(4)(5).. -- -- --
Jeffrey A.
Patterson(4)........... 110,000 0.88 0.51
Kevork M. Derderian(4).. -- -- --
Edward S.
Hadesman(4)(6)......... 859,161 6.49 4.01
Stephen J. Nardi(4)..... 927,100(7) -- 4.32(7)
James R. Thompson(4).... -- -- --
Jacque M. Ducharme(4)... -- -- --
Christopher J.
Nassetta(4)............ -- -- --
Thomas J. Saylak(4)..... -- -- --
Trustees and Executive
Officers of the Company
as a group
(21 persons)........... 6,796,330 35.44 31.69
</TABLE>
- --------
(1) Assumes exchange only of Common Units owned by such beneficial owner for
Common Shares.
(2) Assumes exchange of all outstanding Common Units for Common Shares.
(3) The shares shown for this person are not beneficially owned because the
Common Units held by such person may not be exchanged for Common Shares
for at least one year following the completion of the Offering and are
disclaimed for beneficial ownership purposes. Such shares are shown to
illustrate the beneficial ownership resulting from an exchange of Common
Units for Common Shares by such person after such prohibition expires.
(4) This person has also received certain Share Options pursuant to the Share
Incentive Plan which Share Options begin vesting in installments beginning
one year after the completion of the Offering and which are excluded from
this table. See "Management--Share Incentive Plan."
(5) This person owns a substantial, but not a controlling, interest in The
Prime Group, Inc., and therefore will not be deemed to beneficially own
the Common Units that are beneficially owned by The Prime Group, Inc.
(6) The Common Units shown for Mr. Hadesman include an aggregate of 397,118
Common Units which are held in separate trusts for his spouse and
children. Mr. Hadesman disclaims beneficial ownership of such Common
Units.
(7) The GP Common Units beneficially owned by Mr. Nardi, an affiliate of the
NAC General Partner, are not exchangeable for Common Shares; however, this
amount illustrates the common equity of the Operating Partnership
beneficially owned by Mr. Nardi.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The Company was formed as a real estate investment trust under the laws of
the State of Maryland. Rights of shareholders are governed by Title 8 of the
Corporations and Associations Article, Annotated Code of Maryland (the
"Maryland REIT Law") and certain provisions of the MGCL and by the Declaration
of Trust and Bylaws. The following summary of the terms of the shares of
beneficial interest of the Company does not purport to be complete and is
subject to and qualified in its entirety by reference to the Declaration of
Trust and Bylaws, forms of which are filed as exhibits to the Registration
Statement of which this Prospectus is a part. Immediately prior to the closing
of the Offering, the Company will amend and restate its Declaration of Trust
to authorize the capitalization described below.
AUTHORIZED SHARES
The Declaration of Trust provides that the Company may issue up to 100.0
million Common Shares, par value $.01 per share, 65.0 million shares of Excess
Shares, par value $.01 per share ("Excess Shares"), and 30.0 million Preferred
Shares, par value $.01 per share (the "Preferred Shares"). The Declaration of
Trust designates 2.0 million Preferred Shares as the Convertible Preferred
Shares. Excess Shares are to be issued automatically upon any automatic
conversion of Common Shares or Preferred Shares which are purported to be
held, transferred or acquired by any person in violation of the ownership
limitations contained in the Declaration of Trust. See "--Restrictions on
Ownership and Transfer." As of July 21, 1997, in connection with the formation
of the Company, 100 Common Shares were issued to Michael W. Reschke and are
outstanding. Upon completion of the Offering and the consummation of the
Formation Transactions, there will be 12,380,000 Common Shares issued and
outstanding, excluding the 1,857,000 shares which are subject to the
Underwriters' over-allotment option.
Under the Maryland REIT Law, a shareholder is not liable for obligations of
the Company solely as a result of his status as a shareholder. The Declaration
of Trust provides that no shareholder shall be liable for any debt or
obligation of the Company by reason of being a shareholder nor shall any
shareholder be subject to any personal liability in tort, contract or
otherwise to any person in connection with the property or affairs of the
Company by reason of being a shareholder. The Company's Bylaws further provide
that the Company shall indemnify each present or former shareholder against
any claim or liability to which the shareholder may become subject by reason
of being or having been a shareholder and that the Company shall reimburse
each shareholder for all reasonable expenses incurred by him in connection
with any such claim or liability. However, with respect to tort claims,
contractual claims where shareholder liability is not so negated, claims for
taxes and certain statutory liability, the shareholders may, in some
jurisdictions, be personally liable to the extent that such claims are not
satisfied by the Company. Inasmuch as the Company carries public liability
insurance which it considers adequate, any risk of personal liability to
shareholders is limited to situations in which the Company's assets plus its
insurance coverage would not be sufficient to satisfy the claims against the
Company and its shareholders.
CONVERTIBLE PREFERRED SHARES
Dividends
Subject to the preferential rights of the holders of any Preferred Shares
that rank senior in the payment of dividends to the Convertible Preferred
Shares, the holders of the Convertible Preferred Shares shall be entitled to
receive, when, as and if declared by the Board of Trustees, out of funds
legally available for the payment of dividends, cumulative preferential
dividends payable in cash in an amount per Convertible Preferred Share equal
to the greater of (i) (x) an annual rate equal to the product of the Issue
Price times 0.07 for Dividend Periods ending before November , 1998 and (y)
an annual rate equal to the product of the Issue Price times 0.075 for
Dividend Periods ending after November , 1998 or (ii) the regular cash
dividends (determined on each Dividend Payment Date) on the Common Shares, or
portion thereof, into which a Convertible Preferred Share is
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convertible. The amount of dividends referred to in clause (i) above payable
for each full Dividend Period on the Convertible Preferred Shares, other than
the Dividend Period commencing October 1, 1998, shall be computed by dividing
the annual dividend rate by four. For the Dividend Period commencing October
1, 1998, the amount of dividends through November , 1998 on the Convertible
Preferred Shares shall be computed by dividing the product of the Issue Price
times 0.07 by 365 and multiplying the result by number of days from October 1,
1998 through November , 1998 and dividends from November , 1998 through
December 31, 1998 on the Convertible Preferred Shares shall be computed by
dividing the product of the Issue Price times .075 by 365 and multiplying the
result by the number of days from November , 1998 through December 31, 1998.
The amount of dividends referred to in clause (ii) above shall equal the
number of Common Shares, or portion thereof, into which a Convertible
Preferred Share will be convertible on or after the Conversion Date (as
defined below), multiplied by the most current quarterly dividend on a Common
Share on or before the applicable Dividend Payment Date.
"Dividend Payment Date" shall mean (i) for any Dividend Period with respect
to which the Company pays a dividend on the Common Shares, the date on which
such dividend is paid, or (ii) for any Dividend Period with respect to which
the Company does not pay a dividend on the Common Shares, a date to be set by
the Board of Trustees, which date shall not be later than the thirtieth
calendar day after the end of the applicable Dividend Period.
"Dividend Periods" shall mean quarterly dividend periods commencing on
January 1, April 1, July 1 and October 1 of each year and ending on and
including the day preceding the first day of the next succeeding Dividend
Period with respect to any Convertible Preferred Shares (other than the
initial Dividend Period, which shall commence on the Issue Date for such
Convertible Preferred Shares and end on and include the last day of the
calendar quarter immediately following such Issue Date, and other than the
Dividend Period during which any Convertible Preferred Shares shall be
redeemed or converted as described below, which shall end on and include the
redemption date with respect to the Convertible Preferred Shares being
redeemed).
Dividends with respect to the Convertible Preferred Shares shall begin to
accrue and shall be fully cumulative from the first day of the applicable
Dividend Period, whether or not in any Dividend Period or Periods there shall
be funds of the Company legally available for the payment of such dividends,
and shall be payable quarterly, when, as and if declared by the Board of
Trustees, in arrears on Dividend Payment Dates. The initial Dividend Period
for the Convertible Preferred Shares will include a partial dividend for the
period from the date on which the Convertible Preferred Shares are issued (the
"Issue Date") until the last day of the calendar quarter immediately following
such Issue Date. The amount of dividends payable for such period, or any other
period shorter than a full Dividend Period, on the Convertible Preferred
Shares shall be computed by dividing the number of days in such period by 365
and multiplying the result by the product of the Issue Price times the annual
dividend rate. Dividends shall be payable in arrears to the holders of record
of the Convertible Preferred Shares as they appear in the records of the
Company at the close of business on such record dates, not less than 10 nor
more than 50 days preceding such Dividend Payment Dates thereof, as shall be
fixed by the Board of Trustees.
Any dividend payment made on the Convertible Preferred Shares shall first be
credited against the earliest accrued but unpaid dividend due with respect to
the Convertible Preferred Shares which remains payable. Holders of Convertible
Preferred Shares shall not be entitled to any dividends, whether payable in
cash, property or shares, in excess of cumulative dividends on the Convertible
Preferred Shares. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Convertible
Preferred Shares which may be in arrears.
So long as any Convertible Preferred Shares are outstanding, no dividends,
except as described in the immediately following sentence, shall be declared
or paid or set apart for payment on any class or series of Parity Shares (as
defined below) for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment on the Convertible Preferred
Shares for all Dividend Periods terminating on or prior to the dividend
payment date on such class or series of Parity Shares. When dividends are not
paid in full or a sum sufficient for such payment is
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not set apart, all dividends declared upon the Convertible Preferred Shares
and all dividends declared upon any other class or series of Parity Shares
shall be declared ratably in proportion to the respective amounts of dividends
accumulated and unpaid on the Convertible Preferred Shares and accumulated and
unpaid on such Parity Shares.
So long as any Convertible Preferred Shares are outstanding, no dividends
(other than dividends or distributions paid solely in shares of, or options,
warrants or rights to subscribe for or purchase shares of, Fully Junior
Shares) shall be declared or paid or set apart for payment or other
distribution shall be declared or made or set apart for payment upon Junior
Shares, nor shall any Junior Shares be redeemed, purchased or otherwise
acquired (other than a redemption, purchase or other acquisition of Common
Shares made for purposes of an employee incentive or benefit plan of the
Company or any subsidiary) for any consideration (or any moneys be paid to or
made available for a sinking fund for the redemption of any Junior Shares) by
the Company, directly or indirectly (except by conversion into or exchange for
Fully Junior Shares), unless in each case (i) the full cumulative dividends on
all outstanding Convertible Preferred Shares and any other Parity Shares of
the Company shall have been or contemporaneously are declared and paid or
declared and set apart for payment for all past Dividend Periods with respect
to the Convertible Preferred Shares and all past dividend periods with respect
to such Parity Shares and (ii) sufficient funds shall have been or
contemporaneously are declared and paid or declared and set apart for the
payment of the dividend for the current Dividend Period with respect to the
Convertible Preferred Shares and the current Dividend Period with respect to
such Parity Shares.
"Fully Junior Shares" shall mean the Common Shares and any other class or
series of shares of beneficial interest of the Company now or hereafter issued
and outstanding over which the Convertible Preferred Shares have preference or
priority in both (i) the payment of dividends and (ii) the distribution of
assets on any liquidation, dissolution or winding up of the Company.
"Junior Shares" shall mean the Common Shares and any other class or series
of shares of beneficial interest of the Company now or hereafter issued and
outstanding over which the Convertible Preferred Shares have preference or
priority in the payment of dividends or in the distribution of assets on any
liquidation, dissolution or winding up of the Company.
No dividends on the Convertible Preferred Shares shall be declared by the
Board of Trustees or paid or set apart for payment by the Company at such time
as the terms and provisions of any agreement of the Company, including any
agreement relating to its indebtedness, prohibits such declaration, payment or
setting apart for payment or provides that such declaration, payment or
setting apart for payment would constitute a breach thereof or a default
thereunder, or if such declaration or payment shall be restricted or
prohibited by law.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, subject to the prior preferences and other
rights of any series of shares of beneficial interest ranking senior to the
Convertible Preferred Shares upon liquidation, distribution or winding up of
the Company, before any payment or distribution of the assets of the Company
(whether capital or surplus) shall be made to or set apart for the holders of
Junior Shares, the holders of the Convertible Preferred Shares shall be
entitled to receive dollars and cents ($ ) (the
"Liquidation Preference") per Convertible Preferred Share plus an amount equal
to all dividends (whether or not earned or declared) accrued and unpaid
thereon to the date of final distribution to such holders (the "Liquidation
Preference Amount").
If, upon any liquidation, dissolution or winding up of the Company, the
assets of the Company, or proceeds thereof, distributable among the holders of
the Convertible Preferred Shares shall be insufficient to pay in full the
Liquidation Preference Amount and liquidating payments on any other shares of
any class or series of Parity Shares, then such assets, or the proceeds
thereof, shall be distributed among the holders of the Convertible Preferred
Shares and any such other Parity Shares ratably in accordance with the
respective amounts that would be payable on such Convertible Preferred Shares
and any such other Parity Shares if all amounts payable thereon were paid in
full.
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A consolidation or merger of the Company with one or more corporations, real
estate investment trusts or other entities, a sale, lease or conveyance of all
or substantially all of the Company's property or business or a statutory
share exchange shall not be deemed to be a liquidation, dissolution or winding
up, voluntary or involuntary, of the Company.
Subject to the rights of the holders of shares of any series or class or
classes of shares of beneficial interest ranking on a parity with or prior to
the Convertible Preferred Shares upon liquidation, dissolution or winding up,
upon any liquidation, dissolution or winding up of the Company, after payment
shall have been made in full to the holders of the Convertible Preferred
Shares, the holders of the Convertible Preferred Shares shall have no other
claim to the remaining assets of the Company and any other series or class or
classes of Junior Shares shall, subject to the respective terms and provisions
(if any) applying thereto, be entitled to receive any and all assets remaining
to be paid or distributed, and the holders of the Convertible Preferred Shares
shall not be entitled to share therein.
Redemption
The Convertible Preferred Shares shall not be redeemable by the Company
prior to November , 2007 except under certain limited circumstances
described below. On and after November , 2007, the Company, at its option,
may redeem the Convertible Preferred Shares, in whole at any time or from time
to time in part out of funds legally available therefor at a redemption price
payable in cash equal to 100.0% of the Liquidation Preference per Convertible
Preferred Share (plus all accumulated, accrued and unpaid dividends as
described below).
Upon any redemption of Convertible Preferred Shares, the Company shall pay
all accrued and unpaid dividends, if any, thereon to the redemption date,
without interest. If the redemption date falls after a dividend payment record
date and prior to the corresponding Dividend Payment Date, then each holder of
Convertible Preferred Shares at the close of business on such dividend payment
record date shall be entitled to the dividend payable on such shares on the
corresponding Dividend Payment Date notwithstanding any redemption of such
shares before such Dividend Payment Date. Except as provided above, the
Company shall make no payment or allowance for unpaid dividends, whether or
not in arrears, on Convertible Preferred Shares called for redemption.
If full cumulative dividends on the Convertible Preferred Shares and any
other class or series of Parity Shares of the Company have not been declared
and paid or declared and set apart for payment, the Convertible Preferred
Shares may not be redeemed in part and the Company may not purchase or acquire
Convertible Preferred Shares, otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of Convertible Preferred
Shares.
Notice of the redemption of any Convertible Preferred Shares (other than as
described below) shall be mailed by first-class mail to each holder of record
of Convertible Preferred Shares to be redeemed at the address of each such
holder as shown on the Company's records, not less than 30 nor more than 90
days prior to the redemption date. Neither the failure to mail any required
notice nor any defect therein or in the mailing thereof, to any particular
holder, shall affect the sufficiency of the notice or the validity of the
proceedings for redemption with respect to the other holders. Each such mailed
notice shall state, as appropriate: (i) the redemption date; (ii) the number
of Convertible Preferred Shares to be redeemed; (iii) the redemption price;
(iv) the place or places at which certificates for such Convertible Preferred
Shares are to be surrendered; (v) the then-current conversion price; and (vi)
that dividends on the shares to be redeemed shall cease to accrue on such
redemption date except as otherwise provided below. If fewer than all the
Convertible Preferred Shares held by any holder are to be redeemed, the notice
mailed to such holder shall also specify the number of Convertible Preferred
Shares to be redeemed from such holder. If notice of redemption of any
Convertible Preferred Shares has been properly given, from and after the
redemption date (unless the Company shall fail to make available an amount of
cash necessary to effect such redemption), except as otherwise described
below, dividends on the Convertible Preferred Shares so called for redemption
shall cease to accrue, such shares shall no longer be deemed to be outstanding
and all rights of the holders thereof as holders of Convertible Preferred
Shares shall cease (except the rights to convert
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and to receive the cash payable upon such redemption, without interest
thereon, upon surrender and endorsement of their certificates if so required
and to receive any dividends payable thereon).
If fewer than all the outstanding Convertible Preferred Shares are to be
redeemed, shares to be redeemed shall be selected by the Company from
outstanding Convertible Preferred Shares not previously called for redemption
pro rata (as nearly as may be), by lot or by any other method determined by
the Company in its sole discretion to be equitable. If fewer than all the
Convertible Preferred Shares represented by any certificate are redeemed, then
new certificates representing the unredeemed shares shall be issued without
cost to the holder thereof.
Notwithstanding anything above to the contrary, beginning on
, 1998 and ending on , 1998, the Company, at
its option, may redeem all, but not less than all, of the Convertible
Preferred Shares at a premium (the "Special Redemption Price") calculated to
result in a total internal rate of return to the holder (including the receipt
of dividends and calculated on an annual compounded basis as if the holder had
owned the shares since the Issue Date) of 20.0%. The Special Redemption Price
may be paid, at the Company's option, in any combination of (i) cash and (ii)
Common Shares valued at Fair Market Value; provided, that the cash portion of
the Special Redemption Price shall equal at least 75.0% of the Special
Redemption Price.
Notice of the special redemption of any Convertible Preferred Shares shall
be mailed by first-class mail to each holder of record of Convertible
Preferred Shares to be redeemed at the address of each such holder as shown on
the Company's records, not less than 30 nor more than 90 days prior to the
Special Redemption Call Date. Neither the failure to mail any notice required
nor any defect therein or in the mailing thereof, to any particular holder,
shall affect the sufficiency of the notice or the validity of the proceedings
for redemption with respect to the other holders. Each such mailed notice
shall state, as appropriate: (1) the Special Redemption Call Date; (2) the
Special Redemption Price (including the amount of the Special Redemption Price
consisting of cash and the amount of the Special Redemption Price consisting
of Common Shares, together with calculations supporting the determination of
the number of Common Shares constituting a portion of the Special Redemption
Price); (3) the place or places at which certificates for such shares are to
be surrendered; and (4) that dividends on the shares to be redeemed shall
cease to accrue on such redemption date except as otherwise provided herein.
Notice having been mailed as aforesaid, from and after the Special Redemption
Call Date (unless the Company shall fail to make available an amount of cash
necessary to effect such redemption), (i) except as otherwise provided herein,
dividends on the Convertible Preferred Shares so called for redemption shall
cease to accrue, (ii) such shares shall no longer be deemed to be outstanding
and (iii) all rights of the holders thereof as holders of Convertible
Preferred Shares shall cease (except the right to receive the Special
Redemption Price, without interest thereon, upon surrender and endorsement of
their certificates if so required).
"Weighted Average Trading Price" shall mean, for any period, the number
obtained by dividing (i) the sum of the products, for each sale of Common
Shares on each trading day in such period, of (a) the sale price per Common
Share and (b) the number of Common Shares sold by (ii) the total number of
Common Shares sold during such period.
"Fair Market Value" shall mean the Weighted Average Trading Price for the
Common Shares for the 20 trading days preceding the date of the special
redemption (the "Special Redemption Call Date").
Conversion
A holder of Convertible Preferred Shares shall have the right, at his or her
option, upon the earliest to occur of (i) September , 1998, (ii) the first
day on which a Change of Control occurs, (iii) the occurrence of a REIT
Termination Event or (iv) such date as determined by the Company (the
"Conversion Date"), to convert all or any portion of such shares (or such
shares as determined by the Company if pursuant to clause (iv) above) into the
number of fully paid and non-assessable Common Shares obtained by dividing the
aggregate Liquidation Preference Amount of such shares by the conversion price
by surrendering such shares to be converted. In the
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case of Convertible Preferred Shares called for redemption, conversion rights
shall expire at the close of business on the fifth business day prior to the
redemption date fixed for such redemption.
"Change of Control" means each occurrence of any of the following: (i) the
acquisition, directly or indirectly, by any individual or entity or group (as
such term is used in Section 13(d)(3) of the Exchange Act) of beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act, except that such
individual or entity shall be deemed to have beneficial ownership of all
shares that any such individual or entity has the right to acquire, whether
such right is exercisable immediately or only after passage of time) of more
than 25.0% of the Company's outstanding shares of beneficial interest with
voting power, under ordinary circumstances, to elect Trustees of the Company;
(ii) other than with respect to the election, resignation or replacement of
any trustee designated, appointed or elected by the holders of the Convertible
Preferred Shares (each a "Preferred Trustee"), during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Trustees of the Company (together with any new trustees whose
election by such Board of Trustees or whose nomination for election by the
shareholders of the Company was approved by a vote of 66 2/3% of the trustees
of the Company (excluding Preferred Trustees) then still in office who were
either trustees at the beginning of such period, or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Trustees then in office; and (iii) (A)
the Company consolidating with or merging into another entity or conveying,
transferring or leasing all or substantially all of its assets (including, but
not limited to, real property investments) to any individual or entity or (B)
any corporation consolidating with or merging into the Company, which in
either event (A) or (B) is pursuant to a transaction in which the outstanding
voting shares of beneficial interest of the Company is reclassified or changed
into or exchanged for cash, securities or other property; provided, however,
that the events described in clause (iii) above shall not be deemed to be a
Change of Control (a) if the sole purpose of such event is that the Company is
seeking to change its domicile or to change its form of organization from a
trust to a corporation or (b) if the holders of the exchanged securities of
the Company immediately after such transaction beneficially own at least a
majority of the securities of the merged or consolidated entity normally
entitled to vote in elections of trustees.
"REIT Termination Event" shall mean the earliest to occur of:
(i) the filing of a federal income tax return by the Company for any
taxable year on which the Company does not elect to be taxed as a real
estate investment trust;
(ii) the approval by the shareholders of the Company of a proposal for
the Company to cease to qualify as a real estate investment trust;
(iii) a determination by the Board of Trustees, based on the advice of
counsel, that the Company has ceased to qualify as a real estate investment
trust; or
(iv) a "determination" within the meaning of Section 1313(a) of the Code,
that the Company has ceased to qualify as a real estate investment trust.
Holders of Convertible Preferred Shares at the close of business on a
dividend payment record date shall be entitled to receive the dividend payable
on such shares on the corresponding Dividend Payment Date notwithstanding the
conversion thereof following such dividend payment record date and prior to
such Dividend Payment Date. However, Convertible Preferred Shares surrendered
for conversion during the period between the close of business on any dividend
payment record date and the opening of business on the corresponding Dividend
Payment Date (except shares converted after the issuance of notice of
redemption with respect to a redemption date during such period, such
Convertible Preferred Shares being entitled to such dividend on the Dividend
Payment Date) must be accompanied by payment of an amount equal to the
dividend payable on such shares on such Dividend Payment Date. A holder of
Convertible Preferred Shares on a dividend payment record date who (or whose
transferee) tenders any such shares for conversion into Common Shares on the
corresponding Dividend Payment Date will receive the dividend payable by the
Company on such Convertible Preferred Shares on such date, and the converting
holder need not include payment of the amount of such dividend upon surrender
of Convertible Preferred Shares for conversion. Except as provided above, the
Company shall make no payment
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or allowance for unpaid dividends, whether or not in arrears, on converted
shares or for dividends on the Common Shares issued upon such conversion.
Each conversion shall be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for Convertible
Preferred Shares shall have been surrendered and such notice shall have been
received by the Company (and if applicable, payment of an amount equal to the
dividend payable on such shares shall have been received by the Company as
described above), and the person or persons in whose name or names any
certificate or certificates for Common Shares shall be issuable upon such
conversion shall be deemed to have become the holder or holders of record of
the shares represented thereby at such time on such date and such conversion
shall be at the conversion price in effect at such time on such date unless
the share transfer books of the Company shall be closed on that date, in which
event such person or persons shall be deemed to have become such holder or
holders of record at the close of business on the next succeeding day on which
such share transfer books are open, but such conversion shall be at the
conversion price in effect on the date on which such shares shall have been
surrendered and such notice received by the Company.
No fractional shares or scrip representing fractions of Common Shares shall
be issued upon conversion of the Convertible Preferred Shares. Instead of any
fractional interest in a Common Share that would otherwise be deliverable upon
the conversion of a Convertible Preferred Share, the Company shall pay to the
holder of such share an amount in cash based upon the current market price of
the Common Shares on the trading day immediately preceding the date of
conversion. If more than one share shall be surrendered for conversion at one
time by the same holder, the number of full Common Shares issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
Convertible Preferred Shares so surrendered.
The conversion price is subject to adjustments upon the occurrence of any of
the following events:
(i) If the Company shall after the Issue Date (A) pay a dividend or make
a distribution on its capital shares in Common Shares, (B) subdivide its
outstanding Common Shares into a greater number of shares, (C) combine its
outstanding Common Shares into a smaller number of shares or (D) issue any
shares of beneficial interest by reclassification of its Common Shares;
(ii) If the Company shall issue after the Issue Date rights, options or
warrants to all holders of Common Shares entitling them (for a period
expiring within 45 days after the record date mentioned below) to subscribe
for or purchase Common Shares at a price per share less than 94.0% (100.0%
if a stand-by underwriter is used and charges the Company a commission) of
the fair market value per Common Share on the record date for the
determination of shareholders entitled to receive such rights, options or
warrants;
(iii) If the Company shall distribute to all holders of its Common Shares
any securities of the Company (other than Common Shares) or evidence of its
indebtedness or assets (excluding cumulative cash dividends or
distributions paid with respect to the Common Shares after December 31,
1996 which are not in excess of the following: the sum of (A) the Company's
cumulative undistributed Funds from Operations at December 31, 1996, plus
(B) the cumulative amount of Funds from Operations, as determined by the
Board of Trustees, after December 31, 1996, minus (C) the cumulative amount
of dividends accrued or paid in respect of the Convertible Preferred Shares
or any other class or series of preferred shares of beneficial interest of
the Company after the Issue Date or rights, options or warrants to
subscribe for or purchase any of its securities (excluding those rights,
options and warrants issued to all holders of Common Shares entitling them
for a period expiring within 45 days after the record date referred to in
clause (ii) above to subscribe for or purchase Common Shares, which rights,
options and warrants are referred to in and treated under clause (ii)
above)); or
(iv) In case a tender or exchange offer (which term shall not include
open market repurchases by the Company) made by the Company or any
subsidiary of the Company for all or any portion of the Common Shares shall
expire and such tender or exchange offer shall involve the payment by the
Company or such subsidiary of consideration per Common Share having a fair
market value (as determined in good faith by the Board of Trustees, whose
determination shall be conclusive and described in a resolution of the
Board of Trustees), at the last time (the "Expiration Time") tenders or
exchanges may be made pursuant to such
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tender or exchange offer, that exceeds the current market price per Common
Share on the trading day next succeeding the Expiration Time.
No adjustment in the conversion price shall be required unless such adjustment
would require a cumulative increase or decrease of at least 1.0% in such
price; provided, however, that any adjustments that by reason of the
immediately preceding clause are not required to be made shall be carried
forward and taken into account in any subsequent adjustment until made. The
adjustments to be made in each such event are set forth in the Declaration of
Trust.
If the Company shall be a party to any transaction (including, without
limitation, a merger, consolidation, statutory share exchange, self tender
offer for all or substantially all of its Common Shares, sale of all or
substantially all of the Company's assets or recapitalization of the Common
Shares) (each of the foregoing being referred to herein as a "Transaction"),
in each case as a result of which all or substantially all of the Company's
Common Shares are converted into the right to receive shares, securities or
other property (including cash or any combination thereof), each Convertible
Preferred Share which is not redeemed or converted into the right to receive
shares, securities or other property prior to such Transaction shall
thereafter be convertible into the kind and amount of shares, securities and
other property (including cash or any combination thereof) receivable upon the
consummation of such Transaction by a holder of that number of Common Shares
into which one Convertible Preferred Share was convertible immediately prior
to such Transaction.
Limitation on Issuance of Additional Preferred Shares and Indebtedness
Without the written consent of the holders of two-thirds of the issued and
outstanding Convertible Preferred Shares, none of the Company, the Operating
Partnership or any of their subsidiaries may issue any additional preferred
securities of any such entity or incur any indebtedness (other than trade
payables or accrued expenses incurred in the ordinary course of business) if,
immediately following such issuance and after giving effect to such issuance
and the application of the net proceeds therefrom, such entity would be
reasonably expected to not satisfy one or both of the following ratios:
(i) Total Debt and liquidation value of non-convertible preferred shares
of beneficial interest to Total Market Capitalization of less than .65 to
1.0; or
(ii) Consolidated EBITDA to Consolidated Fixed Charges of at least 1.4 to
1.0.
In the event that the Company fails to satisfy one or both of the tests in
clause (i) or (ii) above for two consecutive quarters, the holders of
Convertible Preferred Shares shall have the right to require that the Company,
to the extent that the Company shall have funds legally available therefor,
repurchase any or all of each holder's Convertible Preferred Shares at a
repurchase price payable in cash in an amount equal to 100% of the liquidation
preference thereof, plus accrued and unpaid dividends whether or not declared,
if any (the "Repurchase Payment"), to the date of repurchase or the date
payment is made available (the "Repurchase Date"), pursuant to the offer
described below (the "Repurchase Offer").
Within 15 days following the second consecutive quarter that the Company
fails to satisfy one or both of the tests in clause (i) or (ii) above, the
Company shall mail by first class mail or overnight courier a notice to all
holders of Convertible Preferred Shares stating (i) that the Company failed to
satisfy one or both of the tests (naming the test(s) failed), (ii) that the
holders of Convertible Preferred Shares have the right to require the Company
to repurchase any or all Convertible Preferred Shares then held by such holder
in cash, (iii) the date of repurchase (which shall be a business day, no
earlier than 120 days and no later than 150 days from the date such notice is
mailed, or such later date as may be necessary to comply with the requirements
of the Exchange Act), (iv) the repurchase price for the repurchase and (v) the
instructions determined by the Company that the holder must follow in order to
have its Convertible Preferred Shares repurchased.
On the Repurchase Date, the Company will, to the extent lawful, accept for
payment Convertible Preferred Shares or portions thereof tendered pursuant to
the Repurchase Offer and promptly mail by first class mail or overnight
courier or by wire transfer of immediately available funds to the holder of
Convertible Preferred
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Shares, as directed by such holder, payment in an amount equal to the
Repurchase Payment in respect of all Convertible Preferred Shares or portions
thereof so tendered.
"Total Debt" means the sum of (without duplication) any indebtedness,
whether or not contingent, in respect of borrowed money or evidenced by bonds,
notes, debentures, or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing the balance
deferred and unpaid of the purchase price of any property (including pursuant
to capital leases), except any such balance that constitutes an accrued
expense or trade payable, if and to the extent such indebtedness would appear
as a liability upon a balance sheet of such entity prepared on a consolidated
basis in accordance with Generally Accepted Accounting Principles ("GAAP"),
and also includes, to the extent not otherwise included, the guarantee of
items which would be included within this definition.
"Total Market Capitalization" means the sum of: (a) the fair market value of
the outstanding Common Shares, assuming (i) the full exchange of outstanding
partnership units (in each case not held by the Company) of the Operating
Partnership for Common Shares and (ii) the conversion of the outstanding
shares of Convertible Preferred Shares into Common Shares; (b) the aggregate
Liquidation Preference of any outstanding preferred shares of beneficial
interest other than the Convertible Preferred Shares; and (c) the Total Debt
of the Company.
"Consolidated EBITDA" for any period means the consolidated net income of
the Company (before extraordinary income or gains) as reported in the
Company's financial statements filed with the Securities and Exchange
Commission increased by the sum of the following (without duplication):
(i) all income and state franchise taxes paid or accrued according to
GAAP for such period (other than income taxes attributable to
extraordinary, unusual or non-recurring gains or losses except to the
extent that such gains were not included in Consolidated EBITDA);
(ii) all interest expense paid or accrued in accordance with GAAP for
such period (including financing fees and amortization of deferred
financing fees and amortization of original issue discount);
(iii) depreciation and depletion reflected in such reported net income;
(iv) amortization reflected in such reported net income, including,
without limitation, amortization of capitalized debt issuance costs (only
to the extent that such amounts have not been previously included in the
amount of Consolidated EBITDA pursuant to clause (ii) above), goodwill,
other intangibles and management fees; and
(v) any other non-cash charges or discretionary prepayment penalties, to
the extent deducted from consolidated net income (including, but not
limited to, income allocated to minority interests).
"Consolidated Fixed Charges" for any period means the sum of:
(i) all interest expense paid or accrued in accordance with GAAP for such
period (including financing fees and amortization of deferred financing
fees and amortization of original issue discount);
(ii) preferred shares of beneficial interest dividend requirements for
such period, whether or not declared or paid; and
(iii) regularly scheduled amortization of principal during such period
(other than any balloon payments at maturity).
Ranking
Any class or series of shares of beneficial interest of the Company shall be
deemed to rank: (i) prior to the Convertible Preferred Shares, as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of Convertible Preferred Shares; (ii) on a parity with
the Convertible Preferred Shares, as to the payment of dividends and as to
distribution of assets upon liquidation, dissolution or winding up, whether or
not the dividend rates, dividend payment dates or redemption or liquidation
prices per share thereof shall be different
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from those of the Convertible Preferred Shares, if the holders of such class
or series and the Convertible Preferred Shares shall be entitled to the
receipt of dividends and of amounts distributable upon liquidation,
dissolution or winding up in proportion to their respective amounts of accrued
and unpaid dividends per share or liquidation preferences, without preference
or priority one over the other ("Parity Shares"); (iii) junior to the
Convertible Preferred Shares, as to the payment of dividends or as to the
distribution of assets upon liquidation, dissolution or winding up, if such
class or series shall be Junior Shares; and (iv) junior to the Convertible
Preferred Shares, as to the payment of dividends and as to the distribution of
assets upon liquidation, dissolution or winding up, if such class or series
shall be Fully Junior Shares.
Voting Rights
If and whenever (i) two consecutive quarterly dividends payable on the
Convertible Preferred Shares or any series or class of Parity Shares shall be
in arrears (which shall, with respect to any such quarterly dividend, mean
that any such dividend has not been paid in full), whether or not earned or
declared, or (ii) for two consecutive quarterly dividend periods the Company
fails to pay dividends on the Common Shares in an amount per share at least
equal to $ , the number of trustees then constituting the Board of
Trustees shall be increased by one (unless the then current Board of Trustees
consists of more than 10 trustees in which can it shall be increased by two)
and the holders of Convertible Preferred Shares, together with the holders of
shares of every other series of Parity Shares (any such other series, the
"Voting Preferred Shares"), voting as a single class regardless of series,
shall be entitled to elect the one or two additional trustees to serve on the
Board of Trustees at any annual meeting of shareholders or special meeting
held in place thereof, or at a special meeting of the holders of the
Convertible Preferred Shares and the Voting Preferred Shares called as
described below.
Whenever all arrears in dividends on the Convertible Preferred Shares and
the Voting Preferred Shares then outstanding shall have been paid and
dividends thereon for the current quarterly dividend period shall have been
paid or declared and set apart for payment, or the Company has paid dividends
on the Common Shares in an amount per share at least equal to $ for two
consecutive quarters, then the right of the holders of the Convertible
Preferred Shares and the Voting Preferred Shares to elect such additional
trustee(s) shall cease (but subject always to the same provision for the
vesting of such voting rights in the case of any similar future arrearage in
quarterly dividends), and the terms of office of all persons elected as
trustees by the holders of the Convertible Preferred Shares and the Voting
Preferred Shares shall forthwith terminate and the number of the Board of
Trustees shall be reduced accordingly.
So long as any Convertible Preferred Shares are outstanding, in addition to
any other vote or consent of shareholders required by law or by the
Declaration of Trust, the affirmative vote of at least 66 2/3% of the votes
entitled to be cast by the holders of the Convertible Preferred Shares given
in person or by proxy, either in writing without a meeting or by vote at any
meeting called for the purpose, shall be necessary for effecting or
validating: (i) any amendment, alteration or repeal of any of the provisions
of the Declaration of Trust that materially and adversely affects the voting
powers, rights or preferences of the holders of the Convertible Preferred
Shares; provided, however, that the amendment of the provisions of the
Declaration of Trust so as to authorize or create or to increase the
authorized amount of, any Fully Junior Shares, Junior Shares that are not
senior in any respect to the Convertible Preferred Shares or any Parity Shares
shall not be deemed to materially adversely affect the voting powers, rights
or preferences of the holders of Convertible Preferred Shares; or (ii) a share
exchange that affects the Convertible Preferred Shares, a consolidation with
or merger of the Company into another entity, or a consolidation with or
merger of another entity into the Company, unless in each such case each
Convertible Preferred Share (A) shall remain outstanding without a material
and adverse change to its terms and rights or (B) shall be converted into or
exchanged for convertible preferred shares of the surviving entity having
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms or conditions of
redemption thereof identical to that of a Convertible Preferred Share (except
for changes that do not materially and adversely affect the holders of the
Convertible Preferred Shares); provided, however, that no such vote of the
holders of Convertible Preferred Shares shall be required if, at or prior to
the time when such amendment, alteration or repeal is to take effect, or when
the issuance of any such prior shares or convertible security is to be made,
as the case may be, provision is made for the redemption of
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all Convertible Preferred Shares at the time outstanding to the extent such
redemption is authorized. See "--Redemption."
Each Convertible Preferred Share shall have one vote per share, except that
when any other series of Preferred Shares shall have the right to vote with
the Convertible Preferred Shares as a single class on any matter, then the
Convertible Preferred Shares and such other series shall have with respect to
such matters one vote per $ .
Registration Rights
The Company has granted Security Capital Preferred Growth certain "demand"
and "piggyback" registration rights with respect to the Common Shares acquired
by it upon conversion of the Convertible Preferred Shares into Common Shares.
Subject to certain conditions, such demand registration rights permit holders
of such shares to request one demand registration. Subject to certain
conditions, such piggyback registration rights permit the holders of such
Shares to include their Common Shares in the registration by the Company of
its equity securities other than in connection with the registration by the
Company under the Securities Act of any of its securities (i) pursuant to a
shelf registration statement, (ii) in connection with mergers or acquisitions
or (iii) in connection with an employee benefit, share dividend, share
ownership or dividend reinvestment plan.
General
The transfer agent and registrar for the Convertible Preferred Shares is
.
The Company does not intend to list or qualify the Convertible Preferred
Shares for trading on any exchange or on the Nasdaq National Market.
The Convertible Preferred Shares will, when issued, be duly authorized,
fully paid and nonassessable and will have no preemptive rights.
COMMON SHARES
All Common Shares offered hereby will, when issued, be duly authorized,
fully paid and nonassessable. Subject to the preferential rights of the
Convertible Preferred Shares and any other class or series of shares of
beneficial interest and to the provisions of the Declaration of Trust
regarding the Excess Shares and Convertible Preferred Shares, holders of
Common Shares will be entitled to receive distributions on such shares if, as
and when authorized and declared by the Board of Trustees out of assets
legally available therefor and to share ratably in the assets of the Company
legally available for distribution to the shareholders in the event of the
liquidation, dissolution or winding-up of the Company after payment of, or
adequate provision for, all known debts and liabilities of the Company. The
Company intends to pay quarterly distributions, beginning with the quarter
ending December 31, 1997. See "Distribution Policy."
The Convertible Preferred Shares are entitled to payment of distributions at
the rate declared on the Common Shares if such rate is greater than the stated
distribution rate on the Convertible Preferred Shares. Accordingly, at such
time as the distribution rate on the Common Shares is greater than the stated
rate on the Convertible Preferred Shares, holders of Convertible Preferred
Shares will be entitled to participate in any further growth of Funds from
Operations together with the holders of Common Shares.
Subject to the provisions of the Declaration of Trust regarding Excess
Shares and Convertible Preferred Shares, each outstanding Common Share
entitles the holder to one vote on all matters submitted to a vote of
shareholders, including the election of trustees and, except as otherwise
required by law or except as provided with respect to any other class or
series of shares of beneficial interest, the holders of such shares will
possess exclusive voting power. There is no cumulative voting in the election
of trustees, which means that the holders of a majority of the outstanding
Common Shares can elect all of the trustees then standing for election, and
the holders of the remaining shares will not be able to elect any trustees.
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Holders of the Convertible Preferred Shares and Common Shares have no
conversion, sinking fund, redemption rights, exchange rights or preemptive
rights to subscribe for any securities of the Company.
Subject to the provisions of the Declaration of Trust regarding Excess
Shares, Common Shares will have equal dividend, distribution, liquidation and
other rights, and will have no preference, appraisal (except as provided by
Maryland law) or exchange rights.
Pursuant to Maryland REIT Law, a Maryland real estate investment trust
generally cannot dissolve, amend its declaration of trust or merge, unless
approved by the affirmative vote or written consent of shareholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be
cast on the matter) is set forth in the trust's declaration of trust. The
Company's Declaration of Trust contains such a provision providing for a
lesser percentage, a majority of outstanding shares, with respect to
transactions pursuant to which the Company's assets will be combined with
those of one or more other entities (whether by merger, sale or other transfer
of assets, consolidation or share exchange).
The transfer agent and registrar for the Common Shares is LaSalle National
Bank.
The Company has applied for listing of the Common Shares on the NYSE under
the trading symbol "PGE."
ADDITIONAL PREFERRED SHARES
Additional Preferred Shares may be issued from time to time, in one or more
series, as authorized by the Board of Trustees. Other than the Convertible
Preferred Shares, no Preferred Shares are currently issued or outstanding.
Prior to the issuance of shares of each series, the Board of Trustees is
required by the Maryland REIT Law and the Declaration of Trust to fix for each
series the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms or
conditions of redemption, as permitted by Maryland law. Because the Board of
Trustees has the power to establish the preferences, powers and rights of each
series of Preferred Shares, it may afford the holders of any series of
Preferred Shares preferences, powers and rights, voting or otherwise, senior
to the rights of holders of Common Shares. The issuance of additional series
of Preferred Shares could have the effect of delaying or preventing a change
of control of the Company that might involve a premium price for holders of
Common Shares or otherwise be in their best interest. The Board of Trustees
has no present plans to issue any additional series of Preferred Shares.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, among other things, no
more than 50.0% in value of its outstanding shares of beneficial interest may
be owned, actually or constructively under the applicable attribution rules of
the Code, by five or fewer individuals (as defined in the Code to include
certain tax-exempt entities other than, in general, qualified domestic pension
funds) during the last half of a taxable year (other than the first year for
which the election to be taxed as a REIT has been made) or during a
proportionate part of a shorter taxable year (the "five or fewer
requirement"). In addition, if the Company, or an owner of 10.0% or more of
the Company, actually or constructively owns 10.0% or more of a tenant of the
Company (or a tenant of any partnership in which the Company is a partner),
the rent received by the Company (either directly or through any such
partnership) from such tenant will not be qualifying income for purposes of
the REIT gross income tests of the Code. A REIT's stock or beneficial
interests must also be owned by 100 or more persons during at least 335 days
of a taxable year of 12 months or during a proportionate part of a shorter
taxable year (other than the first year for which an election to be treated as
a REIT has been made).
Because the Company expects to qualify as a REIT, the Declaration of Trust
contains restrictions on the ownership and transfer of Common Shares which are
intended to assist the Company in complying with these requirements. The
Ownership Limit set forth in the Declaration of Trust provides that, subject
to certain specified exceptions, no person or entity may own, or be deemed to
own by virtue of the applicable constructive ownership provisions of the Code,
more than 9.9% (by number or value, whichever is more restrictive) of the
outstanding Common Shares. The constructive ownership rules of the Code are
complex, and may cause Common Shares
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owned actually or constructively by a group of related individuals and/or
entities to be deemed to be constructively owned by one individual or entity.
As a result, the acquisition of less than 9.9% of the Common Shares (or the
acquisition of an interest in an entity that owns, actually or constructively,
Common Shares) by an individual or entity, could, nevertheless cause that
individual or entity, or another individual or entity, to be deemed to own
constructively in excess of 9.9% of the outstanding Common Shares and thus to
violate the Ownership Limit, or such other limit as provided in the
Declaration of Trust or as otherwise permitted by the Board of Trustees.
Pension plans and mutual funds are among the entities that are not treated as
holders of stock or beneficial interests under the five or fewer requirement
and instead the beneficial owners of such entities are counted as holders for
this purpose. The Board of Trustees may, but in no event will be required to,
waive the Ownership Limit or such other limit as provided in the Declaration
of Trust with respect to a particular shareholder if it determines that such
ownership will not jeopardize the Company's status as a REIT and the Board of
Trustees otherwise decides such action would be in the best interest of the
Company. As a condition of such waiver, the Board of Trustees may require a
ruling from the IRS or an opinion of counsel satisfactory to it with respect
to preserving the REIT status of the Company.
The Company has waived the Ownership Limit set forth in the Declaration of
Trust with respect to the Common Shares to permit Security Capital Preferred
Growth to own, at any one time, the Common Shares issuable upon conversion of
the Convertible Preferred Shares.
The Declaration of Trust further prohibits (i) any person from actually or
constructively owning shares of beneficial interest of the Company that would
result in the Company being "closely held" under Section 856(h) of the Code
(i.e., a violation of the five or fewer requirement) or otherwise cause the
Company to fail to qualify as a REIT and (ii) any person from transferring
shares of beneficial interest of the Company if such transfer would result in
shares of beneficial interest of the Company being owned by fewer than 100
persons.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of beneficial interest of the Company that
will or may violate any of the foregoing restrictions on transferability of
ownership is required to give notice immediately to the Company and provide
the Company with such other information as the Company may request in order to
determine the effect of such transfer on the Company's status as a REIT.
If any purported transfer of Common Shares of the Company or any other event
would otherwise result in any person violating the Ownership Limit or such
other limit as provided in the Declaration of Trust then any such purported
transfer will be void and of no force or effect with respect to the purported
transferee (the "Prohibited Transferee") as to that number of shares in excess
of the Ownership Limit or such other limit as provided in the Declaration of
Trust and the Prohibited Transferee shall acquire no right or interest in such
excess shares. Any such excess shares described above will be converted
automatically into an equal number of Excess Shares (the "Shares-in-Trust")
and transferred automatically, by operation of law, to a trust (the "Share
Trust"), the beneficiary of which will be selected by the Company (the
"Beneficiary"). Such automatic transfer shall be deemed to be effective as of
the close of business on the business day prior to the date of such violative
transfer. At any time after the expiration of a 90-day period which commences
upon the receipt of notice from the Company of the transfer of Shares-in-Trust
to the Share Trust and during which the Company shall have the right to
purchase such Shares-in-Trust, the trustee of the Share Trust (who shall be
designated by the Company and be unaffiliated with the Company or any
Prohibited Transferee) shall have the right to sell such Shares-in-Trust to a
person or entity who could own such shares without violating the Ownership
Limit or such other limit as provided in the Declaration of Trust and
distribute to the Prohibited Transferee an amount equal to the lesser of the
price paid by the Prohibited Transferee for such Shares-in-Trust or the sales
proceeds received by the Share Trust for such Shares-in-Trust. In the case of
any Shares-in-Trust issued as a result of any event other than a transfer, or
from a transfer for no consideration (such as a gift), the trustee will be
required to sell such Shares-in-Trust to a qualified person or entity and
distribute to the Prohibited Transferee an amount equal to the lesser of the
Market Price (as defined in the Declaration of Trust) of such Shares-in-Trust
as of the date of such event or the sales proceeds received by the trust for
such Shares-in-Trust. In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee will be distributed to the
Beneficiary. Prior to a sale of any
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such Shares-in-Trust by the Share Trust, the trustee will be entitled to
receive, in trust for the Beneficiary, all dividends and other distributions
paid by the Company with respect to such Shares-in-Trust, and also will be
entitled to exercise all voting rights with respect to such Shares-in-Trust.
Subject to Maryland law, effective as of the date that such Shares-in-Trust
have been transferred to the Share Trust, (i) any vote cast by a Prohibited
Transferee prior to the discovery by the Company that such Shares-in-Trust
have been transferred to the Share Trust will be void and of no force or
effect and (ii) the trustee shall have the authority to recast such vote in
accordance with the desires of the trustee acting for the benefit of the
Beneficiary. Any dividend or other distribution paid to the Prohibited
Transferee (prior to the discovery by the Company that such Shares-in-Trust
have been automatically transferred to the Share Trust as described above)
will be required to be repaid to the trustee for distribution to the
Beneficiary.
In addition, Shares-in-Trust held in the Share Trust shall be deemed to have
been offered for sale to the Company, or its designee, at a price per share
equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the Share Trust (or in the case of a devise or
gift, the Market Price at the time of such devise or gift) and (ii) the Market
Price on the date the Company, or its designee, accepts such offer. The
Company shall have the right to accept such offer for a period of 90 days.
If any purported transfer of Common Shares would cause the Company to be
beneficially owned by fewer than 100 persons, such transfer will be null and
void in its entirety and the intended transferee will acquire no rights to
Common Shares.
The foregoing restrictions on transferability and ownership will not apply
if the Board of Trustees determines that it is no longer in the best interest
of the Company to attempt to qualify, or to continue to qualify, as a REIT and
such determination is approved by an affirmative vote of two-thirds of the
votes entitled to be cast on such matter at a regular or special meeting of
the shareholders of the Company. Except as otherwise described above, any
change in the Ownership Limit would require an amendment to the Declaration of
Trust. Subject to certain limited exceptions, amendments to the Declaration of
Trust require the affirmative vote of holders owning at least two-thirds of
the shares of beneficial interest of the Company outstanding and entitled to
vote thereon.
All certificates representing Common Shares of the Company will bear a
legend referring to the restrictions described above.
If the foregoing transfer restrictions are determined to be void or invalid
by virtue of any legal decision, statute, rule or regulation, then the
intended transferee of any Excess Shares may be deemed, at the option of the
Company, to have acted as agent on behalf of the Company in acquiring such
Excess Shares and to hold such Excess Shares on behalf of the Company.
Under the Declaration of Trust, every owner of more than 5% (or such lower
percentage as required by the Code or Treasury Regulations) of the outstanding
Common Shares must file, within 30 days after January 1 of each year, a
written notice with the Company containing information regarding their
ownership of such shares. Under current Treasury Regulations, the percentage
will be set between one-half of 1% and 5%, depending upon the number of record
holders of the Company's shares. Further, each shareholder shall upon demand
be required to disclose to the Company in writing such information as the
Company may request in order to determine the effect, if any, of such
shareholder's actual and constructive ownership of Common Shares on the
Company's status as a REIT.
The foregoing ownership limitations may have the effect of precluding
acquisition of control of the Company without the consent of the Board of
Trustees and, consequently, shareholders may be unable to realize a premium
for their shares over the then-prevailing market price which is customarily
associated with such acquisitions and to ensure compliance with the Ownership
Limit, or such other limit as provided in the Declaration of Trust.
These restrictions will not preclude settlement for transactions through the
NYSE.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S DECLARATION OF TRUST
AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and of
the Declaration of Trust and the Bylaws of the Company. This summary does not
purport to be complete and is subject to and qualified in its entirety by
reference to the MGCL, the Maryland REIT Law, the Declaration of Trust and the
Bylaws, forms of which are exhibits to the Registration Statement of which
this Prospectus is a part.
CLASSIFICATION OF THE BOARD OF TRUSTEES
The Declaration of Trust provides that the number of trustees of the Company
shall be seven (subject to the rights of the holders of Convertible Preferred
Shares to elect additional trustees upon the occurrence of certain events),
which number may be increased or decreased pursuant to the Bylaws, but shall
not be fewer than three. The Bylaws currently provide that the Board of
Trustees will consist of not fewer than three nor more than thirteen trustees.
Any vacancy will be filled, at any regular meeting or at any special meeting
called for that purpose, by the affirmative vote of a majority of the
remaining trustees, even though less than a quorum of the Board of Trustees
may exist.
Pursuant to the terms of the Declaration of Trust, the Board of Trustees is
divided into three classes as nearly equal in size as practicable. One class
will hold office initially for a term expiring at the annual meeting of
shareholders to be held in 1999, another class will hold office initially for
a term expiring at the annual meeting of shareholders to be held in 2000 and
another class will hold office initially for a term expiring at the annual
meeting of shareholders to be held in 2001. As the term of each class expires,
trustees in that class will be elected for a term of three years and until
their successors are duly elected and qualified, and the trustees in the other
two classes will continue in office. The Company believes that classification
of the Board of Trustees will help to assure the continuity and stability of
the Company's business strategies and policies as determined by the Board of
Trustees.
The classified board provision could have the effect of making the removal
of incumbent trustees more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. At least two annual meetings of
shareholders, instead of one, will generally be required to effect a change in
a majority of the Board of Trustees. Thus, the classified board provision
could increase the likelihood that incumbent trustees will retain their
positions. Holders of Common Shares will have no right to cumulative voting
for the election of trustees. Consequently, at each annual meeting of
shareholders, the holders of a majority of the Common Shares will be able to
elect all of the successors of the class of trustees whose term expires at
that meeting. See "Risk Factors."
REMOVAL OF TRUSTEES
While the Declaration of Trust empowers the Shareholders to fill vacancies
in the Board of Trustees that are caused by the removal of a trustee, the
Declaration of Trust also precludes shareholders from removing incumbent
trustees except upon a substantial affirmative vote. Specifically, the
Declaration of Trust provides that a trustee may be removed only for cause and
only by the affirmative vote of at least two-thirds of the votes then entitled
to be cast in the election of trustees. Under the Maryland REIT law, the term
"cause" is not defined and is, therefore, subject to Maryland common law and
to judicial interpretation and review in the context of the unique facts and
circumstances of any particular situation. This provision, when coupled with
the provision in the Bylaws authorizing the Board of Trustees to fill vacant
trusteeships, precludes shareholders from removing incumbent trustees except
upon a substantial affirmative vote and filling the vacancies created by such
removal with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, as applicable to Maryland REITs, certain "business
combinations" (including a merger, consolidation, share exchange or, in
certain circumstances, an asset transfer or issuance or reclassification of
equity securities) between the Company and any Interested Shareholder or an
affiliate thereof are prohibited for
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five years after the most recent date on which the Interested Shareholder
became an Interested Shareholder. Thereafter, any such business combination
must be recommended by the Board of Trustees and approved by the affirmative
vote of at least (a) 80.0% of the votes entitled to be cast by holders of the
Company's outstanding voting shares of beneficial interest and (b) two-thirds
of the votes entitled to be cast by holders of the Company's outstanding
voting shares of beneficial interest other than shares held by the Interested
Shareholder with whom the business combination is to be effected, unless,
among other things, the Company's shareholders receive a minimum price (as
defined in the MGCL) for their shares of beneficial interest and the
consideration is received in cash or in the same form as previously paid by
the Interested Shareholder for its shares. These provisions of the MGCL do not
apply, however, to business combinations that are approved or exempted by the
Board of Trustees of the Company prior to the time that the Interested
Shareholder becomes an Interested Shareholder. As permitted by the MGCL, the
Board of Trustees of the Company has opted out of the business combinations
provisions of the MGCL with respect to any business combination involving
Prime, the Primestone Joint Venture or any of the Contributors, or any of
their respective affiliates (including Mr. Reschke). In addition, the
Partnership Agreement requires that any merger or sale of all or substantially
all of the assets of the Operating Partnership be approved by the holders of
at least 50.0% of the Common Units, including the Common Units held by the
Company.
CONTROL SHARE ACQUISITIONS
The MGCL, as applicable to Maryland REITs, provides that "control shares" of
a Maryland real estate investment trust acquired in a "control share
acquisition" have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares of
beneficial interest owned by the acquiror or by officers or trustees who are
employees of the trust.
"Control shares" are voting shares which, if aggregated with all other such
shares previously acquired by the acquiror or in respect of which the acquiror
is able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing trustees within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority or (iii) a majority or more of all voting power. Control
shares do not include shares the acquiring person is then entitled to vote as
a result of having previously obtained shareholder approval. A "control share
acquisition" means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Trustees to call a special meeting of shareholders to
be held within 50 days of demand to consider the voting rights of the shares.
If no request for a meeting is made, the Company may itself present the
question at any shareholders' meeting.
If voting rights are not approved at the shareholders' meeting or if the
acquiring person does not deliver an acquiring person statement as required by
the MGCL, then, subject to certain conditions and limitations, the trust may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
shareholders at which the voting rights of such shares of beneficial interest
are considered and not approved. If voting rights for control shares are
approved at a shareholders' meeting and the acquiror becomes entitled to vote
a majority of the shares of beneficial interest entitled to vote, all other
shareholders may exercise appraisal rights. The fair value of the shares of
beneficial interest as determined for purposes of such appraisal rights may
not be less than the highest price per share paid by the acquiror in the
control share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context
of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the Company is a party to the
transaction or to acquisitions approved or exempted by the trust's declaration
of trust or bylaws.
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The Bylaws contain a provision exempting from the control share acquisition
statute any and all acquisitions by any person of the Company's shares of
beneficial interest. There can be no assurance that such provision will not be
amended or eliminated at any point in the future.
If the foregoing exemption in the Bylaws is rescinded, the control share
acquisition statute could have the effect of discouraging offers to acquire
the Company and of increasing the difficulty of consummating any such offer.
AMENDMENT TO THE DECLARATION OF TRUST
The Declaration of Trust, with certain limited exceptions, may be amended
with the affirmative vote of the holders of not less than a majority of the
aggregate number of shares of beneficial interest outstanding and entitled to
vote thereon voting generally in the election of trustees. The provisions
relating to the classification of the Board of Trustees and removal of
trustees may be amended only by the affirmative vote of the holders of not
less than two-thirds of the aggregate number of shares of beneficial interest
outstanding and then entitled to vote thereon voting generally in the election
of trustees.
Under the Maryland REIT Law, a declaration of trust may permit the trustees
by a two-thirds vote to amend the declaration of trust from time to time to
qualify as a REIT under the Code or the Maryland REIT Law without the
affirmative vote or written consent of the shareholders. The Company's
Declaration of Trust permits such action by the Board of Trustees. Also under
the Maryland REIT Law, a declaration of trust may permit the board of trustees
to amend the declaration of trust to increase or decrease the aggregate number
of shares of beneficial interest or the number of shares of any class without
shareholder approval. Pursuant to this statute, the Declaration of Trust
authorizes the Board of Trustees to increase or decrease the aggregate number
of shares of beneficial interest of the Company or the number of shares of
beneficial interest of any class of beneficial interest of the Company without
shareholder approval.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting of
shareholders, nominations of persons for election to the Board of Trustees and
the proposal of business to be considered by shareholders may be made only (i)
pursuant to the Company's notice of the meeting, (ii) by the Board of Trustees
or (iii) by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in the Bylaws and (b)
with respect to special meetings of shareholders, only the business specified
in the Company's notice of meeting may be brought before the meeting of
shareholders and nominations of persons for election to the Board of Trustees
may be made only (i) pursuant to the Company's notice of meeting, (ii) by the
Board of Trustees or (iii) provided that the Board of Trustees has determined
that trustees shall be elected at such meeting, by a shareholder who is
entitled to vote at the meeting and has complied with the advance notice
procedures set forth in the Bylaws.
The provisions in the Declaration of Trust on classification of the Board of
Trustees and amendments to the Declaration of Trust and removal of trustees if
the applicable provision in the Bylaws is revoked, control shares acquisition
provisions of the MGCL, and the advance notice provisions of the Bylaws could
have the effect of discouraging a takeover or other transaction in which
holders of some, or a majority, of the Common Shares might receive a premium
for their shares over the then-prevailing market price or which such holders
might believe to be otherwise in their best interests.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland REIT, the Maryland REIT Law
requires that the Company hold, either directly or indirectly, at least 75.0%
of the value of its assets in real estate assets, mortgages or mortgage
related securities, government securities, cash and cash equivalent items,
including high-grade short-term securities and receivables. The Maryland REIT
Law also prohibits using or applying land for farming, agricultural,
horticultural or similar purposes.
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MEETINGS OF SHAREHOLDERS
The Declaration of Trust and the Bylaws provide for annual meetings of
shareholders, commencing with the year 1999, to elect the Board of Trustees
and transact such other business as may properly be brought before the
meeting. Special meetings of shareholders may be called by the President, the
Board of Trustees or the Chairman of the Board and shall be called at the
request in writing of the holders of 50.0% or more of the outstanding shares
of beneficial interest of the Company entitled to vote.
The Bylaws provide that any action required or permitted to be taken at a
meeting of shareholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by each
shareholder entitled to vote on the matter and a written waiver of any right
to dissent is signed by each shareholder entitled to notice of the meeting but
not entitled to vote at it.
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SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon the completion of the Offering and the consummation of the Formation
Transactions, the Company will have outstanding 2,000,000 Convertible
Preferred Shares and 12,380,000 Common Shares (or 14,237,000 Common Shares if
the Underwriters' over-allotment option is exercised in full). In addition,
the Company has reserved 11,064,343 Common Shares for issuance upon the
exchange of LP Common Units held by Limited Partners or conversion of the
Convertible Preferred Shares. All of the Common Shares offered hereby will be
freely tradeable in the public market by persons other than "affiliates" of
the Company without restriction or registration under the Securities Act.
In addition, upon completion of the Offering and the consummation of the
Formation Transactions, the Company will have 9,064,343 LP Common Units
outstanding issued to the Limited Partners. The Limited Partners have agreed
not to, directly or indirectly, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose of (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of
any option to purchase or other sale or disposition) any LP Common Units or
Common Shares or other shares of beneficial interest of the Company, or any
securities convertible or exercisable or exchangeable for any LP Common Units
or Common Shares or other shares of beneficial interest of the Company for the
applicable Holding Period, and the Company has agreed not to offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) any (other than pursuant to the Share Incentive Plan) Common
Shares or other shares of beneficial interest of the Company, or any
securities convertible or exercisable for any LP Common Units or Common Shares
or other shares of beneficial interest of the Company, for a period of 180
days from the date of this Prospectus, in each case without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters,
subject to certain limited exceptions. Prudential Securities Incorporated, at
any time and without notice, may release all or any portion of the Common
Shares subject to the foregoing lock-up agreements. Following the expiration
of the foregoing restrictions, any Common Shares issued to the Limited
Partners upon exchange of their respective LP Common Units may be sold in the
public market pursuant to registration statements which the Company will be
obligated to file pursuant to the exercise of registration rights that have
been granted by the Company or available exemptions from registration. See
"Underwriting."
The Common Shares owned by "affiliates" of the Company and the Common Shares
issuable upon exchange of Common Units (other than those issued pursuant to
registration rights, as described below), will be subject to Rule 144
promulgated under the Securities Act ("Rule 144") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated with them in accordance with Rule 144) who has
beneficially owned "restricted securities" (defined generally as securities
acquired from the issuer or an affiliate of the issuer in a transaction not
involving a public offering) for at least one year, and including the holding
period of any prior owner unless such prior owner is an affiliate, would be
entitled to sell within any three-month period a number of Common Shares that
does not exceed the greater of 1.0% of the then-outstanding number of Common
Shares or 1.0% of the average weekly trading volume of the Common Shares on
the NYSE during the four calendar weeks preceding each such sale. Sales under
Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. Any person (or persons whose shares are aggregated with them in
accordance with Rule 144) who is not deemed to have been an affiliate of the
Company at any time during the three months preceding a sale, and who has
beneficially owned shares for at least two years (including any period of
ownership of preceding non-affiliated holders), would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, notice requirements or public information
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requirements. An "affiliate" of the Company is a person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by,
or under common control with, the Company.
The Company has established the Share Incentive Plan for the purpose of
attracting and retaining executive officers, trustees and other key employees.
See "Management--Share Incentive Plan." Upon the completion of the Offering,
it is expected that the Company will issue in the aggregate options to
purchase 1,113,000 Common Shares to executive officers, trustees and certain
key employees and will reserve 737,000 additional Common Shares for future
issuance under the Share Incentive Plan. The Company intends to file a
registration statement under the Securities Act registering the Common Shares
reserved for issuance upon the exercise of options granted under the Share
Incentive Plan. See "Management--Share Incentive Plan." This registration
statement is expected to be filed soon after the date of this Prospectus and
will become effective automatically upon filing. Accordingly, (i) Common
Shares issued upon exercise of options registered under such registration
statement and (ii) Common Shares issuable upon the exchange of Common Units or
the conversion of the Convertible Preferred Shares that are sold pursuant to
an effective registration statement pursuant to the registration rights
discussed below under "--Exchange Rights and Registration Rights," in each
case, will be available for sale in the open market, unless such shares are
Convertible Preferred Shares or subject to vesting restrictions with the
Company and except to the extent that the holders of such options are subject
to the lock-up agreements described above.
Prior to the date of this Prospectus, there has been no public market for
the Common Shares. It is expected that the Common Shares will be approved for
listing on the NYSE, subject to official notice of issuance. No prediction can
be made as to the effect, if any, that future sales of Common Shares
(including sales pursuant to Rule 144) or the availability of Common Shares
for future sale will have on the market price prevailing from time to time.
Sales of substantial amounts of Common Shares (including Common Shares issued
upon the exercise of options, the exchange of Common Units or conversion of
Convertible Preferred Shares) or the perception that such sales could occur,
could adversely affect prevailing market prices of the Common Shares and
impair the Company's ability to obtain additional capital through the sale of
equity securities. See "Risk Factors--Possible Adverse Effects on Share Price
Arising from Shares Eligible for Future Sale." For a description of certain
restrictions on transfers of Common Shares held by certain shareholders of the
Company, see "Description of Shares of Beneficial Interest--Restrictions on
Ownership and Transfer" and "Underwriting."
EXCHANGE RIGHTS AND REGISTRATION RIGHTS
Subject to certain conditions, beginning 12 months following the completion
of the Offering, each LP Common Unit held by a Limited Partner may be
exchanged for one Common Share (subject to adjustment) or, at the option of
the Company, for cash equal to the fair market value of a Common Share at the
time of exchange. In addition, the Limited Partners have agreed not to sell,
pledge or otherwise transfer their LP Common Units for the applicable Holding
Period without the consent of Prudential Securities Incorporated, on behalf of
the Underwriters. In order to protect the Company's status as a REIT, each
holder of LP Common Units is prohibited from exchanging such LP Common Units
for Common Shares to the extent that as a result of such exchange any person
would own or would be deemed to own, actually or constructively, more than
9.9% of the Common Shares, except to the extent such holder has been granted
an exception to the Ownership Limit. See "Description of Shares of Beneficial
Interest--Convertible Preferred Shares--Certain Registration Rights."
The Company has granted the Limited Partners receiving Common Units in
connection with the Formation Transactions certain "demand" and "piggyback"
registration rights (collectively, the "Registration Rights") with respect to
the Common Shares acquired by them upon exchange of Common Units for Common
Shares. Subject to certain conditions, the demand registration rights permit
the Limited Partners to request up to two demand registrations per year.
Subject to certain conditions, the piggyback registration rights permit the
Limited Partners to include their Common Shares in the registration by the
Company of its Common Shares or other similar equity securities issued by the
Company other than in connection with the registration by the Company
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under the Securities Act of any of its securities in connection with mergers,
acquisitions, exchange offers, subscription offers, share options or other
employee benefit plans. The Limited Partners may exercise their demand
registration rights after one year following the completion of the Offering.
The Limited Partners are classified by investor groups and may each require up
to two registrations per calendar year per group. The Company has granted the
Limited Partners piggyback registration rights with respect to Common Shares
acquired by them by any means. The Company also has agreed to provide the
Registration Rights to any other person who may become an owner of Common
Units, provided such person provides the Company with satisfactory
undertakings. In addition, the Company has granted registration rights to
Security Capital Preferred Growth with respect to the Common Shares acquired
by it upon the conversion of the Convertible Preferred Shares into Common
Shares. See "Description of Shares of Beneficial Interest--Convertible
Preferred Shares--Registration Rights." The Company will bear expenses arising
from exercise of all of the foregoing registration rights, except that the
Company shall not pay any underwriting discounts or commissions, transfer
taxes, Securities and Exchange Commission or Blue Sky registration fees
relating to registration of such Common Shares.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of Common Shares who purchases
such shares in the Offering. Winston & Strawn has acted as special tax counsel
("Tax Counsel") to the Company in connection with the Offering and the
preparation of this Prospectus. This summary should not be construed as tax
advice. The discussion contained herein does not address all aspects of
federal income taxation that may be relevant to particular holders in light of
their personal investment or tax circumstances, or to certain types of holders
(including, without limitation, insurance companies, financial institutions,
broker-dealers, persons whose functional currency is other than the United
States dollar, persons who hold the Common Shares as part of a straddle,
hedging, or conversion transaction or, except as specifically described
herein, tax-exempt entities and foreign persons) who are subject to special
treatment under the federal income tax laws. In addition, this summary is
generally limited to investors who will hold the Common Shares as "capital
assets" (generally, property held for investment) within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code").
The statements in this summary are based on current provisions of the Code,
Treasury Regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly with retroactive effect. The provisions of the Code, the
Treasury Regulations promulgated thereunder and the administrative and
judicial interpretations thereof that concern REITs are highly technical and
complex, and this summary is qualified in its entirety by such Code
provisions, Treasury Regulations, and administrative and judicial
interpretations. No assurance can be given that future legislative, judicial,
or administrative actions or decisions will not affect the accuracy of any
statements in this summary. In addition, no ruling will be sought from the
Internal Revenue Service (the "IRS") with respect to any matter discussed
herein, and there can be no assurance that the IRS or a court will agree with
the statements made herein.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP, AND SALE OF COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED
AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Company intends to make an election to be taxed as a REIT under Sections
856 through 860 of the Code and the applicable Treasury Regulations
promulgated thereunder, which together set forth the requirements for
qualifying as a REIT (the "REIT Requirements"), beginning with its taxable
year ending December 31, 1997. The Company believes that it will be organized
and will operate in such a manner to qualify for taxation as a REIT under the
Code. No assurance can be given, however, that the Company actually will
operate in such a manner to so qualify as a REIT or will continue to operate
in such a manner so as to remain qualified as a REIT.
Subject to the qualifications stated herein and in its opinion, Tax Counsel
has given the Company an opinion that the Company will qualify to be taxed as
a REIT under the Code beginning with its taxable year ending December 31,
1997. An opinion of counsel is not binding on the IRS or a court and there can
be no assurance that the IRS or a court will not take a position different
from that expressed by Tax Counsel. It also must be emphasized that Tax
Counsel's opinion is based on various assumptions and is conditioned upon
numerous representations made by the Company and the Operating Partnership as
to factual matters, including those related to their businesses and properties
as set forth in this Prospectus. Tax Counsel has not independently verified
the Company's representations. Moreover, the Company's qualification and
taxation as a REIT depend upon the Company's ability to meet on a continuing
basis the actual operating results, distribution levels, diversity of
ownership and the various other qualification tests imposed by the Code as
discussed below. Tax Counsel will not review the Company's compliance with
these tests on a continuing basis. Accordingly, no assurance can be
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given that the actual results of the Company's operations for any given
taxable year will satisfy the requirements for qualification and taxation as a
REIT. See "Certain Federal Income Tax Considerations--Failure to Qualify."
Additionally, under the Taxpayer Relief Act of 1997 (the "1997 Tax Act")
various changes have been made to the tax treatment of REITs effective for
taxable years beginning after August 5, 1997. For the Company, these
provisions will be effective beginning January 1, 1998. See "--1997 Taxpayer
Relief Act of 1997--Significant REIT provisions."
TAXATION OF THE COMPANY
For any taxable year in which the Company qualifies for taxation as a REIT,
it generally will not be subject to federal corporate income tax on that
portion of its ordinary income or capital gain that is currently distributed
to its shareholders. The REIT provisions of the Code generally allow a REIT to
deduct dividends paid to its shareholders. This deduction for dividends paid
to shareholders substantially eliminates the federal "double taxation" on
earnings (once at the corporate level and once again at the shareholder level)
that generally results from an investment in a corporation.
Even if the Company continues to qualify for taxation as a REIT, it may be
subject to federal income tax in certain circumstances. First, the Company
will be taxed at regular corporate rates on any undistributed "REIT taxable
income" and undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the corporate "alternative
minimum tax" on its items of tax preference, if any. Third, if the Company has
(i) net income from the sale or other disposition of "foreclosure property"
which is held primarily for sale to customers in the ordinary course of
business or (ii) other nonqualifying income from foreclosure property, the
Company will be subject to tax on such income at the highest regular corporate
rate (currently 35%). Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of
business, other than foreclosure property), such income will be subject to a
100% tax. Fifth, if the Company should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below), but nonetheless
maintains its qualification as a REIT because certain other requirements are
met, the Company will be subject to a 100% tax on the greater of the amount by
which the Company fails the 75% or the 95% test, multiplied by a fraction
intended to reflect the Company's profitability. Sixth, if the Company should
fail to distribute for each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Finally, if the
Company acquires any asset from a C corporation (i.e., generally a corporation
subject to full corporate level tax) in a transaction in which the basis of
the asset in the Company's hands is determined by reference to the basis of
the asset (or any other property) in the hands of the C corporation, and the
Company subsequently recognizes gain on the disposition of such asset during
the ten-year period (the "Recognition Period") beginning on the date on which
the asset was acquired by the Company, then, pursuant to guidelines issued by
the IRS, the excess of (i) the fair market value of the asset as of the
beginning of the applicable Recognition Period, over (ii) the Company's
adjusted basis in such asset as of the beginning of such Recognition Period
(i.e., "built-in gain") will be subject to tax at the highest regular
corporate rate. Pursuant to the 1997 Tax Act, the Company also will be taxed
on any built-in gains during the Recognition Period attributed to the
disposition of assets of an acquired corporation which is a "qualified REIT
subsidiary." See "Certain Federal Income Tax Considerations--Requirements for
Qualification--Qualified REIT Subsidiary."
If the Company invests in properties in foreign countries, the Company's
profits from such investments will generally be subject to tax in the
countries where such properties are located. The precise nature and amount of
any such taxation will depend on the laws of the countries where the
properties are located. If the Company satisfies the annual distribution
requirements for qualification as a REIT and is therefore not subject to
federal corporate income tax on that portion of its ordinary income and
capital gain that is currently distributed to its shareholders, the Company
will generally not be able to recover the cost of any foreign tax imposed on
profits from its foreign investments by claiming foreign tax credits against
its U.S. tax liability on such profits. Moreover, a REIT is not able to pass
foreign tax credits through to its shareholders.
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The Company will use the calendar year for both federal income tax purposes
and financial reporting purposes.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company must meet and continue to meet the
requirements, discussed below, relating to the Company's organization, the
sources of its gross income, the nature of its assets, and the level of
distributions to its shareholders.
Organizational Requirements
The Code requires that a REIT be 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 compliance
with the REIT Requirements;
(iv) which is neither a financial institution nor an insurance company
subject to certain special provisions of the Code;
(v)the beneficial ownership of which is held by 100 or more persons;
(vi) at any time during the last half of each taxable year not more than
50% in value of the outstanding stock or shares of beneficial interest
of which is owned, directly or indirectly through the application of
certain attribution rules, by or for five or fewer individuals (as
defined in the Code to include certain tax-exempt entities other than,
in general, qualified domestic pension funds); and
(vii) which meets certain other tests, described below, regarding the
nature of its income and assets and distribution requirements.
The Code provides that conditions (i) through (iv), inclusive, must be met
during the entire taxable year and that condition (v) 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.
The Company intends to issue sufficient Common Shares to enough holders to
allow the Company to satisfy the requirement set forth in (v) above (the "100
holder" requirement). For purposes of determining ongoing compliance with the
100 holder requirement, Treasury Regulations require the Company to issue
letters to certain shareholders demanding information regarding the amount of
shares each such shareholder actually or constructively owns ("shareholder
demand letters").
As set forth in (vi) above, to qualify as a REIT, the Company must also
satisfy the requirement set forth in Section 856(a)(6) of the Code that it not
be closely held. The Company will not be closely held so long as at all times
during the last half of any taxable year of the Company (other than the first
taxable year for which the REIT election is made) not more than 50% in value
of its outstanding shares of beneficial interest is owned, directly or
constructively under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain tax-exempt
entities, other than, in general, qualified domestic pension funds) (the "five
or fewer" requirement). Although the Company's Declaration of Trust contains
certain restrictions on the ownership and transfer of the Common Shares, the
restrictions do not ensure that the Company will be able to satisfy the "five
or fewer" requirement. If the Company fails to satisfy the "five or fewer"
requirement, the Company's status as a REIT will terminate, and the Company
will not be able to prevent such termination. However, the 1997 Tax Act states
that, for taxable years beginning after the date of enactment of the 1997 Tax
Act, if the Company complies with the procedures prescribed in Treasury
Regulations for issuing shareholder demand letters and does not know, or with
the exercise of reasonable diligence would not have known, that the five or
fewer requirement was violated, the requirement will be deemed to be satisfied
for the year. See "Certain Federal Income Tax Considerations--Failure to
Qualify."
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Ownership of a Partnership Interest
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share of
the assets of the partnership corresponding to the REIT's capital interest in
such partnership and is deemed to be entitled to the income of the partnership
attributable to such proportionate share. In addition, the character of the
assets and gross income of the partnership retain the same character in the
hands of the REIT for purposes of the REIT Requirements, including satisfying
the gross income tests and the asset tests. Accordingly, the Company's
proportionate share of the assets, liabilities and items of income of the
Operating Partnership, including the Operating Partnership's proportionate
share of the assets, liabilities and items of income of each Property
Partnership, are treated as assets, liabilities and items of income of the
Company for purposes of applying the REIT Requirements, provided that the
Operating Partnership and each of the Property Partnerships are treated as
partnerships for federal income tax purposes. See "Certain Federal Income Tax
Considerations--Tax Aspects of the Company's Investments in Partnerships--
Partnership Classification."
Qualified REIT Subsidiary
If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary,"
within the meaning of section 856(i) of the Code, that subsidiary is
disregarded for federal income tax purposes, and all assets, liabilities, and
items of income, deduction, and credit of the subsidiary are treated as
assets, liabilities and such items of the REIT itself. A "qualified REIT
subsidiary" is a corporation all of the capital stock of which has been owned
by the REIT from the commencement of such corporation's existence. Pursuant to
the 1997 Tax Act, an existing corporation, all of the capital stock of which
is owned by a REIT, could be a "qualified REIT Subsidiary" so long as the
acquired corporation is considered to have liquidated for federal income tax
purposes and any pre-acquisition earnings and profits are distributed before
the end of the REIT's taxable year. Any corporation formed directly by the
Company to act as a general partner in any of the Property Partnerships will
be a qualified REIT subsidiary and thus all of its assets, liabilities, and
items of income, deduction, and credit will be treated as assets, liabilities,
and items of income, deduction and credit of the Company.
Income Tests
To maintain its qualification as a REIT, the Company must satisfy three
gross income requirements annually. First, at least 75% of the Company's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property (including "rents from real property"
and, in certain circumstances, interest) or from certain types of temporary
investments. Second, at least 95% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must be
derived from such real property investments and from dividends, interest, and
gain from the sale or disposition of stock or securities or from any
combination of the foregoing. Third, gain from the sale or other disposition
of stock or securities held for less than one year, gain from prohibited
transactions, and gain from the sale or other disposition of real property
held for less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of the Company's gross
income (including gross income from prohibited transactions) for each taxable
year. The 1997 Tax Act repeals the 30% limitation for taxable years beginning
after the date of enactment.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent received or accrued with
respect to any property must not be based in whole or in part on the income or
profits derived by any person from such property, although an amount 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 gross receipts or gross sales. Rents received from a tenant that are based
on the tenant's income from the property will not be treated as rents based on
income or profits and thus excluded from the term "rents from real property"
if the tenant derives substantially all of its income with respect to such
property from the leasing or subleasing of
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substantially all of such property, provided that the tenant receives from
subtenants only amounts that would be treated as rents from real property if
received directly by a REIT. Second, rents received from a tenant will not
qualify as "rents from real property" in satisfying the gross income tests if
the REIT, or an owner of 10% or more of the REIT, directly or constructively
owns 10% or more of such tenant (a "Related Party Tenant"). Third, if rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, a REIT generally must not operate or
manage the property or furnish or render services to the tenants of such
property, other than through an "independent contractor" from whom the REIT
derives no income. The independent contractor requirement, however, does not
apply to the extent the services rendered by the REIT are customarily
furnished or rendered in connection with the rental of the real property such
that they are services that a tax-exempt organization could provide to its
tenants without causing its rental income to be unrelated business taxable
income under the Code. A tax-exempt organization may provide services which
are "usually or customarily rendered" in connection with the rental of space
for occupancy only and are not otherwise considered "rendered to the
occupant," without incurring unrelated business taxable income. Pursuant to
the 1997 Tax Act, a de minimis amount of non-customary services will not
disqualify income as rents from real property so long as the value of the
impermissible services does not exceed 1.0% of the gross income for the
property. For these purposes, the services may not be valued at less than 150%
of the REIT's direct cost of providing the services.
Substantially all of the gross income of the Company is expected to be
attributable to investments in real property and specifically to rents
attributable to and gains from the disposition of real property. The Company
does not expect to receive rents based on the net income or profits of a
tenant. Moreover, the Company believes that it will not receive rents in
excess of a de minimis amount (generally rent from certain office space leased
to Prime affiliates) from a Related Party Tenant. The Company also does not
expect to receive any rent attributable to personal property leased in
connection with a lease of real property that exceeds 15% of the total rents
received under any such lease (for this purpose the Company took into account
as personal property the overhead cranes in use at certain of its Industrial
Properties).
The Operating Partnership expects to provide certain services with respect
to the Properties, but does not satisfy the "independent contractor"
requirements described above. To the extent necessary to preserve the
Company's status as a REIT, the Operating Partnership will arrange to have
services provided by independent contractors from whom the Company or
Operating Partnership does not derive or receive any income.
The Operating Partnership may also receive fees in exchange for the
performance of certain usual and customary services relating to properties not
owned entirely by the Operating Partnership. The ratable portion of these fees
attributable to the part of the property not owned by the Operating
Partnership does not constitute qualifying income under the 75% or 95% gross
income tests. The remainder of these fees is ignored under the 75% and 95%
gross income test so long as the Company has a significant interest in such
property. The Company believes that the aggregate amount of such nonqualifying
fees (and any other nonqualifying income) in any taxable year will not exceed
the limits on nonqualifying income under the gross income tests described
above.
The Properties include a 398-space parking facility for which the Company,
through the Operating Partnership, receives fees. This parking facility will
be operated through an independent contractor from whom the Company will
derive no income.
The Services Company, pursuant to contractual arrangements, will perform
management services with respect to properties not owned by the Company or the
Operating Partnership. The health club located in the 77 West Wacker Drive
Building (which is available for use at certain membership fees by employees
of tenants as well as by the general public) will be contributed to the
Services Company. The income from such services and the revenues from the
health club will be taxed to the Services Company at the regular corporate tax
rates. Note payments and dividends paid by the Services Company to the
Operating Partnership will constitute qualifying income for purposes of the
95% gross income test but not for the purposes of the 75% gross income test.
Should the potential amount of nonqualifying income in the future create a
risk as to the qualification of the Company as a REIT, the Company intends to
take action to avoid not qualifying as a REIT. The Company may
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for instance transfer certain nonqualifying activities to a taxable
corporation such as the Services Company, from which it would receive
dividends. If this should occur, the Operating Partnership would be entitled
to receive dividends as a stockholder of such corporation. The amount of
dividends available for distribution to the Company would be reduced below the
comparable amount of fee income that would otherwise be received by the
Operating Partnership because such a corporation would be subject to a
corporate level tax on its taxable income, thereby reducing the amount of cash
available for distribution. Furthermore, the Company would be required to
structure the stock interest owned by the Operating Partnership in such a
corporation to ensure that the various asset tests described below were not
violated (i.e., the Operating Partnership would not own more than 10% of the
voting securities of such corporation and the value of the stock interest
would not exceed 5% of the value of the Company's total assets).
If the Company fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will be generally available if (i) the Company's
failure to meet such test(s) was due to reasonable cause and not due to
willful neglect, (ii) the Company reported the nature and amount of each item
of its income included in the test(s) for such taxable year on a schedule
attached to its return, and (iii) any incorrect information on the schedule
was not due to fraud with intent to evade tax. It is not possible, however, to
state whether, in all circumstances, the Company would be entitled to the
benefit of these relief provisions. For example, if the Company fails to
satisfy the gross income tests because nonqualifying income that the Company
intentionally earns exceeds the limits on such income, the IRS could conclude
that the Company's failure to satisfy the tests was not due to reasonable
cause. As discussed above in "--Taxation of the Company" even if these relief
provisions apply, the Company will still be subject to a 100% tax on the
greater of the amount by which the Company failed the 75% or the 95% test,
multiplied by a fraction intended to reflect the Company's profitability. See
"--Failure to Qualify."
Asset Tests
At the close of each quarter of its taxable year, the Company also must
satisfy three tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets, including its allocable share of
assets held by the Operating Partnership and each Property Partnership in
which the Operating Partnership is a partner, must be represented by real
estate assets (which for this purpose includes stock or debt instruments held
for not more than one year purchased with proceeds of a stock offering or a
long-term (at least five years) debt offering of the Company), cash, cash
items and U.S. government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in
the 75% asset class. Third, 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 may not
own more than 10% of any one issuer's outstanding voting securities. By virtue
of its partnership interest in the Operating Partnership, the Company will be
deemed to own for purposes of the three asset tests its pro rata share of the
assets of the Operating Partnership, and the assets of each Property
Partnership in which the Operating Partnership is a partner. The Operating
Partnership owns 100% of the Preferred Stock of the Services Company and the
Note issued by the Services Company, but none of that corporation's voting
stock. The Company does not believe that its pro rata share of the stock and
securities (i.e., the Note) the Operating Partnership owns in such corporation
exceeds 5% of the total value of the Company's assets. No independent
appraisals will be obtained to support this conclusion, and Tax Counsel, in
rendering its opinion as to the qualification of the Company as a REIT, is
relying on the Company's representation that the Preferred Stock and Note
issued by the Services Company and held by the Operating Partnership does not
cause the Company to fail the 5% value test.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy any of the
asset tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance
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with the asset tests, and to take such other action within 30 days after the
close of any quarter as may be required to cure any noncompliance.
Annual Distribution Requirements
To continue to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its shareholders each year in
an amount at least equal to (i) the sum of (A) 95% of the Company's "REIT
taxable income" (computed without regard to the dividends paid deduction and
the Company's net capital gain) plus (B) 95% of the net income (after tax), if
any, from foreclosure property, minus (ii) the sum of certain items of non-
cash income. 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. A distribution which is not pro rata
within a class of beneficial interest entitled to a dividend or which is not
consistent with the rights to distributions between classes of beneficial
interest (a "preferential dividend") is not taken into consideration for the
purpose of meeting the distribution requirement. Accordingly, the payment of a
preferential dividend could affect the Company's ability to meet this
distribution requirement.
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 or ordinary corporate tax rates, as the case may be.
Furthermore, if the Company should fail to distribute for each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, plus (iii) any
undistributed taxable income from prior periods, the Company will 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 all
of the annual distribution requirements. The Company anticipates that it will
generally have sufficient cash or liquid assets to enable it to satisfy these
distribution requirements. It is possible that, from time to time, the Company
may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement due to the insufficiency of cash flow from the
Operating Partnership in a particular year or to timing differences between
the actual receipt of income and actual payment of deductible expenses, on the
one hand, and the inclusion of such income and deduction of such expenses in
computing the Company's "REIT taxable income," on the other hand. In the event
that such an insufficiency or such timing differences occur, in order to meet
the 95% distribution requirement, the Company may find it necessary to cause
the Operating Partnership to pay dividends in the form of taxable stock
dividends, to borrow funds, or to liquidate assets.
If the Company fails to meet the 95% distribution requirement as a result of
an adjustment to the Company's tax return by the IRS upon audit, the Company
may retroactively cure the failure by paying "deficiency dividends" to its
shareholders in a later year, which may then be included in the Company's
deduction for dividends paid for the earlier year. The Company may thus be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest to the IRS based upon
the amount of any deduction taken for deficiency dividends.
Penalty Tax on Prohibited Transactions
The Company's share of any gain realized on the sale of any property held as
inventory or otherwise primarily for sale to customers in the ordinary course
of its trade or business generally will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Under existing law, whether
property is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business is a question of fact that depends on
all the facts and circumstances with respect to the particular transaction.
The Operating Partnership, through the Property Partnerships, intends to hold
the Properties for investment with a view to long-term appreciation, to engage
in the business of acquiring, developing, owning and operating the Properties
and to make such occasional sales of the Properties as are consistent with the
Company's investment objectives.
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Based upon such investment objectives, the Company believes that in general
the Properties should not be considered inventory or other property held
primarily for sale to customers in the ordinary course of a trade or business
and that the amount of income from prohibited transactions, if any, will not
be material.
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 will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which
the Company fails to qualify as a REIT will not be required and, if made, will
not be deductible by the Company. As a result, the Company's failure to
qualify as a REIT will reduce the cash available for distribution by the
Company to its shareholders. In addition, if the Company fails to qualify as a
REIT, all distributions to the Company's shareholders will be taxable as
ordinary dividend income to the extent of the Company's then current and
accumulated earnings and profits, and, subject to certain limitations in the
Code, corporate distributees may be eligible for the dividends-received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be ineligible for qualification as a REIT during the four
taxable years following the year during which qualification was lost. It is
not possible to determine whether the Company would be entitled to such
statutory relief in all circumstances.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN PARTNERSHIPS
The Company holds direct or indirect interests in the Operating Partnership
and each of the Property Partnerships (each individually a "Partnership" and,
collectively, the "Partnerships"). The following discussion summarizes certain
federal income tax considerations applicable solely to the Company's
investments in the Partnerships. The discussion does not address state or
local tax laws or any federal tax laws other than income tax laws.
Partnership Classification
The Company is entitled to include in its income its distributive share of
the income, and to deduct its distributive share of the losses, of each of the
Partnerships only if each such Partnership is classified for federal income
tax purposes as a partnership rather than as an association (or publicly-
traded partnership) taxable as a corporation.
Prior to January 1, 1997, an organization formed as a partnership was
treated as a partnership for federal income tax purposes rather than a
corporation only if it had no more than two of the four corporate
characteristics that the Treasury Regulations in effect at that time used to
distinguish a partnership from a corporation for tax purposes. These four
characteristics were (i) continuity of life, (ii) centralization of
management, (iii) limited liability and (iv) free transferability of
interests. Under final Treasury Regulations which became effective January 1,
1997, the four factor test has been eliminated, and an entity with two or more
members formed as a partnership under relevant state law will be taxed as a
partnership for federal income tax purposes unless it specifically elects
otherwise. The final regulations also provide that the IRS will not challenge
the classification of an existing partnership for tax periods prior to January
1, 1997 so long as (1) the entity had a reasonable basis for its claimed
classification, (2) the entity and all its members recognized the federal
income tax consequences of any changes in the entity's classification within
the 60 months prior to January 1, 1997, and (3) neither the entity nor any
member of the entity had been notified in writing on or before May 8, 1996,
that the classification of the entity was under examination by the IRS.
The Company believes that each Partnership formed on or after January 1,
1997 will be treated as a partnership for federal income tax purposes because
each was or will be formed as a partnership under state law and will have two
or more partners. Further, for each Partnership that was formed prior to
January 1, 1997, the Company expects that such Partnership will be treated as
a partnership for federal income tax purposes for the periods before January
1, 1997 as (1) such Partnership had a reasonable basis for its claimed
classification, (2)
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such Partnership and all its partners recognized the federal income tax
consequences of any changes in the partnership's classification within the 60
months prior to January 1, 1997, and (3) neither the Partnership nor any
member of the Partnership had been notified in writing on or before May 8,
1996, that the classification of the entity was under examination by the IRS.
Additionally, the Company believes that none of the Partnerships will be
treated as publicly traded partnerships within the meaning of Code section
7704 that is taxed as a corporation for federal income tax purposes because,
under the applicable Treasury Regulations, none of the interests in the
Partnerships are registered under the Securities Act or traded on an
established securities market and none of the Partnerships have more than 100
partners for purposes of Code Section 7704 (or will otherwise fall within one
of the other "safe harbors" for the Partnership to avoid being treated as
having interests which are "readily tradeable on a secondary market (or the
substantial equivalent thereof)"). The Company further believes that none of
the Partnerships will be treated as a publicly traded partnership on the basis
of the gross income exception that 90% or more of its annual gross income will
be from certain passive sources, such as rents from real property, interest,
and the sale or disposition of real property and capital assets, and that none
of the Partnerships would be described as an investment company if it were a
domestic corporation.
If for any reason any of the Partnerships were taxable as a corporation
rather than as a partnership for federal income tax purposes, the character of
the Company's assets and items of gross income would change, and, as a result,
the Company would most likely be unable to satisfy the income and asset tests,
which would thus prevent the Company from qualifying as a REIT. In addition,
any change in the status for tax purposes of any of the Partnerships might be
treated as a taxable event, in which case the Company could incur a tax
liability without any related cash distribution. Further, if any of the
Partnerships were to be treated as an association taxable as a corporation,
items of income, gain, loss, deduction and credit of such Partnership would
not pass through to its partners; instead, the Partnership would be taxable as
a corporation, subject to entity-level taxation on its net income at regular
corporate tax rates. The partners of any such Partnership would be treated for
federal income tax purposes as stockholders, with distributions to such
partners being treated as dividends. See "--Requirements for Qualification--
Income Tests" and "--Asset Tests."
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
Partners, Not Partnerships, Subject to Tax
A partnership (that is not a publicly traded partnership) is not subject to
tax as an entity for federal income tax purposes. Rather, partners are
allocated their proportionate share of the items of income, gain, loss,
deduction and credit of the partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive any distributions from
the partnership. The Company will be required to take into account its
allocable 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--Income Tests."
Partnership Allocations
Although a partnership agreement will generally determine the allocation of
a partnership's income and losses among the partners, such allocations will be
disregarded for tax purposes under Section 704(b) of the Code if they do not
comply with the provisions of Section 704(b) and the Treasury Regulations
promulgated thereunder. If an allocation is not recognized for federal income
tax purposes, the item subject to the allocation will be reallocated in
accordance with the partners' interests in the partnership, which will be
determined by taking into account all of the facts and circumstances relating
to the economic arrangement of the partners with respect to such item. The
Company believes that the allocations of taxable income and loss contained in
the partnership agreements for each of the Partnerships complies with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations With Respect to the Properties
Pursuant to Section 704(c) of the Code, income, gain, loss, and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership (such as interests in the Property Partnerships that own
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the Properties) in exchange for an interest in the partnership must be
allocated for federal income tax purposes in a manner such that the
contributing partner is charged with, or benefits from, respectively, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of such unrealized gain or unrealized loss 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 the time of contribution (a "Book-Tax Difference"). Such
allocations are solely for federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners.
The Operating Partnership was formed by way of contributions, including
contributions of appreciated property (including interests in the Property
Partnerships that own the Properties), by certain Limited Partners.
Consequently the Partnership Agreement requires allocations of income, gain,
loss and deduction attributable to such contributed property to be made in a
manner that is consistent with Section 704(c) of the Code.
In general, these allocations tend to eliminate the Book-Tax Differences
over the life of the Partnerships by allocating to the Limited Partners of the
Operating Partnership, solely for tax purposes, lower amounts of depreciation
deductions and increased taxable income and gain on the sale by the Property
Partnerships of the Properties than would ordinarily be the case for economic
or book purposes. The Operating Partnership and the Company will elect to use
the "traditional method" under Treasury Regulation section 1.704-3(c) as the
method of accounting for the Book-Tax Differences with respect to properties
contributed to the Partnerships. However, this allocation method may not
always entirely rectify a Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Moreover, the
application of Section 704(c) principles in tiered partnership arrangements is
not entirely clear. Accordingly, the IRS may assert that a different
allocation should be used to eliminate any such Book-Tax Difference.
With respect to any property purchased by any of the Property Partnerships
subsequent to the formation of the Company, such property will initially have
a tax basis equal to its fair market value and Section 704(c) of the Code will
not apply.
Depreciation Deductions Available to the Operating Partnership
Certain assets owned by the Operating Partnership and the Property
Partnerships consist of property contributed by their partners. In general,
when property is contributed in a tax-free transaction under section 721 of
the Code, the transferee partnership is treated in the same manner as the
contributing partner for purposes of computing depreciation. The effect of
this rule is to continue the historic basis, placed in service dates and
depreciation methods with respect to property contributed to a partnership. In
general, this will result in the Operating Partnership and the Property
Partnerships claiming less depreciation than if they had purchased the
contributed properties in a taxable transaction and could result in the
Company being allocated less depreciation than if the contributed properties
were purchased in a taxable transaction.
Basis in Partnership Interest
The Company's adjusted tax basis in its partnership interest in the
Operating Partnership is generally (i) equal to the amount of cash and the
basis of any other property contributed to the Operating Partnership by the
Company, (ii) increased by (A) the Company's allocable share of the Operating
Partnership's income and (B) the Company's allocable share of indebtedness of
the Operating Partnership, and (iii) reduced, but not below zero, by (A) the
Company's allocable share of the Operating Partnership's losses and (B) the
amount of cash and the basis of any other property distributed by the
Operating Partnership to the Company, including any constructive cash
distributions resulting from a reduction in the Company's allocable share of
indebtedness of the Operating Partnership.
If the allocation to the Company of its distributive share of any loss of
the Operating Partnership would reduce the adjusted tax basis in its
partnership interest in the Operating Partnership below zero, the recognition
of such excess loss will be deferred until such time and to the extent that
the Company has sufficient tax basis in
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its partnership interest so that the recognition of such loss would not reduce
the amount of such 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 (each such decrease being considered
a constructive cash distribution to the Company), would reduce the Company's
adjusted tax basis in its partnership interest below zero, such excess
distributions (including such constructive distributions) would constitute
taxable income to the Company. Such distributions and constructive
distributions will normally be characterized as a capital gain, and if the
Company has held its partnership interest in the Operating Partnership for
longer than the long-term capital gain holding period (currently one year),
the distributions and constructive distributions will constitute long-term
capital gains.
The rules described above with respect to basis apply equally to the
Operating Partnership in its capacity as a partner in any Property
Partnership, as well as to the Company in its capacity as a partner in any
Property Partnership.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As used herein, the term "U.S. Shareholder" means a holder of Common Shares
who (for United States federal income tax purposes) (i) is a citizen or
resident of the United States, (ii) is a corporation, partnership, or other
entity created or organized in or under the laws of the United States or of
any political subdivision thereof, (iii) is a trust if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more United States fiduciaries have the authority to
control all substantial decisions of the trust or (iv) is an estate subject to
taxation in the United States, regardless of its source of income.
As long as the Company continues to qualify as a REIT, distributions made by
the Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
U.S. Shareholders as ordinary income. Such distributions will not be eligible
for the dividends-received deduction in the case of U.S. Shareholders that are
corporations.
Dividends paid to U.S. Shareholders will be treated as portfolio income.
Such income, therefore, will not be subject to reduction by losses from
passive activities (i.e., any interest in a rental activity or in a trade or
business in which the holder does not materially participate, such as certain
interests held as a limited partner) of any holder who is subject to the
passive activity loss rules. Such distributions will, however, be considered
investment income which may be offset by certain investment expense
deductions.
Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to U.S. Shareholders as
long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Shareholder has held his/her Common Shares. U.S. Shareholders
that are corporations may, however, be required to treat up to 20% of certain
capital gain dividends as ordinary income. Pursuant to the 1997 Tax Act, the
Company may elect to retain amounts representing long-term capital gain income
on which the Company will be taxed at regular corporate capital gains tax
rates. In that case, each shareholder will be taxed on a proportionate share
of the total long-term capital gains retained by the Company and will also
receive a credit for a proportionate share of the tax paid by the Company.
Finally, each shareholder would increase the adjusted basis in his/her shares
by the amount of the allocable long-term capital gain. If the Company should
elect to retain long-term capital gains, it will notify each shareholder of
the relevant tax information within 60 days after the close of the taxable
year.
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Shareholder, reducing the adjusted basis which such U.S.
Shareholder has in his/her Common Shares for tax purposes by the amount of
such distribution (but not below zero), with distributions in excess of a U.S.
Shareholder's adjusted basis in his/her shares taxable as capital gains
(provided that the shares have been held as a capital asset). Dividends
declared by the Company in October, November or December of
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any year and payable to a shareholder of record on a specified 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 on or before January 31 of the following calendar
year. Shareholders may not include in their own income tax returns any net
operating losses or capital losses of the Company.
Upon any sale or other disposition of Common Shares, the holder will
generally recognize gain or loss for federal income tax purposes in an amount
equal to the difference between (i) the amount of cash and the fair market
value of any property received on such sale or other disposition and (ii) the
holder's adjusted basis in the shares. Such gain or loss will generally be
capital gain or loss and will be long-term gain or loss if such shares have
been held for more than one year. In general, any loss recognized by a U.S.
Shareholder upon the sale or other disposition of Common Shares that have been
held for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss, to the extent of distributions
received by such U.S. Shareholder from the Company which were required to be
treated as long-term capital gains.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not
constitute "unrelated business taxable income," even though the REIT may have
financed certain of its activities with acquisition indebtedness. Although
revenue rulings are interpretive in nature and are subject to revocation or
modification by the IRS, based upon the revenue ruling and the analysis
therein, distributions made by the Company to a U.S. Shareholder that is a
tax-exempt entity (such as an individual retirement account ("IRA") or a
401(k) plan) should not constitute unrelated business taxable income unless
such tax-exempt U.S. Shareholder has financed the acquisition of its shares
with "acquisition indebtedness" within the meaning of the Code, or the shares
are otherwise used in an unrelated trade or business conducted by such U.S.
Shareholder.
Special rules apply to certain tax-exempt pension funds (including 401(k)
plans but excluding IRAs or government pension plans) that own more than 10%
(measured by value) of a "pension-held REIT" at any time during a taxable year
beginning after December 31, 1993. Such a pension fund may be required to
treat a certain percentage of all dividends received from the REIT during the
year as unrelated business taxable income. The percentage is equal to the
ratio of the REIT's gross income (less direct expenses related thereto)
derived from the conduct of unrelated trades or businesses determined as if
the REIT were a tax-exempt pension fund, to the REIT's gross income (less
direct expenses related thereto) from all sources. The special rules will not
apply to require a pension fund to recharacterize a portion of its dividends
as unrelated business taxable income unless the percentage computed is at
least 5%.
A REIT will be treated as a "pension-held REIT" if the REIT is predominantly
held by tax-exempt pension funds and if the REIT would otherwise fail to
satisfy the "five or fewer" ownership requirements discussed above, see "--
Requirements for Qualification--Organizational Requirements," if the stock or
beneficial interests of the REIT held by such tax-exempt pension funds were
not treated as held directly by their respective beneficiaries. A REIT is
predominantly held by tax-exempt pension funds if at least one tax-exempt
pension fund holds more than 25% (measured by value) of the REIT's stock or
beneficial interests, or if one or more tax-exempt pension funds (each of
which owns more than 10% (measured by value) of the REIT's stock or beneficial
interests) own in the aggregate more than 50% (measured by value) of the
REIT's stock or beneficial interests. The Company believes that it will not be
treated as a pension-held REIT. However, because the shares of the Company
will be publicly traded, no assurance can be given that the Company is not or
will not become a pension-held REIT.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing United States federal income taxation of any person
other than (i) a citizen or resident of the United States, (ii) a corporation
or partnership created in the United States or under the laws of the United
States or of any state thereof, (iii) an estate whose income is includable in
income for U.S. federal income tax
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purposes regardless of its source or (iv) a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States fiduciaries have the authority to control
all substantial decisions of the trust (collectively, "Non-U.S. Shareholders")
are highly complex, and the following discussion is intended only as a summary
of such rules. Prospective Non-U.S. Shareholders should consult with their own
tax advisors to determine the impact of United States federal, state, and
local income tax laws on an investment in Common Shares, including any
reporting requirements.
In general, Non-U.S. Shareholders are subject to regular United States
income tax with respect to their investment in Common Shares in the same
manner as a U.S. Shareholder if such investment is "effectively connected"
with the Non-U.S. Shareholder's conduct of a trade or business in the United
States. A corporate Non-U.S. Shareholder that receives income with respect to
its investment in Common Shares that is (or is treated as) effectively
connected with the conduct of a trade or business in the United States also
may be subject to the 30% branch profits tax imposed by the Code, which is
payable in addition to regular United States corporate income tax. The
following discussion addresses only the United States taxation of Non-U.S.
Shareholders whose investment in Common Shares is not effectively connected
with the conduct of a trade or business in the United States.
Ordinary Dividends
Distributions made by the Company that are not attributable to gain from the
sale or exchange by the Company of United States real property interests and
that are not designated by the Company as capital gain dividends will be
treated as ordinary income dividends to the extent made out of current or
accumulated earnings and profits of the Company. Generally, such ordinary
income dividends will be subject to United States withholding tax at the rate
of 30% on the gross amount of the dividend paid unless reduced or eliminated
by an applicable United States income tax treaty. The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of
any such dividends paid to a Non-U.S. Shareholder unless a lower treaty rate
applies and the Non-U.S. Shareholder has filed an IRS Form 1001 with the
Company, certifying the Non-U.S. Shareholder's entitlement to treaty benefits.
Non-Dividend Distributions
Distributions made by the Company in excess of its current and accumulated
earnings and profits to a Non-U.S. Shareholder who holds 5.0% or less of the
Common Shares (after application of certain ownership rules) will not be
subject to U.S. income or withholding tax. If it cannot be determined at the
time a distribution is made whether or not such distribution will be in excess
of the Company's current and accumulated earnings and profits, the
distribution will be subject to withholding at the rate applicable to a
dividend distribution. However, the Non-U.S. Shareholder may seek a refund
from the IRS of any amount withheld if it is subsequently determined that such
distribution was, in fact, in excess of the Company's then current and
accumulated earnings and profits.
Capital Gains Dividends
As long as the Company continues to qualify as a REIT, distributions made by
the Company that are attributable to gain from the sale or exchange by the
Company of any United States real property interests ("USRPI") will be taxed
to a Non-U.S. Shareholder under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-
U.S. Shareholder as if such distributions were gains "effectively connected"
with the conduct of a trade or business in the United States. Accordingly, a
Non-U.S. Shareholder will be taxed on such distributions at the same capital
gain rates applicable to U.S. Shareholders (subject to any applicable
alternative minimum tax and a special alternative minimum tax in the case of
non-resident alien individuals). Distributions subject to FIRPTA also may be
subject to the 30% branch profits tax in the case of a corporate Non-U.S.
Shareholder that is not entitled to treaty relief or exemption. The Company
will be required to withhold tax from any distribution to a Non-U.S.
Shareholder that could be designated by the Company as a USRPI capital gain
dividend in an amount equal to 35% of the gross
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distribution. The amount of tax withheld is fully creditable against the Non-
U.S. Shareholder's FIRPTA tax liability, and if such amount exceeds the Non-
U.S. Shareholder's federal income tax liability for the applicable taxable
year, the Non-U.S. Shareholder may seek a refund of the excess from the IRS.
In addition, if the Company designates prior distributions as capital gain
dividends, subsequent distributions, up to the amount of such prior
distributions, will be treated as capital gain dividends for purposes of
withholding.
Disposition of Shares of Beneficial Interest of the Company
Gain recognized by a Non-U.S. Shareholder upon the sale or exchange of
Common Shares generally will not be subject to United States taxation unless
the Common Shares constitute a USRPI within the meaning of FIRPTA. The Common
Shares will not constitute a USRPI so long as the Company is a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock or
beneficial interests are held directly or indirectly by Non-U.S. Shareholders.
The Company believes that it will be a "domestically controlled REIT," and
therefore that the sale of Common Shares will not be subject to taxation under
FIRPTA. However, because the Common Shares will be publicly traded, no
assurance can be given that the Company is or will continue to be a
"domestically-controlled REIT." Notwithstanding the foregoing, gain from the
sale or exchange of Common Shares not otherwise subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if the Non-U.S. Shareholder is a nonresident
alien individual who is present in the United States for 183 days or more
during the taxable year and has a "tax home" in the United States. In such
case, the nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
If the Company did not constitute a "domestically-controlled REIT," gain
arising from the sale or exchange by a Non-U.S. Shareholder of Common Shares
would be subject to United States taxation under FIRPTA as a sale of a USRPI
unless (i) the Common Shares are "regularly traded" (as defined in the
applicable Treasury regulations) and (ii) the selling Non-U.S. Shareholder's
interest (after application of certain constructive ownership rules) in the
Company is 5.0% or less at all times during the five years preceding the sale
or exchange. If gain on the sale or exchange of the Common Shares were subject
to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to regular
United States income tax with respect to such gain in the same manner as a
U.S. Shareholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations), and the purchaser of the Common Shares (including the Company)
would be required to withhold and remit to the IRS 10% of the purchase price.
Additionally, in such case, distributions on the Common Shares to the extent
they represent a return of capital or capital gain from the sale of the Common
Shares, rather than dividends, would be subject to a 10% withholding tax.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Shareholder in two cases; (i) if the Non-U.S.
Shareholder's investment in the Common Shares of the Company is effectively
connected with a U.S. trade or business conducted by such Non-U.S.
Shareholder, the Non-U.S. Shareholder will be subject to the same treatment as
a U.S. shareholder with respect to such gain, or (ii) if the Non-U.S.
Shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has a "tax home" in
the United States, the nonresident alien individual will be subject to a 30%
tax on the individual's capital gain.
Estate Tax
Common Shares of the Company owned or treated as owned by an individual who
is not a citizen or resident (as specially defined for U.S. federal estate tax
purposes) of the United States at the time of death will be includable in the
individual's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise. Such individual's estate may
be subject to U.S. federal estate tax on the property includable in the estate
for U.S. federal estate tax purposes.
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INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its U.S. Shareholders and to 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 U.S.
Shareholder may be subject to backup withholding at the rate of 31% on
dividends paid unless such U.S. Shareholder (i) is a corporation or falls
within certain other exempt categories and, when required, can demonstrate
this fact, or (ii) 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 U.S. Shareholder
who does not provide the Company with his correct taxpayer identification
number also may be subject to penalties imposed by the IRS. Any amount paid as
backup withholding will be creditable against the U.S. Shareholder's federal
income tax liability. In addition, the Company may be required to withhold a
portion of any capital gain distributions made to U.S. Shareholders who fail
to certify their non-foreign status to the Company. See "--Taxation of Non-
U.S. Shareholders."
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Shareholders, and Non-U.S. Shareholders
should consult their tax advisors with respect to any such information
reporting and backup withholding requirements.
SPECIAL RULES REGARDING THE TAXATION OF HOLDERS OF CONVERTIBLE PREFERRED
SHARES
Redemption of Convertible Preferred Shares. A redemption of shares of
Convertible Preferred Shares will be treated under Section 302 of the Code as
a distribution taxable as a dividend (to the extent of the Company's current
and accumulated earnings and profits) at ordinary income rates unless the
redemption satisfies one of the tests set forth in Section 302(b) of the Code
and is therefore treated as a sale or exchange of the redeemed shares. The
redemption will be treated as a sale or exchange under Section 302(b) if it
(i) is "substantially disproportionate" with respect to the holder, (ii)
results in a "complete termination" of the holder's stock interest in the
Company, or (iii) is "not essentially equivalent to a dividend" with respect
to the holder within the meaning of Section 302(b)(2) of the Code. In
determining whether any of these tests have been met, Common Shares (and other
equity interests in the Company) considered to be owned by the holder by
reason of certain constructive ownership rules set forth in Section 318 of the
Code, as well as Common Shares actually owned by the holder, must generally be
taken into account. Because the determination as to whether any of the
alternative tests of Section 302(b) of the Code will be satisfied with respect
to any particular holder of Convertible Preferred Shares depends upon the
facts and circumstances at the time that the determination must be made,
holders of Convertible Preferred Shares are advised to consult their own tax
advisors to determine such treatment.
If a redemption of shares of Convertible Preferred Shares is not treated as
a distribution taxable as a dividend to a particular holder, it will be
treated, as to that holder, as a taxable sale or exchange. As a result, such
holder will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received (less any portion thereof attributed to
accumulated and declared but unpaid dividends, which will be taxable as a
dividend to the extent of the Company's current and accumulated earnings and
profits), and (ii) the holder's adjusted basis in the shares of Convertible
Preferred Shares for tax purposes. Generally, such gain or loss will be
capital gain or loss if the shares of Convertible Preferred Shares have been
held as a capital asset, and will be long-term gain or loss if such shares
have been held for more than eighteen months.
If a redemption of shares of Convertible Preferred Shares is treated as a
distribution taxable as a dividend, the amount of the distribution will be
measured by the amount of cash and the fair market value of any project
received by the holder. The holder's adjusted basis in the redeemed shares of
Convertible Preferred Shares for tax purposes will be transferred to the
holder's remaining Common Shares in the Company, if any. If the holder owns no
other Common Shares, such basis may under certain circumstances, be
transferred to a related person or it may be lost entirely.
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Redemption Premium. Under Section 305(c) of the Code and applicable Treasury
Regulations, if the redemption price of the Convertible Preferred Shares
exceeds its issue price by more than a de minimis amount then, in certain
circumstances, the amount of such excess may be deemed to be a constructive
distribution (treated as a dividend to the extent of the Company's current and
accumulated earnings and profits) which is taxable to the holder at a constant
yield (as if it was original issue discount on a debt instrument) over the
period the Convertible Preferred Shares cannot be redeemed.
A redemption premium is considered de minimis under the Treasury Regulation
if it is less than the product of .25% times the redemption price of the
Convertible Preferred Shares times the number of complete years the
Convertible Preferred Shares is outstanding. The Company does not expect that
the price paid for the redemption of the Convertible Preferred Shares would be
considered de minimis,
However, the constant yield method, described above, which must be used to
take into account the redemption premium on preferred stock only applies if
the subject preferred stock is (i) mandatorily redeemable, (ii) redeemable at
the holder's option, or (iii) redeemable at the issuer's option if at the time
of issue, based on all the facts and circumstances, it is more likely than not
that the issuer will exercise such option. With respect to situation (iii) in
the preceding sentence, the Treasury Regulations further provide that, even if
the redemption is more likely than not to occur, this constant yield method
will not apply if the redemption premium is solely in the nature of a penalty
for premature redemption. A redemption premium is considered to be a penalty
for premature redemption only if it is paid as a result of changes in economic
or market conditions over which the issuer of the stock or the holder does not
have legal or practical control.
The Convertible Preferred Shares are not mandatorily redeemable or
redeemable at the holder's option, and the Company does not believe that at
the time of issue it is more likely than not that the Convertible Preferred
Shares will be redeemed; thus, the Company does not expect that a holder of
such stock will be required to take the redemption premium into income as a
dividend distribution at a constant yield over the period the holder holds
such stock. However, no assurance can be given that the IRS will not take a
contrary position.
Conversion of Convertible Preferred Shares into Common Shares. In general,
no gain or loss will be recognized for federal income tax purposes upon the
conversion of the Convertible Preferred Shares solely into shares of Common
Shares. The basis that a holder will have for tax purposes in the shares of
the Common Shares received upon the conversion will be equal to the adjusted
basis the holder had in the shares of Convertible Preferred Shares so
converted, and, provided that the shares of Convertible Preferred Shares were
held as a capital asset, the holding period for the shares of Common Shares
received will include the holding period for the shares of Convertible
Preferred Shares converted. A holder, however, will generally recognize gain
or loss on the receipt of cash in lieu of fractional shares of Common Shares
in an amount equal to the difference between the amount of cash received and
the holder's adjusted basis in such fractional shares. Furthermore, under
certain circumstances, a holder of shares of Convertible Preferred Shares may
recognize gain or dividend income to the extent there are dividends in arrears
on the Convertible Preferred Shares at the time of conversion into Common
Shares.
Adjustments to Conversion Price. Adjustments in the conversion price (or the
failure to make such adjustment) pursuant to the anti-dilution provisions of
the Convertible Preferred Shares or otherwise may result in constructive
distributions to the holders of Convertible Preferred Shares that could, under
certain circumstances, be taxable to them as dividends pursuant to Section 305
of the Code. If such a constructive distribution were to occur, a holder of
Convertible Preferred Shares could be required to recognize ordinary income
for tax purposes without receiving a corresponding distribution of cash.
Additionally, such a constructive dividend may constitute a preferential
dividend by the Company.
OTHER TAX CONSIDERATIONS
Possible Legislative or Other Actions Affecting Tax Consequences
Prospective holders should recognize that the present federal income tax
treatment of the Company may be modified by future legislative, judicial or
administrative actions or decisions at any time, which may be retroactive in
effect, and, as a result, any such action or decision may affect investments
and commitments
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previously made. The rules dealing with federal income taxation are constantly
under review by persons involved in the legislative process and by the IRS and
the Treasury Department, resulting in statutory changes as well as
promulgation of new, or revisions to existing, regulations and revised
interpretations of established concepts. No prediction can be made as to the
likelihood of passage of any new tax legislation or other provisions either
directly or indirectly affecting the Company or its shareholders. Revisions in
federal income tax laws and interpretations thereof could adversely affect the
tax consequences of an investment in the Common Shares.
State and Local Taxes
The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective holders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Common Shares.
Taxpayer Relief Act of 1997--Significant REIT Provisions
The 1997 Tax Act included various changes to the tax treatment of REITs
effective for taxable years beginning after August 5, 1997. In the case of the
Company, these provisions will be effective beginning January 1, 1998. Set
forth below is a summary of these changes.
Alternative Penalties for Failure to Ascertain Ownership. Under the 1997 Tax
Act, the rule that disqualifies a REIT for any year in which the REIT failed
to comply with regulations to ascertain its ownership has been replaced with
an intermediate penalty of $25,000 ($50,000 for intentional violations) for
any year in which the REIT did not comply with the ownership regulations. In
addition, a REIT that complied with the regulations for ascertaining its
ownership, and which did not know, or have reason to know, that it was so
closely held as to be classified as a personal holding company would not be
treated as a personal holding company.
De Minimis Rule for Tenant Service Income. Under the 1997 Tax Act, a REIT is
allowed to render a de minimis amount of impermissible services to tenants,
including managing or operating the property, and still treat amounts received
with respect to that property as rent, as long as the amount received with
respect to the impermissible services or management does not exceed one
percent of the REIT's gross income from the property. These services must not
be valued at less than 150 percent of the REIT's direct cost of the services.
Attribution Rules. Under the 1997 Tax Act, for purposes of determining (i)
whether a tenant is a "Related Party Tenant" and (ii) whether a party is an
independent contractor, a partner's ownership only is attributed to a
partnership if the partner owns a 25% or greater interest in the capital or
profits of that partnership.
Election to Retain and Pay Tax on Retained Capital Gains. The 1997 Tax Act
permits a REIT to elect to retain and pay income tax on net long-term capital
gains it received during the tax year. If a REIT makes this election, the REIT
shareholders include in their income as long-term capital gains their
proportionate share of the long-term capital gains as designated by the REIT.
Also, the shareholder will be deemed to have paid a proportionate share of the
tax, which could be credited or refunded to the shareholder. The shareholder's
basis in its shares is increased by the amount of the undistributed long-term
capital gains (less the proportionate amount of capital gains tax paid by the
REIT) included in the shareholder's long-term capital gains.
Repeal of 30-Percent Gross Income Requirement. The 1997 Tax Act repeals the
30 percent gross income test.
Non-REIT Earnings and Profits. The 1997 Tax Act changes the ordering rule
for purposes of the requirement that newly-electing REITs distribute earnings
and profits that were accumulated in non-REIT years such that distributions of
accumulated earnings and profits generally would be treated as made from the
entity's earliest accumulated earnings and profits.
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Treatment of Foreclosure Property. The 1997 Tax Act lengthens the grace
period for foreclosure property to three taxable years following the election
and allows for the possibility of an additional three year extension by filing
a request with the Service. Additionally, a REIT may revoke an election to
treat property as foreclosure property for any taxable year.
Payments Received under Hedging Instruments. The 1997 Tax Act treats income
and gain from all hedges that reduce the interest rate risk associated with
REIT liabilities as qualifying income under the 95% gross income test.
Excess Non-Cash Income. The 1997 Tax Act (i) expands the class of excess
noncash items that are not subject to the 95% distribution requirement to
include income from the cancellation of indebtedness, and (ii) extends the
treatment of original issue discount and coupon interest as excess noncash
items to REITs using the accrual method.
Prohibited Transaction Safe Harbor. The 1997 Tax Act excludes from the
prohibited sales rules any property that was involuntarily converted.
Shared Appreciation Mortgages. The 1997 Tax Act provides that interest
received on a shared appreciation mortgage is not subject to the tax on
prohibited transactions where the property subject to the mortgage is sold
within four years of the REIT's acquisition of the mortgage pursuant to a
bankruptcy plan of the mortgagor unless the REIT, when it acquired the
mortgage, knew or had reason to know that the property subject to the mortgage
would be sold in a bankruptcy proceeding.
Qualified REIT Subsidiaries. The 1997 Tax Act permits any corporation
wholly-owned by a REIT to be treated as a qualified REIT subsidiary,
regardless of whether the corporation has always been owned by the REIT.
However, if the REIT acquires an existing corporation, such corporation is
treated as if it had been liquidated at the time of acquisition by the REIT
and then reincorporated, so that any pre-REIT built-in gains will be taxed. In
addition, any pre-REIT earnings and profits of the subsidiary must be
distributed before the end of the REIT's taxable year.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA
and the prohibited transaction provisions of Section 4975 of the Code that may
be relevant to a prospective purchaser (including, with respect to the
discussion contained in "--Status of the Company, the Operating Partnership
and the Services Company under ERISA," to a prospective purchaser that is not
an employee benefit plan, another tax-qualified retirement plan or an
individual retirement account ("IRA")). This discussion does not propose to
deal with all aspects of ERISA or Section 4975 of the Code or, to the extent
not pre-empted, state law that may be relevant to particular employee benefit
plan shareholders (including plans subject to Title I of ERISA, other employee
benefit plans and IRAs subject to the prohibited transaction provisions of
Section 4975 of the Code, and governmental plans and church plans that are
exempt from ERISA and Section 4975 of the Code but that may be subject to
state law requirements) in light of their particular circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN COMMON SHARES ON BEHALF OF A
PROSPECTIVE PURCHASER WHICH IS AN ERISA PLAN, A TAX-QUALIFIED RETIREMENT PLAN,
AN IRA OR OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT ITS OWN LEGAL
ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION
4975 OF THE CODE, AND (TO THE EXTENT NOT PRE-EMPTED) STATE LAW WITH RESPECT TO
THE PURCHASE, OWNERSHIP OR SALE OF COMMON SHARES BY SUCH PLAN OR IRA. Plans
should also consider the entire discussion under the heading "Certain Federal
Income Tax Considerations," as material contained therein is relevant to any
decision by an employee benefit plan, tax-qualified retirement plan or IRA to
purchase the Common Shares.
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EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of an employee benefit plan subject to Title I of ERISA (an
"ERISA Plan") should carefully consider whether an investment in Common Shares
is consistent with its fiduciary responsibilities under ERISA. In particular,
the fiduciary requirements of Part 4 of Title I of ERISA require (i) an ERISA
Plan's investments to be prudent and in the best interests of the ERISA Plan,
its participants and beneficiaries, (ii) an ERISA Plan's investments to be
diversified in order to reduce the risk of large losses, unless it is clearly
prudent not to do so, (iii) an ERISA Plan's investments to be authorized under
ERISA and the terms of the governing documents of the ERISA Plan and (iv) that
the fiduciary not cause the ERISA Plan to enter into transactions prohibited
under Section 406 of ERISA. In determining whether an investment in Common
Shares is prudent for purposes of ERISA, the appropriate fiduciary of an ERISA
Plan should consider all of the facts and circumstances, including whether the
investment is reasonably designed, as a part of the ERISA Plan's portfolio for
which the fiduciary has investment responsibility, to meet the objectives of
the ERISA Plan, taking into consideration the risk of loss and opportunity for
gain (or other return) from the investment, the diversification, cash flow and
funding requirements of the ERISA Plan and the liquidity and current return of
the ERISA Plan's portfolio. A fiduciary should also take into account the
nature of the Company's business, the length of the Company's operating
history and other matters described under "Risk Factors."
The fiduciary of an IRA or of an employee benefit plan not subject to Title
I of ERISA because it is a governmental or church plan or because it does not
cover common law employee (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents, not prohibited under Section 4975 of the Code
and permitted under applicable state law.
STATUS OF THE COMPANY UNDER ERISA
A prohibited transaction may occur if the assets of the Company are deemed
to be assets of the investing Plans and "parties in interest" or "disqualified
persons" as defined in ERISA and Section 4975 of the Code, respectively deal
with such assets. In certain circumstances where a Plan holds an interest in
an entity, the assets of the entity are deemed to be Plan assets (the "look-
through rule"). Under such circumstances, any person that exercises authority
or control with respect to the management or disposition of such assets is a
Plan fiduciary. Plan assets are not defined in ERISA or the Code, but the
United States Department of Labor has issued regulations, effective March 13,
1987 (the "Regulations"), that outline the circumstances under which a Plan's
interest in an entity will be subject to the look-through rule.
The Regulations apply only to the purchase by a Plan of an "equity interest"
in an entity, such as common stock or common shares of beneficial interest of
a REIT. However, the Regulations provide an exception to the look-through rule
for equity interests that are "publicly-offered securities."
Under the Regulations, a "publicly-offered security" is a security that is
(i) freely transferable, (ii) part of a class of securities that is widely-
held and (iii) either (a) part of a class of securities that is registered
under section 12(b) or 12(g) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), or (b) sold to a Plan as part of an offering of
securities to the public pursuant to an effective registration statement under
the Securities Act and the class of securities of which such security is a
part is registered under the Exchange Act within 120 days (or such longer
period allowed by the Securities and Exchange Commission) after the end of the
fiscal year of the issuer during which the offering of such securities to the
public occurred. Whether a security is considered "freely transferable"
depends on the facts and circumstances of each case. Generally, if the
security is part of an offering in which the minimum investment is $10,000 or
less, any restriction on or prohibition against any transfer or assignment of
such security for the purposes of preventing a termination or reclassification
of the entity for federal or state tax purposes will not of itself prevent the
security from being considered freely transferable. A class of securities is
considered "widely-held" if it is a class of securities that is owned by 100
or more investors independent of the issuer and of one another.
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The Company anticipates that the Common Shares will meet the criteria of the
publicly-offered securities exception to the look-through rule. First, the
Company anticipates that the Common Shares will be considered to be freely
transferable, as the minimum investment will be less than $10,000 and the only
restrictions upon its transfer are those required under federal tax laws to
maintain the Company's status as a REIT. Second, the Company believes that the
Common Shares will be held by 100 or more investors and that at least 100 or
more of these investors will be independent of the Company and of one another.
Third, the Common Shares will be part of an offering of securities to the
public pursuant to an effective registration statement under the Securities
Act and will be registered under the Exchange Act within 120 days after the
end of the fiscal year of the Company during which the offering of such
securities to the public occurs. Accordingly, the Company believes that if a
Plan purchases Common Shares, the Company's assets should not be deemed to be
Plan assets and, therefore, that any person who exercises authority or control
with respect to the Company's assets should not be treated as a Plan fiduciary
for purposes of the prohibited transaction rules of ERISA and Section 4975 of
the Code.
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UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, Friedman, Billings, Ramsey & Co., Inc., Smith Barney
Inc. and Morgan Keegan & Company, Inc. are acting as representatives (the
"Representatives"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the
number of Common Shares set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER COMMON SHARES
----------- -------------
<S> <C>
Prudential Securities Incorporated............................
Friedman, Billings, Ramsey & Co., Inc.........................
Smith Barney Inc..............................................
Morgan Keegan & Company, Inc..................................
----------
Total....................................................... 12,380,000
==========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the Common Shares offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company that
they propose to offer the Common Shares to the public initially at the public
offering price set forth on the cover page of this Prospectus, that the
Underwriters may allow to selected dealers a concession of $ per share and
that such dealers may reallow a concession of $ per share to certain other
dealers. After completion of the Common Share Offering, the offering price and
the concessions may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 1,857,000 additional
Common Shares at the initial public offering price, less the underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of Common Shares offered hereby. To the
extent such option to purchase is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional Common Shares as the number set forth next to
such Underwriter's name in the preceding table bears to 12,380,000.
The Company and the Operating Partnership have agreed to indemnify the
several Underwriters against or to contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Limited Partners have agreed not to, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any LP Common Units or Common Shares or other shares of
beneficial interest of the Company, or any securities convertible or
exercisable or exchangeable for any LP Common Units or Common Shares or other
shares of beneficial interest of the Company for the applicable Holding Period
and the Company has agreed not to offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of
any option to purchase or other sale or disposition) of any Common Shares or
other shares of beneficial interest of the Company, or any securities
convertible or exercisable or exchangeable for any LP Common Units or Common
Shares or other shares of beneficial interest of the Company (other than
pursuant to the Share Incentive Plan), for a period of 180 days from the date
of this Prospectus, in each case without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters,
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subject to certain limited exceptions. Prudential Securities Incorporated may,
at any time and without notice, release all or any portion of the Common
Shares subject to the foregoing lock-up agreements. See "Structure and
Formation of the Company."
At the request of the Company, up to 200,000 of the Common Shares offered
hereby have been reserved for sale to certain individuals, including trustees
and employees of the Company and Prime and members of their families. The
price of such shares to such persons will be the initial public offering price
set forth on the cover page hereof less underwriting discounts and
commissions. The number of shares available to the general public will be
reduced to the extent those persons purchase reserved shares. Any shares not
so purchased will be offered hereby at the initial public offering price set
forth on the cover of this Prospectus.
Application has been made to have the Common Shares approved for listing on
the NYSE. In order to meet one of the requirements for listing the Common
Shares on the NYSE, the Underwriters have undertaken to sell (i) lots of 100
or more shares to a minimum of 2,000 beneficial holders, (ii) a minimum of 1.1
million shares and (iii) shares with a minimum aggregate market value of $40.0
million.
Prior to the Common Share Offering, there has been no public market for the
Common Shares. The initial public offering price will be determined through
negotiations among the Company, Prime and the Representatives. Among the
factors to be considered in such determination will be prevailing market
conditions, dividend yields and financial characteristics of publicly traded
REITs that the Company and the Representatives believe to be comparable to the
Company, the present state of the Company's financial and business operations,
the Company's management, estimates of the business and earnings potential of
the Company and the prospects for the industry in which the Company operates.
The Company will pay to Prudential Securities Incorporated advisory fees
equal, in the aggregate, to 0.75% of the gross proceeds received by the
Company in the Common Share Offering, for investment banking services related
to, among other things, the structuring of the Formation Transactions.
PSCC, an affiliate of Prudential Securities Incorporated, is expected to be
a lender under the Credit Facility. It is also anticipated that PSCC will make
a $40.0 million loan to the Primestone Joint Venture. Such loan will be
secured by all of the LP Common Units held by the Primestone Joint Venture,
representing a 35.5% interest in the Company. It is expected that PSCC will
receive customary fees for services rendered in connection with the Credit
Facility and such loan to the Primestone Joint Venture.
In connection with the Common Share Offering, certain Underwriters and
selling group members (if any) and their respective affiliates may engage in
transactions that stablilize, maintain or otherwise affect the market price of
the Common Shares. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M promulgated by the
Securities and Exchange Commission (the "Commission") pursuant to which such
persons may bid for or purchase Common Shares for the purpose of stabilizing
its market price. The Underwriters also may create a short position for the
account of the Underwriters by selling more Common Shares in connection with
the Common Share Offering than they are committed to purchase from the
Company, and in such case may purchase Common Shares in the open market
following completion of the Common Share Offering to cover all or a portion of
such short position.The Underwriters may also cover all or a portion of such
short position, up to 1,857,000 Common Shares, by exercising the Underwriters'
over-allotment option referred to above. In addition, Prudential Securities
Incorporated, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or any selling group member participating in the Common Share
Offering) for the account of the other Underwriters, the selling concession
with respect to Common Shares that is distributed in the Common Share Offering
but subsequently purchased for the account of the Underwriters in the open
market. Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Shares at a level above that which
might otherwise prevail in the open market. None of the transactions described
in this paragraph are required and, if they are undertaken, they may be
discontinued at any time.
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LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Winston & Strawn, Chicago, Illinois. Legal matters relating
to Maryland law, including the validity of the issuance of the Shares offered
hereby, will be passed upon for the Company by Miles & Stockbridge, a
Professional Corporation, Baltimore, Maryland. Certain legal matters will be
passed upon for the Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP,
New York, New York. In addition, the description of federal income tax
consequences contained in this Prospectus under "Certain Federal Income Tax
Considerations" is, to the extent that it constitutes matters of law,
summaries of legal matters or legal conclusions, the opinion of Winston &
Strawn, special tax counsel to the Company as to the material federal income
tax consequences of the Offering.
EXPERTS
The balance sheet of Prime Group Realty Trust as of July 21, 1997, the
combined financial statements of the Prime Properties (Predecessor Affiliates)
as of June 30, 1997 and December 31, 1996 and 1995, and for the six months
ended June 30, 1997 and for each of the three years in the period ended
December 31, 1996, the combined statements of revenue and certain expenses of
the Prime Industrial Contribution Properties for the period from January 1,
1997 to June 30, 1997 and for the period from March 1, 1996 to December 31,
1996, the combined statements of revenue and certain expenses of the IBD
Properties for the period from January 1, 1997 to June 30, 1997 and for the
year ended December 31, 1996, the combined statements of revenue and certain
expenses of the NAC Properties for the period from January 1, 1997 to June 30,
1997 and for the year ended December 31, 1996, the statements of revenue and
certain expenses of Citibank Office Plaza for the period from January 1, 1997
to June 30, 1997 and for the year ended December 31, 1996, the combined
statements of revenue and certain expenses of Salt Creek Office Center for the
period from January 1, 1997 to June 30, 1997 and for the year ended December
31, 1996, the statements of revenue and certain expenses of 280 Schuman
Boulevard for the period from January 1, 1997 to June 30, 1997 and for the
year ended December 31, 1996, and the statements of revenue and certain
expenses of 475 Superior Avenue for the period from January 1, 1997 to June
30, 1997 and for the year ended December 31, 1996, 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.
In addition, certain statistical and other information appearing in this
Prospectus and the Registration Statement has been prepared by the Rosen
Consulting Group and is included herein in reliance upon the authority of such
firm as an expert in, among other things, real estate consulting and urban
economics and with respect to the Chicago Metropolitan Area and its
submarkets.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street N.W., Washington, D.C. 20549, a Registration
Statement (of which this Prospectus is a part) on Form S-11 under the
Securities Act and the rules and regulations promulgated thereunder with
respect to the securities offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits and
financial statements thereto, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference and the exhibits and schedules hereto. For further information
regarding the Company and the Shares offered hereby, reference is hereby made
to the Registration Statement and such exhibits and schedules, copies of which
may be examined without charge at, or copies obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at Room
1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: 7 World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511, or by way of the Commission's
Internet address, http://www.sec.gov.
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Following the completion of the Offering, the Company will be required to
file reports and other information with the Commission pursuant to the
Exchange Act. In addition to applicable legal or New York Stock Exchange
requirements, if any, the Company intends to furnish its shareholders with
annual reports containing consolidated audited financial statements with a
report thereon by the Company's independent certified public accountants and
with quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus:
"1997 Tax Act" means the Taxpayer Relief Act of 1997, as amended.
"Acquisition Properties" means the two Office Properties and related assets
that comprise 1990 Algonquin Road, 2000-2060 Algonquin Road (also known as the
Salt Creek Office Center), 280 Schuman Boulevard, 475 Superior Avenue and
2205-2245 Enterprise Drive (also known as the Enterprise Centre) that are
expected to be acquired by the Company concurrently with the completion of the
Offering.
"ADA" means the Americans with Disabilities Act of 1990, as amended, and the
regulations promulgated under the authority conferred thereby.
"AEA" means the American Electronics Association.
"AHEC" means the Industrial Property known as 425 East Algonquin Road.
"AIREB" means the Association of Industrial Real Estate Brokers.
"Amended and Restated Bylaws" means the Amended and Restated Bylaws of the
Company.
"Annualized Effective Net Rent" means the total net rent to be received over
the respective terms from all leases in effect at June 30, 1997 minus all
Tenant Expenditures for all such leases, divided by the terms in months for
such leases, multiplied by 12.
"Annualized Net Rent" means, with respect to a lease, the monthly net rent
due under the lease as determined in accordance with GAAP, annualized for all
leases in effect on June 30, 1997.
"Assessment" means the Natural Resources Damage Assessment of the Grand
Calumet River and the Indiana Harbor Canal System which IDEM has requested the
owner of the ECEC, along with numerous other property owners, to develop.
"Audit Committee" means the audit committee of the Board of Trustees of the
Company.
"Base Year" means, with respect to a lease, the tenant's proportionate share
of real estate taxes, insurance, utility and operating expense paid by the
tenant during the tenant's first year of occupancy under such lease.
"Beneficiary" means the qualified charitable organization selected by the
Company which would receive the automatic transfer of any Excess Shares.
"Board of Trustees" means the board of trustees of the Company.
"BOMA" means the Building Owners and Managers Association.
"Book-Tax Difference" means, with respect to appreciated or depreciated
property that is contributed to a partnership, the amount of unrealized gain
or unrealized loss associated with the property of the time of contribution,
which 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 the time of contribution.
"Business Combination" means a merger, consolidation or other combination
with or into another person or sale of all or substantially all of its assets,
or any reclassification, recapitalization or change of outstanding Common
Shares.
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"Chicago CBD" means the Chicago central business district.
"Chicago Metropolitan Area" means the area defined by the United States
Department of Commerce as the Chicago Metropolitan Statistical Area,
comprising Lake, Cook, DuPage, Kane, McHenry, Grundy, Kendall and Will
Counties in Illinois, Kenosha County in Wisconsin and Lake and Porter Counties
in Indiana.
"Class A" means, with regard to buildings, buildings that are centrally
located, professionally managed and maintained, attract high-quality tenants
and command upper-tier rental rates and are modern structures or have been
modernized to compete with newer buildings.
"Class B" means, with regard to buildings, buildings that have good
location, construction and tenancy and are sometimes considered to be
competitive with the lower spectrum of Class A buildings.
"Class C" means, with regard to buildings, buildings that are generally
older buildings with progressing functional and/or economic obsolescence.
"Code" means the Internal Revenue Code of 1986, as amended.
"Combined Financial Statements" means the combined financial statements of
the Prime Properties and various affiliated entities related to certain of the
Properties or other assets being contributed to the Company.
"Commission" means the United States Securities and Exchange Commission.
"Common Share Offering" means the concurrent offering by the Company of the
Common Shares.
"Common Shares" means common shares of beneficial interest, par value $.01
per share, of the Company.
"Common Units" means partnership interests representing the common equity in
the Operating Partnership.
"Company" means Prime Group Realty Trust, a Maryland real estate investment
trust, and its subsidiaries.
"Continental" means Continental Offices Ltd.
"Continental Management Business" means all of the operations and business
of Continental Offices, Ltd. and Continental Offices, Ltd. Realty, including a
construction business and the property management and/or leasing operations at
five of the Properties, excluding certain assets.
"Contributors" means, collectively, the IBD Contributors and the NAC
Contributors.
"Contribution Properties" means, collectively, the IBD Properties and the
NAC Properties.
"Control Shares" means voting shares of beneficial interest of a Maryland
real estate investment trust which, if aggregated with all other such shares
of beneficial interest previously acquired by the acquiror, or in respect of
which the acquiror is able to exercise or direct the exercise of voting power
(except solely by revocable proxy) would entitle the acquiror to exercise
voting power in electing trustees within one of the following ranges of voting
power: (i) one-fifth or more but less than one third; (ii) one-third or more
but less than a majority, or (iii) a majority of all voting power. Control
Shares do not include shares the acquiror is then entitled to vote as a result
of having previously obtained shareholder approval.
"Control Share Acquisition" means the acquisition of Control Shares, subject
to certain exceptions.
"Convertible Preferred Shares" means the % Series A Cumulative
Convertible Preferred Shares of the Company.
"Convertible Preferred Offering" means the Company's offering hereby of
2,000,000 Convertible Preferred Shares.
"CPI" means the Consumer Price Index, the economic index issued by the U.S.
Department of Labor indicating price increases or decreases for the U.S.
economy.
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"Declaration of Trust" means the Company's Declaration of Trust, as amended
by Articles of Amendment and Restatement.
"Dividend Reduction" means the dividend paid on a Common Share of the
Company for each of two consecutive fiscal quarters of the Company has been in
an amount less than eighty-five percent (85.0%) of the dividend paid on a
common share of the Company in the first full fiscal quarter of the Company
subsequent to the Offerings.
"Donnelley" means R.R. Donnelley and Sons Company.
"ECEC" means the East Chicago Enterprise Center.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means an employee benefit plan subject to Title I of ERISA.
"Everen" means Everen Securities, Inc.
"Excess Shares" means the 65.0 million authorized shares of excess shares of
beneficial interest, $.01 par value per share, of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Executive Committee" means the executive committee of the Board of Trustees
of the Company.
"Executive Compensation Committee" means the executive compensation
committee of the Board of Trustees of the Company.
"Expense Stop" means, with respect to a lease, a negotiated amount
approximating the tenant's pro rata share of real estate taxes, insurance, and
operating expense.
"FIRE" means, collectively, with respect to an economy, that sector of such
economy comprised of the businesses of finance, insurance, and real estate.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"five or fewer requirement" means the requirement under the Code that not
more than 50% in value of the Company's outstanding shares of beneficial
interest may be owned directly or indirectly by five or fewer individuals (as
defined in the Code) during the last half of the taxable year (other than the
first year).
"Formation Agreement" means the agreement between the Operating Partnership
and Prime regarding the interests the Operating Partnership will acquire in
the Properties or interests therein owned by Prime and the third-party office
and industrial development, leasing and property management business of Prime.
"Formation Transactions" means those transactions relating to the
organization of the Company and its subsidiaries, including the transfer of
the Properties and other assets to the Company, formation of the Operating
Partnership, consolidation of the ownership interests in certain of the
Properties, the Offering and qualification of the Company as a REIT for
federal income tax purposes for the taxable year beginning January 1, 1997,
all as described under "Structure and Formation of the Company--Formation
Transactions."
"Funds from Operations" means funds from operations computed in accordance
with the resolution adopted by the Board of Governors of NAREIT in its March
1995 White Paper (with the exception that the Company expects to report base
rents on a cash basis, rather than a straight-line GAAP basis, which the
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Company believes will result in a more accurate presentation of its actual
operating activities), as follows: net income (loss) (computed in accordance
with GAAP with the exception that base rents are reported on a cash basis as
described above), excluding gains (or losses) from debt restructuring and
sales of real property, plus real estate related depreciation and amortization
(excluding amortization of deferred financing costs), and after adjustments
for unconsolidated partnerships and joint ventures.
"GAAP" means generally accepted accounting principles in the United States.
"GMP" means gross metropolitan product.
"HEC" means the Hammond Enterprise Center.
"Huntley Business Park" means that certain industrial and office park
located in the Village of Huntley, Illinois.
"IBD" means Industrial Building and Development Company.
"IBD Contributors" means Edward S. Hadesman Trust dated May 22, 1992,
Grandville/Northwestern Management Corp., Carolyn B. Hadesman Trust dated May
21, 1992, Lisa Hadesman 1991 Trust, Cynthia Hadesman 1991 Trust, Tucker B.
Magid, Frances Shubert, Grandville Road Property, Inc., HR Trust, Edward E.
Johnson and Sky Harbor Associates.
"IBD Properties" means, collectively, the Office Property and related assets
that comprise 555 Huehl Road together with the six Industrial Properties and
related assets that comprise 1001 Technology Way, 3818 Grandville/1200
Northwestern, 306-310 Era Drive, 1301 Ridgeview Drive, 515 Huehl Road/500
Lindberg and 455 Academy Drive.
"IDEM" means the Indiana Department of Environmental Management.
"IEPA" means the Illinois Environmental Protection Agency.
"Indemnitors" means certain Limited Partners who have agreed to make certain
representations and warranties concerning the Properties and have also agreed
to indemnify the Company against breaches of such representations and
warranties.
"Indemnified Contributor" means those Contributors with whom the Company has
entered into a Tax Indemnification Agreement whereby the Company agrees to
indemnify such Contributors for, among other things, certain tax liabilities
based on income or gain which they might realize upon the sale by the Company
of the Properties Contributed by such Contributors.
"Industrial Properties" means the industrial properties the Company, through
its subsidiaries, will own upon completion of the Offering consisting of bulk
warehouse distribution facilities, light-assembly and manufacturing facilities
and heavy-industrial/overhead crane buildings.
"Interested Shareholder" means any person who beneficially owns 10% or more
of the voting power of a Maryland real estate investment trust's shares of
beneficial interest or an affiliate of the trust which, at any time within the
two-year period prior to the date in question, was the beneficial owner of 10%
or more of the voting power of the then outstanding voting shares of
beneficial interest of the trust.
"IRA" means an individual retirement account as defined by the Code and the
applicable Treasury Regulations.
"IRS" means the United States Internal Revenue Service.
"Jones Day" means the law firm of Jones, Day, Reavis & Pogue.
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"Keck" means the law firm of Keck, Mahin & Cate.
"Keck Space" means the approximately 113,000 net rentable square feet
formerly leased to Keck at the 77 West Wacker Drive Building. The Property
Partnership that holds such Property has reached a settlement pursuant to
which Keck has agreed to vacate its space by November 30, 1997.
"Libertyville Business Park" means that certain office and industrial park
located in the Village of Libertyville, Illinois.
"Limited Partner" initially means, any of Prime and the Contributors, each
of which are limited partners of the Operating Partnership.
"Management Contracts" means the contracts between the Operating Partnership
and the Services Company pursuant to which the Services Company will render
development, leasing and property management services for the Company.
"Maryland REIT Law" means Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended.
"MGCL" means the Maryland General Corporation Law, as amended.
"Mortgage Debt" means the loans secured by certain of the Contribution
Properties.
"Motorola" means Motorola, Inc.
"MSA" means consolidated metropolitan statistical area.
"NAC Contributors" means certain affiliates of the NAC General Partner,
including Narco River Business Center, Narco Tower Road Associates, Olympian
Office Center, Tri-State Industrial Park Joint Venture, Carol Stream
Industrial Park Joint Venture, Narco Enterprises, Inc., The Nardi Group Ltd.,
Narco Construction Inc., Nardi & Co., Nardi Asset Managment, Inc. and Nardi
Architectural, Inc.
"NAC General Partner" means a limited liability company controlled by
Stephen J. Nardi.
"NAC Properties" means, collectively, the six Office Properties and related
assets that comprise 941-961 Weigel Drive, 4100 Madison Street, 350 N.
Mannheim Road, 1600-1700 167th Street, 1301 Tower Road and 4343 Commerce
Court, the 14 Industrial Properties and related assets that comprise 1401 S.
Jefferson, 1051 N. Kirk Road, 4211 Madison Street, 200 E. Fullerton Avenue,
350 Randy Road, 4248, 4250 and 4300 Madison Street, 370 Carol Lane, 388 Carol
Lane, 342-48 Carol Lane, 343 Carol Lane, 4160-4190 Madison Street, 11039 Gage
Avenue, 11045 Gage Avenue, and 550 Kehoe Boulevard and one retail center that
comprise 371-385 N. Gary Avenue.
"NAREIT" means the National Association of Real Estate Investment Trusts,
Inc.
"National Service Industries" or "NSI, Inc." means National Service
Industries, Inc.
"Net rent" means, with respect to a lease, the amount due from the tenant
under the lease without including operating expenses, taxes and other similar
reimbursements due from the tenant.
"Non-Compete Agreement" means the agreement Prime and Michael W. Reschke
have entered with the Company which contains restrictions on their ability to
compete with the Company.
"Non-ERISA Plan" means an employee benefit plan which is not subject to
Title I of ERISA because it is a governmental or church plan or because it
does not cover common law employees.
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"Non-U.S. Shareholder" means a holder of Common Shares who is a nonresident
alien individual, foreign corporation, foreign partnership, foreign trust or
estate or other foreign shareholder.
"Note" means that certain promissory note to be issued by the Services
Company to the Operating Partnership with an initial principal amount of
approximately $4.2 million.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the offering of Common Shares and Convertible Preferred
Shares of the Company pursuant to and as described in this Prospectus.
"Office Properties" means the office properties in which the Company,
through its subsidiaries, will have an interest or will own upon completion of
the Offering.
"Operating Partnership" means Prime Group Realty, L.P., a Delaware limited
partnership having its principal offices at 77 West Wacker Drive, Suite 3900,
Chicago, Illinois 60601.
"Outparcels" means parcels of vacant land which are located adjacent to, or
near, particular Properties that are not necessarily required for use in
connection with the office building or industrial center located at a
particular property.
"Ownership Limit" means the prohibition in the Declaration of Trust on (i)
beneficial ownership of more than 9.9% of the Common Shares by one person and
(ii) ownership of more than 9.9% of the fully diluted Common Shares (assuming
no exchange of Common Units for Common Shares by one person).
"Partnership Agreement" means the Amended and Restated Limited Partnership
Agreement of the Operating Partnership.
"Plan" means an ERISA Plan or a non-ERISA Plan.
"preferential dividend" means a dividend which is not pro rata within a
class of shares of beneficial interest or stock entitled to a dividend or
which is not consistent with the rights to distribution between classes of
shares of beneficial interest or stock.
"Preferred Stock" means the non-voting participating preferred stock of the
Services Company.
"Preferred Units" means partnership interests representing the preferred
equity in the Operating Partnership.
"Prime" means The Prime Group, Inc., an Illinois corporation, and certain of
its affiliates.
"Prime Contribution Properties" means, collectively, the Office Property and
related assets that comprise 1699 East Woodfield Road (Citibank Office Plaza)
together with the six Industrial Properties and related assets that comprise
2160 McGaw Road, 4849 Groveport Road, 2400 McGaw Road, 5160 Blazer Memorial
Parkway, 4411 Marketing Place and 600 London Road.
"Prime Partnerships" means those corporations, general and limited
partnerships and trusts affiliated with the Prime Properties which are being
acquired by the Operating Partnership.
"Prime Properties" means, collectively, the five Office Properties and
related assets known as the 77 West Wacker Drive Building, 201 4th Avenue N.,
620 Market Street, 625 Gay Street, and 4823 Old Kingston Pike, together with
the 16 Industrial Properties and related assets that comprise 425 East
Algonquin Road, the Chicago Enterprise Center, the East Chicago Enterprise
Center, the Hammond Enterprise Center and a parking facility.
"Prohibited Owner" means any purported owner of Common Shares who would
otherwise violate the Ownership Limit or such other limit as provided in the
Declaration of Trust.
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"Prohibited Transferee" means any purported transferee of Common Shares who
would otherwise violate the Ownership Limit or such other limit as provided in
the Declaration of Trust.
"Properties" means the Office Properties and the Industrial Properties,
which collectively include the Prime Properties, the Prime Contribution
Properties, the Contribution Properties and the Acquisition Properties in
which the Company, through its subsidiaries, will have an interest or which
the Company will own upon the completion of the Offering.
"Property Partnerships" means those corporations, general and limited
partnerships and trusts that own the Properties.
"Prospectus" means the prospectus used in connection with the Offering.
"PPE" is the proposed trading symbol of the Company on the NYSE.
"Put Option Agreement" means that certain Put Option Agreement, by and among
the NAC General Partner, the Company and the Operating Partnership.
"Rank Video" means Rank Video Services America, Inc.
"RCG" means the Rosen Consulting Group.
"Recognition Period" means the ten-year period beginning on the date a
"built-in gain asset" is acquired by the Company.
"Registrable Shares" means any Common Shares acquired by the Limited
Partners upon the exchange by the Limited Partners of Common Units received by
them in connection with the Formation Transactions.
"Registration Rights" means those certain registration rights granted to the
Limited Partners in connection with the Formation Transactions.
"Registration Statement" means the registration statement on Form S-11 filed
with the Commission in connection with the Offering.
"Regulations" means the regulations issued by the United States Department
of Labor that outline the circumstances under which an ERISA Plan's interest
in an entity will be subject to the look through rule.
"REIT" means a self-managed real estate investment trust as defined by the
Code and the applicable Treasury Regulations.
"REIT Requirements" means the requirements for qualifying as a REIT.
"Related Party Tenant" means a tenant directly or constructively owned 10%
or more by the Company or by an owner of 10% or more of the Company.
"Rentable square feet" mean a building's usable area plus common areas and
penetrations, expressed collectively in square feet which are allocated pro
rata to tenants.
"Representatives" means Prudential Securities Incorporated, Friedman,
Billings, Ramsey & Co., Inc., Smith Barney Inc. and Morgan Keegan & Company,
Inc.
"RFA" means Regional Financial Associates.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Services Company" means Prime Group Realty Services, Inc., a Maryland
corporation having its principal offices at 77 West Wacker Drive, Suite 3900,
Chicago, Illinois 60601.
G-7
<PAGE>
"Share Incentive Plan" means the share incentive plan established by the
Company, as further described in this Prospectus under the caption entitled
"Management--Share Incentive Plan."
"Share Options" means share options which the Company is authorized to grant
pursuant to the Share Incentive Plan.
"Share Trust" means a trust which holds Common or Preferred Shares of
beneficial interest of the Company which have been designated as Shares-in-
Trust.
"Shares-in-Trust" means Common or Preferred Shares of beneficial interest of
the Company which are automatically converted into an equal number of Excess
Shares and transferred automatically to the Share Trust upon a purported
transfer of such Common or Preferred Shares which is violative of the
applicable restrictions on transfer.
"SIOR" means the Society of Industrial and Office Realtors.
"Suburban Chicago" means all areas of the Chicago Metropolitan Area, except
for the City of Chicago.
"Surviving Partnership" means a surviving entity in which substantially all
of the surviving partnership's assets are directly or indirectly owned by the
Operating Partnership or another limited partnership or limited liability
company which is the survivor of a merger, consolidation or combination of
assets with the Operating Partnership.
"Tax Counsel" means the law firm of Winston & Strawn, which has acted as a
special tax counsel to the Company in connection with the Offering and the
preparation of the Prospectus.
"Tax-Exempt Bonds" means the tax-exempt bond financing encumbering certain
of the Properties.
"Tenant Expenditures" means tenant improvements, leasing commissions and
other concessions.
"Termination Transaction" means any merger, consolidation or other
combination with or into another person, sale of all or substantially all of
the Company's assets or any reclassification, recapitalization or change of
its outstanding equity interest.
"Total market capitalization" means the sum of the aggregate market value of
the outstanding Common Shares and Convertible Preferred Shares, assuming the
full exchange of all Common Units for Common Shares, plus the Company's total
outstanding debt.
"Treasury Regulations" means the rules and regulations promulgated by the
United States Department of the Treasury under the Code, as such rules and
regulations are amended from time to time.
"Triple net basis lease" means a lease pursuant to which a tenant is
responsible for the base rent in addition to the costs and expenses in
connection with and related to property taxes, insurance and repairs and
maintenance applicable to the leased space.
"U.S. Shareholder" means a holder of Common Shares who (for United States
federal income tax purposes) (i) is a citizen or resident of the United
States, (ii) is a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, or (iii) is an estate or trust which is subject to
taxation in the United States regardless of the source of its income or which
is under the primary supervision or authority of a United States court or a
United States fiduciary.
"United States" or "U.S." means the United States of America (including the
District of Columbia), its territories, possessions and other areas subject to
its jurisdiction.
G-8
<PAGE>
PRIME GROUP REALTY TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Prime Group Realty Trust:
Pro Forma (Unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1997... F-4
Notes to Pro Forma Condensed Consolidated Balance Sheet.............. F-5
Pro Forma Condensed Consolidated Statements of Operations for the six
months ended June 30, 1997 and the year ended December 31, 1996..... F-11-12
Notes to Pro Forma Condensed Consolidated Statements of Operations... F-13
Historical:
Report of Independent Auditors........................................ F-18
Balance Sheet as of July 21, 1997..................................... F-19
Notes to Balance Sheet................................................ F-20
Prime Properties:
Report of Independent Auditors........................................ F-21
Combined Balance Sheets as of June 30, 1997 and December 31, 1996 and
1995................................................................. F-22
Combined Statements of Operations for the six months ended June 30,
1997 and 1996 (unaudited) and the three years ended December 31,
1996, 1995, and 1994................................................. F-23
Combined Statements of Changes in Partners' Deficit for the six months
ended June 30, 1997 and for the three years ended December 31, 1996,
1995, and 1994....................................................... F-24
Combined Statements of Cash Flows for the six months ended June 30,
1997 and 1996 (unaudited) and the three years ended December 31,
1996, 1995, and 1994................................................. F-25
Notes to Combined Financial Statements................................ F-27
Prime Industrial Contribution Properties:
Report of Independent Auditors........................................ F-38
Combined Statements of Revenue and Certain Expenses for the period
from January 1, 1997 to
June 30, 1997 and for the period from March 1, 1996 to December 31,
1996................................................................. F-39
Notes to Combined Statements of Revenue and Certain Expenses.......... F-40
IBD Properties:
Report of Independent Auditors........................................ F-41
Combined Statements of Revenue and Certain Expenses for the period
from January 1, 1997 to
June 30, 1997 and for the year ended December 31, 1996............... F-42
Notes to Combined Statements of Revenue and Certain Expenses.......... F-43
NAC Properties:
Report of Independent Auditors........................................ F-44
Combined Statements of Revenue and Certain Expenses for the period
from January 1, 1997 to June 30, 1997 and for the year ended December
31, 1996............................................................. F-45
Notes to Combined Statements of Revenue and Certain Expenses.......... F-46
Citibank Office Plaza:
Report of Independent Auditors........................................ F-47
Statements of Revenue and Certain Expenses for the period from January
1, 1997 to June 30, 1997 and for the year ended December 31, 1996.... F-48
Notes to Statements of Revenue and Certain Expenses................... F-49
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Salt Creek Office Center:
Report of Independent Auditors........................................... F-50
Combined Statements of Revenue and Certain Expenses for the period from
January 1, 1997 to
June 30, 1997 and for the year ended December 31, 1996.................. F-51
Notes to Combined Statements of Revenue and Certain Expenses............. F-52
280 Schuman Boulevard:
Report of Independent Auditors........................................... F-53
Statements of Revenue and Certain Expenses for the period from January 1,
1997 to
June 30, 1997 and for the year ended December 31, 1996.................. F-54
Notes to Statements of Revenue and Certain Expenses...................... F-55
475 Superior Avenue:
Report of Independent Auditors........................................... F-56
Statements of Revenue and Certain Expenses for the period from January 1,
1997 to
June 30, 1997 and for the year ended December 31, 1996.................. F-57
Notes to Statements of Revenue and Certain Expenses...................... F-58
</TABLE>
F-2
<PAGE>
PRIME GROUP REALTY TRUST
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Consolidated Balance Sheet of the Company
is presented as if, at June 30, 1997, (i) the Company had sold 12.38 million
shares of its common shares of beneficial interest at a sales price of $20.00
per share, the midpoint of the price range, and contributed the net proceeds
to the Operating Partnership, (ii) the Company had sold 2.0 million shares of
its convertible preferred shares of beneficial interest at a sales price of
$20.00 per share, the midpoint of the price range, and contributed the net
proceeds to the Operating Partnership, (iii) The Prime Group, Inc. (Prime)
contributed the properties, business and operations of the Prime Properties
and the Prime Contribution Properties (Prime Industrial Contribution
Properties and Citibank Office Plaza--recently acquired by Prime from third
parties) to the Operating Partnership, (iv) the Operating Partnership had
issued 4.57 million units for $85.0 million to Primestone Joint Venture (a
joint venture in which Prime is a partner--See "Structure and Formation of the
Company"), (v) the IBD Contributors and the NAC Contributors had contributed
their respective properties and operations (IBD Properties and NAC Properties
respectively) to the Operating Partnership, (vi) the Operating Partnership
acquired the Acquisition Properties, (vii) the Operating Partnership acquired
Continental Office, Ltd. and Continental Offices, Ltd. Realty,
construction/property management companies, from a third party, and (viii) the
Operating Partnership repaid debt on certain of the Prime Properties and Prime
Contribution Properties described under "Use of Proceeds." The unaudited Pro
Forma Condensed Consolidated Statements of Operations for the six months ended
June 30, 1997 and for the year ended December 31, 1996 are presented as if the
above transactions occurred as of January 1, 1996. The unaudited Pro Forma
Condensed Consolidated financial statements should be read in conjunction with
all of the financial statements contained elsewhere in the Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of the
Formation and Offering have been made.
The unaudited Pro Forma Condensed Consolidated Balance Sheet and Statements
of Operations of the Company are not necessarily indicative of what the actual
financial position or results operations would have been assuming the
Formation and Offering had occurred at the dates indicated above, nor do they
purport to represent the future financial position or results of operations of
the Company.
F-3
<PAGE>
PRIME GROUP REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRIME
CONTRIBUTION, PRE-
CONTRIBUTION OFFERING
PRIME AND ACQUISITION CONSOLIDATION PRIME GROUP OFFERING
GROUP PROPERTIES AND PRO FORMA REALTY PRO FORMA
REALTY PRIME INVESTMENT IN ADJUST- TRUST PRO ADJUST- PRO
TRUST PROPERTIES(A) SUBSIDIARY(B) MENTS(C) FORMA MENTS(D) FORMA
------ ------------- --------------- ------------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Real estate, net........ $ -- $ 245,457 $ 219,575 $ 1,220 (E) $466,252 $ 1,705 (E) $467,957
Cash.................... 1 4,458 (100,109) (110)(F) (95,760) 100,671 (F) 4,911
Tenant receivables...... -- 41,389 -- -- 41,389 -- 41,389
Investment in
subsidiary............. -- -- 5,890 87 (G) 5,977 -- 5,977
Deferred costs, net..... -- 26,191 -- (350)(H) 25,841 1,718 (H) 27,559
Other................... 2,340 783 1,500 (2,340)(I) 2,283 -- 2,283
------ --------- --------- --------- -------- --------- --------
Total assets............ $2,341 $ 318,278 $ 126,856 $ (1,493) $445,982 $ 104,094 $550,076
====== ========= ========= ========= ======== ========= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Mortgage notes payable.. $ -- $ 343,835 $ 89,925 $(100,808)(J) $332,952 $(243,027)(J) $ 89,925
Bonds payable........... -- 86,450 -- (12,000)(K) 74,450 -- 74,450
Accounts payable and
accrued expenses....... -- 15,822 -- (599)(L) 15,223 -- 15,223
Liabilities for leases
assumed................ -- 6,615(M) -- -- 6,615 -- 6,615
Other................... 2,340 5,835 -- (2,340)(I) 5,835 -- 5,835
------ --------- --------- --------- -------- --------- --------
Total liabilities.... 2,340 458,557 89,925 (115,747) 435,075 (243,027) 192,048
Partners' deficit....... -- (140,279) -- 140,279 (N) -- -- --
Minority interest....... -- -- 36,931 (26,025)(O) 10,906 148,995 (O) 159,901
Shareholders' equity:
Convertible preferred
shares................. -- -- -- -- -- 20 (P) 20
Common shares........... -- -- -- -- -- 124 (P) 124
Additional paid-in
capital................ 1 -- -- -- 1 197,982 (Q) 197,983
------ --------- --------- --------- -------- --------- --------
Total shareholders'
equity.............. 1 -- -- -- 1 198,126 198,127
------ --------- --------- --------- -------- --------- --------
Total liabilities and
shareholders' equity... $2,341 $ 318,278 $ 126,856 $ (1,493) $445,982 $ 104,094 $550,076
====== ========= ========= ========= ======== ========= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
BASIS OF PRESENTATION
The following pro forma adjustments reflect the Offering and Formation
Transactions, including the contribution of the net proceeds of the Offering
by the Company to the Operating Partnership, the contribution of the Prime
Properties and the Prime Contribution Properties (one office building
(Citibank Office Plaza) and six industrial properties (Prime Industrial
Contribution Properties) recently acquired from third parties) by Prime to the
Operating Partnership (Prime and management will receive 3.58 million common
units with an aggregate value of $71.5 million), the purchase of non-Prime
ownership interests in certain of the Prime Properties by the Operating
Partnership, the sale of 4.57 million Operating Partnership units (aggregate
value of $91.4 million) to the Primestone Joint Venture (Primestone, a joint
venture in which Prime is a partner--see "Structure and Formation of the
Company"; Prime will also contribute 3.38 million of its Common Units
described above to Primestone), the contribution of the IBD Properties and the
NAC Properties by their current owners (IBD Contributors and NAC Contributors,
collectively the Contributors) to the Operating Partnership (the IBD
Properties and the NAC Properties are collectively referred to as the
Contribution Properties--See Note B), the purchase of the Acquisition
Properties and Continental Offices Ltd. and Continental Offices, Ltd. Realty
(Continental) by the Operating Partnership (See Note B) and the repayment and
forgiveness of debt on certain of the Prime Properties and the Prime
Contribution Properties by the Operating Partnership. The Operating
Partnership will contribute Continental and other assets to a newly formed
service company (Services Company) in exchange for a non-voting, 95% economic
ownership interest. The Operating Partnership will reflect its investment in
Services Company using the equity method. Prime, Primestone and the
Contributors are collectively referred to as the minority interest unit
holders (Minority Interest) of the Operating Partnership.
The above contributions and purchases will be recorded by the Operating
Partnership as follows:
<TABLE>
<CAPTION>
PROPERTIES/ENTITIES INITIAL RECORDED VALUE
------------------- ----------------------
<S> <C>
Prime Properties:
Prime's ownership interests Prime's historical cost
Non-Prime ownership interests Purchase price of the interests
Prime Contribution Properties Prime's historical cost
IBD Properties Purchase Price
NAC Properties Purchase Price
Acquisition Properties Purchase price
Continental Purchase price
</TABLE>
The Prime Properties and the Prime Contribution Properties will be recorded
at Prime's historical cost (adjusted for the purchase of the non-Prime/non-
sponsor ownership interests in the Prime Properties) since Prime is the
sponsor of the Company's initial public offering. The IBD Properties and the
NAC Properties will be recorded at the value of the consideration (aggregate
value of Operating Partnership units, cash, debt assumed and debt repaid with
new mortgage notes) issued to the Contributors for their contribution since
they are not sponsors. The Acquisition Properties and Continental will be
recorded at their purchase prices since they are being acquired from third-
parties. The initial recorded values are further described in Notes A,B,E,F
and N.
F-5
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--(CONTINUED)
After giving effect to the Offering and Formation Transactions and the
contribution of Common Units by Prime to Primestone described above, the
following represents the common ownership interests in the Company/ Operating
Partnership:
<TABLE>
<CAPTION>
COMMON
SHARES/UNITS COMMON
(IN OWNERSHIP
MILLIONS) INTEREST
------------ ---------
<S> <C> <C>
Company............................................ 12.38 55.34%
Prime (*)(+)....................................... 0.20 0.89%
Primestone (+)..................................... 7.95 35.54%
IBD Contributors................................... 0.92 4.11%
NAC Contributors................................... 0.92 4.12%
----- ------
22.37 100.0%
===== ======
</TABLE>
- --------
(*) Includes 0.11 million units issued to Mr. Patterson, an employee of Prime.
(+) Prime's and Primestone's ownership interest prior to Prime's contribution
of units to Primestone were 16.00% and 20.43%, respectively.
(A) Reflects the historical Prime Properties balance sheet as of June 30,
1997 (See Note 1 to the Prime Properties Notes to the Combined Financial
Statements for a listing of the entities included in the Prime Properties.)
which includes 77 West Wacker Limited Partnership (77 West Wacker) and 77
Fitness Center Ltd. (77 Fitness). The Operating Partnership will contribute 77
Fitness to the Services Company (See Notes E, F, G, L and N).
(B) Adjustments to reflect the contribution of the Prime Contribution
Properties and the Contribution Properties and the purchase of the Acquisition
Properties and Continental as of June 30, 1997:
<TABLE>
<CAPTION>
PROPERTY PROPERTY TYPE
-------- -----------------
<S> <C> <C>
Prime Contribution Properties (i)............. Office/Industrial $ 24,190
Contribution Properties (ii).................. Office/Industrial 155,528
Acquisition Properties (iii).................. Office/Industrial 41,357
--------
$221,075
========
Investment in Subsidiary (iv)................. $ 5,890
========
</TABLE>
- --------
(i) Prime recently acquired the Prime Contribution Properties from third
parties with proceeds of mortgage notes payable and cash. The Operating
Partnership will repay the mortgage notes payable of $23,501, reimburse
Prime $689 for certain acquisition costs.
(ii) The basis of the real estate of the Contribution Properties is the
summation of cash paid, assumed debt, new mortgage notes payable (New
Notes), and the aggregate value of Operating Partnership units (valued at
$20.00 per unit) issued to the Contributors as follows:
<TABLE>
<CAPTION>
VALUE OF
OPERATING
MORTGAGE PARTNERSHIP TOTAL
PROPERTIES CASH NOTES UNITS BASIS
---------- ------- -------- ----------- --------
<S> <C> <C> <C> <C>
IBD Properties+..................... $ 5,151 $33,925 $18,389 $ 57,465
NAC Properties*..................... 23,521 56,000 18,542 98,063
------- ------- ------- --------
Total........................... $28,672 $89,925 $36,931 $155,528
======= ======= ======= ========
</TABLE>
--------
(+) Included in Mortgage Notes is an assumed existing mortgage note
payable of $6,425.
(*) Includes $1,500 of non-real estate assets.
F-6
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--(CONTINUED)
(iii) The basis of the real estate of the Acquisition Properties is equal to
the summation of the cash purchase prices as follows:
<TABLE>
<CAPTION>
PURCHASE
PROPERTY PRICE
-------- --------
<S> <C>
475 Superior Avenue.............................................. $13,450
Enterprise Centre................................................ 11,307
Salt Creek Office Center......................................... 10,400
280 Schuman Boulevard............................................ 6,200
-------
Total........................................................ $41,357
=======
</TABLE>
(iv) The basis of the investment in subsidiary is equal to the cash purchase
price as follows:
<TABLE>
<CAPTION>
PURCHASE
CONTRIBUTION TO SUBSIDIARY PRICE
-------------------------- --------
<S> <C>
Continental...................................................... $5,890
======
</TABLE>
(C) Consolidation Pro Forma Adjustments (Consolidation Adjustment):
To record the consolidation of the assumed contribution of the Prime
Properties and Prime Contribution Properties by Prime, contribution of the
Contribution Properties by the Contributors and the purchase of the
Acquisition Properties and Continental by the Operating Partnership (the
Consolidation). Prime (before Prime contributes 3.38 million units to
Primestone) and the Contributors will receive 5.42 million units representing
a 24.23% ownership interest in the Operating Partnership.
(D) Offering Pro Forma Adjustments (Offering Adjustment):
To record the Offering based upon the assumed issuance of 2.0 million
Convertible Preferred Shares at $20 per share and 12.38 million Common Shares,
at $20 per share and the contribution of the net proceeds by the Company to
the Operating Partnership in exchange for 2.0 million convertible preferred
units and 12.38 million common units representing a 55.34% ownership interest
in the Operating Partnership and the issuance of 4.57 million common units for
$85 million, representing a 20.43% ownership in the Operating Partnership.
(E) Real Estate, Net:
Consolidation Adjustment:
<TABLE>
<S> <C>
Increase in basis resulting from the purchase of the non-Prime
third party's partners' deficit in certain of the Prime Prop-
erties indicated below (See Note N)........................... $ 1,307
Elimination of 77 Fitness (See Notes A and G).................. (87)
--------
$ 1,220
========
Offering Adjustment:
Purchase of the non-Prime third party owners' interest in cer-
tain of the Prime Properties (See Note F)..................... $ 1,705
========
</TABLE>
F-7
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--(CONTINUED)
(F) Cash:
Consolidation Adjustment:
<TABLE>
<S> <C>
Elimination of 77 Fitness (See Notes A and G).................. $ (110)
========
Offering Adjustment:
Gross proceeds from the sale of 2.0 million convertible pre-
ferred shares of beneficial interest, at $20 per share........ $ 40,000
Gross proceeds from the sale of 12.38 million common shares of
beneficial interest, at $20 per share......................... 247,602
Less: underwriters discount ($17,732) and issuance costs
($4,500 incurred by Prime).................................... (22,232)
--------
Net proceeds (See Note Q)..................................... 265,370
Proceeds from the issuance of 4.57 million Operating Partner-
ship units to Primestone (See Note O)......................... 85,000
Repayment of current mortgage note payable on 77 West Wacker
(See
Note J)....................................................... (229,841)
Payment of transfer tax and legal costs related to the
contribution of properties by Prime ($1,900), the IBD
Contributors ($200) and the NAC Contributors ($400) (See Note
O)............................................................ (2,500)
Payment of swap breakage fee related to the repayment of cur-
rent mortgage note payable on 77 West Wacker (See Note O)..... (749)
Repayment of mortgage notes payable on certain of the Prime
Properties (See Note J)....................................... (13,186)
Payment of New Note fees and Credit Facility fees (See Note
H)............................................................ (1,718)
Purchase of the non-Prime third party owners' interest in cer-
tain of the Prime Properties (See Note E)..................... (1,705)
--------
$100,671
========
(G) Investment in Subsidiary:
Consolidation Adjustment:
Contribution of net assets of 77 Fitness to the Services Com-
pany (See
Note A)....................................................... $ 87
========
(H) Deferred Costs, net:
Consolidation Adjustment:
Elimination of net deferred financing fees on current mortgage
notes payable on 77 West Wacker and certain other Prime Prop-
erties being forgiven or repaid (See Note N).................. $ (350)
========
Offering Adjustment:
Payment of New Note fees of $368 (10 year term) and Credit Fa-
cility fees of $1,350 (3 year term) (See Note F).............. $ 1,718
========
</TABLE>
F-8
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--(CONTINUED)
(I) Other Assets/Other Liabilities:
Consolidation Adjustment:
<TABLE>
<S> <C>
Elimination of deferred offering costs, incurred by an
affiliate to be paid as part of the estimated issuance costs
(See Notes F and P)......................................... $ (2,340)
=========
(J) Mortgage Notes Payable:
Consolidation Adjustment:
Forgiveness of unpaid mortgage note payable to non-Prime af-
filiate on
77 West Wacker (See Note N)................................. $(100,808)
=========
Offering Adjustment:
Repayment of current mortgage note payable on 77 West Wacker
(See Note F)................................................ $(229,841)
Repayment of mortgage notes payable on certain of the Prime
Properties (See Note F)..................................... (13,186)
---------
$(243,027)
=========
(K) Bonds Payable:
Consolidation Adjustment:
Forgiveness of bonds payable to Prime affiliate (See Note
N).......................................................... $ (12,000)
=========
(L) Accounts Payable and Accrued Expenses:
Consolidation Adjustment:
Elimination of 77 Fitness (See Notes A and G)................ $ (599)
=========
</TABLE>
(M) Leases Assumed
In connection with obtaining certain tenant leases 77 West Wacker
assumed liability for the remaining terms of the tenants' existing
leases. 77 West Wacker has recorded a liability for the difference
between total remaining costs for leases assumed and the expected
benefits from subleases of the assumed lease properties. The related
incentive to lessee has been capitalized as a deferred charge and is
being amortized to rental revenue over the life of the respective
lease. The deferred charge and related liability are adjusted for
changes in the expected benefits from subleases. See footnotes 1 and 5
of the Notes to Combined Financial Statements of the Prime Properties
for additional information.
(N) Partner's Deficit:
Consolidation Adjustment:
<TABLE>
<S> <C> <C>
Forgiveness of mortgage note payable to non-Prime affili-
ate ($100,808) on 77 West Wacker and bonds payable to
Prime affiliate ($12,000) (See Notes J and K)............ $112,808
Elimination of net deferred financing fees on current
mortgage notes payable on 77 West Wacker and certain
other Prime Properties being forgiven or repaid (See Note
H)....................................................... (350)
Elimination of non-Prime third party's partners' deficit
in certain of the Prime Properties (See Note E).......... 1,307
Elimination of 77 Fitness (See Notes A and G)............. 489
Reclassification of the remaining historical Prime Proper-
ties partners'
deficit to minority interest (see Note O)................ 26,025
--------
$140,279
========
</TABLE>
F-9
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--(CONTINUED)
(O) Minority Interest:
Consolidation Adjustment:
<TABLE>
<S> <C> <C>
Reclasification of the remaining historical Prime
Properties partners' deficit (See Note N)......... $(26,025)
========
Offering Adjustment:
Proceeds from the issuance of 4.57 million Operat-
ing Partnership units to Primestone (See Note F).. $ 85,000
Payment of transfer tax and legal costs related to
the contribution of properties by Prime and the
Contributors (See
Note F)........................................... (2,500)
Payment of swap breakage fee related to the
repayment on current mortgage note payable on 77
West Wacker (See
Note F)........................................... (749)
Adjustment to reflect estimated minority interest
of the Limited Partners in the Operating
Partnership computed as follows:.................. 67,244
--------
$148,995
========
Pro forma total assets............................. $ 550,076
Pro forma total liabilities........................ (192,048)
---------
Pro forma net book value of Operating
Partnership....................................... $ 358,028
=========
Minority interest of the Limited Partners in the
Operating Partnership 44.66....................... $ 159,901
Deduct: Pro forma minority interest before this
adjustment........................................ (92,657)
---------
$ 67,244
=========
(P) Preferred Shares/Common Shares of Beneficial Interest:
Offering Adjustment:
Issuance of 2.0 million convertible preferred
shares of beneficial interest with $0.01 par value
(see Note Q)...................................... $ 20
========
Issuance of 12.38 million common shares of benefi-
cial interest with $0.01 par value (See Note Q)... $ 124
========
(Q) Additional Paid-In Capital:
Offering Adjustment:
Net proceeds from the sale of 2.0 million shares of
beneficial interest at $20 per share and 12.38
million common shares of beneficial interest, at
$20 per share, less underwriters discount and is-
suances costs (See Note F)........................ $265,370
Less: par value of convertible preferred shares of
beneficial interest on 2.0 million shares at $0.01
per share (see Note P)............................ (20)
Less: par value of common shares of beneficial in-
terest on
12.38 million shares at $0.01 per share (See Note
P)................................................ (124)
Adjustment to reflect estimated minority interest
of Limited Partners in the Operating Partnership
(See Note O)...................................... (67,244)
--------
$197,982
========
</TABLE>
F-10
<PAGE>
PRIME GROUP REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRIME
CONTRIBUTION,
CONTRIBUTION CONSOLIDATION PRE OFFERING OFFERING
PRIME AND ACQUISITION PRO FORMA PRIME GROUP REALTY PRO FORMA
PROPERTIES (A) PROPERTIES (B) ADJUSTMENTS (C) TRUST PRO FORMA ADJUSTMENTS (D) PRO FORMA
-------------- --------------- --------------- ------------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Rental.................. $ 16,131 $11,895 $ -- $28,026 $ -- $28,026
Tenant reimbursements... 7,769 2,689 -- 10,458 -- 10,458
Other................... 689 -- (321)(E) 368 -- 368
-------- ------- ------ ------- ------- -------
Total revenue........... 24,589 14,584 (321) 38,852 -- 38,852
EXPENSES:
Property operations..... 4,318 1,844 (446)(F) 5,716 -- 5,716
Real estate taxes....... 5,590 2,209 -- 7,799 -- 7,799
Depreciation and
amortization........... 6,492 -- 2,079 (G) 8,571 244 (G) 8,815
Interest................ 19,236 -- (2,637)(H) 16,599 (11,890)(H) 4,709
Financing fees.......... 640 -- -- 640 -- 640
General and administra-
tive................... 2,687 -- (358)(I) 2,329 638 (I) 2,967
Provision for environ-
mental remediation
costs.................. 3,205 -- -- 3,205 -- 3,205
-------- ------- ------ ------- ------- -------
Total expenses.......... 42,168 4,053 (1,362) 44,859 (11,008) 33,851
-------- ------- ------ ------- ------- -------
Income (loss) from
operations before share
of income of investment
subsidiary, preferred
share dividend and
minority interest...... (17,579) 10,531 1,041 (6,007) 11,008 5,001
Share of income of
investment subsidiary.. -- -- 182 (J) 182 -- 182
-------- ------- ------ ------- ------- -------
Income (loss) before
preferred share
dividend and minority
interest............... (17,579) 10,531 1,223 (5,825) 11,008 5,183
Preferred share
dividend............... -- -- -- -- (1,400)(K) (1,400)
-------- ------- ------ ------- ------- -------
Income (loss) before
minority interest...... (17,579) 10,531 1,223 (5,825) 9,608 3,783
Minority interest....... -- -- -- -- (1,690)(L) (1,690)
-------- ------- ------ ------- ------- -------
Net income (loss)....... $(17,579) $10,531 $1,223 $(5,825) $ 7,918 $ 2,093
======== ======= ====== ======= ======= =======
Average number of
units/common shares of
beneficial interest
outstanding............ 5,422 12,380
======= =======
Net income (loss) per
unit/common share of
beneficial
interest (M)........... $ (1.07) $ 0.17
======= =======
</TABLE>
See accompanying notes.
F-11
<PAGE>
PRIME GROUP REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRIME
CONTRIBUTION,
CONTRIBUTION CONSOLIDATION PRE OFFERING OFFERING
PRIME AND ACQUISITION PRO FORMA PRIME GROUP REALTY PRO FORMA
PROPERTIES (A) PROPERTIES (B) ADJUSTMENTS (C) TRUST PRO FORMA ADJUSTMENTS (D) PRO FORMA
-------------- --------------- --------------- ------------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Rental.................. $ 30,538 $22,463 $ -- $ 53,001 $ -- $53,001
Tenant reimbursements... 14,225 4,991 -- 19,216 -- 19,216
Other................... 3,397 -- (619)(E) 2,778 -- 2,778
-------- ------- ------- -------- -------- -------
Total revenue........... 48,160 27,454 (619) 74,995 -- 74,995
EXPENSES:
Property operations..... 9,767 3,799 (1,034)(F) 12,532 -- 12,532
Real estate taxes....... 9,383 4,057 -- 13,440 13,440
Depreciation and
amortization........... 12,409 -- 4,155 (G) 16,564 487 (G) 17,051
Interest................ 37,217 -- (4,116)(H) 33,101 (23,810)(H) 9,291
Financing fees.......... 1,232 -- -- 1,232 -- 1,232
General and
administrative......... 6,488 -- (714)(I) 5,774 1,387 (I) 7,161
Write-off of deferred
tenant costs........... 3,081 -- -- 3,081 -- 3,081
-------- ------- ------- -------- -------- -------
Total expenses.......... 79,577 7,856 (1,709) 85,724 (21,936) 63,788
-------- ------- ------- -------- -------- -------
Income (loss) from
operations before share
of income of investment
subsidiary, preferred
share dividend and
minority interest...... (31,417) 19,598 1,090 (10,729) 21,936 11,207
Share of income of
investment subsidiary.. -- -- 387 (J) 387 -- 387
-------- ------- ------- -------- -------- -------
Income (loss) before
preferred share
dividend and minority
interest............... (31,417) 19,598 1,477 (10,342) 21,936 11,594
Preferred share
dividend............... -- -- -- -- (2,800)(K) (2,800)
-------- ------- ------- -------- -------- -------
Income (loss) before
minority interest...... (31,417) 19,598 1,477 (10,342) 19,136 8,794
Minority interest....... -- -- -- -- (3,928)(L) (3,928)
-------- ------- ------- -------- -------- -------
Net income (loss)....... $(31,417) $19,598 $ 1,477 $(10,342) $ 15,208 $ 4,866
======== ======= ======= ======== ======== =======
Average number of
units/common shares of
beneficial interest
outstanding............ 5,422 12,380
======== =======
Net income (loss) per
unit/common share of
beneficial interest
(M).................... $ (1.91) $ 0.39
======== =======
</TABLE>
See accompanying notes.
F-12
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND FOR THE YEAR ENDED DECEMBER 31,
1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
BASIS OF PRESENTATION
The following pro forma adjustments reflect the Offering and Formation
transactions, including the contribution of the net proceeds of the Offering
by the Company to the Operating Partnership, the contribution of the Prime
Properties and the Prime Contribution Properties (one office building
(Citibank Office Plaza) and six industrial properties (Prime Industrial
Contribution Properties) recently acquired by Prime) to the Operating
Partnership, the purchase of non-Prime ownership interests in certain of the
Prime Properties by the Operating Partnership, proceeds from the issuance of
4.57 million Operating Partnership units to Primestone Joint Venture
(Primestone--a joint venture in which Prime is a partner--See "Structure and
Formation of the Company"; Prime will also contribute 3.38 million of its
common units, described above, to Primestone) the contribution of the IBD
Properties and the NAC Properties by their current owners (the Contributors)
to the Operating Partnership (the IBD Properties and the NAC Properties are
collectively referred to as the Contribution Properties), the purchase of the
Acquisition Properties and Continental by the Operating Partnership, the
repayment and forgiveness of debt on certain of the Prime Properties and the
Prime Contribution Properties by the Operating Partnership. The Operating
Partnership will contribute Continental and other assets to the Services
Company in exchange for a non-voting, 95% economic ownership interest. The
Operating Partnership will reflect its investment in the Services Company
using the equity method (See Notes J and N). Prime, Primestone and the
Contributors are collectively referred to as the minority interest unit
holders (Minority Interest) of the Operating Partnership.
(A) Reflects the historical operations of the Prime Properties, which
includes 77 West Wacker and 77 Fitness. The Operating Partnership will
contribute 77 Fitness to the Services Company (See Notes E, F and N).
(B) Reflects the historical operations of the Prime Contribution Properties,
the Contribution Properties and the Acquisition Properties being either
contributed to or acquired by the Operating Partnership.
(C) Consolidation Pro Forma Adjustments (Consolidated Adjustment):
To record the consolidation of the assumed contribution of the Prime
Properties and the Prime Contribution Properties by Prime, contribution of the
Contribution Properties by the Contributors, the purchase of the Acquisition
Properties and Continental by the Operating Partnership (the Consolidation).
Prime and the Contributors will receive 5.42 million units representing a
24.23% ownership interest in the Operating Partnership.
(D) Offering Pro Forma Adjustments (Offering Adjustment):
To record the Offering based upon the assumed issuance of 2.0 million
Convertible Preferred Shares at $20 per share and 12.38 million Common Shares,
at $20 per share and the contribution of the net proceeds by the Company to
the Operating Partnership in exchange for 12.38 million units representing a
55.34% ownership interest in the Operating Partnership and the issuance of
4.57 million common units for $85 million, representing a 20.43% ownership in
the Operating Partnership.
(E) Other Revenue:
Consolidation Adjustment:
<TABLE>
<S> <C> <C>
Elimination of 77 Fitness revenue (See Notes A and N).
</TABLE>
F-13
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(F) Property Operations Expense:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
Consolidation Adjustments:
Property Operations Expense:
<S> <C> <C>
Elimination of 77 Fitness property operation
expenses (See Notes A and N)............... $(283) $ (709)
Elimination of historical costs associated
with property management fees reimbursed by
tenants on certain of the Contribution
Properties................................. (163) (325)
----- -------
$(446) $(1,034)
===== =======
</TABLE>
(G) Depreciation and Amortization:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
Consolidation Adjustment:
<S> <C> <C>
Depreciation expense on the Prime
Contribution, Contribution and Acquisition
Properties.................................. $2,273 $4,541
Depreciation expense on the increase in basis
resulting from the elimination of Partners'
deficit and the purchase of the non-Prime
third party owners' interest in certain of
the Prime Properties........................ 55 110
Elimination of amortization expenses of
deferred financing costs related mortgage
loan payable on 77 West Wacker being repaid
or forgiven................................. (249) (496)
------ ------
$2,079 $4,155
====== ======
Offering Adjustment:
Amortization of New Note fees (10 year term)
and Credit Facility fees (3 year term)...... $ 244 $ 487
====== ======
</TABLE>
(H) Interest Expense:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
Consolidation Adjustment:
<S> <C> <C>
Elimination of interest expense on mortgage
notes payable to non-Prime affiliate on 77
West Wacker being forgiven................. $ (5,649) $(10,137)
Elimination of interest expense on bonds
payable to Prime affiliate being forgiven.. (328) (658)
Interest expense on new and assumed mortgage
notes payable on the Contribution
Properties................................. 3,340 6,679
-------- --------
$ (2,637) $ (4,116)
======== ========
Offering Adjustment:
Elimination of interest expense on current
mortgage notes payable on 77 West Wacker
and on certain other Prime Properties being
repaid..................................... $(11,890) $(23,810)
======== ========
</TABLE>
F-14
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(I) General and Administrative:
Historical general and administrative expenses (G&A) have consisted of
property level costs. Corporate level G&A was allocated to the
property level through property management and asset management fees,
administration fees and other reimbursables (Prime Fees: See Note 6 to
the Notes to the Combined Financial Statements of the Prime
Properties). Upon the completion of the Offering and Formation
transactions, certain employees previously employed by Prime (costs
associated with the Prime Fees) will become employees of the Company.
The following pro forma adjustments reflect management's estimate of
the additional corporate G&A the Company will incur as a public
company. In addition, G&A has been adjusted for non-recurring expenses
as a result of Offering and Formation transactions.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
Consolidation Adjustment:
<S> <C> <C>
Elimination of loan fees on 77 West Wacker
that will no longer be incurred by the
Company................................... $ (358) $ (714)
====== ======
Offering Adjustment:
Estimated incremental increases in G&A to
be incurred as a public company........... $ 638 $1,387
====== ======
</TABLE>
(J) Share of income of investment subsidiary:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
Consolidation Adjustment:
<S> <C> <C>
Share of income of Services Company (See
Note N)................................... $182 $387
==== ====
</TABLE>
(K) Convertible Preferred Share Dividend:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
Convertible preferred share dividend with a
7% yield.................................. $(1,400) $(2,800)
======= =======
</TABLE>
(L) Minority Interest:
Offering Adjustment:
Represents income allocated to the Limited Partners (44.66%)
(M) Net Income (Loss) per Unit/Common Share of Beneficial Interest:
Represents "Pre-Offering Prime Group Realty Trust Pro Forma" net loss
divided by 5.42 million units issued to Prime and the Contributors and "Pro
Forma" net income divided by 12.38 million common shares of beneficial
interest.
F-15
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(N) Services Company
The Services Company operations consist of employees previously employed by
Prime, Continental and 77 Fitness.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------------- -------------------------------------------------
77 PRO FORMA PRO 77 PRO FORMA PRO
CONTINENTAL (1) FITNESS (1) ADJUSTMENTS FORMA CONTINENTAL (1) FITNESS (1) ADJUSTMENTS FORMA
--------------- ----------- ----------- ------ --------------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Construction and man-
agement fees.......... $8,124 $ -- $ -- $8,124 $14,134 $ -- $ -- $14,134
Other.................. -- 321 289 (2) 610 -- 619 898 (2) 1,517
------ ----- ----- ------ ------- ----- ------- -------
Total revenue.......... 8,124 321 289 8,734 14,134 619 898 15,651
EXPENSES:
Operating expenses..... 7,306 283 689 (3) 8,278 12,381 709 1,609 (3) 14,699
Interest expense....... -- -- 229 (4) 229 -- -- 459 (4) 459
Depreciation and
amortization.......... 29 -- 281 (5) 310 70 -- 550 (5) 620
------ ----- ----- ------ ------- ----- ------- -------
Total expenses......... 7,335 283 1,199 8,817 12,451 709 2,618 15,778
------ ----- ----- ------ ------- ----- ------- -------
Income (loss) before
income taxes.......... 789 38 (910) (83) 1,683 (90) (1,720) (127)
Income tax benefit .... -- -- 33(6) 33 -- -- 51 (6) 51
------ ----- ----- ------ ------- ----- ------- -------
Net income (loss)...... $ 789 $ 38 $(877) $ (50) $ 1,683 $ (90) $(1,669) $ (76)
====== ===== ===== ====== ======= ===== ======= =======
Company's share of net
income
(loss) (7)............ $ (47) $ (72)
Interest income recog-
nized by Company (8).. 229 459
------ -------
Company's share of the
net earnings of the
Services Company...... $ 182 $ 387
====== =======
</TABLE>
- -------
(1) Represents the historical operations of Continental and 77 Fitness.
(2) Revenue adjustments:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
Revenue derived by certain employees previ-
ously employed by Prime who will become em-
ployees of the Service Company............. $289 $898
==== ====
</TABLE>
(3) Operating expense adjustment:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
Expenses related to certain employees
previously employed by Prime who will become
employees of the Service Company............ $689 $ 1,609
==== =======
</TABLE>
(4) Represents interest expense on a $4,170 promissory note issued by the
Services Company to the Operating Partnership at an interest rate of 11%
per annum (See Note 8).
F-16
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(5) Adjustment to reflect estimated depreciation and amortization of the
Services Company:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
Depreciation expense on Continental and 77
Fitness fixed assets (5 years)............ $ 24 $ 48
Amortization of $5,720 of goodwill relating
to
the acquisition of Continental (10
years).................................... 286 572
Less: Historical depreciation.............. (29) (70)
---- ----
$281 $550
==== ====
</TABLE>
(6) Estimated income tax benefit (expense) of the Services Company at statutory
income tax rates (40%)
(7) The Operating Partnership will have a non-voting, 95% economic ownership
interest of the Services Company.
(8) The Operating Partnership will recognize interest income from the
promissory note issued by the Services Company (See Note 4) as part of its
share of income (loss) from the Services Company.
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying balance sheet of Prime Group Realty Trust,
a Maryland trust, as of July 21, 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 the significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet 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 Prime Group Realty Trust as of
July 21, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
July 21, 1997
F-18
<PAGE>
PRIME GROUP REALTY TRUST
BALANCE SHEET
JULY 21, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Cash................................................................... $ 1
Deferred offering costs................................................ 2,340
------
Total assets........................................................... $2,341
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Due to affiliate....................................................... $2,340
------
Total liabilities...................................................... 2,340
Shareholder's equity:
Common shares of beneficial interest, $.01 par value per share, 100
shares authorized, issued and outstanding............................. --
Additional paid-in capital............................................. 1
------
Total shareholder's equity............................................. 1
------
Total liabilities and shareholder's equity............................. $2,341
======
</TABLE>
See notes to balance sheet.
F-19
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO BALANCE SHEET
JULY 21, 1997
1. FORMATION OF THE COMPANY
Prime Group Realty Trust (the Company), was incorporated in Maryland on July
21, 1997. The Company will file a Registration Statement on Form S-11 with the
Securities and Exchange Commission with respect to a proposed public offerings
(the Offering) of 2.0 million convertible preferred shares of beneficial
interest and 12.38 million common shares of beneficial interest. The Company
has been formed to succeed to the business of The Prime Group, Inc. (Prime)
consisting of a portfolio of eight office, fourteen industrial properties and
a parking garage facility (the Prime Properties) and the real estate
ownership, acquisition, development, leasing and management businesses
historically conducted by Prime. The Company's assets will be owned and
controlled by, and all of its operations will be conducted through Prime Group
Realty, L.P. (the Operating Partnership) and other subsidiaries.
2. INCOME TAXES
It is the intent of the Company to qualify as a real estate investment trust
(REIT) under the Internal Revenue Code of 1986, as amended. As a REIT, the
Company generally will not be subject to federal income tax to the extent that
it distributes at least 95% of its REIT taxable income to its Shareholders.
REITs are subject to 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 tax rates.
3. DEFERRED OFFERING COSTS
In connection with the Offering, affiliates have or will incur legal,
accounting and related costs which will be reimbursed by the Company upon the
consummation of the Offering. These costs will be deducted from the gross
proceeds of the Offering.
4. USE OF ESTIMATES
The preparation of the balance sheet in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts in the balance sheet and accompanying notes.
Actual results could differ from these estimates.
F-20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees Prime Group Realty Trust
We have audited the accompanying combined balance sheets of the Prime
Properties as of June 30, 1997, and December 31, 1996, and 1995, and the
related combined statements of operations, changes in partners' deficit, and
cash flows for the six months ended June 30, 1997, and for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Prime Properties management. Our responsibility is
to express an opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of the Prime
Properties at June 30, 1997, and December 31, 1996 and 1995, and the combined
results of their operations and their cash flows for the six months ended June
30, 1997, and for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
August 20, 1997
F-21
<PAGE>
PRIME PROPERTIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
JUNE 30
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
ASSETS
Real estate at cost:
Land............................................. $ 23,530 $ 23,530 $ 23,505
Building and Improvements........................ 271,839 268,227 266,053
-------- --------- --------
295,369 291,757 289,558
Accumulated depreciation......................... (49,912) (44,411) (34,501)
-------- --------- --------
245,457 247,346 255,057
Cash............................................. 4,458 5,573 1,879
Tenant receivables............................... 41,389 41,384 43,669
Deferred costs--net.............................. 26,191 26,883 35,568
Due from affiliates.............................. 91 2,894 5,752
Other............................................ 692 1,150 1,716
-------- --------- --------
Total assets..................................... $318,278 $ 325,230 $343,641
======== ========= ========
LIABILITIES AND PARTNERS' DEFICIT
Mortgage notes payable........................... $236,304 $ 235,886 $234,730
Mortgage notes payable--affiliates............... 107,531 99,647 84,382
Bonds payable.................................... 74,450 74,450 54,600
Bonds payable--affiliates........................ 12,000 12,000 31,850
Accrued interest payable......................... 2,485 2,538 2,222
Accrued real estate taxes........................ 10,921 9,944 9,693
Accounts payable and accrued expenses............ 2,416 4,213 2,833
Liabilities for leases assumed................... 6,615 7,157 12,582
Due to affiliates................................ 734 708 934
Other............................................ 5,101 1,384 1,167
-------- --------- --------
Total liabilities................................ 458,557 447,927 434,993
Minority interest................................ (7,273) (6,905) (6,047)
Partners' deficit................................ (133,006) (115,792) (85,305)
-------- --------- --------
Total liabilities and partners' deficit.......... $318,278 $ 325,230 $343,641
======== ========= ========
</TABLE>
See accompanying notes.
F-22
<PAGE>
PRIME PROPERTIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
------------------ ----------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Rental...................... $ 16,131 $ 14,449 $ 30,538 $ 33,251 $ 30,352
Tenant reimbursements....... 7,769 6,962 14,225 14,382 12,451
Parking..................... 189 186 320 345 343
Gain on sale of assets...... -- 588 846 771 47
Insurance settlement........ -- -- -- 7,257 --
Other....................... 500 665 2,231 1,599 2,780
-------- -------- -------- -------- --------
Total revenue............... 24,589 22,850 48,160 57,605 45,973
EXPENSES
Property operations......... 4,318 4,304 9,767 9,479 8,852
Real estate taxes........... 5,590 5,154 9,383 9,445 9,057
Depreciation and amortiza-
tion....................... 6,492 6,146 12,409 12,646 11,624
Interest.................... 13,587 13,512 26,422 27,671 25,985
Interest--affiliates........ 5,649 4,852 10,795 8,563 7,402
Financing fees.............. 640 692 1,232 -- --
Property and asset manage-
ment fees--affiliates...... 801 766 1,561 1,496 1,388
General and administrative.. 1,886 1,575 4,927 4,508 3,727
Provision for environmental
remediation costs.......... 3,205 -- -- -- --
Write off deferred tenant
costs...................... -- -- 3,081 13,373 --
-------- -------- -------- -------- --------
Total expenses.............. 42,168 37,001 79,577 87,181 68,035
-------- -------- -------- -------- --------
Loss before minority inter-
est........................ (17,579) (14,151) (31,417) (29,576) (22,062)
Loss allocated to minority
interest................... 368 371 894 3,281 5,393
-------- -------- -------- -------- --------
Net loss.................... $(17,211) $(13,780) $(30,523) $(26,295) $(16,669)
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-23
<PAGE>
PRIME PROPERTIES
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTALS
---------
<S> <C>
Partners' deficit at January 1, 1994................................ $ (28,854)
Contributions....................................................... 349
Distributions....................................................... (178)
Assignment of minority interest..................................... (20,580)
Net forgiveness of amounts due to affiliates........................ 210
Net loss............................................................ (16,669)
---------
Partners' deficit at December 31, 1994.............................. (65,722)
Contributions....................................................... 732
Distributions....................................................... (179)
Assignment of minority interest..................................... 3,243
Forgiveness of notes payable to minority interest................... 2,916
Net loss............................................................ (26,295)
---------
Partners' deficit at December 31, 1995.............................. (85,305)
Contributions....................................................... 40
Distributions....................................................... (4)
Net loss............................................................ (30,523)
---------
Partners' deficit at December 31, 1996.............................. (115,792)
Distributions....................................................... (3)
Net loss............................................................ (17,211)
---------
Partners' deficit at June 30, 1997.................................. $(133,006)
=========
</TABLE>
See accompanying notes.
F-24
<PAGE>
PRIME PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
--------------------- ----------------------------
1997 1996 1996 1995 1994
-------- ----------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................... $(17,211) $(13,780) $(30,523) $(26,295) $(16,669)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Amortization of costs for
leases assumed (included
in rental revenue)...... 622 744 1,244 1,539 1,008
Decrease (increase) in
tenant receivables from
straight-lining rent.... 149 (452) (645) (8,779) (13,537)
Gain on sale of real
estate.................. -- (588) (846) (771) (47)
Depreciation and
amortization............ 6,492 6,146 12,409 12,646 11,624
Interest added to
principal on mortgage
note payable affiliate.. 5,642 4,783 10,002 8,427 7,263
Standby loan fee-
affiliate added to
principal on mortgage
note payable affiliate.. 262 262 522 498 399
Write-off of deferred
tenant costs............ -- -- 3,081 13,373 --
Minority interest........ (368) (371) (894) (3,281) (5,393)
Changes in operating
assets and liabilities:
Decrease (increase) in
tenant receivables.... (154) 718 1,990 2,326 (2,864)
(Increase) decrease in
deferred costs........ (921) 365 (703) (907) 560
Decrease in other
assets................ 458 217 566 2,937 5,657
(Decrease) increase in
accrued interest
payable............... (53) 506 316 (1,221) 132
Increase in accrued
real estate taxes..... 977 1,180 251 5 547
(Decrease) increase in
accounts payable and
accrued expenses...... (1,797) (1,271) 1,380 (34) 484
Decrease in liabilities
for assumed leases.... (542) (1,142) (1,532) (1,985) (3,160)
Increase (decrease) in
other liabilities..... 3,717 (479) 217 263 121
-------- -------- -------- -------- --------
Net cash used in operating
activities................ (2,727) (3,162) (3,165) (1,259) (13,875)
</TABLE>
See accompanying notes.
F-25
<PAGE>
PRIME PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
-------------------- -------------------------
1997 1996 1996 1995 1994
------- ----------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INVESTING ACTIVITIES
Proceeds from sale of real es-
tate......................... $ -- $ 1,197 $ 2,110 $ 921 $ 61
Expenditures for real estate.. (3,612) (731) (3,842) (4,842) (6,191)
Decrease (increase) in due
from affiliates.............. 2,803 1,101 2,858 (5,255) (365)
------- ------- ------- ------- -------
Net cash (used in) provided by
investing activities......... (809) 1,567 1,126 (9,176) (6,495)
FINANCING ACTIVITIES
Additions to deferred financ-
ing costs.................... -- -- (10) (225) (112)
Proceeds from mortgage notes
payable...................... 480 1,535 1,239 9,815 14,859
Proceeds from mortgage notes
payable--affiliates.......... 1,980 2,435 5,891 2,693 1,378
Repayment of mortgage notes
payable...................... (62) (38) (83) (384) (73)
Repayment of mortgage notes
payable--affiliates.......... -- -- (1,150) (1,079) (64)
Increase (decrease) in due to
affiliates................... 26 (204) (226) (347) (882)
Contributions from partners... -- 35 80 872 671
Distributions to partners..... (3) -- (8) (357) (355)
Acquisition of partnership in-
terest....................... -- -- -- (115) --
------- ------- ------- ------- -------
Net cash provided by financing
activities................... 2,421 3,763 5,733 10,873 15,422
------- ------- ------- ------- -------
Net (decrease) increase in
cash......................... (1,115) 2,168 3,694 438 (4,948)
Cash at beginning of period... 5,573 1,879 1,879 1,441 6,389
------- ------- ------- ------- -------
Cash at end of period......... $ 4,458 $ 4,047 $ 5,573 $ 1,879 $ 1,441
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-26
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Prime Properties represent a combination of 23 partnerships described
below (Partnerships) that own, operate, and manage office and industrial
properties (Properties) in the greater Chicagoland area and Tennessee. The
Properties are under common management and ownership of The Prime Group, Inc.
and its affiliates (Prime) as either the managing general partner (responsible
for the operations of the Properties) or 100% owner. As of June 30, 1997, six
of the Partnerships have third party owners (Third Party), whose ownership
interests have been reflected as a minority interest in the combined financial
statements. Pursuant to the formation transactions more fully described
elsewhere in this Registration Statement and Prospectus, Prime Properties will
be owned and operated by a newly formed corporation, Prime Group Realty Trust
(the Company), whose shares are being registered pursuant to this Registration
Statement (the Offering).
The Partnerships and Properties owned and operated by the Prime Properties
at June 30, 1997, are as follows:
<TABLE>
<CAPTION>
OWNERSHIP INTEREST
-----------------------------------
PRIME 3RD PARTY
----------------- -----------------
GENERAL LIMITED GENERAL LIMITED
PARTNERSHIP PROPERTY PARTNERS PARTNERS PARTNERS PARTNERS
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OFFICE
77 West Wacker Limited
Partnership (77 West
Wacker)................ 77 West Wacker Building 5.00% 89.45% 5.00% 0.55%
Nashville Office
Building I, Ltd........ Nashville Office Building 24.50 51.00 24.50 --
Professional Plaza,
Ltd.................... Professional Plaza 24.50 51.00 24.50 --
Old Kingston Properties,
Ltd.................... Old Kingston 24.50 51.00 24.50 --
Two Centre Square,
Ltd.................... Two Centre Square 24.50 51.00 24.50 --
INDUSTRIAL
Hammond Enterprise
Center Limited
Partnership (HEC)...... Hammond Enterprise Center 22.50 77.50 -- --
East Chicago Enterprise
Center Limited
Partnership (ECEC)..... East Chicago Enterprise Center 22.50 77.50 -- --
Kemper/Prime Industrial
Partners (KP).......... Chicago Enterprise Center 100.00 -- -- --
Enterprise Center I,
L.P. (ECI)............. Enterprise Center I 50.00 50.00 -- --
Enterprise Center II,
L.P.................... Enterprise Center II 50.00 50.00 -- --
Enterprise Center III,
L.P.................... Enterprise Center III 50.00 50.00 -- --
Enterprise Center IV,
L.P.................... Enterprise Center IV 50.00 50.00 -- --
Enterprise Center V,
L.P.................... Enterprise Center V 50.00 50.00 -- --
Enterprise Center VI,
L.P.................... Enterprise Center VI 50.00 50.00 -- --
Enterprise Center VII,
L.P.................... Enterprise Center VII 50.00 50.00 -- --
Enterprise Center VIII,
L.P.................... Enterprise Center VIII 50.00 50.00 -- --
Enterprise Center IX,
L.P.................... Enterprise Center IX 50.00 50.00 -- --
Enterprise Center X,
L.P.................... Enterprise Center X 50.00 50.00 -- --
Arlington Heights I,
L.P.................... Arlington Heights I 50.00 50.00 -- --
Arlington Heights II,
L.P.................... Arlington Heights II 50.00 50.00 -- --
Arlington Heights III,
L.P.................... Arlington Heights III 50.00 50.00 -- --
OTHER
Triad Parking Company,
Ltd.................... Triad Parking Facility 0.50 49.50 0.50 49.50
77 Fitness Center,
Ltd.................... Executive Sports and Fitness Center 10.00 90.00 -- --
</TABLE>
F-27
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Certain Third Party owners assigned their limited partner interests in 77
West Wacker ($18,357 deficit in 1994), HEC ($439 deficit in 1995), ECEC ($751
capital in 1995) and KP ($2931 capital in 1995) to Prime. In addition, in
1994, HEC and ECEC acquired their Third Party ownership interest in exchange
for mortgage notes payable totaling $2,716 (collectively, HEC's and ECEC's
Third Party owners had a deficit balance of $2,223, including the notes
payable, at the acquisition date), which, along with accrued interest, were
forgiven in 1995 (see Note 4). During 1995, HEC acquired the remaining Third
Party ownership interest for cash of $115. All acquired Third Party ownership
interests were assigned to Prime.
All significant intercompany accounts and transactions have been eliminated
in combination.
The combined financial statements for the six months ended June 30, 1996 are
unaudited. In the opinion of management, such financial statements reflect all
adjustments necessary for a fair presentation. All such adjustments are of a
normal and reoccurring nature.
REAL ESTATE
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of, under which the Partnerships are required to recognize
impairment losses for the Properties when indicators of impairment are present
and the Properties' expected undiscounted cash flows are not sufficient to
recover the Properties' carrying value. The Partnerships adopted Statement No.
121 effective January 1, 1995. No impairment losses have been recognized in
the accompanying combined financial statements. Interest and other direct
costs incurred during construction periods are capitalized as a component of
the building costs. Expenditures for ordinary maintenance and repairs are
expensed to operations as incurred. Significant renovations and improvements
which improve and/or extend the useful life of the asset are capitalized and
depreciated over their estimated useful life. Depreciation is calculated on
the straight-line method over the estimated useful lives of assets, which are
as follows:
<TABLE>
<S> <C>
Building and improvements Primarily 50 years
Tenant improvements Term of related leases
</TABLE>
DEFERRED COSTS
Deferred financing costs are amortized on the straight-line method over the
terms of the loans. Deferred leasing costs are amortized on the straight-line
method over the terms of the related lease agreements.
LEASES ASSUMED
In connection with obtaining certain tenant leases 77 West Wacker assumed
liability for the remaining terms of the tenants' existing leases. 77 West
Wacker has recorded a liability for the difference between total remaining
costs for leases assumed and the expected benefits from subleases of the
assumed lease properties. The related incentive to lessee has been capitalized
as a deferred charge and is being amortized to rental revenue over the life of
the respective lease. The deferred charge and related liability are adjusted
for changes in the expected benefits from subleases. During 1996, 77 West
Wacker wrote off $3,893 of deferred charges and reduced the related liability
due to changes in the estimated benefits from subleases.
RENTAL REVENUE
Rental revenue is recorded on the straight-line method over the terms of the
related lease agreements. As a result, $149 of cash was received in excess of
recorded rental revenue during the six months ended June 30, 1997 and $452
(unaudited), $645, $8,779 and $13,537 of noncash rent was recorded as rental
revenue during
F-28
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the six months ended June 30, 1996 and the years ended December 31, 1996,
1995, and 1994, respectively, and are included in accounts receivable. As of
June 30, 1997, December 31, 1996 and 1995, the balance of the accounts
receivable relating to the straight-lining of rental revenue is $38,302,
$38,451 and $38,746 respectively.
INTEREST RATE SWAP AGREEMENT
77 West Wacker has entered into an interest rate swap agreement to
effectively convert its variable-rate borrowing into a fixed-rate obligation
(see Note 3). The interest rate differential paid or received is included as
an adjustment to interest expense in the accompanying combined financial
statements.
INCOME TAXES
The Partnerships pay no income taxes, and the income or loss from the
Partnerships is includable on the respective income tax returns of the
Partners.
USE OF ESTIMATES
The preparation of the combined financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. DEFERRED COSTS
Deferred costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
JUNE 30
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Financing costs................................ $ 6,757 $ 6,757 $ 6,879
Leasing costs.................................. 36,307 35,386 41,971
-------- -------- --------
43,064 42,143 48,850
Less: Accumulated amortization................. (16,873) (15,260) (13,282)
-------- -------- --------
$ 26,191 $ 26,883 $ 35,568
======== ======== ========
</TABLE>
3. MORTGAGE NOTES AND BONDS PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
JUNE 30
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Mortgage notes payable to various commercial
lenders (A).................................... $229,841 $229,361 $229,361
Mortgage notes payable to various financial in-
stitutions, interest at a variable rate of
prime plus 1/2% per annum and a fixed rate of
7.375% per annum with principal and interest
payable monthly through October 1998........... 6,463 6,525 5,369
-------- -------- --------
$236,304 $235,886 $234,730
======== ======== ========
Bonds Payable:
Variable rate taxable and tax-exempt bonds is-
sued by various state and local government au-
thorities (B), (C)............................. $ 74,450 $ 74,450 $ 54,600
======== ======== ========
</TABLE>
(A) 77 West Wacker has entered into a mortgage note agreement (Agreement)
with a consortium of commercial lenders providing a maximum loan of $230,000
(Loan). The Loan, which is collateralized by a first mortgage on the 77 West
Wacker Building, is due on March 14, 1998. Under the terms of the Agreement,
77 West Wacker is to make monthly interest-only payments. Interest is
calculated using certain variable rate indices,
F-29
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. MORTGAGE NOTES AND BONDS PAYABLE (CONTINUED)
as defined (6.48% at June 30, 1997). To reduce the impact of increases in
interest rates, 77 West Wacker also entered into an interest rate swap
agreement with affiliates of one of 77 West Wacker's Third Party owner
(Counterparties) for the outstanding principal balance on the Agreement up to
a maximum principal amount of $230,000. Under the terms of the interest rate
swap agreement, 77 West Wacker is to pay the Counterparties interest monthly
at a fixed rate of 10% per annum. 77 West Wacker is to receive monthly
interest payments from the Counterparties at the variable rate and is then
responsible for making the monthly interest payments required under the terms
of the Agreement. The interest rate swap agreement matures at the time the
related Agreement matures. 77 West Wacker is exposed to credit loss in the
event of nonperformance by the Counterparties to the interest rate swap
agreement. However, 77 West Wacker does not anticipate such nonperformance by
the Counterparties. The amount of the exposure is generally limited to the
amount of any payments due but not yet received from the Counterparties. In
addition, 77 West Wacker is subject to market risk as a result of potential
future decreases in the variable rate indices specified by the Agreement.
If the Loan is not repaid on or prior to March 14, 1998, 77 West Wacker will
be required to either extend the maturity date or refinance the loan. The
combined financial statements do not include any adjustments to reflect the
outcome of this matter.
(B) Permanent financing for the development of certain Industrial Properties
has been provided by $48,150 of tax exempt industrial development revenue
bonds (Bonds) (See Note 4--on December 13, 1995 and on May 20, 1996, the Bonds
were acquired by independent third party financial institutions from an
affiliate of Prime). The Bonds mature on June 1, 2022.
Under the terms of the Bond loan agreements, the borrowing Partnerships are
to make interest-only payments monthly, calculated using a floating rate
determined by the Remarketing Agent of the Bonds. The rates ranged from 3.30%
to 4.75% during the six months ended June 30, 1997 and 2.85% to 4.40% during
1996. The rate at June 30, 1997 was 4.40%, at December 31, 1996 was 4.40% and
at December 31, 1995, ranged from 5.25% to 5.51%.
The maximum annual interest rate on the Bonds is 13%. Under certain
conditions, the interest rate on the Bonds may be converted to a fixed rate at
the request of the borrowing Partnership.
Beginning in May of 1996, the Bonds were collateralized by letters of credit
totaling $48,918 from a financial institution that expire May 19, 1999. In
connection with the letters of credit, the borrowing Partnerships pay letter
of credit financing fees of 1.75% per annum of the face amount, payable
quarterly in advance. The letters of credit are collateralized by a first
mortgage on the related properties.
The bondholders may tender bonds on any business day during the variable
interest rate period discussed above and receive principal, plus accrued
interest through the tender date. Upon tender, the remarketing agent shall
immediately remarket the Bonds. In the event the remarketing agent fails to
remarket any Bonds, the borrowing Partnerships are obligated to purchase those
Bonds. The remarketing agent receives a fee of .11% per annum of the
outstanding Bonds balance, payable quarterly in advance.
(C) Permanent financing for the development of certain office Properties has
been provided by $26,300 of tax exempt industrial revenue bonds (IRBs). The
IRB's mature on December 1, 2014. Under the terms of the IRB agreements, the
borrowing Partnerships are to make interest-only payments monthly, calculated
using a floating rate determined by the remarketing agent of the IRBs. The
rates ranged from 3.35% to 3.85% during the six months ended June 30, 1997,
3.40% to 4.05% during 1996, 3.40% to 4.50% during 1995, and 2.20% to 3.65%
during 1994. The rates at June 30, 1997 were 3.85%, December 31, 1996 were
3.50% and December 31, 1995 were 4.05%.
F-30
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. MORTGAGE NOTES AND BONDS PAYABLE (CONTINUED)
Under certain conditions, the interest rates on the IRBs may be converted to
a fixed rate at the request of the borrowing Partnerships.
The IRBs are collateralized by letters of credit totaling $26,930 from a
financial institution which expires December 31, 1997 (unless extended as
provided for by the letter of credit agreement). Affiliates of the borrowing
Partnerships' Third Party owner have agreed to purchase from the financial
institutions any amounts drawn on the letters of credit. One of these
affiliates has also agreed to provide or arrange for credit enhancements
(including purchasing the IRBs) as may be required by the IRBs agreements
through March 22, 1999. The above affiliate agreements are collateralized by a
junior collateral interest in the borrowing Partnerships' properties.
Under the terms of the IRB agreements, the bondholders have the option to
require the borrowing Partnerships to purchase any of its IRBs on the 15th day
of any month while the IRBs are outstanding. Upon the exercise of the
bondholders' option to purchase the IRBs, the remarketing agent shall
immediately remarket the IRBs. In the event the remarketing agent fails to
remarket the IRBs, the borrowing Partnerships are obligated to purchase those
IRBs.
Total interest paid on the mortgage notes payable and bonds payable was
$13,319 and $12,102 (unaudited) for the six months ended June 30, 1997 and
1996, respectively, and $25,643, $25,490, and $22,599 for the years ended
December 31, 1996, 1995, and 1994, respectively.
4. MORTGAGE NOTES AND BONDS PAYABLE--AFFILIATES
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30 ---------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Mortgage notes payable--Affiliate (A).............. $107,241 $99,357 $82,942
Mortgage note payable--Affiliate; interest at 9.5%
per annum with interest payable quarterly and
principal and accrued interest due on maturity
date of March 7, 1998............................. 290 290 1,440
-------- ------- -------
$107,531 $99,647 $84,382
======== ======= =======
Bonds Payable--Affiliate:
Variable rate taxable and tax-exempt bonds issued
by state and local government authorities (B)..... $ 12,000 $12,000 $31,850
======== ======= =======
</TABLE>
(A) 77 West Wacker has entered into a subordinate loan agreement with
affiliates of its Third Party owner for a maximum disbursement amount of
$60,000. In addition, the affiliates of the Third Party owner have agreed to
fund 1997 operating deficits, as defined, up to a maximum of $4.2 million. As
of June 30, 1997, December 31, 1996 and 1995, $58,767, $56,787 and $50,896
respectively, has been funded under this agreement, and $46,515, $40,873 and
$30,871 respectively, of accrued interest and $1,959, $1,697 and $1,175
respectively, of standby loan fees, have been added to the principal balance
in accordance with the terms of the agreement. The loan bears interest at a
fixed rate of 11% through the maturity date of March 14, 1998. The Third Party
owner has provided a guarantee of 77 West Wacker's first mortgage note payable
and charges 77 West Wacker a standby loan fee, as defined. Standby loan fees
incurred were $262 and $262 (unaudited) for the six months ended June 30, 1997
and 1996, respectively, and $522, $498 and $399 for the years ended December
31, 1996, 1995, and 1994, respectively (included in general and administrative
expenses in the combined statements of operations). Under the terms of the
subordinate loan agreement, 77 West Wacker is not required to make any
periodic principal or interest payments prior to the date of stabilization, as
defined; unpaid interest is added to the principal balance monthly. Subsequent
to the date of stabilization, as defined, monthly payments of interest only
are payable to the extent of available cash flow, as defined, during the
operating period, with the entire outstanding balance due upon maturity. In
the opinion of management, no payments will be due under the subordinate loan
agreement during 1997. The subordinated loan is collateralized by a second
mortgage on the 77 West Wacker Building.
F-31
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
4. MORTGAGE NOTES AND BONDS PAYABLE--AFFILIATES (CONTINUED)
(B) Permanent financing for the development of certain industrial Properties
has been provided by $12,000 of tax exempt bonds which were converted to
taxable debt industrial development revenue bonds (IDBs). The Bonds mature on
June 1, 2022. On December 13, 1995, $60,150 of IDBs were acquired by an
affiliate of Prime from the Third Party. On December 13, 1995, $28,300 and on
May 20, 1996, $19,850 of the IDBs were sold to independent third party
financial institutions by the affiliate of Prime.
Under the terms of the IDB loan agreement, the borrowing Partnerships are to
make interest-only payments semi-annually, calculated using a floating rate
determined by the Remarketing Agent of the IDBs. The rates were 5.501% during
the six months ended June 30, 1997, 3.90% to 5.501% during 1996, 5.25% to
5.51% during 1995, and 5.00% to 5.50% during 1994. The rates at June 30, 1997
were 5.501%, at December 31, 1996 were 5.501% and December 31, 1995 ranged
from 5.25% to 5.501%.
The maximum annual interest rate on the IDBs is 13%. Under certain
conditions, the interest rate on the IDBs may be converted to a fixed rate at
the request of the respective borrowing Partnership.
The bondholders may tender bonds on any business day during the variable
interest rate period discussed above and receive principal, plus accrued
interest through the tender date. Upon tender, the remarketing agent shall
immediately remarket the IDBs. In the event the remarketing agent fails to
remarket any IDBs, the borrowing Partnership is obligated to purchase those
IDBs. The remarketing agent receives a fee of .11% per annum of the
outstanding IDB balance, payable quarterly in advance.
In 1995, mortgage notes payable to the Third Party totaling $2,716 and
accrued interest of $200 were forgiven by the Third Party. The notes bore
interest at 8.5%, payable quarterly from available cash flow.
Total interest paid on the mortgage notes payable and bonds payable to
affiliates was $328 and $973 (unaudited) for the six months ended June 30,
1997 and 1996, respectively, and $1,256, $3,538, and $3,393 for the years
ended December 31, 1996, 1995, and 1994, respectively.
5. FUTURE MINIMUM LEASE INCOME AND PAYMENTS
The Partnerships have entered into lease agreements with lease terms ranging
from one year to twenty years. The leases generally provide for tenants to
share in increases in operating expenses and real estate taxes in excess of
specified base amounts.
Approximately 53% and 63% (unaudited), 60%, 65%, and 72% of the rental
revenue for the six months ended June 30, 1997 and 1996 and for the years
ended December 31, 1996, 1995 and 1994, respectively, was received from four
tenants.
The total future minimum rentals to be received under such noncancelable
operating leases executed through June 30, 1997, exclusive of tenant
reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- --------
<S> <C>
1997............................................................ $ 16,346
1998............................................................ 31,413
1999............................................................ 30,319
2000............................................................ 29,404
2001............................................................ 28,534
Thereafter...................................................... 181,554
--------
$317,570
========
</TABLE>
Future minimum rentals include amounts to be received from Prime totaling
$2,819.
F-32
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. FUTURE MINIMUM LEASE INCOME AND PAYMENTS (CONTINUED)
In addition, as a part of lease agreements entered into with certain tenants
of 77 West Wacker Building,77 West Wacker assumed the tenants' leases at other
properties and subsequently executed subleases for certain of the assumed lease
space. Net future minimum rental payments due under leases assumed and
subleases executed through June 30, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
1997.............................................................. $ 627
1998.............................................................. 1,279
1999.............................................................. 1,306
2000.............................................................. 1,336
2001.............................................................. 1,367
Thereafter........................................................ 700
------
$6,615
======
</TABLE>
During 1995, a tenant of the 77 West Wacker Building experienced financial
difficulties and began negotiations with 77 West Wacker to reduce its leased
space, resulting in an amendment to the tenant's lease agreement. As a result
of the lease amendment, 77 West Wacker wrote-off $13,373 of deferred tenant
costs, representing $10,296 of tenant receivables related to straight-lining of
the tenant's rental revenue, $2,257 of deferred leasing costs, and $820 of
tenant improvements. The same tenant continued to experience financial
difficulty and in 1997 defaulted on certain 1997 rental payments. As a result
of the default, as of December 31, 1996, 77 West Wacker wrote-off $3,081 of
deferred tenant costs, representing $940 of tenant receivables related to
straight-lining of the tenant's rental revenue and $2,141 of deferred leasing
costs. During the six months ended June 30, 1997, 77 West Wacker recognized
revenue from this tenant only to the extent cash was received. Future minimal
rentals include $49,182 related to this tenant.
6. RELATED PARTY TRANSACTIONS
In connection with the leasing and management of the Properties, Prime is
entitled to payments and fees for services performed. Such amounts incurred
during the six months ended June 30, 1997, and 1996, and for the years ended
December 31, 1996, 1995, and 1994 are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30 YEAR ENDED DECEMBER 31
---------------- -----------------------
1997 1996 1996 1995 1994
---- ----------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Property management fee (a)........... $735 $700 $ 1,429 $ 1,364 $ 1,256
Administration fees (b)............... 223 223 468 730 779
Construction management (c)........... 89 14 102 115 102
Legal fees (d)........................ 134 104 127 77 92
Leasing fees (e)...................... -- -- 19 280 172
Reimbursables (f)..................... 138 26 184 352 569
Asset management fee (g).............. 66 66 132 132 132
</TABLE>
- --------
(a) Prime is entitled to a property management fee ranging from 2.5% to 4% of
gross receipts, payable monthly in arrears. Amounts are included in
property and asset management fees to affiliates.
(b) Prime is entitled to an annual administration fee as defined in the
Partnership agreement. Amounts are included in general and administrative
expenses.
(c) Prime is entitled to a construction management fee equal to 3% of
construction costs.
F-33
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
(d) Prime is reimbursed for reasonable legal and accounting expenses incurred
in connection with the operations of the Partnerships. Amounts are
included in general and administrative expenses.
(e) Prime is entitled to leasing commissions for all leases signed. The
commissions are equal to 1.5% to 3% of rent, exclusive of tenant
reimbursements, during the base term of the lease; commissions are payable
upon commencement of the respective leases.
(f) Prime is entitled to reimbursement for expenses paid for the benefit of
the Partnerships. Amounts are included in general and administrative
expenses.
(g) Prime is entitled to an annual fee from providing asset management
services to the Partnership which is payable from available cash flows.
Amounts are included in property and asset management fees to affiliates.
Amounts due to affiliates are for amounts due for advances made by
affiliates. Amounts due from affiliates are for advances made by the
Partnership to affiliates. Amounts due from and due to affiliates bear
interest at prime plus 2% and are payable upon demand.
Average balances of amounts due form and due to affiliates for the six
months ended June 30, 1997 and 1996 and for the years ended December 31 1996,
1995, and 1994 are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
------------------ -----------------------
1997 1996 1996 1995 1994
------ ----------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Due from affiliates............... $1,492 $5,415 $ 4,323 $ 3,251 $ 565
Due to affiliates................. 721 831 821 1,107 1,722
</TABLE>
7. INSURANCE SETTLEMENT
On July 16, 1994, the Enterprise Center I property was destroyed by a fire.
During 1995, ECI received a final insurance settlement of $10,871 related to
the fire. The proceeds settled an insurance receivable of $1,755 recorded at
December 31, 1994, and additional costs of $1,859 incurred in 1995 related to
the cleanup of the property. ECI believes that all material costs of the fire
were incurred prior to December 31, 1995. The remaining proceeds of $7,257
have been recorded as revenue in the 1995 combined statements of operations.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (SFAS No. 107) and No. 119, Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments
requires disclosures of the fair value of certain on-and off-balance sheet
financial instruments for which it is practicable to estimate. Value is
defined by SFAS No. 107 as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
The following methods and assumptions were used by the Partnerships in
estimating its fair value disclosures for financial instruments:
Cash
The carrying amount of cash reported in the balance sheet approximates its
fair value.
F-34
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Mortgage Notes and Bonds Payable
The carrying amount of the Partnerships' variable rate borrowing
approximates fair value based on the current borrowing rate for similar types
of borrowing arrangements.
The fair value for the Partnerships' fixed-rate borrowing is estimated using
discounted cash flow analysis based upon the incremental borrowing rate for
similar types of borrowing arrangements. The fair value of the Partnerships'
fixed-rate borrowing at June 30, 1997, is the amount recognized in the balance
sheet, as the Partnerships' current incremental borrowing rate approximates
the stated rate on its fixed-rate borrowings.
The carrying amount of accrued interest approximates fair value.
Off-Balance Sheet Financial Instrument
The fair value of 77 West Wacker's off-balance sheet instrument (interest
rate swap agreement) is a liability of approximately $10,300. Such amount is
based on discounted cash flow analyses using current assumptions and taking
into account the remaining term of the agreement.
9. COMMITMENTS AND CONTINGENCIES
The Partnerships are defendants in legal actions arising during the normal
course of business. Management believes that the ultimate outcome of those
actions will not materially affect the Partnerships' combined financial
position.
All of the Properties were subject to Phase I or similar environmental
assessments by independent environmental consultants which were intended to
discover information regarding, and to evaluate the environmental condition
of, the surveyed property and surrounding properties. Management is aware of
contamination at certain of the Industrial Properties, which are already in
remediation programs sponsored by the state in which they are located. The
Phase I assessments estimate that remedial action plans will have a probable
cost of approximately $3.2 million. Prime has recently initiated lawsuits
against a former environmental consultant and a former tenant of one of these
Properties for damages to cover the cost of the remedial action plans.
However, the outcome of the lawsuits cannot yet be determined and the actual
cost to be incurred by the Partnerships cannot yet be determined. Therefore,
as of June 30, 1997 the Industrial Partnerships have recorded a liability of
$3.2 million (included in other liabilities). Prime has contractually agreed
to indemnify the Partnerships from any environmental liabilities the
Partnerships may incur and has pledged $1 million and approximately 485,000
partnership units in an operating partnership that can be converted to common
shares of a publicly traded real estate investment trust to cover these costs.
F-35
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
10. REAL ESTATE AND ACCUMULATED DEPRECIATION
Real estate and accumulated depreciation, by property, consists of the
following:
<TABLE>
<CAPTION>
GROSS AMOUNT
COSTS CAPITALIZED CARRIED
INITIAL COST TO SUBSEQUENT TO AT DECEMBER 31,
DECEMBER 31, 1996 COMPANY ACQUISITION 1996
----------------- -------------------- --------------------- --------------------
BUILDING AND BUILDING AND BUILDING AND
DESCRIPTION LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ----------- --------------------------- ----------------- ------- ------------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office:
77 West Wacker
Building....... Chicago, Illinois $328,718 $17,340 $ -- $ -- $189,042 $17,340 $189,042
Nashville Office
Building....... Nashville, Tennessee 10,175 1,530 -- -- 8,198 1,530 8,198
Professional
Plaza.......... Knoxville, Tennessee 9,000 -- -- -- 10,642 -- 10,642
Old Kingston.... Knoxville, Tennessee 3,500 378 -- -- 4,068 378 4,068
Two Centre
Square......... Knoxville, Tennessee 9,000 -- -- -- 10,542 -- 10,542
Triad Parking
Facility....... Knoxville, Tennessee 1,440 507 -- -- 1,324 507 1,324
Executive Sports
and Fitness
Center . Chicago, Illinois -- -- -- -- 75 -- 75
Hammond
Enterprise
Center(2)...... Hammond, Indiana -- 213 4,899 (188) (3,937) 25 962
Chicago
Enterprise
Center(2)...... Chicago, Illinois -- 2,069 8,795 (1,309) (7,271) 760 1,524
Industrial:
East Chicago
Enterprise
Center(2)...... East Chicago, Indiana -- 94 7,804 (67) (6,916) 27 888
Enterprise
Center I....... East Chicago, Indiana 2,900 18 1,368 -- (768) 18 600
Enterprise
Center II...... East Chicago, Indiana 5,000 18 2,099 -- 463 18 2,562
Enterprise
Center III..... East Chicago, Indiana 4,500 20 2,567 -- 2,798 20 5,365
Enterprise
Center IV...... East Chicago, Indiana 2,600 11 791 -- 232 11 1,023
Enterprise
Center V....... Hammond, Indiana 5,000 81 3,729 -- 755 81 4,484
Enterprise
Center VI...... Hammond, Indiana 4,900 101 3,151 -- 665 101 3,816
Enterprise
Center VII..... Chicago, Illinois 7,200 517 5,632 31 801 548 6,433
Enterprise
Center VIII.... Chicago, Illinois 7,000 124 3,687 -- 94 124 3,781
Enterprise
Center IX...... Chicago, Illinois 4,750 269 925 -- 504 269 1,429
Enterprise
Center X....... Chicago, Illinois 4,300 248 2,173 -- 1,142 248 3,315
Arlington
Heights I...... Arlington Heights, Illinois 4,000 626 2,401 (9) 1,034 617 3,435
Arlington
Heights II..... Arlington Heights, Illinois 4,000 460 1,768 (4) 647 456 2,415
Arlington
Heights III.... Arlington Heights, Illinois 4,000 452 1,738 -- 566 452 2,304
-------- ------- ------- ------- -------- ------- --------
Total........... $421,983 $25,076 $53,527 $(1,546) $214,700 $23,530 $268,227
======== ======= ======= ======= ======== ======= ========
<CAPTION>
DECEMBER 31, 1996
----------------- DATE OF
ACCUMULATED ACQUISITION (A)
DESCRIPTION TOTAL DEPRECIATION (1) CONSTRUCTION (C)
- ----------- -------- ----------------- ----------------
<S> <C> <C> <C>
Office:
77 West Wacker
Building....... $206,382 $26,851 1992(C)
Nashville Office
Building....... 9,728 808 1991(C)
Professional
Plaza.......... 10,642 3,195 1989(C)
Old Kingston.... 4,446 1,136 1989(C)
Two Centre
Square......... 10,542 2,791 1989(C)
Triad Parking
Facility....... 1,831 256 1987(A)
Executive Sports
and Fitness
Center . 75 3 1992(C)
Hammond
Enterprise
Center(2)...... 987 347 1989(A)
Chicago
Enterprise
Center(2)...... 2,284 598 1990(A)
Industrial:
East Chicago
Enterprise
Center(2)...... 915 332 1988(A)
Enterprise
Center I....... 618 44 1993(A)
Enterprise
Center II...... 2,580 617 1993(A)
Enterprise
Center III..... 5,385 651 1993(A)
Enterprise
Center IV...... 1,034 191 1993(A)
Enterprise
Center V....... 4,565 1,583 1993(A)
Enterprise
Center VI...... 3,917 718 1993(A)
Enterprise
Center VII..... 6,981 1,242 1993(A)
Enterprise
Center VIII.... 3,905 978 1993(A)
Enterprise
Center IX...... 1,698 238 1993(A)
Enterprise
Center X....... 3,563 639 1993(A)
Arlington
Heights I...... 4,052 623 1993(A)
Arlington
Heights II..... 2,871 277 1993(A)
Arlington
Heights III.... 2,756 293 1993(A)
-------- -----------------
Total........... $291,757 $44,411
======== =================
</TABLE>
(1) Depreciable lives range from 50 years for building and improvements, to
the term of related leases for tenant improvements.
(2) In 1993 a portion of these properties were sold to Enterprise Center I
through Enterprise Center X.
F-36
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
10. REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
The aggregate gross cost of the property included above, for federal income
tax purposes, approximated $328,220 as of December 31, 1996.
The following table reconciles the historical cost of the Prime Properties
from January 1, 1994 to December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year................... $289,558 $285,687 $281,316
Additions during year--Acquisition, im-
provements, etc........................... 3,842 4,842 6,191
Deductions during year--Write-off of tenant
improvements.............................. (1,643) (971) (1,820)
-------- -------- --------
Balance, close of year....................... $291,757 $289,558 $285,687
======== ======== ========
</TABLE>
The following table reconciles the accumulated depreciation from January 1,
1994 to December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year...................... $34,501 $24,499 $15,348
Additions during year--Depreciation and
amortization for the year.................... 10,288 10,005 9,562
Deductions during year--Accumulated
depreciation of written-off tenant
improvements................................. (378) (3) (411)
------- ------- -------
Balance, close of year.......................... $44,411 $34,501 $24,499
======= ======= =======
</TABLE>
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Combined Statements of Revenue and Certain
Expenses of Prime Industrial Contribution Properties (the Properties) for the
period from January 1, 1997 to June 30, 1997, and for the period from March 1,
1996 to December 31, 1996. The Combined Statements of Revenue and Certain
Expenses are the responsibility of the Properties' management. Our
responsibility is to express an opinion on the Combined Statements of Revenue
and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the Combined Statements of Revenue
and Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Combined Statements of Revenue and Certain Expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Combined Statements of Revenue and Certain Expenses. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust as described in Note 2 and are not
intended to be a complete presentation of the Properties' revenue and
expenses.
In our opinion, the Combined Statements of Revenue and Certain Expenses
referred to above present fairly, in all material respects, the combined
revenue and certain expenses described in Note 2 of the Properties for the
period from January 1, 1997 to June 30, 1997, and for the period from March 1,
1996 to December 31, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
August 20, 1997
F-38
<PAGE>
PRIME INDUSTRIAL CONTRIBUTION PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM MARCH
JANUARY 1, 1997 TO 1, 1996 TO
JUNE 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revenue
Rental.................................... $782 $1,608
Tenant reimbursements..................... 96 138
---- ------
Total revenue............................. 878 1,746
Expenses
Property operating........................ 90 158
Real estate taxes......................... 142 219
---- ------
Total expenses............................ 232 377
---- ------
Revenue in excess of certain expenses..... $646 $1,369
==== ======
</TABLE>
See accompanying notes.
F-39
<PAGE>
PRIME INDUSTRIAL CONTRIBUTION PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Combined Statements of Revenue and Certain Expenses relates
to the operations of six industrial buildings located in the Columbus, Ohio
metropolitan area referred to as the Prime Industrial Contribution Properties
(the Properties). As of June 30, 1997 the Properties had seven tenants, three
of which accounted for approximately 82% of rental revenue for the period from
January 1, 1997 to June 30, 1997. The same three tenants, along with a tenant
that terminated its lease during 1996, accounted for approximately 61% of
rental revenue for the period from March 1, 1996 to December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust. The combined statements are not
representative of the actual operations of the Properties for the periods
presented nor indicative of future operations as certain expenses, primarily
depreciation and amortization, which may not be comparable to the expenses
expected to be incurred by Prime Group Realty Trust in future operations of
the Properties, have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of revenue and certain expenses during the reporting period. Actual results
could differ from these estimates.
3. RENTALS
The Properties have lease agreements with lease terms ranging from three
years to fifteen years. The leases generally provide for tenants to share in
increases in operating expenses and real estate taxes in excess of specified
base amounts. The total future minimum rentals to be received under such
noncancelable operating leases executed through June 30, 1997, exclusive of
tenant reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
1997.............................................................. $ 843
1998.............................................................. 1,395
1999.............................................................. 1,203
2000.............................................................. 1,025
2001.............................................................. 844
Thereafter........................................................ 3,696
------
$9,006
======
</TABLE>
F-40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Combined Statements of Revenue and Certain
Expenses of IBD Properties (the Properties) for the period from January 1,
1997 to June 30, 1997, and for the year ended December 31, 1996. The Combined
Statements of Revenue and Certain Expenses are the responsibility of the
Properties' management. Our responsibility is to express an opinion on the
Combined Statements of Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the Combined Statements of Revenue
and Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Combined Statements of Revenue and Certain Expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Combined Statements of Revenue and Certain Expenses. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust as described in Note 2 and are not
intended to be a complete presentation of the Properties' revenue and
expenses.
In our opinion, the Combined Statements of Revenue and Certain Expenses
referred to above present fairly, in all material respects, the combined
revenue and certain expenses described in Note 2 of the Properties for the
period from January 1, 1997 to June 30, 1997, and for the year ended December
31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
August 20, 1997
F-41
<PAGE>
IBD PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Revenue
Rental................................... $2,654 $5,131
Tenant reimbursements.................... 206 227
------ ------
Total revenue............................ 2,860 5,358
Expenses
Property operating....................... 21 39
Real estate taxes........................ 299 461
------ ------
Total expenses........................... 320 500
------ ------
Revenue in excess of certain expenses.... $2,540 $4,858
====== ======
</TABLE>
See accompanying notes.
F-42
<PAGE>
IBD PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Combined Statements of Revenue and Certain Expenses relates
to the operations of seven industrial buildings located in the Chicago
metropolitan area referred to as the IBD Properties (the Properties). As of
June 30, 1997, the Properties had six tenants, two of which accounted for
approximately 78% of rental revenue for the period from January 1, 1997 to
June 30, 1997, and for the year ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust. The combined statements are not
representative of the actual operations of the Properties for the periods
presented nor indicative of future operations as certain expenses, primarily
depreciation and amortization, which may not be comparable to the expenses
expected to be incurred by Prime Group Realty Trust in future operations of
the Properties, have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of revenue and certain expenses during the reporting period. Actual results
could differ from these estimates.
3. RENTALS
The Properties have lease agreements with lease terms ranging from one year
to twenty years. The leases generally provide for tenants to share in
increases in operating expenses and real estate taxes in excess of specified
base amounts. The total future minimum rentals to be received under such
noncancelable operating leases executed through June 30, 1997, exclusive of
tenant reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- -------
<S> <C>
1997............................................................. $ 2,514
1998............................................................. 5,095
1999............................................................. 5,256
2000............................................................. 5,164
2001............................................................. 5,298
Thereafter....................................................... 16,304
-------
$39,631
=======
</TABLE>
F-43
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Combined Statements of Revenue and Certain
Expenses of NAC Properties (the Properties) for the period from January 1,
1997 to June 30, 1997, and for the year ended December 31, 1996. The Combined
Statements of Revenue and Certain Expenses are the responsibility of the
Properties' management. Our responsibility is to express an opinion on the
Combined Statements of Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the Combined Statements of Revenue
and Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Combined Statements of Revenue and Certain Expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Combined Statements of Revenue and Certain Expenses. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust as described in Note 2 and are not
intended to be a complete presentation of the Properties' revenue and
expenses.
In our opinion, the Combined Statements of Revenue and Certain Expenses
referred to above present fairly, in all material respects, the combined
revenue and certain expenses described in Note 2 of the Properties for the
period from January 1, 1997 to June 30, 1997, and for the year ended December
31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
October 10, 1997
F-44
<PAGE>
NAC PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Revenue
Rental................................... $5,161 $ 9,506
Tenant reimbursements.................... 1,164 2,185
------ -------
Total revenue............................ 6,325 11,691
Expenses
Property operating....................... 846 1,699
Real estate taxes........................ 757 1,483
------ -------
Total expenses........................... 1,603 3,182
------ -------
Revenue in excess of certain expenses.... $4,722 $ 8,509
====== =======
</TABLE>
See accompanying notes.
F-45
<PAGE>
NAC PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Combined Statements of Revenue and Certain Expenses relates
to the operations of 21 office buildings and industrial buildings located in
the Chicago metropolitan area referred to as the NAC Properties (the
Properties). As of June 30, 1997, the Properties had 77 tenants, one of which
accounted for approximately 16% of rental revenue for the period from January
1, 1997 to June 30, 1997, and for the year ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust. The combined statements are not
representative of the actual operations of the Properties for the periods
presented nor indicative of future operations as certain expenses, primarily
depreciation and amortization, which may not be comparable to the expenses
expected to be incurred by Prime Group Realty Trust in future operations of
the Properties, have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of revenue and certain expenses during the reporting period. Actual results
could differ from these estimates.
3. RENTALS
The Properties have lease agreements with lease terms ranging from one year
to twenty years. The leases generally provide for tenants to share in
increases in operating expenses and real estate taxes in excess of specified
base amounts. The total future minimum rentals to be received under such
noncancelable operating leases executed through June 30, 1997, exclusive of
tenant reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31 AMOUNT
------------------------ -------
<S> <C>
1997........................................................... $ 5,031
1998........................................................... 8,447
1999........................................................... 6,343
2000........................................................... 3,715
2001........................................................... 2,396
Thereafter..................................................... 4,446
-------
$30,378
=======
</TABLE>
F-46
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Statements of Revenue and Certain Expenses
of Citibank Office Plaza (the Property) for the period from January 1, 1997 to
June 30, 1997, and for the year ended December 31, 1996. The Statements of
Revenue and Certain Expenses are the responsibility of the Property's
management. Our responsibility is to express an opinion on the Statements of
Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statements of Revenue and
Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Statements of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the Statements
of Revenue and Certain Expenses. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Group Realty Trust as described in Note 2 and is not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, the Statements of Revenue and Certain Expenses referred to
above present fairly, in all material respects, the revenue and certain
expenses described in Note 2 of the Property for the period from January 1,
1997 to June 30, 1997, and for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
August 20, 1997
F-47
<PAGE>
CITIBANK OFFICE PLAZA
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revenue
Rental.................................... $ 845 $1,506
Tenant reimbursements..................... 168 479
------ ------
Total revenue............................. 1,013 1,985
------ ------
Expenses
Cleaning.................................. 55 111
Utilities................................. 109 211
Other property operating.................. 150 264
Real estate taxes......................... 226 456
------ ------
Total expenses............................ 540 1042
------ ------
Revenue in excess of certain expenses..... $ 473 $ 943
====== ======
</TABLE>
See accompanying notes.
F-48
<PAGE>
CITIBANK OFFICE PLAZA
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relates to the
operations of Citibank Office Plaza, an office building located in Schaumburg,
Illinois (the Property). As of June 30, 1997, the Property had twenty tenants,
two of which accounted for approximately 58% of rental revenue for the period
from January 1, 1997 to June 30, 1997, and for the year ended December 31,
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Group Realty Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation and
amortization, which may not be comparable to the expenses expected to be
incurred by Prime Group Realty Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of revenue
and certain expenses during the reporting period. Actual results could differ
from these estimates.
3. RENTALS
The Property has lease agreements with lease terms ranging from one year to
twenty years. The leases generally provide for tenants to share in increases
in operating expenses and real estate taxes in excess of specified base
amounts. The total future minimum rentals to be received under such
noncancelable operating leases executed through June 30, 1997, exclusive of
tenant reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
1997.............................................................. $ 823
1998.............................................................. 1,660
1999.............................................................. 1,537
2000.............................................................. 1,096
2001.............................................................. 818
Thereafter........................................................ 726
------
$6,660
======
</TABLE>
F-49
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Combined Statements of Revenue and Certain
Expenses of Salt Creek Office Center (the Property) for the period from
January 1, 1997 to June 30, 1997, and for the year ended December 31, 1996.
The Combined Statements of Revenue and Certain Expenses are the responsibility
of the Property's management. Our responsibility is to express an opinion on
the Combined Statements of Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Combined Statements of Revenue
and Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Combined Statements of Revenue and Certain Expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Combined Statements of Revenue and Certain Expenses. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust as described in Note 2 and are not
intended to be a complete presentation of the Property's revenue and expenses.
In our opinion, the Combined Statements of Revenue and Certain Expenses
referred to above present fairly, in all material respects, the combined
revenue and certain expenses described in Note 2 of the Property for the
period from January 1, 1997 to June 30, 1997, and for the year ended December
31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
August 20, 1997
F-50
<PAGE>
SALT CREEK OFFICE CENTER
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revenue
Rental.................................... $ 610 $1,086
Tenant reimbursements..................... 410 721
------ ------
Total revenue............................. 1,020 1,807
------ ------
Expenses
Cleaning.................................. 5 9
Utilities................................. 16 36
Other property operating.................. 159 437
Real estate taxes......................... 249 475
------ ------
Total expenses............................ 429 957
------ ------
Revenue in excess of certain expenses..... $ 591 $ 850
====== ======
</TABLE>
See accompanying notes.
F-51
<PAGE>
SALT CREEK OFFICE CENTER
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Combined Statements of Revenue and Certain Expenses relate
to the operations of two office buildings, Salt Creek Office Complex, located
in Schaumburg, Illinois (collectively, the "Property"). As of June 30, 1997
the Property had thirty-nine tenants, one of which accounted for approximately
19% of rental revenue for the period from January 1, 1997 to June 30, 1997 and
22% of rental revenue for the year ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust. The combined statements are not
representative of the actual operations of the Property for the period
presented, nor indicative of future operations as certain expenses, primarily
depreciation and management fees, which may not be comparable to the expenses
expected to be incurred by Prime Group Realty Trust in future operations of
the Property, have been excluded.
Revenue and Expense Recognition
Rental income is recognized as income in the period earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of revenues and certain expenses during the reporting period. Actual results
could differ from these estimates.
3. RENTALS
The Property has lease agreements with lease terms ranging from one to
fifteen years. The leases generally provide for tenants either to share in
increases in operating expenses in excess of specified base amounts or pay a
pro rata share of recoverable expenses as defined. The total future minimum
rentals to be received under such noncancelable operating leases executed
through June 30, 1997, exclusive of tenant reimbursements, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
1997.............................................................. $ 590
1998.............................................................. 1,104
1999.............................................................. 894
2000.............................................................. 614
2001.............................................................. 289
Thereafter........................................................ 109
------
$3,600
======
</TABLE>
F-52
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Statements of Revenue and Certain Expenses
of 280 Schuman Boulevard (the Property) for the period from January 1, 1997 to
June 30, 1997, and for the year ended December 31, 1996. The Statements of
Revenue and Certain Expenses are the responsibility of the Property's
management. Our responsibility is to express an opinion on the Statements of
Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statements of Revenue and
Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Statements of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the Statements
of Revenue and Certain Expenses. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Group Realty Trust as described in Note 2 and is not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, the Statements of Revenue and Certain Expenses referred to
above present fairly, in all material respects, the revenue and certain
expenses described in Note 2 of the Property for the period from January 1,
1997 to June 30, 1997, and for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
October 10, 1997
F-53
<PAGE>
280 SCHUMAN BOULEVARD
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revenue
Rental.................................... $561 $1,011
Tenant reimbursements..................... 33 20
---- ------
Total revenue............................. 594 1,031
---- ------
Expenses
Cleaning.................................. 26 47
Utilities................................. 28 64
Other property operating.................. 75 159
Real estate taxes......................... 49 97
---- ------
Total expenses............................ 178 367
---- ------
Revenue in excess of certain expenses..... $416 $ 664
==== ======
</TABLE>
See accompanying notes.
F-54
<PAGE>
280 SCHUMAN BOULEVARD
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relates to the
operations of 280 Schuman Boulevard, an office building located in Naperville,
Illinois (the Property). As of June 30, 1997, the Property had 13 tenants, 4
of which accounted for approximately 66% and 72% of rental revenue for the
period from January 1, 1997 to June 30, 1997, and for the year ended December
31, 1996, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Group Realty Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation and
amortization, which may not be comparable to the expenses expected to be
incurred by Prime Group Realty Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of revenue
and certain expenses during the reporting period. Actual results could differ
from these estimates.
3. RENTALS
The Property has lease agreements with lease terms ranging from one year to
ten years. The leases generally provide for tenants to share in increases in
operating expenses and real estate taxes in excess of specified base amounts.
The total future minimum rentals to be received under such noncancelable
operating leases executed through June 30, 1997, exclusive of tenant
reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31 AMOUNT
------------------------ ------
<S> <C>
1997............................................................ $ 496
1998............................................................ 956
1999............................................................ 857
2000............................................................ 826
2001............................................................ 522
Thereafter...................................................... 995
------
$4,652
======
</TABLE>
F-55
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Statements of Revenue and Certain Expenses
of 475 Superior Avenue (the Property) for the period from January 1, 1997 to
June 30, 1997, and for the year ended December 31, 1996. The Statements of
Revenue and Certain Expenses are the responsibility of the Property's
management. Our responsibility is to express an opinion on the Statements of
Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statements of Revenue and
Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Statements of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the Statements
of Revenue and Certain Expenses. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Group Realty Trust as described in Note 2 and are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, the Statements of Revenue and Certain Expenses referred to
above present fairly, in all material respects, the revenue and certain
expenses described in Note 2 of the Property for the period from January 1,
1997 to June 30, 1997, and for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
October 10, 1997
F-56
<PAGE>
475 SUPERIOR AVENUE
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revenue
Rental.................................... $632 $1,250
Tenant reimbursements..................... 282 515
---- ------
Total revenue............................. 914 1,765
---- ------
Expenses
Property operating........................ 24 27
Real estate taxes......................... 265 472
---- ------
Total expenses............................ 289 499
---- ------
Revenue in excess of certain expenses..... $625 $1,266
==== ======
</TABLE>
See accompanying notes.
F-57
<PAGE>
475 SUPERIOR AVENUE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relates to the
operations of 475 Superior Avenue, an industrial building located in Munster,
Indiana (the Property). As of June 30, 1997, the Property had one tenant which
accounted for approximately 100% of rental revenue for the period from January
1, 1997 to June 30, 1997, and for the year ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Group Realty Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation and
amortization, which may not be comparable to the expenses expected to be
incurred by Prime Group Realty Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of revenue
and certain expenses during the reporting period. Actual results could differ
from these estimates.
3. RENTALS
The Property has a lease agreement with a lease term of ten years. The lease
provides for the tenant to share in increases in operating expenses and real
estate taxes in excess of specified base amounts. The total future minimum
rentals to be received under such noncancelable operating lease as of June 30,
1997, exclusive of tenant reimbursements and contingent rentals, are as
follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31 AMOUNT
------------------------ ------
<S> <C>
1997............................................................ $ 681
1998............................................................ 1,362
1999............................................................ 340
------
$2,383
======
</TABLE>
F-58
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
ANY SECURITY OTHER THAN THE COMMON SHARES OFFERED BY THIS PROSPECTUS, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE
COMMON SHARES 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 SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT ANY INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THE COMMON SHARE
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Summary Financial Data.................................................... 26
Risk Factors.............................................................. 29
The Company............................................................... 45
Business Objective and Growth Strategies.................................. 49
Use of Proceeds........................................................... 53
Distribution Policy....................................................... 54
Dilution.................................................................. 60
Capitalization............................................................ 62
Selected Financial Data................................................... 63
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................... 66
Business and Properties................................................... 72
Policies with Respect to Certain Activities............................... 132
Management................................................................ 135
Structure and Formation of the Company.................................... 145
Certain Relationships and Related
Transactions............................................................. 152
Partnership Agreement..................................................... 156
Principal Shareholders of the Company..................................... 160
Description of Shares of Beneficial Interest.............................. 161
Certain Provisions of Maryland Law and of the Company's Declaration of
Trust and
Bylaws................................................................... 175
Shares Eligible for Future Sale........................................... 179
Certain Federal Income Tax
Consequences............................................................. 182
ERISA Considerations...................................................... 199
Underwriting.............................................................. 202
Legal Matters............................................................. 204
Experts................................................................... 204
Additional Information.................................................... 204
Glossary.................................................................. G-1
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
12,380,000 Shares
LOGO
LOGO
Common Shares of
Beneficial Interest
---------------
PROSPECTUS
---------------
PRUDENTIAL SECURITIES INCORPORATED
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
SMITH BARNEY INC.
MORGAN KEEGAN & COMPANY, INC.
November , 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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--DATED OCTOBER 24, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
2,000,000 Convertible Preferred Shares
LOGO
% Cumulative Convertible Preferred Shares of Beneficial Interest
LOGO
- --------------------------------------------------------------------------------
Prime Group Realty Trust, a Maryland real estate investment trust (the
"Company"), is a fully-integrated, self-administered and self-managed real
estate company that has been formed to continue and expand the office and
industrial real estate business conducted by The Prime Group, Inc. and certain
of its affiliates (collectively, "Prime"). Upon the completion of this offering
and certain related transactions described herein, including the initial public
offering of the Company's common shares of beneficial interest, the Company,
through its subsidiaries, will own 16 office properties (the "Office
Properties"), 44 industrial properties (the "Industrial Properties"), one
industrial property under construction, one parking facility and one retail
center (collectively, the "Properties"). The Properties are located primarily
in the Chicago, Illinois metropolitan area (the "Chicago Metropolitan Area")
and contain approximately 2.4 million net rentable square feet of office space
and 5.7 million net rentable square feet of industrial space. As of June 30,
1997, the Office Properties were 88.0% leased to more than 200 tenants, and the
Industrial Properties were 87.9% leased to more than 60 tenants. As of June 30,
1997, the Office Properties and the Industrial Properties generated 65.1% and
34.9%, respectively, of the Company's Annualized Net Rent (as defined herein).
The Company also will own approximately 83.4 acres and have rights to acquire
approximately 157.2 acres of developable land (including rights to acquire one
development site located in the Chicago central business district (the "Chicago
CBD") containing approximately 58,000 square feet), which management believes
could be developed with approximately 1.2 million square feet of additional
office space in the Chicago CBD and approximately 4.4 million square feet of
additional industrial properties primarily in the Chicago Metropolitan Area.
All of the % Cumulative Convertible Preferred Shares of beneficial interest of
the Company, $.01 par value per share (the "Convertible Preferred Shares"),
offered hereby (the "Convertible Preferred Offering") are being sold by the
Company to Security Capital Preferred Growth Incorporated ("Security Capital
Preferred Growth"). The Company is also conducting an initial public offering
(the "Common Share Offering") of 12,380,000 shares of its common shares of
beneficial interest, $.01 par value per share (the "Common Shares"), which the
Company expects to close concurrently with the closing of the Convertible
Preferred Offering. The Common Share Offering and the Convertible Preferred
Offering are collectively referred to herein as the "Offering," and the Common
Shares and the Convertible Preferred Shares are collectively referred to herein
as the "Shares."
Upon the completion of the Offering, the Common Shares offered in the Common
Share Offering will represent approximately 55.3% of the common equity of the
Company (58.8% if the Underwriters' over-allotment option is exercised in
full). The remaining 44.7% of the common equity of the Company (41.2% if the
Underwriters' over-allotment option is exercised in full) will be owned by
Prime, by a joint venture (the "Primestone Joint Venture") between Prime and
certain affiliates of Blackstone Real Estate Advisors, L.P. ("Blackstone"), by
senior management of the Company and by certain others in the form of (i)
limited partnership interests (the "LP Common Units") in Prime Group Realty,
L.P., a Delaware limited partnership (the "Operating Partnership"), which,
subject to certain conditions, are exchangeable on a one-for-one basis for
Common Shares and (ii) general partnership interests in the Operating
Partnership (together with the general partnership interests in the Operating
Partnership held by the Company, the "GP Common Units;" the GP Common Units and
the LP Common Units are collectively referred to herein as the "Common Units").
The Company will be the managing general partner of the Operating Partnership.
See "Principal Shareholders of the Company." See "Glossary" beginning on page
G-1 for definitions of certain terms used in this Prospectus.
Prior to the Offering, there has been no public market for the Convertible
Preferred Shares. It is unlikely that an active trading market for the
Convertible Preferred Shares will develop, because the Company does not intend
to list or qualify the Convertible Preferred Shares for trading on any exchange
or the Nasdaq National Market. It is currently estimated that the initial
offering price of the Convertible Preferred Shares will be between $19.00 and
$21.00 per share.
SEE "RISK FACTORS" ON PAGES 29 TO 44 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS WHICH SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
CONVERTIBLE PREFERRED SHARES OFFERED HEREBY, INCLUDING:
. The possibility that the consideration paid by the Company for certain of
the Properties and other assets contributed to the Company in connection
with its formation may exceed their fair market value, and the fact that
there were no arm's-length negotiations or third-party appraisals of such
Properties and other assets (Prime will receive Common Units worth
approximately $69.3 million and cash reimbursement of approximately $5.2
million for certain expenses incurred by Prime in connection with the
Formation Transactions and the Offering, in exchange for the contribution by
Prime of certain assets having a deficit book value of approximately $140.3
million at June 30, 1997);
. Geographic concentration of the Properties in the Chicago Metropolitan Area
and the significance of the 77 West Wacker Drive Building to the Company's
revenue which renders the Company vulnerable to the possible adverse effect
of general economic and other conditions in the Chicago Metropolitan Area on
real estate values and on the ability of tenants to pay rent;
. Conflicts of interest in the formation and operations of the Company,
including conflicts between the holders of LP Common Units (the "Limited
Partners"), the NAC General Partner (as defined herein) and their respective
affiliates with their positions as officers and trustees of the Company in
connection with the potential sale or refinancing of certain of the
Properties or the enforcement of certain agreements;
. Real estate debt financing risks, including the potential inability to
refinance the Company's debt upon maturity or violation of other loan
covenants that could result in the loss of properties secured by such debt;
. Limitation on the ownership of Common Shares to 9.9% of the outstanding
Common Shares and certain provisions in the organizational documents of the
Company which could make takeovers more difficult and may deter acquisition
proposals;
. Taxation of the Company as a regular corporation if it fails to qualify as a
REIT for federal income tax purposes;
. The immediate and substantial dilution of $4.00 per share in net tangible
book value of the Common Shares purchased in the Offering, which will result
in an immediate increase of $55.24 per Common Unit in net tangible book
value of the Common Units received by Prime in exchange for the Prime
Properties and the Prime Contribution Properties;
. Risk that the Company will not have sufficient cash available to make its
expected annual distributions for the 12-month period following the
completion of the Offering, which represent approximately 95.5% of the
estimated cash available for distribution for such period; and
. The Company has incurred net losses on a historical basis and may incur net
losses in the future.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
November , 1997
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY........................................................ 3
The Company............................................................. 3
Risk Factors............................................................ 6
Benefits to Prime of the Formation Transactions and the Offering........ 7
Conflicts of Interest................................................... 8
Business Objective and Growth Strategies................................ 8
The Properties.......................................................... 12
The Company's Markets................................................... 18
Structure and Formation of the Company.................................. 20
Restrictions on Ownership and Transfer.................................. 23
Distribution Policy..................................................... 24
The Convertible Preferred Offering...................................... 25
Tax Status of the Company............................................... 25
SUMMARY FINANCIAL DATA.................................................... 26
RISK FACTORS.............................................................. 29
Lack of Independent Appraisals in the Formation Transactions; Market
Capitalization of the Company May Exceed Fair Market Value of the
Company's Assets; Value of Services Company Not Determined through
Arm's-Length Negotiation............................................... 29
Geographic Concentration of the Properties in the Chicago Metropolitan
Area, Nashville, Knoxville and Columbus; Local Economic Conditions..... 30
Conflicts of Interest; Benefits to Prime................................ 30
Real Estate Financing Risks............................................. 31
Certain Anti-Takeover Provisions May Inhibit a Change in Control of the
Company................................................................ 32
Adverse Consequences of Failure to Qualify as a REIT; Other Tax
Liabilities............................................................ 35
Distributions to Shareholders Affected by Many Factors.................. 36
Initial Distribution Payout Percentage Will be 95.5% for the Twelve
Months Ending June 30, 1998............................................ 36
Historical Losses and Accumulated Deficit; Possibility of Future
Losses................................................................. 37
Acquisition and Development Risks....................................... 37
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Company's Performance and Value are Subject to Real Estate Investment
Risks.................................................................. 38
Consequences of Failure to Qualify as Partnerships...................... 40
Changes in Policy and Investment Activity without Shareholder Approval.. 40
Dependence on Key Personnel............................................. 41
Dependence on Significant Tenants....................................... 41
Managed Property Business and Non-REIT Services......................... 41
Liabilities for Environmental Matters Could Adversely Affect the
Company's Financial Condition.......................................... 41
Possible Adverse Effects on Share Price Arising from Shares Eligible for
Future Sale............................................................ 43
Market Interest Rates Could Adversely Impact the Market Price of the
Common Shares.......................................................... 44
Absence of Prior Public Market Could Adversely Impact the Market Price
of the Common Shares................................................... 44
THE COMPANY............................................................... 45
Services Company........................................................ 47
BUSINESS OBJECTIVE AND GROWTH STRATEGIES.................................. 49
Business Objective...................................................... 49
Operating Strategy...................................................... 49
Acquisition Strategy.................................................... 51
Development Strategy.................................................... 52
Financing Strategy...................................................... 52
USE OF PROCEEDS........................................................... 53
DISTRIBUTION POLICY....................................................... 54
Estimated Cash Flows.................................................... 56
CAPITALIZATION............................................................ 60
SELECTED FINANCIAL DATA................................................... 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 65
Results of Operations................................................... 65
Pro Forma Liquidity and Capital
Resources.............................................................. 66
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Historical Cash Flows.................................................... 68
Funds from Operations.................................................... 69
Inflation................................................................ 69
BUSINESS AND PROPERTIES.................................................... 70
General.................................................................. 70
The Office and Industrial Properties..................................... 72
Summary Land Parcel Information.......................................... 77
Occupancy and Rental Information......................................... 77
Lease Expirations........................................................ 78
Tenant Information....................................................... 92
Office Properties........................................................ 92
Industrial Properties.................................................... 93
Development, Leasing and Management Activities........................... 93
Contribution Properties.................................................. 94
Acquisition Properties................................................... 94
Prime Contribution Properties............................................ 95
The Company's Markets.................................................... 95
The Company's Office Submarkets.......................................... 100
The Company's Industrial Submarkets...................................... 114
Land for Development and Option Properties............................... 123
Competition.............................................................. 126
Tax-Exempt Bonds......................................................... 126
Insurance................................................................ 126
Government Regulations................................................... 126
Management and Employees................................................. 128
Legal Proceedings........................................................ 129
Prime Assets Not Acquired by the Company................................. 129
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................................ 130
Investment Objectives and Policies....................................... 130
Financing Strategy....................................................... 130
Conflicts of Interest Policies........................................... 131
Working Capital Reserves................................................. 132
Policies with Respect to Other Activities................................ 132
MANAGEMENT................................................................. 133
Trustees, Executive Officers and Key Employees........................... 133
Committees of the Board of Trustees...................................... 138
Compensation of Trustees................................................. 138
Executive Compensation................................................... 139
Employment Agreements.................................................... 139
Share Incentive Plan..................................................... 140
Share Option Grants in Connection with the Formation Transactions........ 142
Indemnification of Trustees and Officers................................. 142
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STRUCTURE AND FORMATION OF THE COMPANY.................................... 143
Formation Transactions.................................................. 143
Reasons for the Organization of the Company............................. 145
Comparison of Common Shares and Common Units............................ 146
Advantages and Disadvantages of the Formation Transactions to
Unaffiliated Shareholders.............................................. 146
Benefits of the Formation Transactions and the Offering................. 147
Determination and Valuation of Ownership Interests...................... 148
Acquisition of the Properties and the Business from Prime............... 148
Formation of the Services Company....................................... 149
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 150
Formation Agreement..................................................... 150
Partnership Agreement................................................... 150
Exchange Rights and Registration Rights................................. 150
The Primestone Joint Venture............................................ 150
IBD Contribution Agreement.............................................. 151
NAC Contribution Agreement; Put Option Agreement........................ 151
Tax Indemnification Agreements.......................................... 151
Non-Compete Agreement between Prime and Michael W. Reschke.............. 152
Consulting Agreement with Stephen J. Nardi.............................. 152
Option to Purchase and Right of First Offer............................. 152
Patterson Contribution Agreement........................................ 153
Leases with Prime Affiliates............................................ 153
Sale of Common Shares to Mr. Reschke. 153
Other Transactions...................................................... 153
PARTNERSHIP AGREEMENT..................................................... 155
Management.............................................................. 155
Indemnification......................................................... 155
Transferability of Interests............................................ 155
Extraordinary Transactions.............................................. 156
Issuance of Additional Common Units..................................... 156
Capital Contributions................................................... 156
Awards Under Share Incentive Plan....................................... 157
Distributions........................................................... 157
Operations.............................................................. 157
Limited Partner Exchange Rights......................................... 157
Registration Rights..................................................... 158
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Tax Matters............................................................ 158
Duties and Conflicts................................................... 158
Term................................................................... 158
PRINCIPAL SHAREHOLDERS OF THE COMPANY.................................... 159
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST............................. 160
Authorized Shares...................................................... 160
Convertible Preferred Shares........................................... 160
Common Shares.......................................................... 170
Additional Preferred Shares............................................ 171
Restrictions on Ownership and Transfer................................. 171
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S DECLARATION OF
TRUST AND BYLAWS........................................................ 174
Classification of the Board of Trustees................................ 174
Removal of Trustees.................................................... 174
Business Combinations.................................................. 174
Control Share Acquisitions............................................. 175
Amendment to the Declaration of Trust.................................. 176
Advance Notice of Trustee Nominations and New Business................. 176
Maryland Asset Requirements............................................ 176
Meetings of Shareholders............................................... 176
SHARES ELIGIBLE FOR FUTURE SALE.......................................... 178
General................................................................ 178
Exchange Rights and Registration Rights................................ 179
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS................................. 181
General................................................................. 181
Taxation of the Company................................................. 182
Requirements for Qualification.......................................... 182
Failure to Qualify...................................................... 188
Tax Aspects of the Company's Investments in Partnerships................ 188
Income Taxation of the Partnerships and Their Partners.................. 189
Taxation of Taxable U.S. Shareholders................................... 191
Taxation of Tax-Exempt Shareholders..................................... 192
Taxation of Non-U.S. Shareholders....................................... 192
Information Reporting Requirements and Backup Withholding Tax........... 195
Special Rules Regarding the Taxation of Holders of Convertible Preferred
Shares................................................................. 195
Other Tax Considerations................................................ 196
ERISA CONSIDERATIONS...................................................... 198
Employee Benefit Plans, Tax-qualified Retirement Plans and IRAs......... 199
Status of the Company under ERISA....................................... 199
PLAN OF DISTRIBUTION...................................................... 201
LEGAL MATTERS............................................................. 203
EXPERTS................................................................... 203
GLOSSARY.................................................................. G-1
INDEX TO FINANCIAL STATEMENTS............................................. F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the financial statements and notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information contained in this Prospectus assumes (i) the consummation of
the transactions described under "Structure and Formation of the Company"
(collectively, the "Formation Transactions"), (ii) the purchase by Security
Capital Preferred Growth of 2,000,000 Convertible Preferred Shares at a price
of $20.00 per Convertible Preferred Share (representing the midpoint of the
price range) pursuant to the Convertible Preferred Offering, (iii) the
Underwriters' over-allotment option with respect to the Common Shares will not
be exercised and (iv) an initial public offering price for the Common Shares of
$20.00 per Common Share (representing the midpoint of the price range). Unless
the context otherwise requires, all references to the "Company" in this
Prospectus include Prime Group Realty Trust and its subsidiaries, including
Prime Group Realty, L.P. (the "Operating Partnership"), Prime Group Realty
Services, Inc. (the "Services Company"), or any one of them. See "Glossary"
beginning on page G-1 for the definitions of certain other terms used in this
Prospectus.
THE COMPANY
The Company is a fully-integrated, self-administered and self-managed real
estate company that has been formed to continue and expand the office and
industrial real estate business of The Prime Group, Inc. and certain of its
affiliates (collectively, "Prime"). The Company expects to qualify as a real
estate investment trust ("REIT") for federal income tax purposes. In connection
with the Offering, the Company will succeed to the office and industrial
development, leasing and property management business of Prime and will acquire
certain additional office and industrial properties from third parties. The
Company will own 16 office properties (the "Office Properties") containing an
aggregate of approximately 2.4 million net rentable square feet, 44 industrial
properties (the "Industrial Properties") containing an aggregate of
approximately 5.7 million net rentable square feet, one industrial property
under construction, one parking facility and one retail center (collectively,
the "Properties"). The Properties are located primarily in the Chicago,
Illinois metropolitan area (the "Chicago Metropolitan Area"). As of June 30,
1997, the Office Properties and the Industrial Properties generated 65.1% and
34.9%, respectively, of the Company's Annualized Net Rent (as defined herein).
The Company also will own approximately 83.4 acres and have rights to acquire
approximately 157.2 acres of developable land (including rights to acquire one
development site located in the Chicago central business district ("Chicago
CBD") containing approximately 58,000 square feet), which management believes
could be developed with approximately 1.2 million square feet of additional
office space in the Chicago CBD and approximately 4.4 million square feet of
additional industrial properties primarily in the Chicago Metropolitan Area.
In terms of net rentable area, approximately 80.0% of the Office Properties
and 87.1% of the Industrial Properties are located in the Chicago Metropolitan
Area in prime business locations within established business communities. The
Properties located in the Chicago Metropolitan Area account for approximately
88.7% of the annualized net rent of the Properties ("Annualized Net Rent"). The
remaining Office Properties are located in the Nashville, Tennessee and
Knoxville, Tennessee metropolitan areas, and the remaining Industrial
Properties are located in the Columbus, Ohio metropolitan area. After the
completion of the Offering, the Company intends to invest in the acquisition,
development and redevelopment of office and industrial properties primarily
located in Suburban Chicago (as defined herein) and Chicago CBD office markets
and the Chicago Metropolitan Area warehouse/distribution market and overhead
crane/manufacturing market. In addition, the Company believes that it will be
the only publicly-traded REIT primarily focusing on both the office and
industrial markets in the Chicago Metropolitan Area.
The Company believes that the Properties are well-located, have excellent
highway access, attract high-quality tenants and are well-maintained and
professionally managed. Approximately 71.7% of the Office Properties, in terms
of Annualized Net Rent, are Class A properties. The Company considers Class A
office buildings to be buildings that are centrally located, professionally
managed and maintained, attract high-quality
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tenants, command upper-tier rental rates and are modern structures or have been
modernized to compete with new buildings. The Industrial Properties, in terms
of Annualized Net Rent, consist of 58.5% warehouse/distribution properties and
41.5% overhead crane/manufacturing properties. As of June 30, 1997, the Office
Properties were 88.0% leased to more than 200 tenants and the Industrial
Properties were 87.9% leased to more than 60 tenants. Management of the Company
has developed (or redeveloped), leased and managed 79.2% of the Office
Properties and 81.9% of the Industrial Properties, based on net rentable square
feet.
The Properties have a diverse and stable base of tenants and have
historically provided steadily increasing rents which the Company believes is
due to the quality of the Properties, the existence of long-term leases with
contractual rent escalations and the strength of the markets in which the
Properties are located. As of June 30, 1997, approximately 58.2% of the leases
for the Properties, in terms of Annualized Net Rent, had contractual rent
increases, of which approximately 42.4% of the Annualized Net Rent was
attributable to leases with specified contractual rent increases which on
average provided for annual rent increases of 4.9% over the next three years
and approximately 15.8% of the Annualized Net Rent was attributable to leases
with contractual rent increases tied to the annual change in the Consumer Price
Index (the "CPI"), subject to certain limitations. The three largest tenants in
the Properties, in terms of Annualized Net Rent, are R.R. Donnelley & Sons
Company ("Donnelley"), Everen Securities, Inc. ("Everen") and Jones, Day,
Reavis & Pogue ("Jones Day"). As of June 30, 1997, the Company's ten largest
office and ten largest industrial tenants (based upon Annualized Net Rent) had
leased space from the Company for an average of 8.9 and 3.7 years,
respectively, and accounted for 43.3% and 19.3%, respectively, of Annualized
Net Rent.
The Prime Group, Inc. was founded in 1981 by Michael W. Reschke and has been
involved in the ownership, acquisition, renovation, development, construction,
financing, marketing, leasing and management of institutional quality, income-
producing real estate properties for nearly 17 years. In 1994, Prime
contributed its retail development business and its multi-family housing
business to separate publicly-traded real estate investment trusts--Prime
Retail, Inc. (NYSE: PRT) and Ambassador Apartments, Inc. (NYSE: AAH). In May
1997, Prime contributed its senior and assisted living business to Brookdale
Living Communities, Inc. (Nasdaq: BLCI), a publicly-traded owner, operator and
developer of senior housing and a provider of senior and assisted living
services to the elderly.
Concurrently with the Convertible Preferred Offering, the Company is
conducting the Common Share Offering, which the Company expects to close
simultaneously with the closing of the Convertible Preferred Offering. The
Common Shares offered in the Common Share Offering will represent 55.3% of the
common equity of the Company (58.8% if the Underwriters' over-allotment option
is exercised in full). Another 35.5% of the common equity of the Company (32.8%
if the Underwriters' over-allotment option is exercised in full) will be owned
in the form of Common Units by the Primestone Joint Venture, a joint venture
between Prime and Blackstone. The balance of 9.2% of the common equity of the
Company (8.4% if the Underwriters' over-allotment option is exercised in full)
will be held by Prime, senior management of the Company and certain others. See
"Principal Shareholders of the Company."
The Company engages in property management, leasing, acquisition,
development, redevelopment, construction, marketing, finance and other related
activities. The senior management of the Company includes the executives of
Prime who are responsible for the strategic direction, management and day-to-
day operations of Prime's office and industrial real estate business. The
Company's management has substantial experience in the full range of real
estate activities undertaken by the Company. The top ten senior executives of
the Company have an average of 19.3 years experience in the real estate
industry in the Chicago Metropolitan Area.
The Company's primary business strategy is to achieve its investment and
growth objectives by focusing on the acquisition, development and operation of
office and industrial real estate located in the Chicago Metropolitan Area and,
to a lesser extent, other midwestern markets. To implement this strategy, the
Company intends to (a) own, acquire, develop, redevelop, lease, manage and
operate Class A office properties, (b) acquire distressed, underperforming and
undermanaged office properties in desirable locations and improve the income
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potential of such assets by raising these properties to a higher level of
operating standard through value-added renovation programs, professional
property management and aggressive leasing, retenanting and marketing efforts
and (c) own, acquire, develop, redevelop, lease, manage and operate bulk
warehouse/distribution facilities and overhead crane/manufacturing facilities.
The Company believes that it can draw upon its extensive experience and long-
term presence in the Chicago Metropolitan Area to create a strategic advantage
in competing for future development and acquisition opportunities.
The Company believes that the solid, diversified local economy in the Chicago
Metropolitan Area is creating continued office space demand and absorption.
Because of steady expansion of office employment and nearly no new
construction, the overall Class A vacancy rate has steadily declined for five
years and is expected to continue to decline. According to Rosen Consulting
Group ("RCG"), Class A rental rates in the Company's largest office market, the
Chicago CBD, have begun to rise as Class A vacancy rates in the Chicago CBD
have decreased from 23.1% in 1992 to 9.3% by the end of the second quarter of
1997.
The Chicago Metropolitan Area also has experienced a very active market in
industrial space in the 1990s. As of the end of the second quarter of 1997, the
Chicago Metropolitan Area's industrial market's overall vacancy rate was 7.5%,
below the national average vacancy rate of 8.1%. In addition, 32.6% (in terms
of net rentable square feet) of the Company's Industrial Properties in the
Chicago Metropolitan Area consists of overhead crane facilities, which have a
replacement cost substantially in excess of the Company's basis in its
Properties. The Company believes that current rental rates in the overhead
crane/manufacturing submarket are less than the level which would justify the
construction of new overhead crane/manufacturing facilities and, therefore, the
Company believes that there will be little new competition with the Company's
overhead crane/manufacturing Properties. See "Business and Properties--The
Company's Markets."
The Company believes that the foundation for growth in cash flow per share in
future years will be from a number of sources, including contractual rent
escalations in existing leases, the leasing of all or a portion of the existing
vacant space in the Properties, the quality and strategic location of its
Properties, the acquisition at below replacement cost, renovation (where
necessary) and repositioning of additional office and industrial properties,
the strengthening of the Chicago Metropolitan Area economy, the development of
new office and industrial properties when market conditions warrant such new
development and the knowledge and experience of its senior management team and
their long-term relationships with large corporate tenants, municipalities,
landowners and institutional sellers. Further, upon the completion of the
Offering, the Company believes it will be conservatively capitalized with
outstanding debt of approximately 25.2% of the Company's total market
capitalization.
The Company was formed on July 21, 1997 as a Maryland real estate investment
trust. The Company's executive offices are located at 77 West Wacker Drive,
Suite 3900, Chicago, Illinois 60601, and its telephone number is (312) 917-
1500.
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RISK FACTORS
An investment in the Shares involves various material risks. Prospective
investors should carefully consider the matters discussed under "Risk Factors"
prior to making an investment decision. These risks include:
. The possibility that the consideration paid by the Company for certain of
the Properties and other assets contributed to the Company in its
formation may exceed their fair market value, and the fact that there
were no arm's-length negotiations or third-party appraisals of such
Properties and other assets (Prime will receive Common Units worth
approximately $69.3 million and cash reimbursement of approximately $5.2
million for certain expenses incurred by Prime in connection with the
Formation Transactions and the Offering, in exchange for the contribution
by Prime of certain assets having a deficit book value of approximately
$140.3 million at June 30, 1997).
. The geographic concentration of the Properties in the Chicago
Metropolitan Area and the significance of the 77 West Wacker Drive
Building to the Company's revenue, which renders the Company vulnerable
to the local economic conditions and tenants' continued demand and
ability to pay rent for office and industrial space in the Chicago
Metropolitan Area. The local economic conditions of the Nashville,
Tennessee, Knoxville, Tennessee and Columbus, Ohio metropolitan areas
also will affect the Company due to the location of certain of its
Properties in such areas.
. Real estate debt financing risks, including the potential inability to
refinance mortgage indebtedness upon maturity, the potential loss of
properties from a foreclosure proceeding if the Company fails to meet its
obligations under any secured mortgage indebtedness, the absence of any
limitation in the organizational documents of the Company restricting the
level of debt the Company may incur and the potential increase in
interest cost of the Company resulting from increases in market interest
rates upon the refinancing of any existing mortgage indebtedness or
fluctuations in any of the Company's variable rate indebtedness,
including under the Company's floating rate tax-exempt bond debt ($74.5
million outstanding at June 30, 1997).
. The potential anti-takeover effects of provisions in the Company's
Declaration of Trust (the "Declaration of Trust") and Amended and
Restated Bylaws (the "Bylaws"), including, among other things, provisions
generally limiting the actual or constructive ownership of Common Shares
by any one person or entity to 9.9% of the outstanding Common Shares,
restricting ownership of the Common Shares and staggering the terms of
the members of the Company's board of trustees (the "Board of Trustees"),
which could deter the acquisition of control by a third party, thus
making it more difficult to effect a change in management or limiting the
opportunity for shareholders to receive a premium over the market price
for their Common Shares.
. The taxation of the Company as a regular corporation if it fails to
qualify as a REIT and the resulting decrease in funds available to pay
distributions to shareholders.
. The Company's cash available for distribution, which may be less than the
Company expects and may decrease in future periods from such expected
levels, materially adversely affecting the Company's ability to make the
expected annual distributions of $1.35 per Common Share during the 12-
month period following the completion of the Offering (which aggregate
expected annual distributions represent approximately 95.5% of the
estimated cash available for distribution for such period) or to sustain
such distribution rate in the future.
. The incurrence of a net loss on an historical basis in accordance with
generally accepted accounting principles ("GAAP") for each of the last
five calendar years for the Prime Properties and the fact that there can
be no assurance that the Company will not experience net losses in the
future.
. The risk that permanent financing for newly-developed properties may be
unavailable or may be available only on disadvantageous terms. In
addition, an acquisition of an office or industrial property entails the
risk that such investment will fail to perform in accordance with
expectations.
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. Real estate ownership risks, such as the effect of economic and other
conditions on real estate values, the general lack of liquidity of
investments in real estate, competition in seeking properties for
acquisition and development and in seeking tenants, the inability of
tenants to make rent payments, increases in real estate taxes, the
possibility that the Company will be unable to lease space currently
available or as it becomes available on terms favorable to the Company,
the potential for unknown or future environmental liabilities,
uninsurable losses and the inability of a property to generate income
sufficient to meet operating expenses and debt service obligations
relating to such property, which, individually or in the aggregate, may
negatively affect the Company's ability to make distributions.
. The Company's dependence on certain significant tenants.
. Development, leasing and management business risks, including the
limitation on the ability of the Company to control the operations of the
Services Company due to the lack of control by the Company in connection
with the election of the directors and the appointment of the officers of
the Services Company.
. The absence of a public market for the Convertible Preferred Shares.
BENEFITS TO PRIME OF THE FORMATION TRANSACTIONS AND THE OFFERING
Prime and certain of its affiliates will receive certain material benefits in
connection with the Formation Transactions and the Offering, including the
following:
. Prime will receive in the aggregate 3,465,000 Common Units with an
aggregate value of $69.3 million (assuming that each Common Unit held by
Prime has a value equal to that of a Common Share). The Operating
Partnership will pay on behalf of Prime, or reimburse Prime for,
approximately $5.2 million of expenses incurred by or on behalf of Prime
in connection with the Formation Transactions and the Offering.
. Prime will receive the return of approximately $15.0 million of cash and
$7.2 million of securities previously pledged as additional collateral by
Prime to secure its limited recourse guarantee obligations to the issuers
of the letters of credit which secure the payment of principal and
interest of the Tax-Exempt Bonds. Such collateral will be returned to
Prime upon the completion of the Offering and the replacement of such
letters of credit by the Operating Partnership.
. Prime will realize an immediate increase in the net tangible book value
of its investment in the Company of $55.24 per Common Unit upon the
completion of the Offering. The assets to be transferred by Prime in the
Formation Transactions had an aggregate deficit book value of
approximately $140.3 million (as determined at June 30, 1997 in
accordance with GAAP).
. Prime will no longer be liable as a general partner of the Property
Partnerships that own certain of the Properties. In addition, Prime will
be released from various limited recourse guaranties and obligations to
indemnify the lenders in connection with the Tax-Exempt Bonds encumbering
certain of the Properties and $60.0 million of other debt.
. Prime will defer certain tax consequences to it from certain of the
Formation Transactions through the contribution to the Operating
Partnership of its interests in the Properties and the business related
thereto for Common Units.
. Prime will obtain improved liquidity of its investment in its office and
industrial real estate business as a result of the Formation Transactions
through the ownership of Common Units, which are exchangeable for Common
Shares or cash, at the option of the Company.
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The $5.2 million expense reimbursement and the Common Units that Prime will
receive with an aggregate value of $69.3 million (assuming that each Common
Unit held by Prime has a value equal to that of a Common Share) in exchange for
its interests in the Prime Properties and the Prime Contribution Properties and
the office and industrial development, leasing and property management
businesses will significantly exceed the historical deficit book value of such
interests computed in accordance with GAAP (approximately $140.3 million at
June 30, 1997). Similarly, the value of the Company will exceed the depreciated
book value of its tangible assets. The Company does not believe, however, that
book value is a relevant measure of the going concern value of its office and
industrial real estate business because real estate book values typically
decrease over time due to the cumulative effect of depreciation and do not
reflect that the current economic values of real estate assets are directly
related to the cash flow generated by such assets.
CONFLICTS OF INTEREST
Certain conflicts of interest exist between the Company and (a) the Limited
Partners (including Prime) and the NAC General Partner and (b) certain of its
officers and trustees (including Michael W. Reschke, Richard S. Curto, Edward
S. Hadesman and Stephen J. Nardi, who are affiliates of certain of the Limited
Partners and, in the case of Mr. Nardi, the NAC General Partner). In addition,
such Limited Partners and such General Partner or their affiliates will have
significant influence over the affairs of the Company, which, together with the
foregoing conflicts of interest, may influence certain officers and trustees of
the Company to make decisions which may not be in the best interests of all
shareholders, in connection with the (i) Formation Transactions, (ii) operation
of the Company's ongoing businesses, including conflicts associated with the
tax consequences to Limited Partners and such General Partner of sales or
refinancings of certain of the Properties, which, together with certain
provisions of the Partnership Agreement, may influence the Company's decision
to sell or refinance, or to prepay debt secured by, certain Properties, (iii)
potential election by the Company to exercise its option to purchase or right
of first offer with respect to any of the land tracts owned or controlled by
one or more of the Limited Partners and such General Partner or their
affiliates and (iv) enforcement of agreements with affiliates of the Company.
The Company has adopted certain policies that are designed to eliminate or
minimize certain potential conflicts of interest. See "Policies with Respect to
Certain Activities--Conflicts of Interest Policies." The Company intends to
engage in transactions with certain related parties. See "Certain Relationships
and Related Transactions."
BUSINESS OBJECTIVE AND GROWTH STRATEGIES
BUSINESS OBJECTIVE
The Company currently intends to invest in the acquisition, development and
redevelopment of office and industrial properties located in Suburban Chicago
and Chicago CBD office markets and the midwestern region of the United States
with a primary focus on the office and industrial markets in the Chicago
Metropolitan Area. The Company's primary business objective is to achieve
sustainable long-term growth in cash flow per share and to enhance the value of
its portfolio through the implementation of effective operating, acquisition,
development and financing strategies. While there can be no assurance that the
Company will achieve such business objective, the Company believes it will
realize increased cash flow per share by:
. contractual rent increases in existing leases;
. leasing all or a portion of the existing vacant space in the Properties;
. acquiring office and industrial properties (or entities that own or
control such properties) at or below replacement cost and at positive
spreads to its cost of capital;
8
<PAGE>
. increasing rental and occupancy rates and decreasing tenant concessions
as vacancy rates in the Company's submarkets generally continue to
decline;
. developing office and industrial properties for the benefit of the
Company where such development will result in a favorable risk-adjusted
return on investment;
. expanding its property management, leasing and corporate advisory
services business; and
. using, when available, long-term, tax-exempt bonds (which typically have
lower interest costs) to finance the acquisition and renovation of
existing industrial facilities and the development of new industrial
facilities.
The Company believes that a number of factors will enable it to achieve its
business objectives, including: (a) the opportunity to lease available space at
attractive rental rates because of increasing demand and, with respect to the
Office Properties, the present limited level of new construction in the Chicago
Metropolitan Area; (b) the presence of distressed sellers and inadvertent
owners (through foreclosure or otherwise) of office and industrial properties
in the Company's markets, as well as the Company's ability to acquire
properties with Common Units (thereby deferring the seller's taxable gain), all
of which create enhanced acquisition opportunities; and (c) the quality and
location of the Properties.
Management believes that the Company is well-positioned to take advantage of
these opportunities because of its extensive experience in its markets, its
seasoned management team, its significant land holdings and option rights and
its ability to develop, redevelop, lease and efficiently manage office and
industrial properties. In addition, the Company believes that public ownership
and its capital structure will provide the Company with enhanced access to the
public debt and equity capital markets and new opportunities for growth. The
Company has obtained a commitment from BankBoston, N.A. and Prudential
Securities Credit Corporation ("PSCC") for a credit facility up to a maximum of
$225.0 million (the "Credit Facility") which, subject to compliance by the
Company with the applicable loan covenants, may be used to provide funds for
acquisitions and development activities and to provide the replacement letters
of credit for the $74.5 million of Tax-Exempt Bonds. PSCC is an affiliate of
Prudential Securities Incorporated, one of the Underwriters. There can be no
assurance that such financing will be obtained. Upon the completion of the
Offering, the Company expects to have outstanding debt of approximately 25.2%
of the Company's total market capitalization. See "Business Objective and
Growth Strategies--Business Objective" and "--Financing Strategy."
OPERATING STRATEGY
The Company will focus on enhancing its cash flow per share by: (a)
maximizing cash flow from its Properties through contractual rent increases,
pro-active leasing programs and effective property management; (b) managing
operating expenses through the use of in-house management, leasing, marketing,
financing, accounting, legal, construction, management and data processing
functions; (c) maintaining and developing long-term relationships with a
diverse tenant group; (d) attracting and retaining motivated employees by
providing financial and other incentives to meet the Company's operating and
financial goals; and (e) continuing to emphasize value-added capital
improvements to enhance the Properties' competitive advantages in their
submarkets.
Contractual Increases in Rent
A substantial portion of the Company's existing portfolio is leased pursuant
to long-term leases with contractual annual rent increases, thereby providing
the Company with both stable and escalating rental revenues. By way of example,
the contractual rent increases from existing leases in the 77 West Wacker Drive
Building average approximately $630,000 per year over the next ten years. As of
June 30, 1997, approximately 58.2% of
9
<PAGE>
the leases for the Properties, in terms of Annualized Net Rent, had contractual
rent increases, of which approximately 42.4% of the Annualized Net Rent was
attributable to leases with specified contractual rent increases which on
average provided for annual rent increases of 4.9% over the next three years
and approximately 15.8% of the Annualized Net Rent was attributable to leases
with contractual rent increases related to the CPI. The Company believes that
reporting rental revenues on a cash basis will result in a more accurate
presentation of its actual operating activities than if rental revenues were
reported on a straight-line basis and, accordingly, expects to report Funds
from Operations on a cash basis. As a result, contractual rent increases will
cause reported Funds from Operations to increase.
Pro-Active Leasing; Ability to Lease Vacant Space
The Company believes that the strength of its leasing program is demonstrated
by the current occupancy status of the Properties. The Company believes that
one of its most notable leasing accomplishments is the 77 West Wacker Drive
Building, a recently developed 50-story office tower located in downtown
Chicago, containing approximately 944,600 square feet of net rentable area.
Construction began in April 1990 and was successfully completed with the
opening of the building in May 1992. At its opening, the building had
commitments for long-term leases for over 95.0% of its net rentable office
area. In 1995, the Company restructured its lease with Keck, a significant
tenant at the 77 West Wacker Drive Building, to decrease the space subject to
the lease and to reduce the rent on Keck's remaining space. In June 1997, Keck
stopped paying rent and, in connection with a settlement of the resulting
litigation, has agreed to vacate its remaining space no later than November 30,
1997. See "Business and Properties--Legal Proceedings." The Company believes it
will be able to increase cash flow per share by continuing to lease the
existing vacant space in its Properties. As of June 30, 1997, the Company had
282,069 net rentable square feet of vacant space in its Office Properties
(including approximately 113,000 net rentable square feet at the 77 West Wacker
Drive Building leased to Keck (the "Keck Space"), of which approximately 52,000
net rentable square feet has been subsequently leased). As of June 30, 1997 the
Company also had 690,007 net rentable square feet of vacant space in its
Industrial Properties.
Long-Term Leases; Tenant Retention
A substantial portion of the Properties is leased on a long-term basis,
thereby providing the Company with a reduced level of costs and capital
expenditures due to tenant lease expirations. Approximately 56.7% of the
Company's Annualized Net Rent is attributable to leases expiring in 2002 or
beyond, and approximately 40.5% of the Company's Annualized Net Rent is
attributable to leases expiring in 2007 or beyond. With regard to the Office
Properties, as of June 30, 1997, 65.6% of the office leases, in terms of
Annualized Net Rent, had terms expiring in five years or more, resulting in an
average annual turnover for the next five years of 6.9% per annum. With regard
to the Industrial Properties, as of June 30, 1997, 34.0% of the industrial
leases, in terms of Annualized Net Rent, had terms expiring in five years or
more, resulting in an average annual turnover for the next five years of 13.2%
per annum. From January 1, 1994 through June 30, 1997, the Prime Properties
have achieved a tenant retention rate, based on renewals of leases with
scheduled expirations, of approximately 64.0% in terms of net rentable square
feet. The Company intends, as market conditions permit, to continue to favor
longer-term leases with contractual annual rent increases. See "Business and
Properties--Lease Expirations."
Management of Operating Expenses
The Company believes that it has been successful in providing high-quality
and professional property management services to its tenants, while maintaining
property operating expenses and real estate taxes at or below such expense
levels for comparable properties. As the Company continues to grow through the
acquisition and development of additional office and industrial properties,
management of the Company believes that economies of scale will allow the
Company to operate its properties with increasing efficiency.
10
<PAGE>
ACQUISITION STRATEGY
The Company will seek to increase its cash flow per share by acquiring
additional office and industrial properties at prices below replacement cost,
including properties that: (a) may provide attractive initial yields and
significant potential for growth in cash flow from property operations; (b) are
well-located, high quality and competitive in their respective submarkets; (c)
are located in the Company's existing submarkets and/or in other strategic
submarkets where the demand for office and industrial space exceeds available
supply; or (d) have been undermanaged or are otherwise capable of improved
performance through intensive management, marketing and leasing.
The Company plans to concentrate its acquisition activities in the Chicago
Metropolitan Area and, to a lesser extent, in other midwestern markets. The
Company believes that attractive opportunities exist to acquire office and
industrial properties in these markets at prices below replacement cost. Each
acquisition opportunity will be reviewed to evaluate whether it meets one or
more of the following criteria: (a) potential for higher occupancy levels
and/or rents as well as for lower tenant turnover and/or operating expenses;
(b) ability to generate returns in excess of the Company's weighted average
cost of capital, taking into account the estimated costs associated with
renovation and tenant turnover (i.e., tenant improvements and leasing
commissions); and (c) a purchase price at or below estimated replacement cost.
See "Business Objective and Growth Strategies--Acquisition Strategy" and
"Business and Properties--Acquisition Properties."
DEVELOPMENT STRATEGY
As opportunities arise and where market conditions support a favorable risk-
adjusted return on investment, the Company intends to pursue opportunities for
growth through the development of new office and industrial properties. The
Company believes that the strength and experience of its management in the
development of office and industrial properties will provide it with a
competitive advantage in evaluating and pursuing opportunities to develop
additional properties. During the next few years, the Company expects that most
of its development activities will be focused on office and industrial
properties in the Chicago Metropolitan Area.
Based on ongoing marketing activities and discussions with prospective
tenants, the Company expects that over the next several years there will be
significant demand from several large tenants that are unable to find large
blocks of contiguous Class A office space in downtown Chicago which may lead to
significant office development opportunities. The Company believes that its
significant land holdings and land option rights will provide it with a
distinct advantage in competing for future development opportunities. The
Company owns approximately 83.4 acres and has rights to acquire approximately
157.2 acres of developable land, which management believes could be developed
with approximately 1.2 million square feet of additional office space in the
Chicago CBD and approximately 4.4 million square feet of additional industrial
properties primarily in the Chicago Metropolitan Area. The Company's option
rights include an option to acquire a development site containing approximately
58,000 square feet known as 300 N. LaSalle in downtown Chicago which, to the
extent the Company is able to obtain significant preleasing commitments for
such a project, the Company believes it could develop as an office project
containing up to approximately 1.2 million net rentable square feet.
The Services Company's corporate advisory activities with third parties are
expected to give the Company further access to future development
opportunities. The Services Company also will continue to undertake build-to-
suit projects for third parties.
FINANCING STRATEGY
The Company's financing strategy and objectives are determined by the Board
of Trustees. The Company presently intends to operate with a ratio of debt-to-
total market capitalization (defined as the total debt of the Company as a
percentage of the sum of the market value of issued and outstanding Shares,
including the
11
<PAGE>
Common Units exchangeable for Common Shares, plus total debt) in the range of
25.0% to 40.0%. The Company also intends to operate in a manner that will
facilitate its ability to secure an investment grade rating on future unsecured
debt as soon as practicable. However, such objectives may be altered without
the consent of the Company's shareholders, and the Company's organizational
documents do not limit the amount or type of indebtedness that the Company may
incur. Upon the completion of the Offering and the consummation of the
Formation Transactions, the Company's total debt will constitute approximately
25.2% of its total market capitalization.
The Company intends to use one or more sources of capital for future
acquisitions and development activities. These capital sources may include
undistributed cash flow, borrowings under certain acquisition facilities,
proceeds from the issuance of long-term tax-exempt bonds, other debt or equity
securities and other bank and/or institutional borrowings, including the $225.0
million Credit Facility. The Company has a commitment for the Credit Facility;
however, there can be no assurance that any such financing will be obtained.
See "Business and Properties--Development, Leasing and Management Activities"
and "Business Objective and Growth Strategies--Financing Strategy."
THE PROPERTIES
Upon the completion of the Offering and the consummation of the Formation
Transactions, the Company (through the Operating Partnership) will own 16
Office Properties encompassing an aggregate of approximately 2.4 million net
rentable square feet, 44 Industrial Properties containing an aggregate of
approximately 5.7 million net rentable square feet, one industrial property
under construction, one retail center and one parking facility with 398 parking
spaces. Twelve of the 16 Office Properties, 38 of the 44 Industrial Properties,
the industrial property under construction and the retail center are located in
the Chicago Metropolitan Area. Three of the Office Properties are located in
Knoxville, Tennessee, one Office Property is located in downtown Nashville,
Tennessee, six of the Industrial Properties are located in the Columbus, Ohio
metropolitan area and the parking facility is located in Knoxville, Tennessee.
In the Chicago Metropolitan Area, the most notable Office Property is the 77
West Wacker Drive Building, a premier 50-story landmark office tower in
downtown Chicago, which contains approximately 944,600 net rentable square
feet. The building has won numerous awards including, in 1993, the Sun-Times
Real Estate Development of the Year Award and the Best New Building Award from
Friends of Downtown. As of June 30, 1997, the Office Properties were
approximately 88.0% leased to more than 200 tenants, and the Industrial
Properties were approximately 87.9% leased to more than 60 tenants. In
addition, the Company owns or has options to acquire certain land for
development. See "Business and Properties--Land for Development."
Following the completion of the Offering, the Company will provide its own
development, leasing and property management services for all of the
Properties, and the Services Company will provide fee-based development,
leasing and property management services on a selected basis for unaffiliated
third parties. The Company's staff of approximately 151 employees will provide
these services from the Company's executive headquarters in Chicago, Illinois
and through on-site staff at the Properties.
12
<PAGE>
THE OFFICE AND INDUSTRIAL PROPERTIES
The following table sets forth certain information relating to each of the
Properties as of June 30, 1997, unless indicated otherwise. After completion
of the Formation Transactions, the Company (through the Operating Partnership)
will own a 100% interest in all of the Office Properties and the Industrial
Properties.
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED EFFECTIVE NET
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET RENT PER
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3) SQ. FT.($)(4)
- -------- -------- ----------- -------- ---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICE PROPER-
TIES:
77 West Wacker Chicago, IL 1992 944,556 84.6 18,263 22.84 15,367 19.22(6)
Drive(5)........
1990 Algonquin
Road/
2000-2060 Algon-
quin Road
(Salt Creek Of-
fice
Center)(7)(8)... Schaumburg, IL 1979/1986 125,922 90.9 1,153 10.07 1,141 9.97
1699 E.
Woodfield Road
(Citibank Office
Plaza)(9)....... Schaumburg, IL 1979 105,400 95.2 932 9.29 922 9.19
555 Huehl Northbrook, IL 1987 74,000 100.0 529 7.15 522 7.05
Road(10)........
201 4th Avenue Nashville, TN 1968/1985 250,566 90.1 1,987 8.80 1,870 8.28(6)
N...............
620 Market Knoxville, TN 1988 93,711 91.4 895 10.45 805 9.40(6)
Street..........
625 Gay Street.. Knoxville, TN 1988 91,426 90.0 701 8.52 589 7.16(6)
4823 Old Knoxville, TN 1988 34,638 100.0 305 8.80 257 7.43(6)
Kingston Pike...
941-961 Weigel Elmhurst, IL 1989/1994 123,077 100.0 1,571 12.76 1,559 12.66
Drive(10).......
4100 Madison Hillside, IL 1978 24,536 51.2 39 3.07 37 2.97
Street(10)......
350 N. Mannheim Hillside, IL 1977/1987 4,850 -- -- -- -- --
Road(10)........
1600-1700 167th Calumet City, IL 1981 65,394 53.1 431 12.41 427 12.31
Street(10)......
4343 Commerce Lisle, IL 1989 170,708 88.9 2,622 17.28 2,607 17.18
Court(10).......
1301 E. Tower Schaumburg, IL 1992 50,400 100.0 524 10.41 519 10.31
Road(10)........
280 Shuman Naperville, IL 1979 65,001 98.8 648 10.09 642 9.99
Blvd.(7)........
<CAPTION>
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE
FEET PER PROPERTY
PROPERTY AS OF 6/30/97
- -------- ------------------------
<S> <C>
OFFICE PROPER-
TIES:
77 West Wacker Donnelley (25.6%)
Drive(5)........ Everen (25.5%)
Jones Day (11.8%)
1990 Algonquin
Road/
2000-2060 Algon-
quin Road
(Salt Creek Of-
fice
Center)(7)(8)... Silicon Graphics
(19.4%)
1699 E.
Woodfield Road
(Citibank Office
Plaza)(9)....... McGladrey &
Pullen (47.5%)
Merrill Lynch (11.3%)
555 Huehl
Road(10)........ Rank Video (100.0%)
201 4th Avenue
N............... SunTrust Bank (49.0%)
620 Market Morton, Lewis, King &
Street.......... Kreig (31.7%)
FNB Financial (20.7%)
625 Gay Street.. Healthsource (28.3%)
4823 Old
Kingston Pike... Talbots (68.1%)
941-961 Weigel Household Financial
Drive(10)....... Corporation (100.0%)(11)
4100 Madison Nardi Group (27.3%)
Street(10)...... Narco Construction
(20.9%)
350 N. Mannheim
Road(10)........ Vacant
1600-1700 167th
Street(10)...... Unger-Sirovatka (11.1%)
4343 Commerce Computer Associates
Court(10)....... (25.3%)
EquiFax (17.2%)
Hinshaw, Culbertson
(11.1%)
1301 E. Tower Household Credit
Road(10)........ Services (100.0%)(12)
280 Shuman EBY-Brown (35.4%)
Blvd.(7)........ Devtech Associates
(14.3%)
General Electric (10.1%)
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3)
- -------- -------- ----------- --------- ---------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
2205-2255 Enter-
prise
Drive(7)....... Westchester, IL 1987 129,574 91.4 1,174 9.91 1,162
--------- ----- ------ ------
Office Proper- 2,353,759 88.0 31,774 15.34 28,426
ties Subtotal..
--------- ----- ------ ------
INDUSTRIAL PROP-
ERTIES:
Warehouse/Distribution
Facilities:
425 E. Algonquin Arlington Heights, IL 1978 304,506 100.0 946 3.11 836
Road...........
1001 Technology Libertyville, IL 1996 212,831 100.0 841 3.95 819
Way(10)........
3818 Grandville/
1200 Northwest-
ern(10) ....... Gurnee, IL 1961/1990 345,232 100.0 1,041 3.02 1,007
306-310 Era Northbrook, IL 1984 36,495 100.0 393 10.77 389
Drive(10)(13)..
2160 McGaw
Road(9)........ Obetz, OH 1974 310,100 100.0 458 1.48 427
4849 Groveport
Road(9)........ Obetz, OH 1968 132,100 100.0 288 2.18 274
2400 McGaw
Road(9)........ Obetz, OH 1972 86,400 100.0 191 2.21 183
5160 Blazer Me-
morial
Parkway
(9)(14)........ Dublin, OH 1983 85,962 64.5 348 6.28 343
600 London Delaware, OH 1981 52,441 100.0 110 2.11 105
Road(9)........
1401 S. Jeffer- Chicago, IL 1965/1985 17,265 100.0 89 5.15 87
son(10)........
1051 N. Kirk Batavia, IL 1990 120,004 100.0 474 3.95 462
Road(10).......
4211 Madison Hillside, IL 1977/1992 90,334 100.0 349 3.87 340
Street(10).....
200 E. Fullerton Carol Stream, IL 1968/1995 66,254 100.0 248 3.75 242
Avenue(10).....
350 Randy Carol Stream, IL 1974 25,200 87.5 129 5.85 127
Road(10).......
4248, 4250 and
4300 Madison
Street(10)..... Hillside, IL 1980 127,129 100.0 597 4.70 585
370 Carol Elmhurst, IL 1977/1994 60,290 100.0 256 4.25 250
Lane(10).......
<CAPTION>
TENANTS LEASING
10% OR MORE OF
ANNUALIZED NET RENTABLE
EFFECTIVE NET SQUARE
RENT PER FEET PER PROPERTY
PROPERTY SQ. FT.($)(4) AS OF 6/30/97
- -------- ------------- ----------------------------
<S> <C> <C>
2205-2255 Enter-
prise
Drive(7)....... 9.81 Census Bureau (14.5%)
National Restaurant
Enterprise (12.6%)
Cherry Communications
(12.3%)
Office Proper- 13.72
ties Subtotal..
INDUSTRIAL PROP-
ERTIES:
Warehouse/Distribution
Facilities:
425 E. Algonquin 2.75(6) Berlin Packaging (34.2%)
Road........... AM International (26.2%)
International Components
(20.8%)
Barnes & Reineke (18.9%)
1001 Technology 3.85 Rank Video (76.0%)
Way(10)........ Arlington Industries (23.9%)
3818 Grandville/
1200 Northwest-
ern(10) ....... 2.92 Rank Video (100.0%)
306-310 Era 10.67 Roche/NICL (62.3%)
Drive(10)(13).. SLJ/Lionstone (37.7%)
2160 McGaw
Road(9)........ 1.38 Spartan Warehouse (100.0%)
4849 Groveport Premier Auto Glass Corp
Road(9)........ 2.08 (100.0%)
2400 McGaw
Road(9)........ 2.11 S.P. Richards (100.0%)
5160 Blazer Me-
morial
Parkway
(9)(14)........ 6.18 Cross Medical (32.2%)
Alkon (32.3%)
600 London 2.01 Schneider National, Inc.
Road(9)........ (100.0%)
1401 S. Jeffer- 5.05 Federal Express Corp
son(10)........ (100.0%)
1051 N. Kirk 3.85 Houghton Mifflin Co., Inc.
Road(10)....... (100.0%)
4211 Madison 3.77 Dynamic Manufacturing Co.
Street(10)..... (71.2%)
Aratex Services, Inc.
(28.8%)
200 E. Fullerton 3.65 Spraying Systems
Avenue(10)..... (100.0%)(15)
350 Randy 5.75 Data Instruments (37.5%)
Road(10)....... Micro Energy (12.5%)
Miller Pharmaceutical Group
(12.5%)
Mar-Cole Music Center
(12.5%)
Installation Services
(12.5%)
4248, 4250 and
4300 Madison
Street(10)..... 4.60 Best Buy Co., Inc. (40.1%)
Micron Industries (28.9%)
Friction Automotive (12.3%)
370 Carol 4.15
Lane(10)....... Semblex Corp (100.0%)
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED EFFECTIVE NET
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET RENT PER
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3) SQ. FT.($)(4)
- -------- -------- -------------- -------- ---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
388 Carol Elmhurst, IL 1979 40,920 88.4 180 4.97 176 4.87
Lane(10)........
342-346 Carol Elmhurst, IL 1989 67,935 100.0 294 4.32 287 4.22
Lane(10)........
343 Carol
Lane(10)........ Elmhurst, IL 1989 30,084 100.0 202 6.71 199 6.61
4160-4190 Madison
Street(10)...... Hillside, IL 1974/1992 79,532 100.0 318 4.00 310 3.90
11039 Gage Ave-
nue(10)......... Franklin Park, IL 1965/1993 21,935 100.0 107 4.90 105 4.80
11045 Gage Ave-
nue(10)......... Franklin Park, IL 1970/1992 140,815 100.0 535 3.80 521 3.70
550 Kehoe
Blvd(10)........ Carol Stream, IL 1997 44,575 100.0 292 6.55 288 6.45
475 Superior Ave-
nue(7).......... Munster, IN 1989 450,000 100.0 1,258 2.80 1,213 2.70
Overhead
Crane/Manufacturing
Facilities:
1301 Ridgeview
Drive(10)(18)... McHenry, IL 1995 217,600 100.0 1,031 4.74 1,009 4.64
515 Huehl Road/
500
Lindberg(10).... Northbrook, IL 1988 201,244 100.0 822 4.08 801 3.98
455 Academy
Drive(10)(19)... Northbrook, IL 1976 105,444 100.0 406 3.85 395 3.75
4411 Marketing
Place(9)........ Groveport, OH 1984 65,804 100.0 227 3.45 220 3.35
Chicago
Enterprise
Center.......... Chicago, IL 1916/1991-1996
13535-A S.
Torrence
Avenue......... 384,806 37.9 321 2.20 321 2.20
13535-B S.
Torrence
Avenue......... 239,752 100.0 649 2.71 432 1.80
13535-C S.
Torrence
Avenue......... 99,333 81.9 210 2.59 106 1.31
13535-D S.
Torrence
Avenue......... 77,325 100.0 236 3.05 213 2.75
13535-E S.
Torrence
<CAPTION>Avenue......... 57,453 15.3 30 3.42 25 2.85
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE
FEET PER PROPERTY
PROPERTY AS OF 6/30/97
- -------- ----------------------------
<S> <C>
388 Carol
Lane(10)........ Ameritech (88.4%)
342-346 Carol 3-D Exhibits (70.5%)
Lane(10)........ Old Kent Financial Corp.
(29.5%)
343 Carol Matsushita Industrial
Lane(10)........ Equipment (100.0%)
4160-4190 Madison
Street(10)...... Evans, Inc. (46.0%)
Dynamic Manufacturing
(32.3%)
Charles A. Levy (21.7%)(16)
11039 Gage Ave- Boston Coach Illinois Corp.
nue(10)......... (100.0%)
11045 Gage Ave-
nue(10)......... Echlin, Inc. (100.0%)(17)
550 Kehoe
Blvd(10)........ Associated Material (100.0%)
475 Superior Ave-
nue(7).......... General Electric (100.0%)
Overhead
Crane/Manufacturing
Facilities:
1301 Ridgeview
Drive(10)(18)... Motorola (100.0%)
515 Huehl Road/
500
Lindberg(10).... Rank Video (100.0%)
455 Academy National Service Industries
Drive(10)(19)... (100.0%)
4411 Marketing
Place(9)........ Wes-Tran Corp. (100.0%)
Chicago
Enterprise
Center..........
13535-A S.
Torrence
Avenue......... Co-Steel Lasco (37.9%)
13535-B S.
Torrence
Avenue......... Welded Tube Company (100.0%)
13535-C S.
Torrence
Avenue......... Sterling Steel (81.9%)
13535-D S.
Torrence
Avenue......... Alpha Processing (100.0%)
13535-E S.
Torrence
Avenue......... Signode (13.9%)
13535-F S.
Torrence
Avenue......... 44,800 100.0 146 3.25 129 2.87
13535-G S.
Torrence
Avenue......... 54,743 -- -- -- -- --
13535-H S.
Torrence
Avenue......... 73,612 56.3 75 1.82 71 1.72(6)
13535-F S.
Torrence
Avenue......... Signode (100.0%)
13535-G S.
Torrence
Avenue......... Vacant
13535-H S.
Torrence
Avenue......... Performance Minerals (42.4%)
Jet Vac, Inc. (13.9%)
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED EFFECTIVE NET
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET RENT PER
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3) SQ. FT.($)(4)
- -------- -------- -------------- --------- ---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
East Chicago
Enterprise
Center.......... East Chicago, IN 1917/1991-1997
Building 2 (4407
Railroad
Avenue)........ 169,435 -- -- -- -- --
Building 3 (4407 291,550 100.0 1,423 4.88 1,273 4.37(6)
Railroad
Avenue)........
Building 4 (4407
Railroad
Avenue)........ 87,483 98.1 286 3.33 277 3.23
4440 Railroad
Avenue(20)..... 40,000 100.0 299 7.47 287 7.17
4635 Railroad
Avenue......... 14,070 -- -- -- -- --
Hammond
Enterprise
Center.......... Hammond, IN 1920-1952
4507 Columbia
Avenue......... 256,595 98.8 572 2.26 226 .89(6)
4527 Columbia
Avenue(22)..... 16,701 62.8 56 5.36 56 5.36
4531 Columbia
Avenue......... 250,266 74.1 274 1.48 253 1.36
--------- ------ ------
Industrial Prop- 5,696,355 87.9 17,007 3.40 15,669 3.13
erties
Subtotal........
--------- ------ ------
Portfolio Total.. 8,050,114 87.9 48,781 6.89 44,095 6.23
========= ====== ======
OTHER PROPERTIES
398 Unit Parking
Facility........ Knoxville, TN 1981
371-385 N. Gary
Avenue(10)(24).. Carol Stream, IL 1978 11,276
801 Technology Libertyville, IL 1997 68,824 -- -- -- -- --
Way(25).........
<CAPTION>
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE
FEET PER PROPERTY
PROPERTY AS OF 6/30/97
- -------- ------------------------
<S> <C>
East Chicago
Enterprise
Center..........
Building 2 (4407
Railroad
Avenue)........ Vacant
Building 3 (4407 Acutus-Gladwin (47.1%)
Railroad Metro Metals (52.9%)
Avenue)........
Building 4 (4407
Railroad
Avenue)........ Illiana Steel (98.1%)
4440 Railroad
Avenue(20)..... Inland Steel (100.0%)
4635 Railroad
Avenue......... Vacant
Hammond
Enterprise
Center..........
4507 Columbia
Avenue......... A.M. Castle (47.3%)
Slitting Services
(37.8%)(21)
HECO (12.7%)
4527 Columbia The Prime Group, Inc.
Avenue(22)..... (24.2%)(23)
Town & Country (20.4%)
Great Lakes Engineering
LLC
(16.6%)
4531 Columbia
Avenue......... HECO (41.6%)
Bar Processing (32.5%)
Industrial Prop-
erties
Subtotal........
Portfolio Total..
OTHER PROPERTIES
398 Unit Parking
Facility........
371-385 N. Gary
Avenue(10)(24)..
801 Technology
Way(25)......... Vacant
</TABLE>
- ------
(1) Annualized Net Rent is the monthly net rent due under the lease as
determined in accordance with GAAP, annualized for all leases in effect on
June 30, 1997. Net rent is the amount due under the lease without
including operating expenses, taxes and other similar reimbursements due
from the tenant.
(2) Annualized Net Rent per square foot represents Annualized Net Rent divided
by net rentable square feet for leases in effect at June 30, 1997.
(3) Annualized Effective Net Rent represents total net rent to be received
over their respective terms from all leases in effect at June 30, 1997
minus all tenant improvements, leasing commissions, and other concessions
("Tenant Expenditures") for all such leases, divided by the terms in
months for such leases, multiplied by 12. Tenant Expenditures for
Acquisition and Contribution Properties have been estimated at $0.10 per
square foot for leases in effect at June 30, 1997.
(4) Annualized Effective Net Rent per square foot represents Annualized
Effective Net Rent at June 30, 1997 divided by net rentable square feet
leased at June 30, 1997.
(5) One of the Company's other significant tenants at the 77 West Wacker Drive
Building, Keck, has agreed to vacate the Keck Space on or before November
30, 1997 pursuant to a settlement agreement. Accordingly, the Keck Space
is assumed vacant for purposes of the calculations in this table. See
"Business and Properties--The Company's Office Submarkets--77 West Wacker
Drive Building" and "--Legal Proceedings."
(6) For the purpose of this table, the historical Tenant Expenditures for
these Properties developed by Prime have been adjusted for management's
estimate of costs that can be reused for future tenants (77 West Wacker
Drive Building--$24.65 per leased square foot, other Office Properties--
$5.12 per leased square foot and Industrial Properties--$4.20 per leased
square foot).
(7) These Properties are Acquisition Properties.
(8) This property complex is comprised of 1990 Algonquin Road (a two-story
office building) and 2000-2060 Algonquin Road (seven single-story office
buildings), but is treated as one Office Property.
16
<PAGE>
(9) These Properties are Prime Contribution Properties.
(10) These Properties are Contribution Properties.
(11) Household Financial Corporation has a right of first refusal to purchase
941-961 Weigel Drive.
(12) Household Credit Services has both a right of first refusal to purchase
1301 E. Tower Road and a purchase option exercisable prior to December
30, 2001 at fair market value.
(13) Roche/NICL Ltd. has a right of first refusal to purchase 306 Era Drive.
(14) This Property is a mixed use Industrial/Office Property that has been
classified as an Industrial Property.
(15) Spraying Systems has a right of first refusal for 200 E. Fullerton
Avenue.
(16) This lease expired on August 31, 1997 and has not been renewed.
(17) Echlin, Inc. has a right of first refusal to purchase 11045 Gage Avenue.
(18) Motorola has an option to purchase 1301 Ridgeview Drive for $10,375,000
on May 31, 2000, the end of the initial lease term, $11,620,040 on May
31, 2003, the end of the first option period, $13,014,488 on May 31,
2006, the end of the second option period and $14,576,297 on May 31,
2009, the end of the third option period.
(19) National Service Industries, Inc., has a right of first refusal to
purchase the industrial building at 455 Academy Drive, and the land
adjacent thereto.
(20) This property is an office building adjacent to the East Chicago
Enterprise Center.
(21) This space was leased to A.M. Castle on August 1, 1997 for $2.39 per
square foot, at which time A.M. Castle increased its existing space from
121,000 square feet to 218,589 square feet.
(22) This property is an office building within the Hammond Enterprise Center.
(23) The Company will assume this lease upon the completion of the Offering.
(24) This is a retail center.
(25) This industrial property is under construction and is expected to be
completed during the fourth quarter of 1997. The Property is being
purchased for cash from certain of the IBD Contributors.
17
<PAGE>
LAND FOR DEVELOPMENT AND OPTION PROPERTIES
Following the completion of the Offering, the Company will own approximately
83.4 acres and have rights to acquire approximately 157.2 acres of developable
land (including rights to acquire one development site located in the Chicago
CBD containing approximately 58,000 square feet), which management believes
could be developed with approximately 1.2 million square feet of additional
office space in the Chicago CBD and approximately 4.4 million square feet of
additional industrial properties primarily in the Chicago Metropolitan Area.
For more information regarding these parcels, see "Business and Properties--
Land for Development and Option Properties."
THE COMPANY'S MARKETS
CHICAGO METROPOLITAN AREA
The Company's primary focus is the Chicago Metropolitan Area, the third most
populous metropolitan area in the nation, with an estimated population of over
7.7 million. The Company has relied, with permission, on information concerning
the economies of the Chicago Metropolitan Area, Nashville, Tennessee,
Knoxville, Tennessee and Columbus, Ohio and office and industrial markets
thereof derived from a report commissioned by the Company and prepared by RCG,
a nationally recognized expert in real estate consulting and urban economics.
The discussion of such submarkets below and under the caption "Business and
Properties--The Company's Markets" is based upon such findings of RCG. While
the Company believes that these estimates of economic trends are reasonable,
there can be no assurance that these trends will in fact continue.
The Company currently owns office and industrial properties in the suburban
and downtown submarkets of the Chicago Metropolitan Area. The Company believes
that the Chicago Metropolitan Area has been and will continue to be an
excellent market in which to own and operate office and industrial properties
over the long term. The Company believes that this area is attractive for a
number of reasons, including:
. The Chicago Metropolitan Area contains the largest number of jobs of any
consolidated Metropolitan Statistical Area ("MSA") in the United States,
and is the third most populous MSA, with an estimated population of over
7.7 million;
. Chicago's manufacturing sector has continued to expand, and the services
sector of the Chicago Metropolitan Area economy has grown even faster,
and has outpaced the manufacturing sector in additional employment both
in absolute terms and as a proportion of the local economy. This
development has diversified Chicago's employment base, which already
leads the nation in four out of the seven major employment sectors
(manufacturing; wholesale and retail trade; transportation,
communications and utilities; and construction);
. Employment sectors requiring the use of office and industrial properties
continue to expand with the Chicago Metropolitan Area's continuing growth
and diversification of industries; and
. Since 1992, there has been no increase in the inventory of Chicago CBD
office space and only a slight increase in the inventory of Suburban
Chicago office space.
The strengths of Chicago's economy include its transportation system, highly
diverse economy, strong high-technology sector, growing international trade and
high per capita income. For example, Chicago retains its preeminent role in
transportation as the location of the world's busiest airport, the hub of the
nation's rail system and the primary port connecting the Great Lakes with the
Mississippi River and the Gulf of Mexico. While Chicago has been (and continues
to be) a national center of heavy manufacturing, Illinois recently surpassed
Massachusetts in high-technology employment and merchandise exports and is
behind only California, New York and Texas, according to a 1997 ranking by the
American Electronics Association (the "AEA"). Furthermore, Chicago, as the home
of the Chicago Board of Trade (the "CBOT"), the Chicago Mercantile Exchange
(the "CME") and the Chicago Board Options Exchange (the "CBOE"), has become the
international center of options, futures and commodity trading and an important
center of international finance. In addition,
18
<PAGE>
according to RCG, the Chicago Metropolitan Area's median household income in
1996 was $59,895, 28.3% above the national average. Based on the foregoing, the
Company believes that the Chicago Metropolitan Area's long-term outlook is
positive.
The Chicago Metropolitan Area's top companies include Sears, Motorola,
Ameritech, Allstate, UAL Corporation (United Airlines), Waste Management,
Baxter International, McDonald's, Abbott Laboratories, Walgreen's, Sara Lee,
Donnelley, Arthur Andersen, Amoco and First Chicago NBD. In addition, the
Chicago Metropolitan Area is predicted by market analysts to continue its path
of steady growth until at least the year 2000. The economic fundamentals and
steady growth of both the midwestern region and the Chicago Metropolitan Area
lead the Company to expect continued strength in this market.
The Company believes that the solid, diversified local economy in the Chicago
Metropolitan Area is creating continued office space demand and absorption.
Because of steady expansion of office employment and nearly no new
construction, the overall Class A vacancy rate has steadily declined for five
years and is expected to continue to decline. According to RCG, Class A rental
rates in the Company's largest office market, the Chicago CBD, have begun to
rise as Class A vacancy rates in the Chicago CBD have decreased from 23.1% in
1992 to 9.3% by the end of the second quarter of 1997. The Chicago Metropolitan
Area also has experienced a very active market in industrial space in the
1990s. As of the end of the first quarter of 1997, the Chicago Metropolitan
Area's industrial market overall vacancy rate was 7.3%, below the national
average vacancy rate of 8.1%. In addition, 32.6% (in terms of net rentable
square feet) of the Company's Industrial Properties in the Chicago Metropolitan
Area consist of overhead crane facilities, which have a replacement cost
substantially in excess of the Company's basis in its Properties. The Company
believes that current rental rates in the overhead crane/manufacturing
submarket are less than the level which would be required to justify the
construction of new overhead crane/manufacturing facilities, and, therefore,
the Company believes that there will be little new competition with the
Company's overhead crane/manufacturing Properties. See "Business and
Properties--The Company's Markets."
OTHER MARKETS
In addition to its Properties in the Chicago Metropolitan Area, the Company
also has one Office Property in Nashville, Tennessee, three Office Properties
in Knoxville, Tennessee, six Industrial Properties in the Columbus, Ohio
metropolitan area and a parking facility in Knoxville, Tennessee. Nashville is
the capital of the state of Tennessee and has the advantages of employment by
the state government and the music publishing industry as well as growing
employment by industry market leaders. Knoxville benefits from the presence of
the University of Tennessee and several major governmental employers. Columbus
is the capital of the state of Ohio, and the Columbus metropolitan area is
Ohio's fastest-growing metropolitan economy. As the state capital and the
location of The Ohio State University, Ohio's largest university, Columbus
benefits from employment by the state government and the university. Columbus
also serves as a retail and warehousing center and a regional banking center
and has a diverse economy.
19
<PAGE>
STRUCTURE AND FORMATION OF THE COMPANY
The Formation Transactions are designed to consolidate the ownership of the
Properties in the Company and to continue and expand the operations of the
office and industrial real estate business of Prime. The Company believes that
the Formation Transactions will provide the Company with enhanced access to the
public markets for debt and equity capital, thereby enhancing its potential for
future growth to the benefit of the shareholders and the Limited Partners.
The business and operations of the Company are conducted through the
Operating Partnership and the Services Company. Fee title to the Properties is
held in separate entities (the "Property Partnerships") that will be owned,
directly or indirectly, 100.0% by the Company.
The structure of the Company and the ownership of the equity in the Company
after giving effect to the Offering (assuming the Underwriters' over-allotment
option will not be exercised) and the Formation Transactions is shown in the
following chart:
CHART
- --------
(1) The Company also owns 2,000,000 Preferred Units in the Operating
Partnership, the terms and conditions of which correspond to the
Convertible Preferred Shares. The Company is the managing general partner
of the Operating Partnership.
(2) The Operating Partnership also owns a promissory note issued by the
Services Company (the "Note") with an initial principal balance of
approximately $4.2 million. As a result of the Operating Partnership's
ownership of non-voting participating preferred stock of the Services
Company and the Note, the Company, through the Operating Partnership,
expects to receive 95.0% of the after-tax economic benefits of the Services
Company. See "Structure and Formation of the Company--Formation
Transactions."
20
<PAGE>
Formation Transactions. The Company, the Operating Partnership, the Services
Company and the Property Partnerships will engage in the following series of
transactions with Prime and certain other parties:
. The Company will contribute the $269.9 million of the estimated net
proceeds from the Offering (after the deduction of underwriting discounts
and commissions but before payment of costs and expenses incurred in
connection with the Formation Transactions and the Offering) to the
Operating Partnership in exchange for 12,380,000 GP Common Units and
2,000,000 Preferred Units. The Company will be the managing general
partner of the Operating Partnership. See "Partnership Agreement--
Distributions", "Description of Shares of Beneficial Interest--
Convertible Preferred Shares" and "--Common Shares."
. Prime will contribute to the Operating Partnership (i) its ownership
interests in the Property Partnerships that own the Prime Properties and
the Prime Contribution Properties, (ii) its rights to purchase the
subordinate mortgage encumbering the Property Partnership that owns the
77 West Wacker Drive Building from certain third-party lenders and its
rights to acquire certain third parties' ownership interests in the
Property Partnerships that own the Prime Properties and (iii)
substantially all of its assets and liabilities relating to its office
and industrial development, leasing and management business. The
foregoing assets had an aggregate deficit book value of approximately
$140.3 million (as determined at June 30, 1997 in accordance with GAAP).
In exchange, Prime will receive 3,465,000 Common Units, representing a
15.5% limited partnership interest in the Operating Partnership (with an
aggregate value of $69.3 million, assuming each Common Unit is equal to
the initial offering price of a Common Share). As described below, Prime
will contribute 3,375,000 of such Common Units to the Primestone Joint
Venture, resulting in the direct ownership by Prime of a 0.5% limited
partnership interest in the Operating Partnership. The Operating
Partnership will pay approximately $1.9 million in transfer taxes related
to Prime's contributions of the assets described above and will pay on
behalf of Prime, or reimburse Prime for, approximately $5.2 million of
expenses incurred by it in connection with the Formation Transactions and
Offering. In addition, Jeffrey A. Patterson, an executive officer of the
Company, is contributing his interest in the assets of the office and
industrial division of Prime. In exchange, Mr. Patterson will receive
110,000 Common Units, representing a 0.5% limited partnership interest in
the Operating Partnership.
. Certain affiliates of the NAC General Partner (collectively, the "NAC
Contributors") will contribute the NAC Properties to the Operating
Partnership. In exchange, the NAC Contributors will receive 927,100 GP
Common Units, representing a 4.1% general partnership interest in the
Operating Partnership (with an aggregate value of $18.5 million, assuming
the value of each Common Unit is equal to the initial public offering
price of a Common Share). In addition, the Operating Partnership will pay
the NAC Contributors approximately $23.5 million in cash and will pay
approximately $0.4 million in transfer taxes related to the transfer of
the NAC Properties.
. The IBD Contributors will contribute to the Operating Partnership their
ownership interests in the IBD Properties in exchange for 919,450 Common
Units, representing a 4.1% limited partnership interest in the Operating
Partnership and having an aggregate value of $18.4 million (assuming the
value of each Common Unit is equal to the initial public offering price
of a Common Share). In addition, the Operating Partnership will pay the
IBD Contributors approximately $5.2 million in cash, will assume
approximately $6.4 million in debt and will pay approximately $0.2
million in transfer taxes related to the transfer of the IBD Properties.
. Prime, BRE/Primestone Investment L.L.C., a Delaware limited liability
company, and BRE/Primestone Management Investment L.L.C., a Delaware
limited liability company (each of which is an affiliate of Blackstone),
will form the Primestone Joint Venture to invest in LP Common Units. To
capitalize the Primestone Joint Venture, Prime will contribute to the
Primestone Joint Venture 3,375,000 of the Common Units it receives in
exchange for its contributions to the Operating Partnership. Blackstone
will contribute $45.0 million in cash to the Primestone Joint Venture. In
exchange for such capital contributions, Prime will receive a 60.0%
interest and Blackstone will receive a 40.0% interest in the Primestone
Joint Venture. The Primestone Joint Venture will also borrow $40.0
million and will use the proceeds of such loan and the cash contributed
by Blackstone to purchase 4,569,893 LP Common Units from the Operating
Partnership at a price per Common Unit equal to the per share initial
public offering price of the Common Shares, net of an amount equal to the
underwriting discount applicable to the Common Shares, simultaneously
with the other Formation Transactions. As a result, the Primestone Joint
21
<PAGE>
Venture will own, in the aggregate, 7,944,893 Common Units, representing a
35.5% limited partnership interest in the Operating Partnership. In
connection with the purchase of the LP Common Units, Blackstone has
designated Thomas J. Saylak to be elected as one of the Company's
trustees. The consummation of the Primestone Joint Venture is subject to
various conditions precedent. There can be no assurance that such
conditions precedent will be met. See "Certain Relationships and Related
Transactions--The Primestone Joint Venture."
. The Operating Partnership expects to borrow $83.5 million under two
separate mortgage loans secured by certain of the Contribution Properties
(the "New Mortgage Notes"). The Company currently has no commitment for
such financing, and there can be no assurance that such financing will be
available to the Company on favorable terms, if at all.
. The Operating Partnership will repay third-party lenders approximately
$350.8 million (including prepayment fees) of obligations of the Property
Partnerships or indebtedness encumbering the Properties.
. The Operating Partnership will utilize the Credit Facility to replace the
outstanding letters of credit which secure the payment of principal and
interest on the $74.5 million of Tax-Exempt Bonds. Upon the replacement
of the outstanding letters of credit, Prime will receive the return of
approximately $15.0 million of cash and $7.2 million of certain
securities previously pledged by Prime as additional collateral to secure
certain of its guarantee obligations in connection with the existing
letters of credit.
. The Operating Partnership will pay approximately $41.4 million to acquire
the Acquisition Properties and approximately $5.9 million to acquire the
assets and business of Continental Offices, Ltd. and Continental Offices,
Ltd. Realty (collectively, the "Continental Management Business") from
third parties. The purchase price for the Acquisition Properties and the
Continental Management Business was in each case negotiated in arm's-
length transactions with third parties based on a multiple of the net
operating income of each of the Acquisition Properties and the
Continental Management Business, respectively.
. The Operating Partnership will pay approximately $1.7 million in cash to
third parties for the balance of the ownership interests and subordinate
debt interests relating to certain of the Prime Properties.
. The Operating Partnership will pay approximately $1.7 million in fees to
obtain the Credit Facility and the New Mortgage Notes.
. The Operating Partnership will contribute the Continental Management
Business, the health club facility located in the 77 West Wacker Drive
Building and the office and industrial development, leasing and
property management business to the Services Company in exchange for (i)
100% of the non-voting participating preferred stock of the Services
Company (the "Preferred Stock") and (ii) the Note. Messrs. Reschke and
Curto will contribute an aggregate of $50,000 for 100% of the Services
Company's voting common stock. The Operating Partnership is expected to
receive approximately 95.0% of the economic benefits of the operations of
the Services Company by virtue of payments on the Note and distributions
in respect of its ownership of the Preferred Stock.
See "Structure and Formation of the Company."
Determination and Valuation of Ownership Interests. The Company's percentage
interest in the Operating Partnership was determined based upon the percentage
of estimated cash available for distribution required to pay estimated cash
distributions to shareholders, resulting in an annual distribution rate equal
to 6.75% of the assumed initial public offering price of the Common Shares of
$20.00, representing the midpoint of the price range. The Contributors will
receive cash of $28.7 million and 1,846,550 Common Units based on the
negotiated value of the Contribution Properties, and the remaining interest in
the Operating Partnership having a value of approximately $71.5 million (before
giving effect to the Primestone Joint Venture transactions) will be allocated
to Prime and Mr. Patterson in connection with the Formation Transactions. The
parameters and assumptions used in deriving the estimated cash available for
distribution are described under the caption "Distribution Policy."
In connection with the Offering, the Company did not obtain appraisals with
respect to the market value of any of the Properties or other assets that the
Company will own immediately after completion of the Offering
22
<PAGE>
and the Formation Transactions. The initial offering price will be determined
by the Company and Security Capital Preferred Growth.
Formation of the Services Company. The Services Company was formed in March
1997 under the laws of the state of Maryland to succeed to the office and
industrial property management, leasing and corporate advisory services
business of Prime. Following the consummation of the Formation Transactions,
Messrs. Reschke and Curto together will own 100.0% of the voting common stock
of the Services Company, and the Operating Partnership will own 100.0% of the
Preferred Stock of the Services Company and the Note. The ownership structure
of the Services Company is necessary to permit the Company to share in the
Services Company's income and also maintain its status as a REIT for federal
income tax purposes. Although the Company anticipates that it will receive
substantially all of the economic benefit of the business carried on by the
Services Company (by virtue of the Company's right to receive (i) dividends
through the Operating Partnership's investment in the Preferred Stock and (ii)
interest payments on the Note held by the Operating Partnership), the Company
will not be able to elect the Services Company's officers or directors and,
consequently, will not have the ability to control the operations of the
Services Company or require the declaration of dividends. The Operating
Partnership and the Services Company will enter various management contracts
(the "Management Contracts") and other agreements in connection with the
Formation Transactions pursuant to which the Services Company will render
property management, development and leasing services for third parties. See
"Risk Factors--Managed Property Business and Non-REIT Services--Lack of Control
Over the Services Company," "The Company--Formation of the Services Company"
and "Certain Relationships and Related Transactions."
RESTRICTIONS ON OWNERSHIP AND TRANSFER
Subject to certain conditions, beginning 12 months following completion of
the Offering, each Common Unit held by a Limited Partner may be exchanged for
one Common Share or, at the option of the Company, cash equal to the fair
market value of a Common Share at the time of exchange. The exchange of Common
Units for Common Shares will not cause any dilution of the then existing
shareholders' indirect interest in the Operating Partnership, because any
decrease in such shareholders' interest in the Company will be offset by a
corresponding increase in the Company's interest in the Operating Partnership.
See "Partnership Agreement--Limited Partner Exchange Rights."
The Limited Partners have agreed not to sell, offer, offer to sell, contract
to sell, pledge, grant any option to purchase or otherwise sell or dispose of
their Common Units for a certain period of time after completion of the
Offering without the consent of Prudential Securities Incorporated, on behalf
of the Underwriters; such periods are (i) two years in the case of Prime, (ii)
two years in the case of the Primestone Joint Venture with respect to Common
Units contributed by Prime to the Primestone Joint Venture (the "Contributed
Common Units") (except, in the event of a Dividend Reduction, one year), (iii)
one year in the case of the Primestone Joint Venture with respect to Common
Units purchased by the Primestone Joint Venture (the "Purchased Common Units")
and (iv) one year in the case of the IBD Contributors and Mr. Patterson (the
foregoing periods being hereinafter referred to collectively as the "Holding
Periods"). In addition, neither the Company nor the NAC General Partner (other
than in accordance with the Put Option Agreement) may withdraw from the
Operating Partnership or transfer its general partner interest, nor may another
general partner be admitted to the Operating Partnership, without the consent
of the other general partner. See "Partnership Agreement--Transferability of
Interests," "Shares Eligible for Future Sale," and "Certain Relationships and
Related Transactions--NAC Contribution Agreement; Put Option Agreement."
Ownership of the Common Shares by any one person is generally restricted in
the Declaration of Trust to 9.9% of the outstanding Common Shares. Exchange of
interests in the Operating Partnership for Common Shares is restricted to the
extent that ownership of the Common Shares upon exchange would exceed the
ownership limitation with respect to the Common Shares. The Board of Trustees
may, but in no event will be required to, waive such ownership limitation with
respect to a particular shareholder if it determines that such ownership will
not jeopardize the Company's status as a REIT and the Board of Trustees
otherwise decides such action would be in the best interest of the Company. In
addition, the Company has waived the ownership limitations
23
<PAGE>
set forth in the Company's Declaration of Trust with respect to the Common
Shares to permit Security Capital Preferred Growth to own, at any one time, the
Common Shares issuable upon conversion of the Convertible Preferred Shares
issued in the Convertible Preferred Offering. See "Description of Shares of
Beneficial Interest--Restrictions on Ownership and Transfer" and "Partnership
Agreement--Limited Partner Exchange Rights."
DISTRIBUTION POLICY
The Company presently intends to make regular quarterly distributions to
holders of Common Shares and Common Units. Distributions in respect of the
Common Shares and Common Units are not permitted unless all current and any
accumulated distributions in respect of the Convertible Preferred Shares and
Preferred Units, respectively, have been paid in full. The Company intends to
declare and pay a pro rata distribution with respect to the period commencing
on the completion of the Offering and ending on December 31, 1997, based upon
$0.3375 per share for a full quarter. On an annualized basis, this would be
$1.35 per Common Share, or an annual distribution rate of 6.75% based on an
assumed initial public offering price per share of $20.00 (representing the
midpoint of the price range set forth on the cover page of this Prospectus).
The Company does not intend to reduce the expected distribution per share if
the Underwriters' over-allotment option with respect to the Common Shares is
exercised in whole or in part. The Company expects its distributions to
represent approximately 95.5% of the Company's cash available for distribution
for the 12 months ending June 30, 1998. Common Units and Common Shares will
receive equal distributions. The Board of Trustees may vary the percentage of
cash available for distribution which is distributed if the actual results of
operations, economic conditions or other factors differ from the assumptions
used in the Company's estimates.
24
<PAGE>
THE CONVERTIBLE PREFERRED OFFERING
2,000,000 shares
Convertible Preferred Shares Offered
Hereby.......................... [/R]
Convertible Preferred Shares to be
Outstanding after the Offering....... 2,000,000 shares [/R]
[/R]
Use of Proceeds from the Offering..... The Company will use the net proceeds
of the Offering (which are estimated to
be approximately $39.6 million for the
Convertible Preferred Offering and
approximately $230.3 million for the
Common Share Offering), to acquire
2,000,000 Preferred Units and
12,380,000 GP Common Units. The
Operating Partnership will use such
funds to (i) repay, assume or purchase
certain mortgage and other indebtedness
related to the Properties and held by
third-party lenders, (ii) acquire the
ownership interests in the Prime
Properties not held by Prime, (iii)
acquire the Contribution Properties,
(iv) acquire the Acquisition Properties
and the Continental Management Business
and (v) pay expenses of the Formation
Transactions and the Offering. See "Use
of Proceeds" and "Capitalization." [/R]
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Section 856(c) of the
Internal Revenue Code of 1986, as amended (the "Code"), commencing with its
taxable year ending December 31, 1997. REITs are subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95.0% of its REIT taxable income each year,
determined without regard to the deduction for dividends paid and by excluding
any net capital gains. If the Company qualifies for taxation as a REIT, the
Company generally will not be subject to federal income tax at the corporate
level on income it distributes currently to its shareholders. If the Company
fails to qualify as a REIT for federal income tax purposes in any taxable year,
the Company will be subject to federal income tax (including any alternative
minimum tax) on its taxable income at regular corporate rates. See "Risk
Factors--Adverse Consequences of Failure to Qualify as a REIT; Other Tax
Liabilities" and "Certain Federal Income Tax Considerations--Failure to
Qualify" for a more detailed discussion of the consequences of the failure of
the Company to qualify as a REIT for federal income tax purposes. The Company
may be subject to certain state and local taxes on its income and property
notwithstanding its qualification for taxation as a REIT.
25
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents certain financial and operating data on a pro
forma basis for the Company, and on an historical basis for the Prime
Properties being contributed to the Company (the "Combined Financial
Statements"), whose financial results will be consolidated in the pro forma
financial statements of the Company. The financial and operating data should be
read in conjunction with the historical and pro forma financial statements and
notes thereto included in this Prospectus. The combined historical financial
data as of June 30, 1997 and December 31, 1996 and 1995 and for the six months
ended June 30, 1997 and for the years ended December 31, 1996, 1995 and 1994
have been derived from the audited combined financial statements of the Prime
Properties included elsewhere in this Prospectus. The combined historical
financial data as of December 31, 1994, 1993 and 1992 and for the years ended
December 31, 1993 and 1992 have been derived from the combined financial
statements of the Prime Properties not included in this Prospectus. The
combined historical financial data for the six months ended June 30, 1996 has
been derived from the unaudited combined financial statements of the Prime
Properties included elsewhere in this Prospectus. The pro forma data assume the
consummation of the Formation Transactions, including the contribution of the
Prime Properties and the Prime Contribution Properties by Prime, the
contribution of the Contribution Properties by the Contributors, the
acquisition of the Acquisition Properties and the Continental Management
Business and the completion of the Offering, and use of the aggregate net
proceeds therefrom as described under "Use of Proceeds" as of the beginning of
the periods presented for the operating data and as of the balance sheet date
for the balance sheet data. The pro forma financial data are not necessarily
indicative of what the actual financial position or results of operations of
the Company would have been as of and for the periods indicated, nor does it
purport to represent the future financial position and results of operations.
26
<PAGE>
SUMMARY FINANCIAL DATA
THE COMPANY (PRO FORMA) AND PRIME PROPERTIES (COMBINED HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ---------------------------------------------------------
COMBINED
HISTORICAL COMBINED HISTORICAL
PRO FORMA ------------------ PRO FORMA -----------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
--------- -------- -------- --------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUE:
Rental............... $28,026 $ 16,131 $ 14,449 $53,001 $ 30,538 $ 33,251 $ 30,352 $ 28,177 $17,339
Tenant reimburse-
ments............... 10,458 7,769 6,962 19,216 14,225 14,382 12,451 10,750 5,221
Insurance settle-
ment................ -- -- -- -- -- 7,257 -- -- --
Other................ 368 689 1,439 2,778 3,397 2,715 3,170 1,527 1,435
------- -------- -------- ------- -------- -------- -------- -------- -------
Total revenue...... 38,852 24,589 22,850 74,995 48,160 57,605 45,973 40,454 23,995
------- -------- -------- ------- -------- -------- -------- -------- -------
EXPENSES:
Property operations.. 5,716 4,318 4,304 12,532 9,767 9,479 8,852 8,452 6,518
Real estate taxes.... 7,799 5,590 5,154 13,440 9,383 9,445 9,057 7,167 4,331
Depreciation and
amortization........ 8,815 6,492 6,146 17,051 12,409 12,646 11,624 11,739 7,558
Interest............. 4,709 13,587 13,512 9,291 27,080 27,671 25,985 22,827 10,936
Interest--affiliate.. -- 5,649 4,852 -- 10,137 8,563 7,402 6,335 6,699
Property management
fee--affiliate...... -- 801 766 -- 1,561 1,496 1,388 1,106 1,384
Financing fees....... 640 640 692 1,232 1,232 -- -- -- --
General and adminis-
trative............. 2,967 1,886 1,575 7,161 4,927 4,508 3,727 3,657 1,277
Provision for envi-
ronmental
remediation costs... 3,205 3,205 -- -- -- -- -- -- --
Write-off of deferred
tenant costs........ -- -- -- 3,081 3,081 13,373 -- -- --
------- -------- -------- ------- -------- -------- -------- -------- -------
Total expenses..... 33,851 42,168 37,001 63,788 79,577 87,181 68,035 61,283 38,703
------- -------- -------- ------- -------- -------- -------- -------- -------
Income (loss) before
share of income of
investment
subsidiary,
Convertible
Preferred Share
dividend and
minority interest... 5,001 (17,579) (14,151) 11,207 (31,417) (29,576) (22,062) (20,829) (14,708)
Share of income of
investment
subsidiary.......... 182 -- -- 387 -- -- -- -- --
------- -------- -------- ------- -------- -------- -------- -------- -------
Income (loss) before
Convertible
Preferred Share
dividend and
minority interest... 5,183 (17,579) (14,151) 11,594 (31,417) (29,576) (22,062) (20,829) (14,708)
Convertible Preferred
Share dividend...... (1,400) -- -- (2,800) -- -- -- -- --
------- -------- -------- ------- -------- -------- -------- -------- -------
Income (loss) before
minority interest... 3,783 (17,579) (14,151) 8,794 (31,417) (29,576) (22,062) (20,829) (14,708)
Minority interest.... (1,690) 368 371 (3,928) 894 3,281 5,393 10,531 8,941
------- -------- -------- ------- -------- -------- -------- -------- -------
Net income (loss).... $ 2,093 $(17,211) $(13,780) $ 4,866 $(30,523) $(26,295) $(16,669) $(10,298) $(5,767)
======= ======== ======== ======= ======== ======== ======== ======== =======
Pro forma net income
per
Common Share(1)(2).. $ 0.17 $ 0.39
======= =======
RATIO OF EARNINGS TO
COMBINED FIXED
CHARGES AND CONVERT-
IBLE PREFERRED SHARE
DIVIDENDS:
Ratio of earnings
before
minority interest to
combined fixed
charges and
Convertible
Preferred Share
dividend(3)......... 1.60 0.10 0.24 1.70 0.17 0.21 0.35 0.31 0.16
Excess of combined
fixed charges and
Convertible
Preferred Share
dividend over
earnings before
minority interest... -- $ 17,579 $ 14,151 -- $ 31,417 $ 29,576 $ 22,062 $ 20,829 $19,552
Ratio of Funds from
Operations to
combined fixed
charges and
Convertible
Preferred Share
dividend(4)......... 3.24 0.58 0.52 3.01 0.54 0.66 0.62 0.69 0.49
Excess of combined
fixed charges and
Convertible
Preferred Share
dividend over Funds
from Operations..... -- $ 8,180 $ 8,891 -- $ 17,367 $ 12,733 $ 12,930 $ 9,345 $11,994
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31,
-------------------- ------------------------------------------------
COMBINED HISTORICAL
COMBINED ------------------------------------------------
PRO FORMA HISTORICAL 1996 1995 1994 1993 1992
--------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate assets,
before accumulated
depreciation.......... $514,944 $295,369 $291,757 $289,558 $285,687 $281,316 $259,469
Total assets........... 550,076 318,278 325,230 343,641 356,421 357,158 327,776
Mortgages notes and
bonds payable......... 164,375 430,285 421,983 405,562 388,309 361,832 294,691
Total liabilities...... 192,048 458,557 447,927 434,993 421,257 397,539 343,098
Minority interest...... 159,901 (7,273) (6,905) (6,047) 886 (11,527) (10,297)
Shareholders' equity
(partners' deficit)... 198,127 (133,006) (115,792) (85,305) (65,722) (28,854) (5,025)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------ -----------------------------------------
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA -------------------- PRO FORMA -------------------------------
1997 1997 1996 1996 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Opera-
tions(5).............. $ 15,647 $ (8,180) $ (8,891) $ 28,086 $ (17,367) $ (12,733) $ (12,930)
Cash flows provided by
(used in):
Operating activi-
ties............... -- (2,727) (3,162) -- (3,165) (1,259) (13,875)
Investing activi-
ties............... -- (809) 1,567 -- 1,126 (9,176) (6,495)
Financing activi-
ties............... -- 2,421 3,763 -- 5,733 10,873 15,422
Office Properties:
Square footage...... 2,353,759 1,414,897 1,414,897 2,353,759 1,414,897 1,414,897 1,414,897
Occupancy (%) (6)... 88.0 86.8 88.8 91.6 92.5 95.8 93.7
Industrial Properties:
Square footage...... 5,696,355 2,462,430 2,478,030 5,651,780 2,462,430 2,551,624 2,547,388
Occupancy (%)....... 87.9 73.5 73.3 87.3 73.5 72.9 62.3
</TABLE>
- --------
(1) Pro forma net income per share equals pro forma net income divided by the
12,380 Common Shares outstanding after the Offering.
(2) The pro forma net income (loss) per Common Share based solely on the number
of shares issued in the Offering, the proceeds of which will be used to
retire debt, would be $(0.42) and $(0.49) per share for the six months
ended June 30, 1997 and the year ended December 31, 1996, respectively,
calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------- --------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma Common Shares
in the Offering issued
to retire debt......... 12,151 12,151
=================== ===================
Historical net loss..... $ (17,211) $ (30,523)
Plus pro forma reduction
in interest expense due
to repayment of indebt-
edness................. 12,160 24,550
------------------- -------------------
Pro forma net loss...... $ (5,051) $ (5,973)
=================== ===================
Pro forma net loss per
Common Shares in the
offering issued to re-
tire debt.............. $ (0.42) $ (0.49)
=================== ===================
</TABLE>
(3) For purposes of these computations, earnings before minority interests
consist of income (loss) less income from unconsolidated investment
partnerships, plus fixed charges. Combined fixed charges and Convertible
Preferred Share dividend consist of interest costs, whether expensed or
capitalized, and amortization of debt issuance costs and Convertible
Preferred Share dividend.
(4) For purposes of these computations, Funds from Operations consist of Funds
from Operations (as defined in note 5 below) plus combined fixed charges
and Convertible Preferred Share dividend (as defined in note 3 above).
(5) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), Funds from Operations represents net income (loss) before
minority interest of holders of Common Units (computed in accordance with
GAAP), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization (excluding
amortization of deferred financing costs) and after adjustments for
unconsolidated partnerships and joint ventures. Non-cash adjustments to
Funds from Operations were as follows: in all periods, depreciation and
amortization, for pro forma 1997, provision for environmental remediation
cost, for the years ended December 31, 1996, 1995, 1994 and pro forma 1996,
gains on the sale of real estate, for the years ended December 31, 1996 and
1995 and pro forma 1996, write-off of deferred tenant costs, for the year
ended December 31, 1995, excess proceeds from insurance claims, and for the
year ended December 31, 1994, lease termination fees. Management considers
Funds from Operations an appropriate measure of performance of an office
and/or industrial REIT because industry analysts have accepted it as such.
The Company computes Funds from Operations in accordance with standards
established by the Board of Governors of NAREIT in its March 1995 White
Paper (with the exception that the Company expects to report rental
revenues on a cash basis, rather than a straight-line GAAP basis, which the
Company believes will result in a more accurate presentation of its actual
operating activities), which may differ from the methodology for
calculating Funds from Operations used by certain other office and/or
industrial REITs and, accordingly, may not be comparable to such other
REITs. Further, Funds from Operations does not represent amounts available
for management's discretionary use because of needed capital replacement or
expansion, debt repayment obligations, or other commitments and
uncertainties. (See "Distribution Policy"). Funds from Operations should
not be considered as an alternative for net income as a measure of
profitability nor is it comparable to cash flows provided by operating
activities determined in accordance with GAAP.
(6) The pro forma office occupancy percentage for the six months ended June 30,
1997 was calculated by treating the Keck Space as vacant because, pursuant
to a settlement agreement, Keck has agreed to vacate the space on or before
November 30, 1997. See "Business and Properties--Legal Proceedings."
28
<PAGE>
RISK FACTORS
In addition to the other information presented in this Prospectus,
prospective investors should carefully consider the following matters before
purchasing Shares in the Offering.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements regarding
events, conditions and financial trends that may affect the Company's future
plans of operations, business strategy, results of operations and financial
position. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and are subject to risks
and uncertainties and that actual results may differ materially from those
included within the forward-looking statements as a result of various factors.
Factors that could cause or contribute to such differences include, but are
not limited to, those described below, under the headings "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business and Properties--The Company's Markets" and elsewhere in this
Prospectus.
LACK OF INDEPENDENT APPRAISALS IN THE FORMATION TRANSACTIONS; MARKET
CAPITALIZATION OF THE COMPANY MAY EXCEED FAIR MARKET VALUE OF THE COMPANY'S
ASSETS; VALUE OF SERVICES COMPANY NOT DETERMINED THROUGH ARM'S-LENGTH
NEGOTIATION. The valuation of the Company's assets has not been determined
through arm's-length negotiations or from independent third-party appraisals
of the Properties and the Company's other assets; therefore, the consideration
being paid by the Company for the Properties and other assets may exceed the
current fair market value of such assets. Furthermore, management believes it
is appropriate to value the Company as an ongoing business enterprise rather
than with a view to values that could be obtained from a liquidation of the
Company or of individual properties owned by the Company. Accordingly, the
valuation of the Company has been determined based on a capitalization of the
Company's estimated cash available for distribution and the other factors set
forth in the section captioned "Structure and Formation of the Company--
Determination and Valuation of Ownership Interests." Because the liquidation
value of the Company may be less than the value of the Company as a going
concern, holders of Shares may suffer a loss in the value of their Shares if
the Company is required to sell its assets in a liquidation. The Company's
estimate of cash available for distribution is based on certain assumptions,
including assumptions with respect to future leasing, acquisitions, and
anticipated operating expense levels, which may not prove accurate and actual
results may vary substantially from the estimate. See "Distribution Policy."
Accordingly, there can be no assurance that the value of the Common Units
(assuming that the value of the Common Units is equal to the initial public
offering price of the Common Shares) received by Prime and others in exchange
for their interests in certain of the Properties is equivalent to the actual
value of those assets to the Company or that the initial public offering price
of the Common Shares or the initial offering price of the Convertible
Preferred Shares reflects the fair market value of the Shares purchased in the
Offering.
The valuation of the Company's office and industrial property management,
leasing and corporate advisory services business has not been determined
through arm's-length negotiations or from independent third-party appraisals.
The value has been derived, in part, from a capitalization of the estimated
net profit derived from the Company's agreements with third parties for
development, leasing and management services. Prime will receive Common Units
worth approximately $69.3 million and cash of approximately $5.2 million for
reimbursement of certain expenses incurred by Prime in connection with the
Formation Transactions and the Offering, in exchange for the contribution by
Prime of the Prime Properties and the Prime Contribution Properties which had
a deficit book value of approximately $140.3 million at June 30, 1997. There
can be no assurance that the value of the Common Units received by Prime in
exchange for its interests in such businesses is equivalent to the actual
value of such assets to the Company. Upon completion of the Offering, these
development, leasing and management services will be provided through the
Services Company, a separate corporation that is subject to federal and state
income tax at the corporate level. See "--Conflicts of Interest; Benefits to
Prime" and "Structure and Formation of the Company--Formation of the Services
Company."
29
<PAGE>
GEOGRAPHIC CONCENTRATION OF THE PROPERTIES IN THE CHICAGO METROPOLITAN AREA,
NASHVILLE, KNOXVILLE AND COLUMBUS; LOCAL ECONOMIC CONDITIONS. The Company's
revenues and the value of its Properties may be affected by a number of
factors, including the local economic climate (which may be adversely impacted
by business layoffs or downsizing, industry slowdowns, changing demographics
and other factors) and local real estate conditions (such as oversupply of or
reduced demand for office and industrial properties). Further, 12 of the
Office Properties and 38 of the Industrial Properties, comprising an aggregate
of approximately 1.9 million and 5.0 million rentable square feet,
respectively (representing approximately 80.0% of the aggregate net rentable
square feet of the Company's office space and 87.1% of the aggregate net
rentable square feet of the Company's industrial space, and approximately
88.7% of the Annualized Net Rent of all of the Properties), are located in the
Chicago Metropolitan Area. Further, the 77 West Wacker Drive Building, which
represents 37.4% of the Annualized Net Rent of the Properties, is located in
the Chicago CBD. A material decline in the demand and/or the ability of
tenants to pay rent for office and industrial space in the Chicago
Metropolitan Area may result in a material decline in the demand for the
Company's office or industrial space and the Company's cash available for
distribution, which may have a material adverse effect greater than if the
Company had a more geographically diverse portfolio of properties. The local
economic conditions of the Nashville, Tennessee, Knoxville, Tennessee and
Columbus, Ohio metropolitan areas also will affect the Company due to the
location of certain of its Properties in such areas.
CONFLICTS OF INTEREST; BENEFITS TO PRIME
No Arm's-Length Negotiations in Formation Transactions with Prime; Prime
Will Receive Material Benefits from the Formation Transactions. The Company is
acquiring a substantial portion of the Properties from partnerships that are
controlled by Prime or in which Prime has ownership interests. As a result,
the agreements pursuant to which such Properties will be acquired were not
negotiated on an arm's-length basis, and the representations, warranties and
covenants in these agreements may not provide the same level of protection as
those contained in a purchase contract negotiated on an arm's-length basis. In
addition, Prime will receive material benefits from the Formation
Transactions, such as the return of approximately $22.2 million of collateral
(consisting of cash and marketable securities) currently securing certain
indebtedness of the Properties, release of guarantees and indemnification
obligations relating to certain indebtedness of the Properties and the
deferral of certain tax consequences through the contribution of the
Properties to the Operating Partnership, that will not generally be received
by other participants in the Formation Transactions. See "Structure and
Formation of the Company--Benefits of the Formation Transactions and the
Offering."
Ability of Limited Partners, Officers and Trustees to Influence Operating
Partnership. Upon completion of the Offering, Prime will directly own a 0.5%
interest in the Operating Partnership, and the Primestone Joint Venture (in
which Prime owns a 60.0% interest) will own a 35.5% interest in the Operating
Partnership. Because of Prime's ownership interest in the Operating
Partnership and the fact that Messrs. Reschke, Curto and Rudnik are executive
officers and/or trustees of the Company and also are owners of Prime, Prime
may be in a position to exercise significant influence over the affairs of the
Company. In addition, Mr. Patterson, an executive officer of the Company, will
own a 0.5% interest in the Operating Partnership. Certain conflicts exist
between the obligations of Mr. Reschke as a trustee of the Company and his
interest as a Limited Partner through his ownership of Prime. Blackstone, as
the 40.0% owner of the Primestone Joint Venture, has designated Mr. Saylak to
be elected a trustee of the Company. In addition, the Contributors will own,
in the aggregate, an 8.2% interest in the Operating Partnership. Edward S.
Hadesman, an affiliate of the IBD Contributors, will be an officer of the
Company and Stephen J. Nardi, an affiliate of the NAC General Partner, will be
a trustee of the Company. As Limited Partners, Prime, the Primestone Joint
Venture, the IBD Contributors and Mr. Patterson and, as a General Partner, the
NAC General Partner, may suffer different and more adverse tax consequences
than the Company upon the sale or refinancing of certain of the Properties. In
addition, Prime has agreed to indemnify the Company for certain amounts the
Company may be required to pay for tax liabilities incurred by the
Contributors upon the sale of Properties they contributed to the Company in
connection with the Formation Transactions. Therefore, the Limited Partners
and the NAC General Partner may have different objectives than the Company
regarding the appropriate pricing and timing of any sale or refinancing of
such Properties. While the Company, as the
30
<PAGE>
managing general partner of the Operating Partnership, has the ability to
determine whether and on what terms to sell or refinance an individual
Property, those members of the Company's management and Board of Trustees who
directly or indirectly hold Common Units, including Messrs. Reschke, Curto,
Rudnik, Patterson, Hadesman and Nardi, could have an ability to influence the
Company not to sell or refinance certain Properties, even though such sale
might otherwise be financially advantageous to the Company, or may influence
the Company to refinance a Property with a high level of debt. See "Policies
With Respect to Certain Activities--Conflicts of Interest Policies."
Mr. Reschke Will Continue to Engage in Activities Outside of the Company,
Including Real Estate Activities. Under the terms of his employment agreement
as Chairman of the Board of the Company, Mr. Reschke will be permitted to
devote a considerable portion of his time to the management of interests
outside of the Company. In addition to serving as Chairman of the Board of the
Company, Mr. Reschke expects to continue to serve as Chairman of the Board of
Prime Retail, Inc. (NYSE: PRT), Chairman of the Board of Brookdale Living
Communities, Inc. (Nasdaq: BLCI), Chairman of the Board and CEO of The Prime
Group, Inc. and a member of the board of Ambassador Apartments, Inc. (NYSE:
AAH) and to serve on various other boards and civic organizations. See
"Management" and "Principal Shareholders of the Company." As a result of these
interests and the business time to be devoted to activities related to them,
certain conflicts of interest may arise between Mr. Reschke's duties and
responsibilities to the Company and his other interests. The Company could be
adversely affected if these conflicts of interest adversely affect his
performance of managerial duties and responsibilities to the Company. Prime
and Mr. Reschke have entered a Non-Compete Agreement with the Company (the
"Non-Compete Agreement") that contains restrictions on their ability to
compete with the Company. However, there can be no assurance that these
contracts or the Company's policies with respect to conflicts of interest
always will be successful in eliminating the influence of such conflicts and,
if they are not successful, decisions could be made that might fail to reflect
fully the interests of all shareholders. See "Policies with Respect to Certain
Activities--Conflicts of Interest Policies" and "Certain Relationships and
Related Transactions."
Certain Partner Approval Rights Limit the Company's Ability to Take Certain
Actions with Respect to the Operating Partnership. While the Company will be
the managing general partner of the Operating Partnership, and generally will
have the ability to exercise full and exclusive responsibility and discretion
in the management and control of the Operating Partnership, certain provisions
of the Partnership Agreement place limitations on the Company's ability to act
with respect to the Operating Partnership. For example, the Company cannot
withdraw as a general partner of the Operating Partnership or admit another
general partner to the Operating Partnership without the consent of the NAC
General Partner, in its capacity as general partner of the Operating
Partnership. In addition, the Partnership Agreement provides that the Company
shall not, on behalf of the Operating Partnership, take any action without the
prior consent of the holders of more than 50.0% of the LP Common Units to
dissolve the Operating Partnership. Furthermore, the Partnership Agreement
provides that, except in connection with certain transactions, and in addition
to the required consent of the NAC General Partner, the Company may not
voluntarily withdraw from the Operating Partnership, or transfer or assign its
interest in the Operating Partnership, unless it obtains the consent of the
holders of at least 50.0% of the Common Units (including Common Units held by
the Company) and meets certain other criteria with respect to the
consideration to be received by the Limited Partners. Further, in connection
with certain extraordinary transactions where the Limited Partners are treated
differently than the holders of Common Shares, the consent of the Limited
Partners holding more than 50.0% of the LP Common Units will be required. See
"Partnership Agreement--Transferability of Interests" and "--Extraordinary
Transactions."
REAL ESTATE FINANCING RISKS
Required Repayment of Debt or of Interest Thereon Could Adversely Affect the
Company. The Company will be subject to the risks associated with debt
financing, including the risk that the Company's cash flow will be
insufficient to meet required payments of principal and interest, the risk
that the Company will not be able to refinance existing indebtedness on the
Properties or that the terms of such refinancing will not be as favorable to
the Company as the terms of existing indebtedness and the risk that necessary
capital expenditures
31
<PAGE>
for purposes such as reletting space will not be able to be financed on
favorable terms. If a property is mortgaged to secure payment of indebtedness
and the Company is unable to meet mortgage payments, the property could be
transferred (by foreclosure or otherwise) to the mortgagee with a consequent
loss of any prospective income and equity value from such property to the
Company.
Company's Ability to Increase Its Debt Could Adversely Affect the Company's
Cash Flow. Immediately following the completion of the Offering and the
Formation Transactions, the Company will have outstanding debt equal to
approximately 25.2% of the total market capitalization of the Company. See
"Management's Discussion and Analysis of Financial Condition and Result of
Operations--Liquidity and Capital Resources." Subject to certain limitations
in the Declaration of Trust with regard to the Convertible Preferred Shares,
the Company's organizational documents do not limit the level or amount of
debt that it may incur. The Company intends to pursue a strategy of
conservative use of leverage, generally with a ratio of debt-to-total market
capitalization in the range of 25.0% to 40.0%, although this strategy is
subject to reevaluation and modification by the Board of Trustees. See
"Policies with Respect to Certain Activities--Financing Policies." If this
strategy were modified to permit a higher degree of leverage and the Company
were to incur additional indebtedness, debt service requirements would
increase accordingly, and such an increase could adversely affect the
Company's financial condition and results of operations. In addition,
increased leverage could increase the risk of default by the Company on its
debt obligations, with the potential for loss of cash available for
distribution, and asset values, of the Company.
In determining an appropriate level of leverage, the Company will utilize
its market capitalization rather than the aggregate book value of its assets.
The Company has chosen to use market capitalization because it believes that
the book value of its assets (which is primarily the historic cost of real
property less depreciation) does not accurately reflect its ability to borrow
and to meet debt service requirements. The market capitalization of the
Company, however, is more variable than book value, and does not necessarily
reflect the fair market value of the underlying assets of the Company at all
times. Although the Company will consider factors other than market
capitalization in making decisions regarding the incurrence of debt (such as
the purchase price of properties to be acquired with debt financing, the
estimated market value of the properties to be financed, and the ability of
particular properties and the Company as a whole to generate cash flow to
cover expected debt service and to make distributions), there can be no
assurance that management decisions based on the ratio of debt-to-total market
capitalization (or to any other measure of asset value) will not adversely
affect the expected level of distributions to shareholders.
Company's Ability to Obtain Permanent Financing Cannot Be Assured. The
Company anticipates that it will finance its acquisitions and development
activities in part with proceeds from the Credit Facility and that such
acquisition financing then will be replaced by permanent financing. There can
be no assurance that the Company will be able to obtain such permanent
financing on acceptable terms. Further, if market interest rates were to
increase at a time when amounts are outstanding under the Credit Facility or
under the Company's floating rate tax-exempt bond debt ($74.5 million
outstanding at June 30, 1997) or if other variable rate debt amounts were
outstanding, the Company's debt service obligations likewise would increase,
with potentially adverse effects on the Company's financial condition and
results of operations.
CERTAIN ANTI-TAKEOVER PROVISIONS MAY INHIBIT A CHANGE IN CONTROL OF THE
COMPANY
General. Certain provisions contained in the Declaration of Trust and Bylaws
and the Maryland General Corporation Law (the "MGCL"), as applicable to
Maryland REITs, and certain provisions of the Partnership Agreement may have
the effect of discouraging a third party from making an acquisition proposal
for the Company and may thereby delay, deter or prevent a change in control of
the Company or the removal of existing management and, as a result, could
prevent the shareholders of the Company from being paid a premium for their
Common Shares over then-prevailing market prices. See "Description of Shares
of Beneficial Interest--Restrictions on Ownership and Transfer" and "Certain
Provisions of Maryland Law and of the Company's Declaration of Trust and
Bylaws."
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In order to, among other things, protect the Company against the risk of
losing REIT status for federal income tax purposes due to a concentration of
ownership among its shareholders, the Ownership Limit set forth in the
Declaration of Trust provides that, subject to certain specified exceptions
(e.g., the Company has waived the Ownership Limit for Security Capital
Preferred Growth with respect to the Common Shares issuable upon the conversion
of the Convertible Preferred Shares), no person or entity (which does not
include certain pension plans and mutual funds) may own, or be deemed to own by
virtue of the applicable constructive ownership provisions of the Code, more
than 9.9% (by number or value, whichever is more restrictive) of the
outstanding Common Shares. The Board of Trustees may, but in no event will be
required to, waive the Ownership Limit or such other limit set forth in the
Declaration of Trust, as applicable, with respect to a particular shareholder
if the Board of Trustees determines that such ownership will not jeopardize the
Company's status as a REIT and the Board of Trustees otherwise decides such
action would be in the best interest of the Company. As a condition of such
waiver, the Board of Trustees may require a ruling from the IRS or an opinion
of counsel satisfactory to it with respect to preserving the REIT status of the
Company. The foregoing ownership limitations may have the effect of precluding
acquisition of control of the Company without the consent of the Board of
Trustees and, consequently, shareholders may be unable to realize a premium for
their shares over the then-prevailing market price (a premium is customarily
associated with such acquisitions).
Potential Effects of the Issuance of Additional Preferred Shares. The
Declaration of Trust permits the Board of Trustees to issue up to 30.0 million
shares of Preferred Shares, par value $.01 per share, of which 2.0 million are
designated as Convertible Preferred Shares to be sold in the Convertible
Preferred Offering, and to establish the preferences and rights (including the
right to vote, participate in earnings, and to convert into Common Shares) of
any such Preferred Shares issued. Thus, the Board of Trustees could authorize
the issuance of Preferred Shares with terms and conditions which could have the
effect of discouraging a takeover or other transaction in which holders of some
or a majority of the Common Shares might receive a premium for their Common
Shares over the then-prevailing market price of such Common Shares. See
"Description of Shares of Beneficial Interest--Preferred Shares."
Potential Effects of a Staggered Board. The Board of Trustees has three
classes of trustees. The terms of the first, second and third classes will
expire in 1999, 2000 and 2001, respectively. Trustees for each class will be
chosen for a three-year term upon the expiration of the current class' term,
beginning in 1999. Subject to the rights of the holders of the Convertible
Preferred Shares and holders of any future series of Preferred Shares to elect
and/or remove trustees in certain circumstances, the affirmative vote of two-
thirds of the outstanding Common Shares is required to remove a trustee. The
staggered terms of trustees may reduce the possibility of a tender offer or an
attempt to change control of the Company, even though a tender offer or a
change in control might be in the best interest of shareholders. See "Certain
Provisions of Maryland Law and of the Company's Declaration of Trust and
Bylaws--Classification of the Board of Trustees."
Certain Provisions of the Operating Partnership Agreement Could Inhibit
Acquisitions and Changes in Control. The Operating Partnership Agreement
provides that the Company may not generally engage in any merger, consolidation
or other combination with or into another person or sale of all or
substantially all of its assets, or any reclassification, or any
recapitalization or change of outstanding Common Shares (a "Business
Combination"), unless the holders of LP Common Units will receive, or have the
opportunity to receive, the same consideration per Common Unit as holders of
Common Shares receive per Common Share in the transaction; if holders of LP
Common Units will not be treated in such manner in connection with a proposed
Business Combination, the Company may not engage in such transaction unless
Limited Partners holding more than 50.0% of the LP Common Units vote to approve
the Business Combination. In addition, as provided in the Operating Partnership
Agreement, the Company will not consummate a Business Combination in which the
Company conducted a vote of the shareholders unless the matter would have been
approved had holders of LP Common Units been able to vote together with the
shareholders on the transaction. The foregoing provision of the Operating
Partnership Agreement would under no circumstances enable or require the
Company to engage in a Business Combination which required the approval of the
Company's shareholders if the Company's shareholders did not in fact give the
requisite approval. Rather, if the Company's shareholders did approve a
Business Combination, the Company would not consummate the transaction unless
(i) the Company as managing
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general partner first conducts a vote of holders of Common Units (including
the Company and the NAC General Partner) on the matter, (ii) the Company votes
the Common Units held by it in the same proportion as the shareholders of the
Company voted on the matter at the shareholder vote and (iii) the result of
such vote of the Common Unit holders (including the proportionate vote of the
Company's Common Units) is that had such vote been a vote of shareholders, the
Business Combination would have been approved by the shareholders. As a result
of these provisions of the Operating Partnership, a third party may be
inhibited from making an acquisition proposal that it would otherwise make, or
the Company, despite having the requisite authority under its Declaration of
Trust, may not be authorized to engage in a proposed Business Combination.
Possible Limitations on Change of Control Pursuant to Maryland Business
Combination Statute. Under the MGCL, as applicable to Maryland REITs, certain
"business combinations" (including certain issuances of equity securities)
between a Maryland REIT such as the Company and any person who owns 10.0% or
more of the voting power of the trust's shares or an affiliate or associate of
the trust which, at any time within the two-year period prior to the date in
question, was the beneficial owner of 10.0% or more of the voting power of the
trust (an "Interested Shareholder"), or between a Maryland REIT and an
affiliate of an Interested Shareholder, are prohibited for five years after
the most recent date on which the Interested Shareholder became an Interested
Shareholder. Thereafter, any such business combination must be approved by the
board of trustees and a super-majority shareholder vote unless, among other
things, the holders of shares of beneficial interest receive a minimum price
(as defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Shareholder for
its shares. As permitted by the MGCL, the Board of Trustees of the Company has
opted out of the business combinations provisions of the MGCL with respect to
any business combination involving Prime, the Primestone Joint Venture or any
of the Contributors or any of their respective affiliates (including Mr.
Reschke). Accordingly, the five-year prohibition and the super-majority
shareholder vote requirement will not apply to any "business combinations"
between Prime, the Primestone Joint Venture or any of the Contributors or
their respective affiliates and the Company. As a result, Prime, the
Primestone Joint Venture or any of the Contributors and their respective
affiliates may be able to enter into "business combinations" with the Company,
which may or may not be in the best interests of the shareholders, without the
super-majority shareholder approval. Further, the business combinations
statute could have the effect of discouraging offers from third parties to
acquire the Company and increasing the difficulty of consummating any such
offer. See "Certain Provisions of Maryland Law and of the Company's
Declaration of Trust and Bylaws--Business Combinations."
Possible Limitations on Change of Control Pursuant to Maryland Control Share
Acquisition Statute. Maryland law provides that "control shares" of a Maryland
REIT acquired in a "control share acquisition" have no voting rights except to
the extent approved by a vote of two-thirds of the votes eligible under the
statute to be cast on the matter. "Control shares" are voting shares of stock
or beneficial interest which, if aggregated with all other such shares of
stock or beneficial interest previously acquired by the acquiror, would
entitle the acquiror to exercise voting power in electing trustees within one
of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority or (iii) a majority
of all voting power. Control shares do not include shares that the acquiring
person is then entitled to vote as a result of having previously obtained
shareholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
If voting rights are not approved at a meeting of shareholders then, subject
to certain conditions and limitations, the trust may redeem any or all of the
control shares (except those for which voting rights have previously been
approved) for fair value. If voting rights for control shares are approved at
a shareholders' meeting and the acquiror becomes entitled to vote a majority
of the shares of beneficial interest entitled to vote, all other shareholders
may exercise appraisal rights.
The Bylaws contain a provision exempting from the control share acquisition
statute any and all acquisitions by any person of the Company's shares of
beneficial interest. There can be no assurance that such provision will
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not be amended or eliminated at any point in the future. If the foregoing
exemption in the Bylaws is rescinded, the control share acquisition statute
could have the effect of discouraging offers to acquire the Company and of
increasing the difficulty of consummating any such offer. See "Certain
Provisions of Maryland Law and of the Company's Declaration of Trust and
Bylaws--Control Share Acquisitions."
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT; OTHER TAX LIABILITIES
Tax Liabilities as a Consequence of Failure to Qualify as a REIT. The
Company intends to operate its business so as to qualify as a REIT under the
Code commencing with its taxable year ending December 31, 1997. Although
management believes that the Company will be organized and will operate in
such a manner, no assurance can be given that the Company will be able to
operate in a manner so as to qualify or remain so qualified. Qualification as
a REIT involves the satisfaction of numerous requirements (some on an annual
and others on a quarterly basis) established under highly technical and
complex Code provisions for which there are only limited judicial and
administrative interpretations and involves the determination of various
factual matters and circumstances not entirely within the Company's control.
For example, in order to qualify as a REIT, at least 95.0% of the Company's
gross income in any year must be derived from qualifying sources and the
Company must pay distributions to shareholders aggregating annually at least
95.0% of its REIT taxable income (determined without regard to the dividends
paid deduction and by excluding net capital gains). The complexity of these
provisions and of the applicable Treasury Regulations that have been
promulgated under the Code is greater in the case of a REIT that holds its
assets in partnership form. In addition, no assurance can be given that new
legislation, regulations, administrative interpretations or court decisions
will not significantly change the tax laws with respect to qualification as a
REIT or the federal income tax consequences of such qualification. The
Company, however, is not aware of any pending tax legislation that would
adversely affect the Company's ability to operate as a REIT. The Company has
received the opinion of Winston & Strawn, counsel to the Company, regarding
the Company's ability to qualify as a REIT. See "Certain Federal Income Tax
Considerations--Taxation of the Company" and "Legal Matters." Such legal
opinion is based on various assumptions and factual representations by the
Company regarding the Company's ability to meet the various requirements for
qualification as a REIT, and no assurance can be given that actual operating
results will meet these requirements. Such legal opinion is not binding on the
IRS or any court.
Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed 5.0% of the value of the
REIT's total assets on certain testing dates. See "Certain Federal Income Tax
Considerations--Requirements for Qualification." The Company believes that its
allocable share of the aggregate value of the securities of the Services
Company to be held by the Operating Partnership (i.e., the Note and the
Preferred Stock) will be less than 5.0% of the value of the Company's total
assets, based on the initial allocation of Common Units among participants in
the Formation Transactions and the Company's opinion regarding the maximum
value that could be assigned to the expected securities and net operating
income contributions of the Services Company after the Offering. In rendering
its opinion as to the qualifications of the Company as a REIT, Winston &
Strawn is relying on the conclusion of the Company regarding the value of the
Services Company. In addition to the 5.0% limitation, a REIT is not permitted
to own more than 10.0% of the voting securities of any particular issuer. The
Preferred Stock and Note of the Services Company held by the Operating
Partnership should not be treated as voting securities. However, the IRS could
challenge this conclusion if it determines that the Operating Partnership
exercises de facto control over and management of the Services Company.
If the Company fails to satisfy the 5.0% or 10.0% limitations or otherwise
fails to qualify as a REIT in any taxable year, except as to certain failures
for which there may be statutory relief or imposition of intermediate
sanctions in the form of monetary penalties, the Company would be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates and would not be allowed a deduction
in computing its taxable income for amounts distributed to its shareholders.
This treatment would reduce the net earnings of the Company available for
investment or distribution to shareholders because of the additional tax
liability to the Company for the years involved. In addition, unless entitled
to relief under certain statutory provisions, the Company also would be
disqualified from treatment as a REIT for the four taxable years
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following the year during which qualification is lost. See "Certain Federal
Income Tax Considerations--Failure to Qualify."
Other Tax Liabilities. Even if the Company qualifies as and maintains its
status as a REIT, it will be subject to certain federal, state and local taxes
on its income and property. For example, if the Company has net income from a
"prohibited transaction," such income will be subject to a 100.0% tax. See
"Certain Federal Income Tax Considerations--Requirements for Qualification--
Penalty Tax on Prohibited Transactions."
DISTRIBUTIONS TO SHAREHOLDERS AFFECTED BY MANY FACTORS. Distributions by the
Company to its shareholders will be based principally on cash available for
distribution from the Properties. Contractual increases in rent under the
leases of the Properties or the receipt of rental revenue in connection with
future acquisitions will increase the Company's cash available for
distribution to shareholders. However, in the event of a default or a lease
termination by a lessee, there could be a decrease or cessation of rental
payments and thereby a decrease in cash available for distribution. In
addition, the amount available to make distributions may decrease if
properties acquired in the future yield lower than expected returns.
The distribution requirements for REITs under federal income tax laws may
limit the Company's ability to finance future developments, acquisitions
and/or expansions without additional debt or equity financing. If the Company
incurs additional indebtedness in the future, it will require additional funds
to service such indebtedness and as a result amounts available to make
distributions may decrease. Distributions by the Company will also be
dependent on a number of other factors, including the Company's financial
condition, any decision to reinvest funds rather than to distribute such
funds, capital expenditures, the annual distribution requirements under the
REIT provisions of the Code and such other factors as the Company deems
relevant. In addition, the Company may issue from time to time additional
Common Shares in connection with the acquisition of properties or in certain
other circumstances. No prediction can be made as to the number of such Common
Shares which may be issued, if any, and, if issued, the effect on cash
available for distributions on a per share basis to holders of Common Shares.
Such issuances, if any, will have a dilutive effect on cash available for
distribution on a per share basis to holders of Common Shares. See "Business
Objective and Growth Strategies." The possibility exists that actual results
of the Company may differ from the assumptions used by the Board of Trustees
in determining the initial distribution rate. In such event, the trading price
of the Common Shares may be adversely affected.
To obtain the favorable tax treatment associated with REITs, the Company
generally will be required to distribute to its shareholders at least 95.0% of
its REIT taxable income (determined without regard to the dividends paid
deduction and by excluding net capital gains) each year. See "Certain Federal
Income Tax Considerations--Requirements for Qualification--Annual Distribution
Requirements." In addition, the Company will be subject to tax at regular
corporate rates to the extent that it does not distribute all of its net
capital gain or distributes more than 95.0% but less than 100.0% of its REIT
taxable income each year. The Company will also be subject to a 4.0%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it for any calendar year are less than the sum of 85.0% of its REIT
ordinary income, 95.0% of its REIT capital gain net income and 100.0% of its
undistributed income from prior years.
The Company intends to make distributions to its shareholders to comply with
the distribution requirements of the Code and to eliminate, or at least
minimize, exposure to federal income taxes and the nondeductible excise tax.
Differences in timing between the receipt of income and the payment of
expenses in arriving at taxable income and the effect of required debt
amortization payments could require the Company to borrow funds on a short-
term basis to meet the distribution requirements that are necessary to achieve
the tax benefits associated with qualifying as a REIT.
INITIAL DISTRIBUTION PAYOUT PERCENTAGE ON THE COMMON SHARES WILL BE 95.5%
FOR THE TWELVE MONTHS ENDING JUNE 30, 1998. The Company's expected annual
distributions on the Common Shares for the 12 months following the completion
of the Offering are expected to be $1.35 per Common Share (representing
approximately 95.5% of the estimated cash available for distribution during
such period). If cash available for distribution generated by the Company's
assets for such 12-month period is less than the Company's estimate,
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or if such cash available for distribution decreases in future periods from
expected levels, the Company's ability to make the expected distributions would
be adversely affected. Any such failure to make expected distributions may
result in a decrease in the market price of the Common Shares. See
"Distribution Policy."
On a pro forma basis giving effect to the Offering and the Formation
Transactions for the year ended December 31, 1996, the Company's earnings and
Funds from Operations, respectively, would have been sufficient to cover fixed
charges (including distributions on the Convertible Preferred Shares) by
approximately $8.8 million and $25.3 million, respectively. While the Company
expects to have sufficient cash available to pay distributions on the
Convertible Preferred Shares, no assurances can be made that such distributions
will be declared or paid in respect of the Convertible Preferred Shares.
The Company is not permitted to make any distributions in respect of the
Common Shares unless all current and any accumulated dividends in respect of
the Convertible Preferred Shares have been paid in full. The Convertible
Preferred Shares are entitled to payment of distributions at the same rate
declared on the Common Shares if such rate is greater than the stated
distribution rate on the Convertible Preferred Shares. Accordingly, at such
time as the distribution rate on the Common Shares is greater than the stated
rate on the Convertible Preferred Shares, holders of Convertible Preferred
Shares will be entitled to participate in any increases in distributions on
Shares together with the holders of Common Shares. See "Distribution Policy"
and "Partnership Agreement--Distributions."
HISTORICAL LOSSES AND ACCUMULATED DEFICIT; POSSIBILITY OF FUTURE LOSSES. The
Company, through the Prime Properties, has had historical accounting losses for
certain fiscal years, and there can be no assurance that the Company will not
have similar losses in the future. The Prime Properties had a net loss before
allocation to minority interest of approximately $31.4 million in the aggregate
in 1996 and had cumulative aggregate deficits in owners' equity, inclusive of
minority interest, of approximately $140.3 million and $122.7 million at June
30, 1997 and December 31, 1996, respectively.
ACQUISITION AND DEVELOPMENT RISKS
General. The Company intends to acquire additional office and industrial
properties. See "Business Objective and Growth Strategies." The Company
anticipates that future acquisitions will be financed, in part, through a
combination of secured or unsecured financing. If new developments are financed
through construction loans, there is a risk that, upon completion of
construction, permanent financing for newly-developed properties may not be
available or may be available only on disadvantageous terms. In addition, an
acquisition of an office or industrial property entails the risk that such
investment will fail to perform in accordance with expectations. Estimates of
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may also prove
inaccurate. Further, there are general investment risks associated with any
real estate investment. See "--General Real Estate Investment Risks."
While the Company expects to limit its business primarily to the Chicago
Metropolitan Area, and to a lesser extent the rest of the midwestern United
States, and to continue to explore opportunities within these areas, it is
possible that the Company will in the future expand its business to new
geographic markets. The Company will not initially possess the same level of
familiarity with new markets that it has with respect to the markets in which
it currently operates, which could adversely affect its ability to develop,
acquire, manage or lease properties in such markets.
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Cash Flows Are Uncertain. A portion of the Company's anticipated cash
available for distribution may be generated from development activities, which
are partially dependent on the availability of development opportunities and
which are subject to the risks inherent in development and general economic
conditions. There can be no assurance that the Company will realize such
anticipated cash flows from future development projects.
COMPANY'S PERFORMANCE AND VALUE ARE SUBJECT TO REAL ESTATE INVESTMENT RISKS
General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend on the
amount of income earned and capital appreciation generated by the Properties
as well as the expenses incurred in connection therewith. If the Properties do
not generate income sufficient to meet operating expenses, including debt
service and capital expenditures, the ability to make distributions to the
Company's shareholders could be adversely affected. Income from, and the value
of, the Properties may be adversely affected by the general economic climate,
local conditions such as oversupply of office or industrial space or a
reduction in demand for office or industrial space in the area, the
attractiveness of the Properties to potential tenants, competition from other
office or industrial buildings, and the ability of the Company to provide
adequate maintenance and insurance and increased operating costs (including
insurance premiums, utilities and real estate taxes). In addition, revenues
from properties and real estate values also are affected by such factors as
interest rate levels, the availability of financing, the cost of compliance
with regulations and the potential for liability under applicable laws,
including changes in tax laws. See "Business and Properties--Competition."
The Company's income would be adversely affected if a significant number of
tenants were unable to pay rent or if office or industrial space could not be
rented on favorable terms. Certain significant expenditures associated with an
investment in real estate (such as mortgage payments, real estate taxes and
maintenance costs) generally are not reduced when circumstances cause a
reduction in rental income from tenants. It would be very difficult for the
Company to convert a project to an attractive alternative use or to sell a
project to recoup the Company's investment if a project were not successful.
Should such an event occur, the Company's income and funds available for
distribution would be adversely affected.
Illiquidity of Real Estate Could Adversely Affect the Company's Financial
Condition. Real estate investments are relatively illiquid and, therefore, the
Company has a limited ability to vary its portfolio quickly in response to
changes in economic or other conditions. In addition, the Code and related
regulations prohibit a REIT from holding property for sale, which may affect
the Company's ability to sell properties without adversely affecting
distributions to the Company's shareholders.
Competition Could Adversely Affect the Company. The Company plans to expand,
primarily through the acquisition and development of additional office and
industrial buildings in the Chicago Metropolitan Area and other midwestern
markets where the acquisition and/or development of property would, in the
opinion of management, result in a favorable risk-adjusted return on
investment. There are a number of office and industrial building developers
and real estate companies that compete with the Company in seeking properties
for acquisition, prospective tenants and land for development. All of the
Properties are in developed areas where there are generally other properties
of the same type and quality. Competition from other office and industrial
properties may affect the Company's ability to attract and retain tenants,
rental rate and expenses of operation (particularly in light of the higher
vacancy rates of many competing properties which may result in lower-priced
space being available in such properties). The Company also may be competing
with other entities that have greater financial and other resources than the
Company.
Lease Expirations and Reletting Expenses Could Adversely Affect the
Company's Cash Flow. Certain leases expiring during the first several years
following the Offering are at rental rates higher than those attained by the
Company in its recent leasing activity. Such leases, or other leases of the
Company, may not be renewed or, if renewed, may be renewed at rental rates
lower than rental rates in effect immediately prior to expiration. Decreases
in the rental rates for the Company's properties, the failure of tenants to
renew any such leases or the
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failure of the Company to relet any of the Company's space could materially
adversely affect the Company and its ability to make distributions. From July
1, 1997 through December 31, 1999, the Company will have expiring Office
Property leases covering approximately 543,000 net rentable square feet (which
represent 21.0% of the Annualized Net Rent of the Office Properties) and
Industrial Property leases covering approximately 1,634,000 net rentable
square feet (which represent 28.9% of the Annualized Net Rent of the
Industrial Properties). These lease expirations represent, in the aggregate,
approximately 23.7% of the Annualized Net Rent of the Company. As of June 30,
1997, such expiring leases had a weighted average annual net rent per net
rentable square foot of approximately $12.27 for Office Property leases and
$3.01 for Industrial Property leases. If the Company is unable to promptly
relet or renew the leases for all or a substantial portion of this space, if
the rental rate upon such renewal or reletting is significantly lower than
expected rates, then the Company's cash flow and ability to make expected
distributions to shareholders would be adversely affected. See "Business and
Properties--General" and "--Lease Expirations."
Capital Improvement Requirements Could Adversely Affect the Company's Cash
Flow. The Properties vary in age and require regular capital improvements. If
the cost of improvements, whether required to attract and retain tenants or to
comply with governmental requirements, substantially exceeds management's
expectations, cash available for distribution may be reduced.
Uninsured Losses Could Adversely Affect the Company's Cash Flow. Management
believes that the Properties are covered by adequate comprehensive liability,
fire, flood, extended coverage, rental loss and all-risk insurance provided by
reputable companies and with commercially reasonable deductibles, limits and
policy specifications customarily carried for similar properties. Certain
types of losses, however, may be either uninsurable or not economically
insurable, such as losses due to floods, riots or acts of war, or may be
insured subject to certain limitations, such as large deductibles or
copayments. Should an uninsured loss or a loss in excess of insured limits
occur, the Company could lose its investment in and the cash flow from a
property and may be obligated on any mortgage indebtedness or other
obligations related to such property. Any such loss could adversely affect the
Company and its ability to make distributions.
Bankruptcy and Financial Condition of Tenants Could Adversely Affect the
Company's Cash Flow. At any time, a tenant of the Properties may seek the
protection of the bankruptcy laws, which could result in the rejection and
termination of such tenant's lease and thereby cause a reduction in the cash
available for distribution by the Company. No assurance can be given that
certain tenants will not file for bankruptcy protection in the future or, if
any tenants file, that they will affirm their leases and continue to make
rental payments in a timely manner. In addition, a tenant from time to time
may experience a downturn in its business which may weaken its financial
condition and result in the failure to make rental payments when due, which
may adversely affect the Company's cash flow and its ability to make expected
distributions to shareholders. For example, certain legal action has been
taken against Keck to obtain possession of the Keck Space at the 77 West
Wacker Drive Building. A settlement agreement was entered pursuant to which
Keck has agreed to vacate the Keck Space by no later than November 30, 1997.
See "Business and Properties--Legal Proceedings."
Risks of Investments in Securities Related to Real Estate. The Company may
pursue its investment objectives through the ownership of securities of
entities engaged in the ownership of real estate. Ownership of such securities
may not entitle the Company to control the ownership, operation and management
of the underlying real estate. In addition, the Company may have no ability to
control the distributions with respect to such securities, which may adversely
affect the Company's ability to make required distributions to shareholders.
Furthermore, if the Company desires to control an issuer of securities, it may
be prevented from doing so by the limitations on the asset and gross income
tests which must be satisfied by the Company in order for the Company to
qualify as a REIT for federal income tax purposes. See "Certain Federal Income
Tax Considerations--Taxation of the Company" and "--Requirements for
Qualification." The Company intends to operate its business in a manner that
will not require the Company to register under the Investment Company Act of
1940, as amended, and shareholders will therefore not have the protection of
such act.
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The Company also may invest in mortgages or other debt instruments secured
by real estate and may do so as a strategy for ultimately acquiring the
underlying real estate. In general, investments in mortgages include the risk
that borrowers may be unable to make debt service payments or pay principal
when due, the risk that the value of the mortgaged property may be less than
the principal amount of the mortgage note securing such property and the risk
that interest rates payable on the mortgages may be lower than the Company's
cost of funds to acquire these mortgages. In any of these events, Funds from
Operations and the Company's ability to make required distributions to
shareholders could be adversely affected.
Changes in Laws and Property Tax Rates Could Adversely Affect the Company's
Financial Condition. Costs resulting from changes in real estate laws and
property taxes generally may be passed through to tenants of the Properties
and should not adversely affect the Company. Increases in income, services or
transfer taxes, however, generally are not passed through to tenants and may
adversely affect the Company's results of operations and ability to make
distributions to its shareholders. Similarly, changes in laws increasing the
potential liability for environmental conditions existing on properties or
increasing the restrictions on discharges or other conditions, however, may
result in significant unanticipated expenditures, which could adversely affect
the Company's ability to make distributions to shareholders.
Costs of Complying With the Americans with Disabilities Act Could Adversely
Affect the Company's Cash Flow. Under the Americans with Disabilities Act of
1990, as amended (the "ADA"), all public accommodations and commercial
facilities are required to meet certain federal requirements related to access
and use by disabled persons. These requirements became effective in 1992.
Compliance with the ADA requirements could require removal of access barriers,
and non-compliance could result in imposition of fines by the federal
government or an award of damages to private litigants. Although the Company
believes that the Properties are substantially in compliance with these
requirements, the Company may incur additional costs to comply with the ADA.
Although the Company believes that such costs will not have a material adverse
effect on the Company, if required changes involve a greater expenditure than
the Company currently anticipates, the Company's ability to make expected
distributions to shareholders could be adversely affected.
CONSEQUENCES OF FAILURE TO QUALIFY AS PARTNERSHIPS. The Company expects that
the Operating Partnership and each of the Property Partnerships will be
organized as partnerships and will be treated as partnerships for federal
income tax purposes. If the Operating Partnership or any of the Property
Partnerships fails to qualify as a partnership for federal income tax purposes
and instead is taxable as a corporation, the Company could cease to qualify as
a REIT and such partnership would be subject to federal income tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. See "Certain Federal Income Tax Considerations--Failure to
Qualify" and "--Tax Aspects of the Company's Investment in Partnerships--
Partnership Classification." The imposition of a corporate level tax on the
Operating Partnership would reduce the amount of cash available for
distribution to the Company and its shareholders.
CHANGES IN POLICY AND INVESTMENT ACTIVITY WITHOUT SHAREHOLDER APPROVAL
Ability to Change Certain Policies Without Shareholder Approval. The
investment and financing policies of the Company and its policies with respect
to other activities, including acquisitions, developments, expansions,
capitalizations, distributions and operations will be determined by the Board
of Trustees. Although the Board of Trustees has no present intention to do so,
the Board of Trustees may amend or revise these and other policies from time
to time without a vote of the shareholders of the Company. Change in these
policies could adversely affect the Company's financial condition or results
of operations. The Company cannot, however, change its policy of seeking to
maintain its qualification as a REIT for federal income tax purposes without
the approval of the holders of at least a majority of the outstanding Common
Shares. See "Policies with Respect to Certain Activities."
Ability to Engage in Investment Activity Without Shareholder Approval. In
the future, the Company expects to acquire and develop additional real estate
assets pursuant to its investment strategies and consistent with its
investment policies. See "Business Objective and Growth Strategies." The
shareholders of the Company
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will not be entitled to receive historical financial statements regarding, or
to vote on, any such activities and, instead, will be required to rely
entirely on the decisions of management.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of
certain of its executive officers and trustees, particularly Mr. Reschke,
Chairman of the Board, and Mr. Curto, President and Chief Executive Officer,
for strategic business direction and experience in the Chicago Metropolitan
Area and other real estate markets. While the Company believes that it could
find replacement for these key personnel, the loss of their services could
have an adverse effect on the operations of the Company. The Company has
entered employment agreements with Mr. Reschke and Mr. Curto. See
"Management--Employment Agreements."
DEPENDENCE ON SIGNIFICANT TENANTS. The Company's ten largest office tenants
as of June 30, 1997, represented approximately 43.3% of the Annualized Net
Rent and its ten largest industrial tenants as of June 30, 1997 represented
approximately 19.3% of the Annualized Net Rent. Of this amount, its three
largest tenants, Donnelley, Everen and Jones Day, currently lease
approximately 594,500 rentable square feet of office space in the 77 West
Wacker Drive Building, representing approximately 32.2% of the Annualized Net
Rent. The Company's revenues and cash available for distribution to
shareholders would be disproportionately and materially adversely affected in
the event of bankruptcy or insolvency of, or a downturn in the business of, or
the nonrenewal of leases by, any of its significant tenants or the renewal of
such leases on terms less favorable to the Company than their current terms.
MANAGED PROPERTY BUSINESS AND NON-REIT SERVICES
Lack of Control Over the Services Company. To comply with the REIT asset
tests that restrict ownership of shares of other corporations, upon the
completion of the Offering, the Operating Partnership will own 100.0% of the
Preferred Stock of the Services Company, Messrs. Reschke and Curto of the
Company will hold 100.0% of the voting stock of the Services Company, and the
initial board of directors of the Services Company will consist of Messrs.
Reschke, Curto and Derderian. This ownership structure is necessary to permit
the Company to share in the income of the Services Company while also
maintaining its status as a REIT. Moreover, such persons, as the holders of
100.0% of the voting stock, will retain the ability to elect the board of
directors of the Services Company after the terms of the initial directors
expire. Although it is anticipated that the Company will receive substantially
all of the economic benefit of the business carried on by the Services Company
due to the Company's right to receive interest on the Note and dividends
through the Operating Partnership, the Company will not be able to elect
directors or officers of the Services Company. Therefore, the Company will not
have the ability to influence directly the operations of the Services Company
or to require that the Services Company's board of directors declare and pay a
cash dividend on the Preferred Stock held by the Operating Partnership. As a
result, the board of directors and management of the Services Company may
implement business policies or decisions that would not have been implemented
by entities controlled by the Company and that are adverse to the interests of
the Company or that lead to adverse financial results, which could adversely
impact the Company's net operating income and cash flow.
Tax Liabilities and Adverse Consequences of REIT Status on the Business of
the Services Company. The Services Company will be subject to federal and
state income tax on its taxable income at regular corporate rates. Certain
requirements for REIT qualification may in the future limit the Company's
ability to receive increased distributions from the Services Company without
jeopardizing the Company's qualifications as a REIT. See
"--Adverse Consequences of Failure to Qualify as a REIT; Other Tax
Liabilities."
LIABILITIES FOR ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT THE COMPANY'S
FINANCIAL CONDITION. Under various federal, state and local laws, ordinances
and regulations relating to the protection of the environment, an owner or
operator of real property may be held liable for the costs of removal or
remediation of certain hazardous or toxic substances located on or in such
property. These laws often impose liability without regard to whether the
owner or operator was responsible for, or even knew of, the presence of such
hazardous or toxic substances. The costs of investigation, removal or
remediation of such substances may be substantial, and the presence of such
substances may adversely affect the owner's or operator's ability to rent or
sell such
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property or to borrow using such property as collateral and may expose such
owner or operator to liability resulting from any release of or exposure to
such substances. Persons who arrange for the disposal or treatment of
hazardous or toxic substances at another location also may be liable for the
costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person. Certain environmental laws impose liability for release of asbestos-
containing materials into the air, and third parties may also seek recovery
from owners or operators of real properties for personal injury associated
with asbestos-containing materials and other hazardous or toxic substances. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be considered an owner or
operator of such properties or as having arranged for the disposal or
treatment of hazardous or toxic substances and therefore potentially liable
for removal or remediation costs, as well as certain other related costs,
including governmental penalties and injuries to persons and property.
All of the Properties have been subject to recent Phase I or similar
environmental assessments by independent environmental consultants within the
past two years. Phase I assessments are intended to discover information
regarding, and to evaluate the environmental condition of, the surveyed
property and surrounding properties. Phase I assessments generally include an
historical review, a public records review, an investigation of the surveyed
site and surrounding properties, and preparation and issuance of a written
report, but do not include soil sampling or subsurface investigations. The
Company is aware of contamination at certain of the Industrial Properties,
which are already in remediation programs sponsored by the state in which they
are located. Prime has sued a former environmental consultant and a former
tenant of one of these Properties for damages. Prime has contractually agreed
to retain liability, and indemnify the Company, for environmental remediation
with regard to certain of these Industrial Properties, which environmental
consultants have estimated will cost, in the aggregate, approximately $3.2
million. The Company also has received contractual indemnification from a
tenant for possible environmental liabilities caused by the tenant at one of
the Contribution Properties. See "Business and Properties--Government
Regulations--Environmental Matters."
The Company believes that the other Properties are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances. The Company has not been
notified by any governmental authority, and is not otherwise aware, of any
material noncompliance liability or claim relating to hazardous or toxic
substances in connection with any of its other Properties. None of the
Company's environmental assessments of the Properties has revealed any
environmental liability that, after giving effect to the contractual
indemnities described above, the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liability. Nonetheless, it is possible that the Company's assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no
assurance that (i) future laws, ordinances or regulations will not impose any
material environmental liability or (ii) the current environmental condition
of the Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks) or by third parties unrelated to the Company. If
compliance with the various laws and regulations, now existing or hereafter
adopted, exceeds the Company's budgets for such items, the Company's ability
to make expected distributions to shareholders could be adversely affected.
Other Regulations Could Adversely Affect the Company's Financial
Condition. The Properties also are subject to various federal, state and local
regulatory requirements, such as state and local fire and safety requirements.
Failure to comply with these requirements could result in the imposition of
fines by governmental authorities or awards of damages to private litigants.
The Company believes that the Properties are currently in material compliance
with all such regulatory requirements. There can be no assurance, however,
that these requirements will not be changed or that new requirements will not
be imposed which would require significant unanticipated expenditures by the
Company and could have an adverse effect on the Company's Funds from
Operations and expected distributions.
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POSSIBLE ADVERSE EFFECTS ON SHARE PRICE ARISING FROM SHARES ELIGIBLE FOR
FUTURE SALE
No prediction can be made as to the effect, if any, of future sales of
Common Shares, or the availability of shares for future sales, on the market
price of the Common Shares. Sales of substantial amounts of Common Shares
(including Common Shares issued upon the exercise of options, the exchange of
LP Common Units or conversion of Convertible Preferred Shares), or the
perception that such sales could occur, may adversely affect prevailing market
prices for the Common Shares.
In connection with the Formation Transactions, approximately 9,064,343 LP
Common Units in the aggregate will be issued. None of the Limited Partners can
exchange such LP Common Units for Common Shares until the first anniversary of
the completion of the Offering. Further, each of the Limited Partners has
agreed not to directly or indirectly offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose of (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of
any option to purchase or other sale or disposition of) any LP Common Units or
Common Shares or other shares of beneficial interest of the Company, or any
securities convertible or exercisable or exchangeable for any LP Common Units
or Common Shares or other shares of beneficial interest of the Company for the
applicable Holding Periods, and the Company has agreed not to offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition of) any Common Shares or other shares of beneficial interest of
the Company, or any securities convertible or exercisable or exchangeable for
any LP Common Units or Common Shares or other shares of beneficial interest of
the Company (other than pursuant to the Share Incentive Plan), for a period of
180 days from the date of this Prospectus, in each case without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, subject to certain limited exceptions. Prudential Securities
Incorporated, at any time and without notice, may release all or any portion
of the Common Shares subject to the foregoing lock-up agreements. Following
the expiration of the foregoing restrictions, any Common Shares issued to a
Limited Partner upon exchange of their respective LP Common Units may be sold
in the public market pursuant to registration statements which the Company
will be obligated to file pursuant to the exercise of registration rights that
have been granted by the Company or available exemptions from registration.
See "Shares Eligible for Future Sale."
Upon the completion of the Offering and the consummation of the Formation
Transactions, the Company will have 12,380,000 Common Shares outstanding (or
14,237,000 Common Shares if the Underwriters' over-allotment option is
exercised in full), all of which will be freely tradeable in the public market
by persons other than "affiliates" of the Company without restriction or
registration under the Securities Act. All Common Shares that are issuable
upon the exchange of Common Units or the conversion of the Convertible
Preferred Shares will be deemed to be "restricted securities" within the
meaning of Rule 144 under the Securities Act and may not be transferred unless
such Common Shares are registered under the Securities Act or an exemption
from registration is available, including any exemption from registration
provided under Rule 144. In general, upon satisfaction of certain conditions,
Rule 144 permits the sale of certain amounts of restricted securities one year
following the date of acquisition of the restricted securities from the
Company and, after two years, permits unlimited sales by persons unaffiliated
with the Company.
The Company has agreed to provide registration rights to the Limited
Partners receiving Common Units in connection with the Formation Transactions
with respect to the Common Shares acquired by them upon exchange of Common
Units for Common Shares. In addition, the Company has granted certain
registration rights to Security Capital Preferred Growth with respect to the
Common Shares acquired by it upon the conversion of the Convertible Preferred
Shares into Common Shares. See "Shares Eligible for Future Sale--Exchange
Rights and Registration Rights."
It is expected that upon completion of the Offering the Company will grant
options to purchase an aggregate of 1,113,000 Common Shares at the initial
public offering price to certain trustees, executive officers and other
employees of the Company, and an additional 737,000 Common Shares will be
reserved for issuance upon the
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exercise of options granted under the Share Incentive Plan. See "Management--
Share Incentive Plan." In addition, the Company may issue from time to time
additional Common Shares or Common Units in connection with the acquisition of
properties. See "Business Objective and Growth Strategies--Acquisition
Strategy." The Company anticipates that it will file a registration statement
with respect to the Common Shares issuable under the Share Incentive Plan
following the completion of the Offering. Such registration statement and any
subsequent registration statements filed pursuant to the foregoing
registration rights generally will allow Common Shares covered thereby,
including Common Shares issuable upon the exchange of Common Units, the
conversion of the Convertible Preferred Shares or the exercise of options, to
be transferred or resold without restriction under the Securities Act.
MARKET INTEREST RATES COULD ADVERSELY IMPACT THE MARKET PRICE OF THE COMMON
SHARES. One of the factors that will influence the market prices of the
Common Shares will be the annual yield on the price paid for Common Shares
from distributions by the Company. An increase in market interest rates may
lead prospective purchasers of the Common Shares to demand a higher annual
yield from future distributions. Such an increase in the required yield from
distributions may adversely affect the market price of the Common Shares. In
addition, the market value of the Common Shares could be affected
substantially by other general market conditions. Numerous other factors, such
as government regulatory action and modification of tax laws, could have a
significant effect on the future market price of the Common Shares.
ABSENCE OF PRIOR PUBLIC MARKET COULD ADVERSELY IMPACT THE MARKET PRICE OF
THE CONVERTIBLE PREFERRED SHARES. Prior to the Offering, there has been no
public market for the Convertible Preferred Shares. It is likely that no
active trading market will develop for the Convertible Preferred Shares
because the Company does not intend to list or qualify the Convertible
Preferred Shares for trading on any exchange or on the Nasdaq National Market.
Moreover, there can be no assurance that an active trading market will develop
in the Common Shares or that if such a market develops, it will be sustained.
The initial offering price of the Convertible Preferred Shares will be
determined by the Company and Security Capital Preferred Growth and may not be
indicative of the market prices for the Convertible Preferred Shares after the
Offering.
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THE COMPANY
The Company is a fully-integrated, self-administered and self-managed real
estate company that has been formed to continue and expand the office and
industrial real estate business of Prime. The Company expects to qualify as a
REIT for federal income tax purposes. In connection with the Offering, the
Company will succeed to the office and industrial development, leasing and
property management business of Prime and will acquire certain additional
office and industrial properties from third parties. The Company will own 16
Office Properties containing an aggregate of approximately 2.4 million net
rentable square feet, 44 Industrial Properties containing an aggregate of
approximately 5.7 million net rentable square feet, one industrial property
under construction, one retail center and one parking facility. The Properties
are located primarily in the Chicago Metropolitan Area. As of June 30, 1997,
the Office Properties and the Industrial Properties generated 65.1% and 34.9%,
respectively, of the Company's Annualized Net Rent. The Company also will own
approximately 83.4 acres and have rights to acquire approximately 157.2 acres
of developable land (including rights to acquire one development site located
in the Chicago CBD containing approximately 58,000 square feet), which
management believes could be developed with approximately 1.2 million square
feet of additional office space in the Chicago CBD and approximately 4.4
million square feet of additional industrial properties primarily in the
Chicago Metropolitan Area.
In terms of net rentable square feet, approximately 80.0% of the Office
Properties and 87.1% of the Industrial Properties are located in the Chicago
Metropolitan Area in prime business locations within established business
communities. The Properties located in the Chicago Metropolitan Area account
for approximately 88.7% of the Company's Annualized Net Rent. The remaining
Office Properties are located in the Nashville, Tennessee and Knoxville,
Tennessee metropolitan areas, and the remaining Industrial Properties are
located in the Columbus, Ohio metropolitan area. After the completion of the
Offering, the Company intends to invest in the acquisition, development and
redevelopment of office and industrial properties primarily located in the
Suburban Chicago and Chicago CBD office markets and the Chicago Metropolitan
Area warehouse/distribution market and overhead crane/manufacturing market.
The Company believes that the Properties are well-located, have excellent
highway access, attract high-quality tenants, are well-maintained and
professionally managed. Approximately 71.7% of the Office Properties, in terms
of Annualized Net Rent, are Class A properties. The Company considers Class A
office buildings to be buildings that are centrally located, professionally
managed and maintained, attract high-quality tenants, command upper-tier
rental rates and are modern structures or have been modernized to compete with
new buildings. The Industrial Properties, in terms of Annualized Net Rent,
consist of 58.5% warehouse/distribution properties and 41.5% overhead
crane/manufacturing properties. As of June 30, 1997, the Office Properties
were 88.0% leased to more than 200 tenants, and the Industrial Properties were
87.9% leased to more than 60 tenants. Management of the Company has developed
(or redeveloped), leased and managed 79.2% of the Office Properties and 81.9%
of the Industrial Properties, based on net rentable square feet.
The Properties have a diverse and stable base of tenants and have
historically provided steadily increasing rents which the Company believes is
due to the quality of the Properties, the existence of long-term leases with
contractual rent escalations and the strength of the markets in which the
Properties are located. As of June 30, 1997, approximately 58.2% of the leases
for the Properties, in terms of Annualized Net Rent, had contractual rent
increases, of which approximately 42.4% of the Annualized Net Rent was
attributable to leases with specified contractual rent increases which on
average provided for annual rent increases of 4.9% over the next three years,
and approximately 15.8% of the Annualized Net Rent was attributable to leases
with contractual rent increases related to the CPI. Furthermore, as of June
30, 1997 less than 45.4% of the Annualized Net Rent is derived from leases
scheduled to expire during the next five years. The three largest tenants in
the Properties, in terms of Annualized Net Rent, are Donnelley, Everen and
Jones Day. As of June 30, 1997, the Company's ten largest office and ten
largest industrial tenants (based upon Annualized Net Rent) had leased space
from the Company for an average of 8.9 and 3.7 years, respectively, and
accounted for 43.3% and 19.3%, respectively, of Annualized Net Rent.
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The Prime Group, Inc. was founded in 1981 by Michael W. Reschke and has been
involved in the ownership, acquisition, renovation, development, construction,
financing, marketing, leasing and management of institutional quality, income-
producing real estate properties for nearly 17 years. In 1994, Prime
contributed its retail development business and its multi-family housing
business to separate publicly-traded real estate investment trusts--Prime
Retail, Inc. (NYSE: PRT) and Ambassador Apartments, Inc. (NYSE: AAH). In May
1997, Prime contributed its senior and assisted living business to Brookdale
Living Communities, Inc. (Nasdaq: BLCI), a publicly-traded owner, operator and
developer of senior housing and a provider of senior and assisted living
services to the elderly.
Concurrently with the Convertible Preferred Offering, the Company is
conducting the Common Share Offering, which the Company expects to close
simultaneously with the closing of the Convertible Preferred Offering. The
Common Shares offered in the Common Share Offering will represent 55.3% of the
common equity of the Company (58.8% if the Underwriters' over-allotment option
is exercised in full). Another 35.5% of the common equity of the Company
(32.8% if the Underwriters' over-allotment option is exercised in full) will
be owned in the form of Common Units by the Primestone Joint Venture, a joint
venture between Prime and Blackstone. The balance of 9.2% of the common equity
of the Company (8.4% if the Underwriters' over-allotment option is exercised
in full) will be held by Prime, senior management of the Company and certain
others. See "Principal Shareholders of the Company."
Prime has been involved in the office and industrial real estate business
since 1985. During this time, Prime has achieved recognition for its
commitment to excellence in terms of architecture, construction, urban
planning and design, as well as its ability to implement aggressive marketing
and leasing programs to achieve among the highest rents and occupancies within
its submarkets. Most notably, Prime successfully developed and leased the 77
West Wacker Drive Building, a recently-developed 50-story, Class A office
tower in the Chicago CBD, which started construction in April 1990 and opened
in May 1992 with commitments for long-term leases for more than 95.0% of the
net rentable office area in the building.
The Company is a fully-integrated real estate company providing property
management, leasing, marketing, acquisition, development, redevelopment,
construction, finance and other related services. The Company has
approximately 151 employees, 37 of whom are located at the Company's executive
offices in Chicago. The senior management of the Company includes the
executives of Prime who were responsible for the strategic direction,
management and day-to-day operations of Prime's office and industrial real
estate business. The Company's management personnel have substantial
experience in a full range of real estate services. The top ten senior
executives of the Company have an average of 19.3 years experience in the real
estate industry in the Chicago Metropolitan Area.
The Company's primary business strategy is to achieve its investment and
growth objectives by focusing on the acquisition, development and operation of
office and industrial real estate located in the Chicago Metropolitan Area
and, to a lesser extent, other midwestern markets. To implement this strategy,
the Company intends to (a) own, acquire, develop, redevelop, lease, manage and
operate Class A office properties, (b) acquire distressed, underperforming and
undermanaged office properties in desirable locations and improve the income
potential of such assets by raising these properties to a higher level of
operating standard through value-added renovation programs, professional
property management and aggressive leasing, retenanting and marketing efforts
and (c) own, acquire, develop, redevelop, lease, manage and operate bulk
warehouse/distribution facilities and overhead crane/manufacturing facilities.
The Company believes that it can draw upon its extensive experience and long-
term presence in the Chicago Metropolitan Area to create a strategic advantage
in competing for future development and acquisition opportunities.
The Company believes that the solid, diversified local economy in the
Chicago Metropolitan Area is creating continued office space demand and
absorption. Because of steady expansion of office employment and nearly no new
construction, the overall Class A vacancy rate has steadily declined for five
years and is expected to continue to decline. According to RCG, Class A rental
rates in the Company's largest office market, the Chicago CBD, have begun to
rise as Class A vacancy rates in the Chicago CBD have decreased from 23.1% in
1992 to 9.3% by the end of the second quarter of 1997.
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The Chicago Metropolitan Area also has experienced a very active market in
industrial space in the 1990s. As of the end of the first quarter of 1997, the
Chicago Metropolitan Area's industrial market's overall vacancy rate was 7.3%,
below the national average vacancy rate of 8.1%. In addition, 32.6% (in terms
of net rentable square feet) of the Company's Industrial Properties in the
Chicago Metropolitan Area consists of overhead crane facilities, which have a
replacement cost substantially in excess of the Company's basis in its
Properties. The Company believes that current rental rates in the overhead
crane/manufacturing market are less than the level which would justify the
construction of new overhead crane/manufacturing facilities and, therefore,
the Company believes that there will be little new competition with the
Company's overhead crane/manufacturing Properties. See "Business and
Properties--The Company's Markets."
The Company believes that the foundation for growth in cash flow per share
in future years will be from a number of sources, including contractual rent
escalations in existing leases, the leasing of all or a portion of the
existing vacant space in the Properties, the quality and strategic location of
its Properties, the acquisition, renovation (where necessary) and
repositioning of additional office and industrial properties at below
replacement cost, the strengthening of the Chicago Metropolitan Area economy,
the development of new office and industrial properties when market conditions
warrant such new development and the knowledge and experience of its senior
management team and their long-term relationships with large corporate
tenants, municipalities, landowners and institutional sellers. In addition,
the Company believes that it will be the only publicly-traded REIT primarily
focusing on both the office and industrial markets in the Chicago Metropolitan
Area. Further, upon the completion of the Offering, the Company believes it
will be conservatively capitalized with outstanding debt of approximately
25.2% of the Company's total market capitalization.
The Company was formed on July 21, 1997 as a Maryland real estate investment
trust. The Company's executive offices are located at 77 West Wacker Drive,
Suite 3900, Chicago, Illinois 60601, and its telephone number is (312) 917-
1500.
SERVICES COMPANY
The Services Company. The Services Company was formed in March 1997 under
the laws of the state of Maryland to succeed to Prime's office and industrial
property management, leasing and corporate advisory services business.
Following the consummation of the Formation Transactions, Mr. Reschke and Mr.
Curto together will own 100.0% of the voting common stock of the Services
Company, representing 5.0% of its economic value, for which they will
contribute an aggregate of $50,000. The Operating Partnership will own 100.0%
of the nonvoting Preferred Stock of the Services Company, representing 95.0%
of its economic value. The Preferred Stock of the Services Company will have
an annual dividend rate of 8.5%, will pay dividends on a cumulative and
participating basis, and will not be redeemable by the Services Company or
convertible into other securities of the Services Company. See "Structure and
Formation of the Company--Formation Transactions" and "--Formation of the
Services Company." The Operating Partnership also will hold the Note to be
issued by the Services Company. The Note is expected to have a term of ten
years, to bear interest at a rate of 11.0% per annum and to require quarterly
interest only payments in arrears. The ownership structure of the Services
Company is necessary to permit the Company to share in the Service Company's
income and also maintain its status as a REIT for federal income tax purposes.
Although the Company anticipates receiving substantially all of the economic
benefit of the businesses carried on by the Services Company by virtue of the
Company's rights to receive (i) dividends through the Operating Partnership's
investment in the Preferred Stock and (ii) interest payments on the Note held
by the Operating Partnership, the Company will not be able to elect the
Services Company's officers or directors and, consequently, will not have the
ability to control the operations of the Services Company or require the
declaration of dividends. See "Risk Factors--Managed Property Business and
Non-REIT Services--Lack of Control Over the Services Company."
In addition to succeeding to Prime's businesses, the Services Company also
will receive the contribution of certain other operations. Upon completion of
the Offering, the Company will acquire, and simultaneously contribute to the
Services Company, the Continental Management Business. The Continental
Management
47
<PAGE>
Business includes a construction business and the property management and/or
leasing operations at five properties. The Company expects to pay
approximately $5.9 million, subject to applicable purchase price adjustments,
for the Continental Management Business. The health club facility located in
the 77 West Wacker Drive Building will also be contributed to the Services
Company. Prime estimates that the replacement cost of the health club facility
is approximately $2.0 million. After completion of the Offering, the Company
will employ various individuals from the Continental Management Business and
Prime's businesses. For a description of these individuals, see "Management--
Trustees, Executive Officers and Key Employees."
The Services Company will provide management, leasing, tenant improvement
construction, painting contracting and tenant representation services to
buildings owned by others pursuant to contracts contributed to the Services
Company by the Operating Partnership. Such contracts generally provide for
management fees of 1.5% to 5.0% of collected revenue. As is customary in the
real estate industry, most of the management contracts with the building
owners to be contributed are terminable upon 30 days notice. The Services
Company's responsibilities under these contracts include providing and
coordinating accounting services, lease administration, maintenance, repair
and engineering services, management, leasing, tenant improvement
construction, painting contracting and tenant representation.
The Services Company's leasing division will provide leasing services to
other property owners for fees that will be paid as leases are executed and as
the space is occupied. In general, leasing fees range from 4.0% to 5.0% of the
lease rental amount during the first five years of the lease term and 2.0% to
2.5% for the next five years of the lease term. The Services Company's
construction management division will provide construction management services
for tenant improvements, renovations and other construction to the properties
managed by the Services Company.
The Services Company will initially have three directors: Messrs. Reschke,
Curto and Derderian. Mr. Curto will serve as the Services Company's Chairman
of the Board, Mr. Derderian will serve as the Services Company's Chief
Executive Officer, and John O. Wilson will serve as the Services Company's
President.
The real estate management and leasing industries are highly competitive.
The Services Company's major competitors for construction, leasing and
management contracts include a variety of Chicago Metropolitan Area and
national firms. The Services Company expects to continue to be competitive in
these areas based upon the quality of its employees and services and its
current market presence.
48
<PAGE>
BUSINESS OBJECTIVE AND GROWTH STRATEGIES
BUSINESS OBJECTIVE
The Company currently intends to invest primarily in the acquisition,
development and redevelopment of commercial real estate properties located in
the (i) Suburban Chicago office market, (ii) Chicago CBD office market, (iii)
Chicago Metropolitan Area warehouse/distribution market and (iv) Chicago
Metropolitan Area overhead crane/manufacturing market. The Company's primary
business objective is to achieve sustainable long-term growth in cash flow per
share and to enhance the value of its portfolio through the implementation of
effective operating, acquisition, development and financing strategies. The
Company believes that opportunities exist to increase cash flow per share by:
. contractual rent increases in existing leases;
. leasing all or a portion of the existing vacant space in the Properties;
. acquiring office and industrial properties (or entities that own or
control such properties) at or below replacement cost and at positive
spreads to its cost of capital;
. increasing rental and occupancy rates and decreasing tenant concessions
as vacancy rates in the Company's submarkets generally continue to
decline;
. developing office and industrial properties for the benefit of the
Company where such development will result in a favorable risk-adjusted
return on investment;
. expanding its property management, leasing and corporate advisory
services business; and
. using, when available, long-term, tax-exempt bonds (which typically have
lower interest costs) to finance the acquisition and renovation of
existing industrial facilities and the development of new industrial
facilities.
The Company believes that a number of factors will enable it to achieve its
business objectives, including: (a) the opportunity to lease available space
at attractive rental rates because of increasing demand and, with respect to
the Office Properties, the present limited level of new construction in the
Chicago Metropolitan Area; (b) the presence of distressed sellers and
inadvertent owners (through foreclosure or otherwise) of office and industrial
properties in the Company's submarkets, as well as the Company's ability to
acquire properties with Common Units (thereby deferring the seller's taxable
gain), all of which create enhanced acquisition opportunities; and (c) the
quality and location of the Properties.
Management believes that the Company is well-positioned to take advantage of
these opportunities because of its extensive experience in its markets, its
seasoned management team, its significant land holdings and option rights and
its ability to develop, redevelop, lease and efficiently manage office and
industrial properties. In addition, the Company believes that public ownership
and its capital structure will provide the Company with enhanced access to the
public debt and equity capital markets and new opportunities for growth. Upon
the completion of the Offering, the Company expects to have obtained the
$225.0 million Credit Facility and to have a debt-to-total market
capitalization ratio of approximately 25.2%. There can be no assurance that
any such financing will be obtained.
OPERATING STRATEGY
The Company will focus on enhancing its cash flow per share by: (a)
maximizing cash flow from its Properties through contractual rent increases,
pro-active leasing programs and effective property management; (b) managing
operating expenses through the use of in-house management, leasing, marketing,
financing, accounting, legal, construction, management and data processing
functions; (c) maintaining and developing long-term relationships with a
diverse tenant group; (d) attracting and retaining motivated employees by
providing financial and other incentives to meet the Company's operating and
financial goals; and (e) continuing to emphasize value-added capital
improvements to enhance the Properties' competitive advantages in their
submarkets.
49
<PAGE>
Contractual Increases in Rent
A substantial portion of the Company's existing portfolio is leased pursuant
to long-term leases with contractual annual rent increases, thereby providing
the Company with both stable and escalating rental revenues. By way of
example, the contractual rent increases from existing leases in the 77 West
Wacker Drive Building average approximately $630,000 per year over the next
ten years. As of June 30, 1997, approximately 58.2% of the leases for the
Properties, in terms of Annualized Net Rent, had contractual rent increases,
of which approximately 42.4% of the Annualized Net Rent was attributable to
leases with specified contractual rent increases which on average provided for
annual rent increases of 4.9% over the next three years and approximately
15.8% of the Annualized Net Rent was attributable to leases with contractual
rent increases related to the CPI. The Company believes that reporting rental
revenues on a cash basis will result in a more accurate presentation of its
actual operating activities than if rental revenues were reported on a
straight-line basis and, accordingly, expects to report funds from operations
on a cash basis. As a result, contractual rent increases will cause reported
Funds from Operations to increase.
Pro-Active Leasing; Ability to Lease Vacant Space
The Company believes that the strength of its leasing program is
demonstrated by the current occupancy status of the Properties. As of June 30,
1997, the Office Properties were approximately 88.0% leased, and the
Industrial Properties were approximately 87.9% leased. Such occupancy rates
compare to average occupancy rates at June 30, 1997 of 85.1% for the Chicago
CBD office market, 89.1% for the Suburban Chicago office market and 92.5% for
the Chicago industrial market. See "Business and Properties--General," "--
Occupancy and Rental Information," "--Office Properties," "--Industrial
Properties" and "--The Company's Office Submarkets--Chicago Metropolitan Area
Office Submarkets."
The Company believes that one of its most notable leasing accomplishments is
the 77 West Wacker Drive Building, a recently-developed 50-story office tower
located in downtown Chicago, containing approximately 944,600 square feet of
net rentable area. Construction began in April 1990 and was successfully
completed with the opening of the building in May 1992. At its opening, the
building had commitments for long-term leases for over 95.0% of its net
rentable office area. In 1995, the Company restructured its lease with Keck, a
significant tenant at the 77 West Wacker Drive Building, to decrease the Keck
Space and to reduce the rent on Keck's remaining space. In June 1997, Keck
stopped paying rent and, in connection with a settlement of the resulting
litigation, Keck has agreed to vacate its remaining space no later than
November 30, 1997. See "Business and Properties--Legal Proceedings." The
Company believes it will be able to increase cash flow per share by continuing
to lease the existing vacant space in its Properties, including the Keck
Space. As of June 30, 1997, the Company had 282,069 net rentable square feet
of vacant space in its Office Properties (including approximately 113,000 net
rentable square feet attributable to the Keck Space at the 77 West Wacker
Drive Building, of which approximately 52,000 net rentable square feet has
been subsequently leased). As of June 30, 1997, the Company also had 690,007
net rentable square feet of vacant space in its Industrial Properties.
Long-Term Leases; Tenant Retention
A substantial portion of the Properties is leased on a long-term basis,
thereby providing the Company with a reduced level of costs and capital
expenditures due to tenant lease expirations. Approximately 56.7% of the
Company's Annualized Net Rent is attributable to leases expiring in 2002 or
beyond, and 40.5% of the Company's Annualized Net Rent is attributable to
leases expiring in 2007 or beyond. With regard to the Office Properties, as of
June 30, 1997, 65.6% of the office leases in terms of Annualized Net Rent, had
terms expiring in five years or more, resulting in an average annual turnover
for the next five years of 6.9% per annum. With regard to the Industrial
Properties, as of June 30, 1997, 34.0% of the industrial leases in terms of
Annualized Net Rent, had terms expiring in five years or more, resulting in an
average annual turnover for the next five years of 13.2% per annum. From
January 1, 1994 through June 30, 1997 the Prime Properties achieved a tenant
retention rate, based on renewals of leases with scheduled expirations, of
approximately 64.0% in terms of net rentable square feet. The Company intends,
as market conditions permit, to continue to favor longer-term leases with
contractual annual rent increases. See "Business and Properties--Lease
Expirations."
50
<PAGE>
Management of Operating Expenses
The Company believes that it has been successful in providing high-quality
and professional property management services to its tenants, while
maintaining property operating expenses and real estate taxes at or below such
expense levels for comparable properties. As the Company continues to grow
through the acquisition and development of additional office and industrial
properties, management of the Company believes that economies of scale will
allow the Company to operate its properties with increasing efficiency.
ACQUISITION STRATEGY
The Company will seek to increase its cash flow per share by acquiring
additional office and industrial properties at prices below replacement cost,
including properties that: (a) may provide attractive initial yields and
significant potential for growth in cash flow from property operations; (b)
are well-located, high quality and competitive in their respective submarkets;
(c) are located in the Company's existing submarkets and/or in other strategic
submarkets where the demand for office and industrial space exceeds available
supply; or (d) have been undermanaged or are otherwise capable of improved
performance through intensive management, marketing and leasing.
The Company plans to concentrate its acquisition activities in the Chicago
Metropolitan Area and, to a lesser extent, in other midwestern markets. The
Company believes that attractive opportunities exist to acquire office and
industrial properties in these markets at prices below replacement cost. Each
acquisition opportunity will be reviewed to evaluate whether it meets one or
more of the following criteria: (a) potential for higher occupancy levels
and/or rents as well as for lower tenant turnover and/or operating expenses;
(b) ability to generate returns in excess of the Company's weighted average
cost of capital, taking into account the estimated costs associated with
renovation and tenant turnover (i.e., tenant improvements and leasing
commissions); and (c) a purchase price at or below estimated replacement cost.
The Company believes it has certain competitive advantages that enhance its
ability to identify and complete acquisitions on a timely and efficient basis,
including: (a) management's significant local market experience with, and
knowledge of, properties, submarkets and potential tenants; (b) management's
long-standing relationships with commercial real estate brokers and
institutional and other owners of commercial real estate in the Chicago
Metropolitan Area; (c) the Company's fully-integrated real estate operations,
which allow it to quickly evaluate and respond to acquisition opportunities;
(d) the Company's ability to access relatively low-cost financing through the
capital markets; and (e) management's reputation as an experienced purchaser
of office and industrial properties with the ability to execute transactions
in an efficient and timely manner. The Company also believes it could add a
number of office and industrial properties to its portfolio without the need
for a significant increase in general and administrative expenses, due to the
Company's expertise and depth of management and the efficiencies created by
its centralized management structure.
The Company believes that many of the owners of commercial real estate
properties located in the Chicago Metropolitan Area have a low tax basis in
their properties and have the corresponding potential for the recognition of
substantial taxable gains as a result of the disposition of such properties.
Management believes that the Company's capital structure and ability to
acquire properties in exchange for Common Units, and thereby defer a seller's
potential taxable gain, will enhance the ability of the Company to consummate
transactions quickly and to structure more competitive acquisitions than other
real estate companies in the market which lack the Company's access to capital
and ability to acquire property with Common Units.
Prime has recently acquired the Prime Contribution Properties and will
contribute such Properties to the Company in connection with the Formation
Transactions. In addition, the Company has executed agreements to acquire the
Acquisition Properties. The acquisition of the Acquisition Properties by the
Company is expected to occur prior to or concurrently with the completion of
the Offering. There can be no assurance, however, that the Company will be
able to complete any property acquisitions, including the acquisitions of the
Acquisition
51
<PAGE>
Properties, or to improve the operating results of any acquired properties.
See "Business and Properties--Acquisition Properties."
DEVELOPMENT STRATEGY
As opportunities arise and where market conditions support a favorable risk-
adjusted return on investment, the Company intends to pursue opportunities for
growth through the development of new office and industrial properties. The
Company believes that the strength and experience of its management in the
development of office and industrial properties will provide it with a
competitive advantage in evaluating and pursuing opportunities to develop
additional properties. During the next few years, the Company expects that
most of its development activities will be focused on suburban office and
industrial properties in the Chicago Metropolitan Area.
Based on ongoing marketing activities and discussions with prospective
tenants, the Company expects that over the next several years there will be
significant demand from several large tenants that are unable to find large
blocks of contiguous Class A office space in downtown Chicago which may lead
to significant office development opportunities. The Company believes that its
significant land holdings and land option rights will provide it with a
distinct advantage in competing for future development opportunities.
Following the completion of the Offering, the Company will own approximately
83.4 acres and have rights to acquire approximately 157.2 acres of developable
land, which management believes could be developed with approximately 1.2
million square feet of additional office space in the Chicago CBD and
approximately 4.4 million square feet of additional industrial properties
primarily in the Chicago Metropolitan Area. The Company's option rights
include an option to acquire a development site containing approximately
58,000 square feet known as 300 N. LaSalle in downtown Chicago which, to the
extent the Company is able to obtain significant preleasing commitments for
such a project, the Company believes it could develop as an office or mixed-
use project containing up to approximately 1.2 million net rentable square
feet.
The Services Company's corporate advisory activities with third parties are
expected to give the Company further access to future development
opportunities. The Services Company also will continue to undertake build-to-
suit projects for third parties.
FINANCING STRATEGY
The Company's financing strategy and objectives are determined by the
Company's Board of Trustees. The Company presently intends to operate with a
ratio of debt-to-total market capitalization (defined as the total debt of the
Company as a percentage of the sum of the market value of issued and
outstanding Shares, including the Common Units exchangeable for Common Shares,
plus total debt) in the range of 25.0% to 40.0%. The Company also intends to
operate in a manner that will facilitate its ability to secure an investment
grade rating on future unsecured debt as soon as practicable. However, such
objectives may be altered without the consent of the Company's shareholders,
and the Company's organizational documents do not limit the amount or type of
indebtedness that the Company may incur. Upon the completion of the Offering
and the consummation of the Formation Transactions, the Company's total debt
will constitute approximately 25.2% of its total market capitalization.
The Company intends to use one or more sources of capital for future
acquisitions and development activities. These capital sources may include
undistributed cash flow, borrowings under certain acquisition facilities,
proceeds from the issuance of long-term, tax-exempt bonds and other debt or
equity securities and other bank and/or institutional borrowings. Subject to
compliance by the Company with applicable loan covenants, upon completion of
the Offering, the $225.0 million Credit Facility may be used to provide funds
for acquisitions and development activities and to provide the replacement
letters of credit for the $74.5 million of Tax-Exempt Bonds. There can be no
assurance that any such financing will be obtained.
52
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering (which are estimated to be
approximately $39.6 million for the Convertible Preferred Offering and
approximately $230.3 million for the Common Share Offering), after the
deduction of underwriting discounts and commissions applicable to the Common
Share Offering, are estimated to be approximately $269.9 million ($304.4
million if the Underwriters' over-allotment option with respect to the Common
Shares is exercised in full). The Company will use the net proceeds of the
Offering to acquire 2,000,000 Preferred Units and 12,380,000 Common Units
(representing a 55.3% common equity interest in the Operating Partnership).
The Operating Partnership will use the funds its receives from (i) the sale
of Common Units and Preferred Units to the Company for the net proceeds of the
Offering, (ii) the sale of Common Units to the Primestone Joint Venture for
$85.0 million and (iii) the expected borrowings of $83.5 million under the New
Mortgage Notes as follows:
. $350.8 million (including prepayment fees) will be used to repay certain
mortgages and other indebtedness related to the Properties and held by
third-party lenders;
. $41.4 million to acquire the Acquisition Properties from third parties
and to pay approximately $5.9 million for the Continental Management
Business;
. $28.7 million in cash to the IBD Contributors and NAC Contributors in
connection with their contribution of the IBD Properties and NAC
Properties;
. $5.2 million to pay on behalf of Prime, or reimburse Prime for, costs
and expenses incurred by Prime in connection with the Formation
Transactions and the Offering, including registration, NASD and NYSE
listing fees of approximately $250,000, financial printing and engraving
costs of approximately $400,000, legal, accounting, due diligence and
related fees of approximately $3.9 million and certain acquisition costs
(including earnest money deposits) of approximately $0.7 million
relating to Prime Contribution Properties;
. $2.5 million to pay transfer taxes related to the Prime Properties, the
Prime Contribution Properties, the IBD Properties and the NAC
Properties;
. $1.7 million to acquire the ownership interests and subordinate debt
interests in the Property Partnerships of the Prime Properties not held
by Prime;
. $1.7 million to pay commitment fees relating to the Credit Facility and
the New Mortgage Notes; and
. $0.5 million in excess proceeds to be used for working capital.
If the Underwriters' over-allotment option with respect to the Common Shares
is exercised, the Company will use the proceeds from the exercise of the
option to acquire additional Common Units, and the Operating Partnership will
use the funds it receives from the Company for working capital and general
corporate purposes, including future acquisitions and development. See the Pro
Forma Condensed Consolidated Balance Sheet and the Pro Forma Condensed
Consolidated Statements of Operations included elsewhere in this Prospectus
for the pro forma effects of the foregoing transactions and the debt reduction
under certain assumptions described therein. See also "Structure and Formation
of the Company--Formation Transactions."
The following table sets forth certain information concerning the
indebtedness outstanding at June 30, 1997 being repaid with the net proceeds
of the Offering:
<TABLE>
<CAPTION>
INTEREST MATURITY
PROPERTIES RATE (%) DATE PRINCIPAL
---------- -------- -------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
77 West Wacker Drive Building................ 10.0% 3/98 $229.8
77 West Wacker Drive Building................ 11.0% 3/98 6.7
201 4th Avenue N............................. 7.4% 10/98 5.3
Parking facility............................. 7.6% 10/98 1.2
------
$243.0
======
</TABLE>
53
<PAGE>
DISTRIBUTION POLICY
The Company presently intends to make regular quarterly distributions to the
holders of its Convertible Preferred Shares and Preferred Units. Distributions
in respect of the Common Shares and Common Units are not permitted unless all
current and any accumulated distributions in respect of the Convertible
Preferred Shares and Preferred Units, respectively, have been paid in full.
The Company intends to declare and pay a pro rata distribution with respect to
the period commencing on the completion of the Offering and ending on December
31, 1997 based upon $0. per Convertible Preferred Share for a full
quarter. On an annualized basis, this would be $ per Convertible Preferred
Share, or an annual distribution rate of approximately % based on an
assumed initial offering price per share of $20.00 (representing the midpoint
of the price range). The following discussion and the information set forth in
the table and footnotes below should be read together with the financial
statements and notes thereto, the pro forma financial information and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Pro Forma Liquidity and Capital Resources" included
elsewhere in this Prospectus.
54
<PAGE>
Federal income tax law requires that a REIT distribute annually at least
95.0% of its REIT taxable income. See "Certain Federal Income Tax
Considerations--Requirements for Qualification--Annual Distribution
Requirements." The amount of distributions on an annual basis necessary to
maintain the Company's REIT status based on pro forma taxable income of the
Operating Partnership for the 12 months ended December 31, 1996, as adjusted
for certain items in the following table, would have been approximately $14.8
million. The estimated cash available for distribution is anticipated to be in
excess of the annual distribution requirements applicable to REITs. Under
certain circumstances, the Company may be required to make distributions in
excess of cash available for distribution in order to meet such distribution
requirements. See "Risk Factors--Adverse Consequences of Failure to Qualify as
a REIT; Other Adverse Consequences." For a discussion of the tax treatment of
distributions to holders of Convertible Preferred Shares, see "Certain Federal
Income Tax Considerations."
55
<PAGE>
ESTIMATED CASH FLOWS
The following table illustrates the adjustments made by the Company to
reflect cash flow activity (including pro forma Funds from Operations) for the
12 months ended June 30, 1997 in order to calculate estimated initial cash
available for distribution for the 12 months ending June 30, 1998 (dollar
amounts, except per share amounts, in the table and related footnotes are in
thousands unless otherwise indicated):
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
Pro forma net income before minority interests for the year ended De-
cember 31, 1996..................................................... $ 8,794
Plus pro forma net income before minority interests for the six
months ended June 30, 1997.......................................... 3,783
Less pro forma net income before minority interests for the six
months ended June 30, 1996.......................................... (5,642)
-------
Pro forma net income before minority interests for the 12 months
ended June 30, 1997................................................. 6,935
Add (deduct) non-cash items:
Pro forma depreciation and amortization for the 12 months ended
June 30, 1997(1).................................................. 16,811
Gain on sales of property(2)....................................... (674)
Other non-recurring charges(3)..................................... 6,639
-------
Pro forma Funds from Operations for the 12 months ended June 30,
1997................................................................ 29,711
Adjustments:
Net increase in contractual rental income(4)....................... 1,641
Increases from new leases(5)....................................... 4,865
Net effect of lease expirations, assuming no renewals(6)........... (5,721)
Non-recurring items(7)............................................. 2,071
-------
Estimated adjusted pro forma Funds from Operations for the 12 months
ended June 30, 1998................................................. 32,567
Adjustments:
Net effect of straight-line rents(8)............................... 239
Pro forma non-real estate amortization for the 12 months ended June
30, 1998(9)....................................................... 1,250
-------
Estimated adjusted pro forma cash flow from operating activities for
the 12 months ending June 30, 1998.................................. 34,056
Estimated capitalized tenant improvements and leasing commis-
sions(10)(11)....................................................... (1,698)
Estimated capital expenditures(11)(12)............................... (644)
Scheduled debt principal payments(13)................................ (89)
-------
Estimated cash available for distribution for the 12 months ending
June 30, 1998(14)................................................... $31,625
=======
Company's share of cash available for distribution(15)............. $17,501
=======
Minority interests' share of cash available for distribution....... $14,124
=======
Total estimated initial distribution(14)............................. $30,201
=======
Estimated initial annual distribution per share...................... $ 1.35
=======
Estimated cash available for distribution on payout ratio(16)........ 95.5%
=======
</TABLE>
- --------
(1) Pro forma depreciation and amortization of $16,390 for the year ended
December 31, 1996 plus $8,484 for the six months ended June 30, 1997 less
$8,063 for the six months ended June 30, 1996, exclusive of amortization
of deferred financing costs for each respective period. Amounts include
the Company's proportionate share of depreciation and amortization of the
Services Company for each respective period.
(2) Gain on sales of property included in pro forma net income before minority
interests for the 12 months ended June 30, 1997.
(3) Elimination of non-recurring provision for environmental remediation costs
($3,205) on certain of the Prime Properties which are the obligations of
Prime (see Note 9 to the Combined Financial Statements of the Prime
Properties for additional information) and non-recurring write-off of
deferred tenant costs ($3,434) associated with Keck, a major tenant of the
77 West Wacker Drive Building. Keck has agreed to vacate the
56
<PAGE>
Keck Space on or before November 30, 1997 (see Note 5 to the Combined
Financial Statements of the Prime Properties for additional information).
(4) Represents the incremental increase in Funds from Operations attributable
to contractual rent increases for the 12 months ending June 30, 1998 over
actual rental revenue included in pro forma Funds from Operations for the
12 months ended June 30, 1997. (Contractual rental increases are limited
to the actual number of months in which the increased rental rate will be
in effect for each lease.)
(5) Represents the incremental increase in pro forma Funds from Operations
attributable to rental revenue from new executed leases commencing after
June 30, 1996 for the 12 months ending June 30, 1998.
(6) Represents the elimination of rental revenue for the 12 months ended June
30, 1998 from: (i) leases which expired between June 30, 1996 and June 30,
1997 ($4,002); (ii) leases which will expire between July 1, 1997 and June
30, 1998 for that portion of the 12 months ending June 30, 1998 that such
leases are no longer in effect ($1,580); and (iii) elimination of rental
revenues attributable to tenants leasing on a month-to-month basis for
such period ($139). This table assumes that leases which expire prior to
June 30, 1998 will not be renewed or released during the period. As a
result of this assumption, the average occupancy rate of the Properties
for the 12-month period ending June 30, 1998 will equal approximately
83.9% versus the actual occupancy rate of Properties as of June 30, 1997
of approximately 87.9%. (Occupancy rates as of June 30, 1997 assume that
the Keck Space was vacant.) The Company's average retention rate for
expiring leases for January 1, 1994 through June 30, 1997, in terms of
square footage, was approximately 63.9% for the Prime Properties.
(7) Represents the elimination of non-recurring expenses relating to the Prime
Properties. These costs consist of (i) legal and consulting costs
associated with environmental liability studies ($1,246) on certain of the
Prime industrial properties which environmental liabilities are the
responsibility of Prime (see Note 9 to the Combined Financial Statements
of the Prime Properties for additional information); (ii) crane
maintenance costs of a previous tenant that are now the responsibility of
a new tenant ($407); and (iii) costs associated with the litigation
against Keck ($418).
(8) Represents the net effect of adjusting straight-line rental income
included in pro forma net income from an accrual basis under GAAP to a
cash basis.
(9) Represents pro forma non-real estate amortization for the 12 months ended
June 30, 1998 consisting of (i) amortization of deferred financing and
other amortization costs included in pro forma net income before minority
interests for the 12 months ended June 30, 1997 ($707) and (ii) the
Company's share (at 95%) of goodwill amortization recorded for the
Services Company ($543).
(10) Represents management's estimate of projected non-incremental revenue-
generating tenant improvements ("TI") and leasing commissions ("LC") for
the 12-month period ending June 30, 1998. Projected TI and LC for the
Office Properties and Industrial Properties are provided in the following
table (amounts not rounded to thousands) based on the weighted average TI
and LC expenditures and retenant and renewal rates for all renewed and
retenanted space during 1994, 1995, 1996, and the six months ended June
30, 1997 for the Prime Properties, multiplied by the average annual
leased space expiring for the Office Properties and the Industrial
Properties during 1998, 1999, and 2000.
57
<PAGE>
<TABLE>
<CAPTION>
(AMOUNTS IN DOLLARS)
WEIGHTED
1994 1995 1996 1997 AVERAGE
------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
Retenanted
TI per net rentable square foot...... $10.68 $11.36 $ 9.96 $ -- $ 8.30
LC per net rentable square foot...... $ 3.98 $ 6.23 $ 2.63 $ 1.61 $ 2.81
----------
Total weighted average TI and LC.... $ 11.11
Average annual net rentable square
feet of leased space expiring dur-
ing the three 12-month periods fol-
lowing the Offering................ 190,996
----------
Total estimated annual TI and LC.... $2,121,966
Rate of retenant.................... 38%
----------
Total cost of retenants............. $ 806,347
Renewals
TI per net rentable square foot...... $ 5.24 $ 3.48 $ 0.33 $ 2.48 $ 3.11
LC per net rentable square foot...... $ 1.02 $ 4.15 $ 0.82 $ 3.82 $ 1.59
----------
Total weighted average TI and LC.... $ 4.70
Average annual net rentable square
feet of leased space expiring dur-
ing the three 12-month periods fol-
lowing the Offering................ 190,996
----------
Total estimated annual TI and LC.... $ 897,681
Rate of renewal..................... 62%
----------
Total cost of renewals.............. $ 556,562
----------
Total estimated annual TI and LC cost
of the Office Properties............. $1,362,909
INDUSTRIAL PROPERTIES:
Retenanted
TI per net rentable square foot...... $ -- $ 0.43 $ 0.16 $ -- $ 0.37
LC per net rentable square foot...... $ -- $ 0.42 $ 0.53 $ -- $ 0.44
----------
Total weighted average TI and LC.... $ 0.81
Average annual net rentable square
feet of leased space expiring dur-
ing the three 12-month periods fol-
lowing the Offering................ 681,328
----------
Total estimated annual TI and LC.... $ 551,876
Rate of retenant.................... 35%
----------
Total cost of retenants............. $ 193,157
Renewals
TI per net rentable square foot...... $ -- $ -- $ -- $ -- $ --
LC per net rentable square foot...... $ 0.58 $ 0.51 $ -- $ -- $ 0.32
----------
Total weighted average TI and LC.... $ 0.32
Average annual net rentable square
feet of leased space expiring dur-
ing the three 12-month periods fol-
lowing the Offering................ 681,328
----------
Total estimated annual TI and LC.... $ 218,025
Rate of renewal..................... 65%
----------
Total cost of renewals.............. $ 141,716
----------
Total estimated annual TI and LC cost
of the Industrial Properties......... $ 334,873
----------
Total.................................. $1,697,782
==========
</TABLE>
58
<PAGE>
(11) The Company expects to fund non-recurring capital expenditures, tenant
improvements, and leasing commissions from cash reserves, borrowings,
cash flow from operating activities or other working capital sources.
(12) The Company's historical average cost per square foot for recurring
capital expenditures not reimbursed by Tenant at the Prime Properties
during the years ended December 31, 1995 and 1996 and the annualized nine
months ended September 30, 1997 was $0.08. Estimated capital expenditures
for the 12 months ended June 30, 1998 is calculated by multiplying $0.08
per square foot by the total square footage for the Office Properties and
Industrial Properties.
(13) Estimated principal payments on the mortgage notes payable.
(14) Estimated cash available for distribution represents the Company's
increase in cash for the period before any distributions in respect of
the Common Shares and Common Units. Total estimated initial distribution
represents an expected use of cash.
(15) The Company's share of estimated distributions based on its approximately
55.3% partnership interest in the Operating Partnership.
(16) Calculated as the estimated initial annual distribution divided by the
estimated cash flow available for distribution for the 12 months ending
June 30, 1998. The payout ratio of estimated adjusted pro forma Funds
from Operations (adjusted for the net effect of straight-line rents) for
the 12 months ending June 30, 1998 equals 92.1%.
Cash available for distribution is based on Funds from Operations (which is
defined by NAREIT as net income (loss) computed in accordance with GAAP,
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate related depreciation and amortization (excluding amortization
of deferred financing costs)) and after adjustments for unconsolidated
partnerships and joint ventures. The calculation of adjustments to pro forma
Funds from Operations is being made solely for the purpose of setting the
initial distribution amount and is not intended to be a projection or
prediction of the Company's actual results of operations nor is the
methodology upon which such adjustments are made intended to be a basis for
determining future distributions. Management considers Funds from Operations
an appropriate measure of performance of an equity REIT because industry
analysts have accepted it as such. The Company computes Funds from Operations
in accordance with standards established by the Board of Governors of NAREIT
in its March 1995 White Paper (with the exception that the Company expects to
report rental revenues on a cash basis, rather than a straight-line GAAP
basis, which the Company believes will result in a more meaningful
presentation of its actual operating activities), which may differ from the
methodology for calculating Funds from Operations used by other office and/or
industrial REITs and, accordingly, may not be comparable to such other REITs.
Further, Funds from Operations does not represent amounts available for
management's discretionary use because of needed capital replacement or
expansion, debt service obligations, or other commitments and uncertainties.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Funds from Operations."
THE ESTIMATES OF PRO FORMA CASH FLOWS FROM OPERATING ACTIVITIES AND CASH
AVAILABLE FOR DISTRIBUTION ARE BEING MADE SOLELY FOR THE PURPOSE OF SETTING
THE INITIAL DISTRIBUTION RATE AND ARE NOT INTENDED TO BE A PROJECTION OR
FORECAST OF THE COMPANY'S RESULTS OF OPERATIONS OR OF ITS LIQUIDITY. FUNDS
FROM OPERATIONS DOES NOT REPRESENT CASH FLOW FROM OPERATIONS AS DEFINED BY
GAAP, IS NOT NECESSARILY INDICATIVE OF CASH AVAILABLE TO FUND ALL OF THE
COMPANY'S CASH NEEDS AND SHOULD NOT BE CONSIDERED AS AN ALTERNATIVE TO NET
INCOME FOR PURPOSES OF EVALUATING THE COMPANY'S OPERATING PERFORMANCE.
59
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (based on
the historical combined financial statements of the Properties) as of June 30,
1997 and on a pro forma basis for the Company after giving effect to the
Offering and the consummation of the Formation Transactions and the use of the
estimated net proceeds from the Offering as described under "Use of Proceeds."
See the historical and pro forma financial information relating to the Company
and the Properties set forth elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------
HISTORICAL PRO FORMA
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Mortgage notes payable............................... $ 343,835 $ 89,925
Tax-exempt and taxable bonds payable................. 86,450 74,450
Credit Facility(1)................................... -- --
----------- ----------
Total debt............................................. 430,285 164,375
Partners' deficit...................................... (140,279) --
Minority interest...................................... -- 159,901
Shareholders' equity:
Preferred Shares, $.01 par value; 30.0 million shares
authorized, 2.0 million Convertible Preferred Shares
issued and outstanding.............................. -- 20
Common Shares, $.01 par value; 100.0 million shares
authorized, 12.38 million shares issued and
outstanding(2)(3)................................... -- 124
Additional paid-in capital........................... -- 197,983
----------- ----------
Total shareholders' equity............................. -- 198,127
----------- ----------
Total capitalization................................... $ 290,006 $ 522,403
=========== ==========
</TABLE>
- --------
(1) The Company has obtained a commitment for the $225.0 million Credit
Facility, which is subject to customary conditions. Borrowings under the
Credit Facility may be used to provide funds for acquisitions and
development activities and to provide the replacement letters of credit
for the $74.5 million of Tax-Exempt Bonds. There can be no assurance that
any such financing will be obtained. See "Business Objective and Growth
Strategies--Financing Strategy."
(2) Assumes no exchange of Common Units to be issued to the Limited Partners
in connection with the Formation Transactions. If all of the Common Units
(including the GP Common Units of the NAC General Partner, which are not,
by their terms exchangeable into Common Shares but which represent common
equity interests in the Operating Partnership) were exchanged, 22,371,443
Common Shares would be outstanding.
(3) Excludes 737,000 shares of the 1,850,000 Common Shares reserved for
issuance pursuant to the Share Incentive Plan. See "Management--Share
Incentive Plan."
60
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain financial information on a pro forma
basis for the Company and on a combined historical basis for the Prime
Properties. The combined historical financial information should be read in
conjunction with the combined financial statements and notes thereto included
elsewhere in this Prospectus.
Pro forma operating information is presented as if, at June 30, 1997, (i)
the Company had sold 12.38 million shares of its Common Shares at $20.00 per
share, representing the midpoint of the price range, and contributed the net
proceeds to the Operating Partnership, (ii) the Company had sold 2.0 million
shares of its Convertible Preferred Shares at $20.00 per share, representing
the midpoint of the price range, and contributed the net proceeds to the
Operating Partnership, (iii) Prime had contributed the properties, business
and operations of the Prime Properties and the Prime Contribution Properties
to the Operating Partnership, (iv) the Operating Partnership had sold 4.57
million Common Units to the Primestone Joint Venture at a price per Common
Unit equal to the initial public offering price of the Common Shares, net of
underwriting discounts and commissions, (v) the IBD Contributors and the NAC
Contributors had contributed the Contribution Properties to the Operating
Partnership, (vi) the Operating Partnership had acquired the Acquisition
Properties, (vii) the Operating Partnership had acquired the Continental
Management Business from a third party and (viii) the Operating Partnership
had repaid debt on certain of the Prime Properties and Prime Contribution
Properties described under "Use of Proceeds." The unaudited Pro Forma
Condensed Consolidated Statements of Operations for the six months ended June
30, 1997 and for the year ended December 31, 1996 are presented as if the
above transactions occurred as of January 1, 1996. The unaudited Pro Forma
Condensed Consolidated financial statements should be read in conjunction with
all of the financial statements contained elsewhere in the Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of the
Formation Transactions and the Offering have been made.
The unaudited Pro Forma Condensed Consolidated Balance Sheet and Statements
of Operations of the Company are not necessarily indicative of what the actual
financial position or results operations would have been assuming the
Formation Transactions and the Offering had occurred at the dates indicated
above, nor do they purport to represent the future financial position or
results of operations of the Company.
61
<PAGE>
SUMMARY FINANCIAL DATA
THE COMPANY (PRO FORMA) AND PRIME PROPERTIES (COMBINED HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ---------------------------------------------------------
COMBINED
HISTORICAL COMBINED HISTORICAL
PRO FORMA ------------------ PRO FORMA -----------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
--------- -------- -------- --------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
REVENUE:
Rental............... $28,026 $ 16,131 $ 14,449 $53,001 $ 30,538 $ 33,251 $ 30,352 $ 28,177 $17,339
Tenant reimburse-
ments............... 10,458 7,769 6,962 19,216 14,225 14,382 12,451 10,750 5,221
Insurance settle-
ment................ -- -- -- -- -- 7,257 -- -- --
Other................ 368 689 1,439 2,778 3,397 2,715 3,170 1,527 1,435
------- -------- -------- ------- -------- -------- -------- -------- -------
Total revenue...... 38,852 24,589 22,850 74,995 48,160 57,605 45,973 40,454 23,995
------- -------- -------- ------- -------- -------- -------- -------- -------
EXPENSES:
Property operations.. 5,716 4,318 4,304 12,532 9,767 9,479 8,852 8,452 6,518
Real estate taxes.... 7,799 5,590 5,154 13,440 9,383 9,445 9,057 7,167 4,331
Depreciation and
amortization........ 8,815 6,492 6,146 17,051 12,409 12,646 11,624 11,739 7,558
Interest............. 4,709 13,587 13,512 9,291 27,080 27,671 25,985 22,827 10,936
Interest--affiliate.. -- 5,649 4,852 -- 10,137 8,563 7,402 6,335 6,699
Property management
fee--
affiliate........... -- 801 766 -- 1,561 1,496 1,388 1,106 1,384
Financing fees....... 640 640 692 1,232 1,232 -- -- -- --
General and adminis-
trative............. 2,967 1,886 1,575 7,161 4,927 4,508 3,727 3,657 1,277
Provision for envi-
ronmental
remediation costs... 3,205 3,205 -- -- -- -- -- -- --
Write-off of deferred
tenant costs........ -- -- -- 3,081 3,081 13,373 -- -- --
------- -------- -------- ------- -------- -------- -------- -------- -------
Total expenses..... 33,851 42,168 37,001 63,788 79,577 87,181 68,035 61,283 38,703
------- -------- -------- ------- -------- -------- -------- -------- -------
Income (loss) before
share of income of
investment
subsidiary,
Convertible
Preferred Share
dividend and
minority interest... 5,001 (17,579) (14,151) 11,207 (31,417) (29,576) (22,062) (20,829) (14,708)
Share of income of
investment
subsidiary.......... 182 -- -- 387 -- -- -- -- --
------- -------- -------- ------- -------- -------- -------- -------- -------
Income (loss) before
Convertible
Preferred Share
dividend and
minority interest... 5,183 (17,579) (14,151) 11,594 (31,417) (29,576) (22,062) (20,829) (14,708)
Convertible Preferred
Share dividend...... (1,400) -- -- (2,800) -- -- -- -- --
------- -------- -------- ------- -------- -------- -------- -------- -------
Income (loss) before
minority interest... 3,783 (17,579) (14,151) 8,794 (31,417) (29,576) (22,062) (20,829) (14,708)
Minority interest.... (1,690) 368 371 (3,928) 894 3,281 5,393 10,531 8,941
------- -------- -------- ------- -------- -------- -------- -------- -------
Net income (loss).... $ 2,093 $(17,211) $(13,780) $ 4,866 $(30,523) $(26,295) $(16,669) $(10,298) $(5,767)
======= ======== ======== ======= ======== ======== ======== ======== =======
Pro forma net income
per
Common Share(1)(2).. $ 0.17 $ 0.39
======= =======
OTHER OPERATING DATA:
Ratio of earnings
before minority
interest to combined
fixed charges and
Convertible
Preferred Share
dividend(3)......... 1.60 0.10 0.24 1.70 0.17 0.21 0.35 0.31 0.16
Excess of combined
fixed charges and
Convertible
Preferred Share
dividend over
earnings before
minority interest... -- $ 17,579 $ 14,151 -- $ 31,417 $29,576 $ 22,062 $ 20,829 $19,552
Ratio of Funds from
Operations to
combined fixed
charges and
Convertible
Preferred Share
dividend(4)......... 3.24 0.58 0.52 3.01 0.54 0.66 0.62 0.69 0.49
Excess of combined
fixed charges and
Convertible
Preferred Share
dividend over Funds
from Operations..... $ -- $ 8,180 $ 8,891 $ -- $ 17,367 $ 12,733 $ 12,930 $ 9,345 $11,994
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31,
-------------------- ------------------------------------------------
COMBINED HISTORICAL
COMBINED ------------------------------------------------
PRO FORMA HISTORICAL 1996 1995 1994 1993 1992
--------- ---------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate assets,
before accumulated
depreciation.......... $514,944 $295,369 $291,757 $289,558 $285,687 $281,316 $259,469
Total assets........... 550,076 318,278 325,230 343,641 356,421 357,158 327,776
Mortgages notes and
bonds payable......... 164,375 430,285 421,983 405,562 388,309 361,832 294,691
Total liabilities...... 192,048 458,557 447,927 434,993 421,257 397,539 343,098
Minority interest...... 159,901 (7,273) (6,905) (6,047) 886 (11,527) (10,297)
Shareholders' equity
(partners' deficit)... 198,127 (133,006) (115,792) (85,305) (65,722) (28,854) (5,025)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------------------ -----------------------------------------
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA -------------------- PRO FORMA -------------------------------
1997 1997 1996 1996 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from Opera-
tions(5).............. $ 15,647 $ (8,180) $ (8,891) $ 28,086 $ (17,367) $ (12,733) $ (12,930)
Cash flows provided by
(used in):
Operating activi-
ties............... -- (2,727) (3,162) -- (3,165) (1,259) (13,875)
Investing activi-
ties............... -- (809) 1,567 -- 1,126 (9,176) (6,495)
Financing activi-
ties............... -- 2,421 3,763 -- 5,733 10,873 15,422
Office Properties:
Square footage...... 2,353,759 1,414,897 1,414,897 2,353,759 1,414,897 1,414,897 1,414,897
Occupancy (%)(6).... 88.0 86.8 88.8 91.6 92.5 95.8 93.7
Industrial Properties:
Square footage...... 5,696,355 2,462,430 2,478,030 5,651,780 2,462,430 2,551,624 2,547,388
Occupancy (%)....... 87.9 73.5 73.3 87.3 73.5 72.9 62.3
</TABLE>
- --------
(1) Pro forma net income per share equals pro forma net income divided by the
12,380 Common Shares outstanding after the Offering.
(2) The pro forma net income (loss) per Common Share based solely on the
number of shares issued in the Offering, the proceeds of which will be
used to retire debt, would be $(0.42) and $(0.49) per share for the six
months ended June 30, 1997 and the year ended December 31, 1996,
respectively, calculated as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------- --------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Pro forma Common Shares
in the Offering issued
to retire debt......... 12,151 12,151
=================== ===================
Historical net loss..... $ (17,211) $ (30,523)
Plus pro forma reduction
in interest expense due
to repayment of indebt-
edness................. 12,160 24,550
------------------- -------------------
Pro forma net loss...... $ (5,051) $ (5,973)
=================== ===================
Pro forma net loss per
Common Shares in the
Offering issued to re-
tire debt.............. $ (0.42) $ (0.49)
=================== ===================
</TABLE>
(3) For purposes of these computations, earnings before minority interests
consist of income (loss) less income from unconsolidated investment
partnerships, plus fixed charges. Combined fixed charges and Convertible
Preferred Share dividend consist of interest costs, whether expensed or
capitalized, and amortization of debt issuance costs and Convertible
Preferred Share dividend.
(4) For purposes of these computations, Funds from Operations consist of Funds
from Operations (as defined in note 5 below) plus combined fixed charges
and Convertible Preferred Share dividend (as defined in note 3 above).
(5) As defined by NAREIT, Funds from Operations represents net income (loss)
before minority interest of holders of Common Units (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring
and sales of property, plus real estate related depreciation and
amortization (excluding amortization of deferred financing costs) and
after adjustments for unconsolidated partnerships and joint ventures. Non-
cash adjustments to Funds from Operations were as follows: in all periods,
depreciation and amortization, for pro forma 1997, provision for
environmental remediation cost, for the years ended December 31, 1996,
1995, 1994 and pro forma 1996, gains on the sale of real estate, for the
years ended December 31, 1996 and 1995 and pro forma 1996, write-off of
deferred tenant costs, for the year ended December 31, 1995, excess
proceeds from insurance claims, and for the year ended December 31, 1994,
lease termination fees. Management considers Funds from Operations an
appropriate measure of performance of an office and/or industrial REIT
because industry analysts have accepted it as such. The Company computes
Funds from Operations in accordance with standards established by the
Board of Governors of NAREIT in its March 1995 White Paper (with the
exception that the Company expects to report rental revenues on a cash
basis, rather than a straight-line GAAP basis, which the Company believes
will result in a more accurate presentation of its actual operating
activities), which may differ from the methodology for calculating Funds
from Operations used by certain other office and/or industrial REITs and,
accordingly, may not be comparable to such other REITs. Further, Funds
from Operations does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
repayment obligations, or other commitments and uncertainties. (See
"Distribution Policy"). Funds from Operations should not be considered as
an alternative for net income as a measure of profitability nor is it
comparable to cash flows provided by operating activities determined in
accordance with GAAP.
(6) The pro forma office occupancy percentage for the six months ended June
30, 1997 was calculated by treating the Keck Space as vacant because,
pursuant to a settlement agreement, Keck has agreed to vacate the space on
or before November 30, 1997. See "Business and Properties--Legal
Proceedings."
63
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Combined Financial Statements for the Prime Properties
and notes thereto appearing elsewhere in this Prospectus. The Combined
Financial Statements of the Prime Properties are comprised of the operations,
assets and liabilities of the properties described in Note 1 of the Notes to
the Combined Financial Statements of the Prime Properties and does not include
any operations, assets and liabilities of the Prime Contribution Properties,
the Contribution Properties or the Acquisition Properties. As part of the
Formation Transactions, the Properties will be contributed to the Operating
Partnership, of which the Company owns an approximate 55.3% interest. As a
result, for accounting purposes, the financial information of the Operating
Partnership and the Company will be consolidated.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Total revenue increased $1.7 million, or 7.4%, to $24.6 million for the six
months ended June 30, 1997 compared to $22.9 million for the six months ended
June 30, 1996. Rental revenue increased $1.7 million, or 11.8%, to $16.1
million in 1997 from $14.4 million in 1996. In 1997, rental revenue from the
Office Properties increased $1.1 million, or 9.1%, to $13.2 million from $12.1
million in 1996 primarily due to increased net rent per leased square foot
($20.80 in 1997 and $18.66 in 1996). In 1997, rental revenue from the
Industrial Properties increased $0.6 million, or 26.1%, to $2.9 million from
$2.3 million in 1996 primarily due to increased average percentage leased
(73.5% in 1997 and 73.1% in 1996) and increased net rent per leased square
foot ($3.21 in 1997 and $2.47 in 1996). Tenant reimbursements increased $0.8
million, or 11.4%, to $7.8 million in 1997 from $7.0 million in 1996. In 1997,
tenant reimbursements from the Office Properties increased $0.8 million, or
13.6%, to $6.7 million from $5.9 million in 1996 primarily due to the
restructuring of Keck's lease. During 1996, Keck paid no tenant reimbursements
until a final restructuring agreement was reached in late 1996. During 1997,
Keck paid $0.6 million of tenant reimbursements. Tenant reimbursements from
the Industrial Properties remained consistent at $1.1 million in both 1997 and
1996. During 1996, one of the Industrial Properties sold a parcel of land for
a gain of $0.6 million. No similar sales occurred in 1997. All other revenue
amounts remained comparable between 1997 and 1996.
Total expenses increased $5.2 million, or 14.1%, to $42.2 million for the
six months ended June 30, 1997 compared to $37.0 million for the six months
ended June 30, 1996. Property operating expenses remained consistent at $4.3
million in both 1997 and 1996. In 1997, property operating expenses from the
Office Properties and the Industrial Properties remained consistent at $4.1
million and $0.2 million, respectively, in both 1997 and 1996. Although there
were changes in occupancy in 1997, property operations were at such a level
that the changes had minimal effect on the overall property operations. In
1997, real estate tax expenses increased $0.4 million, or 7.7%, to $5.6
million from $5.2 million in 1996 primarily due to higher property assessments
in 1997. In 1997, total interest expense increased $0.8 million, or 4.3%, to
$19.2 from $18.4 million in 1996 primarily due to a $15.7 million increase in
outstanding debt in 1997 and 1996. In 1997, general and administrative
expenses increased $0.3 million, or 18.8%, to $1.9 million from $1.6 million
in 1996 primarily due to the write-off of $0.2 million of uncollected tenant
receivables from Keck. In 1997, the Industrial Properties recorded a provision
for environmental remediation costs of $3.2 million, which represents the
probable costs to be incurred for the clean-up of environmental contamination
at the properties. Prime has contractually agreed to indemnify the Company
from any environmental liabilities the Property Partnerships may incur and has
pledged $1.0 million and approximately 485,000 partnership units in an
operating partnership that can be converted to common shares of a publicly
traded real estate investment trust to cover these costs. All other expense
amounts remained comparable between 1997 and 1996.
In both 1997 and 1996, loss allocated to minority interest remained
consistent at $0.4 million primarily due to a minority interest's ownership in
the Prime Properties and loss before minority interest for the properties in
which the minority owners have an interest remained consistent in 1997 and
1996.
Net loss increased $3.4 million, or 24.6%, to $17.2 million in 1997 compared
to $13.8 million in 1996, primarily due to the changes described above.
64
<PAGE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenue decreased $9.4 million, or 16.3%, to $48.2 million for the
year ended December 31, 1996 compared to $57.6 million for the year ended
December 31, 1995 primarily due to the realization of a gain in 1995 from a
non-recurring insurance settlement payment to the Company relating to fire
damage to one of the Industrial Properties. Rental revenue decreased $2.8
million, or 8.4%, to $30.5 million in 1996 from $33.3 million in 1995. In
1996, rental revenue from Office Properties decreased $3.8 million, or 13.3%,
to $24.7 million from $28.5 million in 1995 primarily due to the restructuring
of Keck's lease. The restructuring resulted in decreased average percentage
leased (94.1% in 1996 and 94.7% in 1995) and net rent per leased square foot
($18.71 in 1996 and $21.40 in 1995). In 1996, rental revenue from Industrial
Properties increased $1.0 million, or 20.8%, to $5.8 million from $4.8 million
in 1995 primarily due to increased average percentage leased (73.2% in 1996
and 67.6% in 1995) and net rent per leased square foot ($3.18 in 1996 and
$2.77 in 1995). Tenant reimbursements decreased $0.2 million, or 1.4%, to
$14.2 million in 1996 from $14.4 million in 1995. In 1996, tenant
reimbursements from Office Properties decreased $0.4 million, or 3.2%, to
$12.1 million from $12.5 million in 1995 primarily due to the restructuring of
Keck's lease. In 1996, tenant reimbursements from Industrial Properties
increased $0.3 million, or 16.6%, to $2.1 million from $1.8 million in 1995
primarily due to the increased occupancy described above. In 1995, one of the
Industrial Properties received a final insurance settlement of $7.3 million
related to a fire that destroyed the Property. No such proceeds were received
in 1996. Other revenue increased to $2.2 million in 1996 from $1.6 million in
1995 primarily due to a $0.6 million increase in interest income. The increase
in interest income was due to a $1.0 million increase in the average balance
outstanding of amounts due from affiliates from 1995 to 1996. All other
revenue amounts remained comparable between 1996 and 1995.
Total expenses decreased $7.6 million, or 8.7%, to $79.6 million for the
year ended December 31, 1996 compared to $87.2 million for the year ended
December 31, 1995 primarily due to a decrease of $10.3 million, or 77.4%, to
$3.1 million in 1996 from $13.3 million in 1995 of the write-off by the
Company of deferred tenant costs as part of the restructuring of the Keck
lease. Property operating expenses increased $0.3 million, or 1.1%, to $9.8
million in 1996 from $9.5 million in 1995. Property operating expenses from
Office Properties remained constant at $8.2 million in both 1996 and 1995.
Although there was a decline in Office Properties' occupancy in 1996, property
operations were at such a level that a decline in occupancy had a minimal
effect on the overall property operations. In 1996, property operating
expenses from Industrial Properties decreased $0.1 million, or 7.6%, to $1.2
million from $1.3 million in 1995. In 1996, depreciation and amortization
expense decreased $0.2 million, or 1.6%, to $12.4 million from $12.6 million
in 1995, primarily due to the restructuring of Keck's lease, offset by an
increase in occupancy and additional tenant improvements at the Industrial
Properties described above. No additional costs were written off in 1996. In
1996, total interest expense increased $1.0 million, or 2.8%, to $37.2 million
from $36.2 million in 1995 primarily due to a $16.4 million increase in
outstanding debt during May 1996. Financing fees increased $1.2 million in
1996 from the same period in 1995 due to a letter of credit facility obtained
in 1996 on behalf of the Industrial Properties. In 1996, general and
administrative expenses increased $0.4 million, or 8.9%, to $4.9 million from
$4.5 million in 1995 primarily due to a $0.5 million allowance for
uncollectible tenant receivables due from the restructured lease with Keck
recorded in 1996. All other expenses remained comparable between 1996 and
1995.
In 1996, loss allocated to minority interest decreased $2.4 million, or
74.4%, to $0.9 million from $3.3 million in 1995 primarily due to a reduction
of the minority interest's ownership in the Prime Properties during 1995.
Net loss increased $4.2 million to $30.5 million in 1996 compared to a net
loss of $26.3 million in 1995, primarily due to the changes described above.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenue increased $11.6 million, or 25.2%, to $57.6 million for the
year ended December 31, 1995 compared to $46.0 million for the year ended
December 31, 1994 the booking in 1995 of a non-recurring insurance settlement
payment to the Company relating to fire damage to one of the Industrial
Properties. Rental revenue increased $2.9 million, or 9.5%, to $33.3 million
in 1995 compared to $30.4 million in 1994. In 1995,
65
<PAGE>
rental revenue from Office Properties increased $2.4 million, or 9.2%, to
$28.5 million from $26.1 million in 1994 primarily due to increased average
percentage leased (94.7% in 1995 and 92.9% in 1994) and net rent per leased
square foot ($21.40 in 1995 and $19.97 in 1994). In 1995, rental revenue from
Industrial Properties increased $0.5 million, or 11.6%, to $4.8 million from
$4.3 million in 1994 due to increased average percentage leased (67.6% in 1995
and 64.1% in 1994) and net rent per leased square foot ($2.77 in 1995 and
$2.51 in 1994). In 1995, tenant reimbursements increased $1.9 million, or
15.2%, to $14.4 million in 1995 from $12.5 million in 1994. In 1995, tenant
reimbursements from Office Properties increased $1.8 million, or 16.8%, to
$12.5 million from $10.7 million in 1994 primarily due to the increase in
occupancy described above. In 1995, tenant reimbursements from Industrial
Properties increased $0.1 million, or 5.9%, to $1.8 million from $1.7 million
in 1994 primarily due to the increased occupancy described above. In 1995, one
of the Industrial Properties received a final insurance settlement of $7.3
million related to a fire that destroyed the Property. In 1995, gain on sale
of assets increased $0.8 million to $0.8 million from $0.0 million in 1994
primarily due to a $0.9 million increase in proceeds from the sale of real
estate. Other revenue decreased to $1.6 million in 1995 from $2.8 million in
1994, primarily due to a $1.7 million lease termination fee received in 1994.
No such fee was received in 1995. All other revenue amounts remained
comparable between 1995 and 1994.
Total expenses increased $19.2 million, or 28.2%, to $87.2 million for the
year ended December 31, 1995 compared to $68.0 million for the year ended
December 31, 1994 primarily due to the write-off by the Company in 1995 of
approximately $13.3 million of deferred tenant costs as part of the
restructuring of Keck's lease which included approximately $3.1 million of
leasing commissions and tenant improvements. Property operating expenses
increased $0.6 million, or 6.7%, to $9.5 million in 1995 from $8.9 million in
1994. In 1995, property operating expenses from Office Properties increased
$0.6 million, or 8.0%, to $8.1 million from $7.5 million in 1994 primarily due
to the increase in occupancy described above. Property operating expenses from
Industrial Properties remained constant at $1.3 million in both 1995 and 1994.
Although there was an increase in Industrial Properties' occupancy in 1995,
property operations were at such a level that an increase in occupancy had
minimal effect on the overall property operations. In 1995, real estate tax
expense increased $0.4 million, or 4.4%, to $9.5 million from $9.1 million in
1994. The increase is primarily due to higher property assessments in 1995. In
1995, depreciation and amortization expense increased $1.0 million, or 8.6%,
to $12.6 million from $11.6 million in 1994, primarily due to the increase in
occupancy and additional tenant improvements at the Office Properties and
Industrial Properties described above. In 1995, total interest expense
increased $2.8 million, or 8.4%, to $36.2 million from $33.4 million in 1994
primarily due to a $17.3 million increase in outstanding debt during 1995. In
1995, general and administrative expenses increased $0.8 million, or 21.6%, to
$4.5 million from $3.7 million in 1994 primarily due to an increase in
occupancy at both the Office Properties and Industrial Properties. All other
expenses remained comparable between 1995 and 1994.
In 1995, loss allocated to minority interest decreased $2.1 million, or
38.9%, to $3.3 million from $5.4 million in 1995 primarily due a reduction of
the minority interest's ownership in the Prime Properties during 1995 and
1994.
The net loss increased $9.6 million to $26.3 million in 1995 compared to a
net loss of $16.7 million in 1994, due to the changes described above.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Offering and the Formation Transactions and the
application of the net proceeds therefrom as described in "Use of Proceeds,"
the Company expects to have reduced total indebtedness on the Properties from
$430.3 million to $164.4 million, comprised of debt secured by certain of the
Properties (the "Mortgage Debt"). The $164.4 million Mortgage Debt is expected
to be comprised of three mortgage notes payable totaling $89.9 million and 14
issues of Tax-Exempt Bonds totaling $74.5 million. See "Pro Forma Mortgage
Indebtedness." There will be a total of approximately $90,000 of scheduled
loan principal payments due during the year ending December 31, 1997. The
Company's debt-to-total market capitalization ratio will be 25.2% (24.0% if
the underwriters' overallotment option is exercised in full) of the Company's
total market capitalization.
66
<PAGE>
Pro Forma Mortgage Indebtedness. As of June 30, 1997 on a pro forma basis,
the Company expects to have outstanding approximately $164.4 million of
indebtedness secured by each of the Properties as listed below:
<TABLE>
<CAPTION>
ESTIMATED
ANNUAL DEBT MATURITY BALANCE AT
PROPERTIES INTEREST RATE (%) PRINCIPAL SERVICE DATE MATURITY
- ---------- ----------------- ------------- -------------- -------- -------------
(IN MILLIONS) (IN THOUSANDS) (IN MILLIONS)
<S> <C> <C> <C> <C> <C>
NAC Properties(1) 7.36 $ 56.0 $ 4,122 10/05 $ 51.2
IBD Properties(1) 7.36 27.5 2,024 10/05 25.2
1001 Technology Way(2) 8.30 6.4 618 10/11 4.2
201 4th Avenue N.(3) 5.00 4.8 240 12/14 4.8
620 Market Street(3) 5.00 9.0 450 12/14 9.0
625 Gay Street(3) 5.00 9.0 450 12/14 9.0
4823 Old Kingston
Pike(3) 5.00 3.5 175 12/14 3.5
Chicago Enterprise Cen-
ter(3) 5.00 23.3 1,165 6/22 23.3
East Chicago Enterprise
Center(4) 5.00 15.0 750 6/22 15.0
Hammond Enterprise Cen-
ter(3) 5.00 9.9 495 6/22 9.9
------ ------- ------
Total $164.4 $10,489 $155.1
====== ======= ======
</TABLE>
- --------
(1) Represents mortgage notes payable on the NAC Properties and IBD Properties
(excluding 1001 Technology Way), which are expected to require interest-
only payments during years one through three; beginning in year four,
principal and interest payments are expected to be based on a 22-year
amortization schedule. Interest on the loan is expected to be payable at a
rate equal to seven-year U.S. Treasury Notes, plus 1.27%. Based on recent
U.S. Treasury Note rates, such interest rate is estimated to be 7.36%.
(2) Interest rate is fixed at 8.30% with annual debt service including
principal and interest.
(3) Interest rates represent floating tax-exempt bond rates at June 30, 1997
plus the related annualized credit enhancement fees and expenses. Annual
debt service represents interest and fees only.
The Credit Facility. The Company expects to obtain the Credit Facility for
up to a maximum of $225.0 million, which will be secured by first mortgages on
the Prime Properties and an assignment of management and other fees payable to
the Operating Partnership. The Company has obtained a commitment from
BankBoston, N.A. and PSCC, an affiliate of Prudential Securities Incorporated,
for the $225.0 million Credit Facility. Subject to compliance by the Company
with the applicable loan covenants, the Credit Facility may be used to provide
funds for acquisitions and development activities and to provide the
replacement letters of credit for the $74.5 million of Tax-Exempt Bonds. There
can be no assurance that such financing will be obtained.
New Mortgage Notes. The Company expects to borrow $83.5 million aggregate
principal amount of the New Mortgage Notes. The New Mortgage Notes are
expected to consist of two separate notes secured by first mortgages on
certain of the IBD Contribution Properties and the NAC Contribution
Properties, respectively, and are expected to have a term of seven years. The
New Mortgage Notes are expected to provide for interest-only payments during
years one through three; beginning in year four, principal and interest
payments are expected to be based on a 22-year amortization schedule. Interest
on the loan is expected to accrue at a rate equal to seven-year U.S. Treasury
Notes, plus 1.27%. Based on recent U.S. Treasury Note rates, such interest
rate is estimated to be 7.36%. There can be no assurance that the New Mortgage
Notes financing will be obtained on terms favorable to the Company, if at all.
Analysis of Liquidity and Capital Resources. Upon completion of the Offering
and the Formation Transactions and the use of proceeds therefrom, the Company
will have reduced its total indebtedness by approximately $265.9 million.
67
<PAGE>
The Company believes the Offering and the Formation Transactions will
improve its financial performance through changes in its capital structure,
principally the substantial reduction in its overall debt and its debt to
equity ratio. The Company anticipates that distributions will be paid from
cash available for distribution, which is expected to exceed cash historically
available for distribution as a result of the reduction in debt service
resulting from the repayment and forgiveness of indebtedness. Through the
Formation Transactions, the Company will repay and be forgiven $355.8 million
of its existing debt and add new debt of $89.9 million, reducing pro forma
1996 annual interest expense by approximately $28.1 million.
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital and net cash provided by operations. The
Properties require periodic investments of capital for tenant-related capital
expenditures and for general capital improvements. For the years ended
December 31, 1992 through December 31, 1996, the Company's recurring tenant
improvements and leasing commissions for the Prime Properties averaged $1.47
per square foot of leased space per year. The Company expects that the average
annual cost of recurring tenant improvements and leasing commissions will be
approximately $1.7 million based upon an average annual square feet for which
leases expire during the periods ending June 30, 1997 through June 30, 2000.
The Company expects the cost of general capital improvements to the Properties
to average approximately $0.6 million annually based upon an estimate of $0.08
per square foot.
The Company expects to meet its long-term liquidity requirements for the
funding of property development, property acquisitions and other non-recurring
capital improvements through long-term secured and unsecured indebtedness
(including the Credit Facility) and the issuance of additional equity
securities from the Company. The terms of the Credit Facility and the
Convertible Preferred Shares will impose restrictions on the Company's ability
to incur indebtedness and issue additional preferred shares.
HISTORICAL CASH FLOWS
Historically, the Prime Properties' principal sources of funding for
operations and capital expenditures were from debt financings. Prime incurred
net losses before extraordinary items in each of the last five years and for
the six-month periods ended June 30, 1997 and 1996. However, after adding back
depreciation and amortization, the Properties have generated positive net
operating cash flows for each of the last four years.
The Prime Properties had net cash used in operating activities of $2.7
million, $3.2 million, $3.2 million, $1.3 million and $13.9 million for the
six months ended June 30, 1997 and 1996 and the years ended December 31, 1996,
1995 and 1994, respectively. The $12.6 million decrease in net cash used in
operating activities from 1994 to 1995 is primarily due to a $5.9 million
decrease in loss before minority interest (exclusive of the write-off of
deferred tenant costs in 1995) and a $4.8 million decrease in the adjustment
related to the straight-lining of rents. The $1.9 million increase in net cash
used in operating activities from 1995 to 1996 is primarily due to a $12.1
million increase in loss before minority interest (exclusive of the write-off
of deferred tenant costs in 1996 and 1995), offset by a $8.1 million decrease
in the adjustment related to the straight-lining of rent and a $1.6 million
increase in interest added to principal on mortgage note payable-affiliate.
The $0.5 million decrease in net cash used in operating activities for the six
months ended June 30, 1997 from the six months ended June 30, 1996 was
primarily due to a $0.6 million decrease in tenant receivables from straight-
lining rent, a $0.6 million decrease in gain sale of real estate, a $0.9
million increase in interest added to principal on the mortgage note payable
to affiliates and a $4.2 million increase in other liabilities offset by a
$3.4 million increase in net loss, a $0.9 million increase in tenant
receivables, a $1.3 million increase in deferred costs and a $0.6 million
decrease in accrued interest payable.
The Prime Properties had net cash (used in) provided by investing activities
of ($0.8 million) $1.6 million, $1.1 million, ($9.2 million) and ($6.5
million) for the six months ended June 30, 1997 and 1996 and for the years
ended December 31, 1996, 1995 and 1994, respectively. The $2.7 million
increase in net cash used in investing activities from 1994 to 1995 was
primarily due to a $4.9 million increase in advances made to affiliates,
offset by a $1.3 million decrease in real estate expenditures. The $10.3
million increase in net cash provided by investing activities from 1995 to
1996 was primarily due to an $8.1 million net repayment of advances to
68
<PAGE>
affiliates, a $1.2 million increase in proceeds from sale of real estate and a
$1.0 million decrease in real estate expenditures. The $2.4 million increase
in net cash used in investing activities for the six months ended June 30,
1997 from the six months ended June 30, 1996 was primarily due to a $1.2
million decrease in proceeds from the sale of real estate and a $2.9 million
increase in real estate expenditures offset by a $1.7 million decrease in
amounts due from affiliates.
The Prime Properties had net cash provided by financing activities of $2.4
million, $3.8 million, $5.7 million, $10.9 million and $15.4 million for the
six months ended June 30, 1997 and 1996 and the years ended December 31, 1996,
1995 and 1994, respectively. The $4.5 million decrease in net cash provided by
financing activities from 1994 to 1995 was primarily due to a $3.7 million
decrease in proceeds from mortgage notes payable and a $1.3 million increase
in the repayment of mortgage notes payable. The $5.2 million decrease in net
cash provided by financing activities from 1995 to 1996 was primarily due to a
$5.4 million decrease in proceeds from mortgage notes payable, offset by a
$0.2 million decrease in distributions to partners. The $1.4 million increase
in net cash provided by financing activities for the six months ended June 30,
1997 from the six months ended June 30, 1996 was primarily due to $1.5 million
decrease in proceeds from mortgage notes payable.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations, as defined by
NAREIT, an alternative measure of performance of an equity REIT. Funds from
Operations is defined by NAREIT to mean net income (loss) determined in
accordance with GAAP, excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization (other than amortization
of deferred financing costs and depreciation of non-real estate assets) and
after adjustment for unconsolidated partnerships and joint ventures. The
Company believes that in order to facilitate a clear understanding of the
combined historical operating results of the Company, Funds from Operations
should be examined in conjunction with net income (loss) as presented in the
audited Combined Financial Statements and selected financial data included
elsewhere in this Prospectus. The Company computes Funds from Operations in
accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper (with the exception that the Company expects to
report rental revenues on a cash basis, rather than a straight-line GAAP
basis, which the Company believes will result in a more accurate presentation
of its actual operating activities), which may differ from the methodology for
calculating Funds from Operations used by other certain office and/or
industrial REITs and, accordingly, may not be comparable to such other REITs.
As a result of the Company's reporting rental revenues on a cash basis,
contractual rent increases will cause reported Funds from Operations to
increase. Further, Funds from Operations does not represent amounts available
for management's discretionary use because of needed capital replacement or
expansion, debt repayment obligations, or other commitments and uncertainties.
Funds from Operations should not be considered as an alternative to net income
(loss), as an indication of the Company's performance or to cash flows as a
measure of liquidity or the ability to pay dividends or make distributions.
INFLATION
The Company's leases with the majority of its tenants require the tenants to
pay most operating expenses, including real estate taxes and insurance, and
increases in common area maintenance expenses, which reduce the Company's
exposure to increases in costs and operating expenses resulting from
inflation.
69
<PAGE>
BUSINESS AND PROPERTIES
Unless indicated otherwise, information contained herein concerning the
economies of the Chicago Metropolitan Area, Nashville, Tennessee, Knoxville,
Tennessee, and Columbus, Ohio and office and industrial markets thereof is
derived from a report commissioned by the Company and prepared by RCG, a
nationally known real estate consulting company, and is included herein with
the consent of RCG.
GENERAL
Upon the completion of the Offering and the consummation of the Formation
Transactions, the Company (through the Operating Partnership) will own 16
Office Properties encompassing an aggregate of approximately 2.4 million net
rentable square feet, 44 Industrial Properties encompassing an aggregate of
approximately 5.7 million net rentable square feet, one industrial property
under construction, one parking facility with 398 parking spaces and one
retail center. The Properties are owned in fee simple by the respective
Property Partnerships. Twelve of the 16 Office Properties and 38 of the 44
Industrial Properties are located in the Chicago Metropolitan Area. In the
Chicago Metropolitan Area, the most notable Office Property is the 77 West
Wacker Drive Building, a premier 50-story landmark office tower in downtown
Chicago, which contains approximately 944,600 net rentable square feet. The
building has won numerous awards, including, in 1993, the Sun-Times Real
Estate Development of the Year and the Best New Building Award from Friends of
Downtown. Three Office Properties are located in Knoxville, Tennessee, one
Office Property is located in downtown Nashville, Tennessee, six Industrial
Properties are located in the Columbus, Ohio metropolitan area, the parking
facility is located in Knoxville, Tennessee and the retail center is located
in Suburban Chicago. As of June 30, 1997, the Office Properties were
approximately 88.0% leased to more than 200 tenants, and the Industrial
Properties were approximately 87.9% leased to more than 60 tenants.
Management has developed (or redeveloped), leased and managed 37 of the 44
Industrial Properties (79.2%, in terms of net rentable square feet) and 12 of
the 16 Office Properties (81.9%, in terms of net rentable square feet). In the
course of such development and redevelopment, the Company has acquired
experience across a broad range of development and redevelopment projects. For
example, the Company has developed both Office Properties, such as the 77 West
Wacker Drive Building, and Industrial Properties, such as the Contribution
Properties. The Company also has redeveloped both Office Properties, such as
201 4th Avenue N. in Nashville, and Industrial Properties, such as the Chicago
Enterprise Center, the East Chicago Enterprise Center and the Hammond
Enterprise Center, in the Chicago Metropolitan Area. The Company believes that
all of its Properties are well-maintained and, based on recent engineering
reports, do not require significant capital improvements.
Upon the consummation of the Formation Transactions, in addition to its
interests in the Office Properties and Industrial Properties, the Company will
own approximately 83.4 acres and have the rights to acquire approximately
157.2 acres of developable land (including rights to acquire one development
site located in the Chicago CBD containing approximately 58,000 square feet).
Management believes that the developable land and development site could be
developed with approximately 1.2 million square feet of additional office
space in the Chicago CBD and approximately 4.4 million square feet of
additional industrial properties, primarily in the Chicago Metropolitan Area.
See "--Land for Development." The Company also will have (a) an option to
acquire one additional industrial property, 901 Technology Way, in the
Libertyville Business Park, from certain of the IBD Contributors and (b) a 15-
year right of first offer to develop (or develop and acquire an ownership
interest in) all or any portion of 360 acres of undeveloped office and
industrial land in the Huntley Business Park currently owned and controlled by
an affiliate of Prime, subject to a participation interest in such property
held by a third-party lender. The right of first offer will apply if it is
determined by Prime that the parcel can be best utilized through the
construction of an office or industrial development to be owned and leased to
third parties by Prime or held by Prime for sale to a third party. See "--Land
for Development and Option Properties."
In general, the Office Properties are leased to tenants on a net basis with
tenants obligated to pay their proportionate share of real estate taxes,
insurance, utility and operating expenses or on a full service basis, with the
landlord responsible for the payment of taxes, insurance and operating
expenses up to the amount incurred during the tenant's first year of occupancy
("Base Year") or a negotiated amount approximating the tenant's pro rata share
of real estate taxes, insurance and operating expenses ("Expense Stop"). The
tenant pays its pro rata share of increases in expenses above the Base Year or
Expense Stop. Most of the leases for the Industrial Properties are written on
a net basis, with tenants paying their proportionate share of real estate
taxes, insurance, utility and operating expenses.
70
<PAGE>
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Prime Properties that
comprise a portion of the Office Properties since 1994 (based upon an average
of all renovations and renewal lease transactions during the respective
periods):
PRIME PROPERTIES-OFFICE PROPERTIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTH
------------------------- PERIOD ENDED
1994 1995 1996 JUNE 30, 1997
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Number of lease transactions during
period(1)........................... 12 22 15 10
Rentable square feet during peri-
od(1)............................... 34,225 77,359 30,513 34,264
Net Rent ($)(2)...................... 14.05 15.72 13.14 13.44
Tenant Improvements ($)(3)........... 8.47 5.42 6.16 1.59
Leasing Commissions ($)(4)........... 2.77 2.10 1.92 1.04
Effective Net Rent ($)(5)............ 12.79 14.94 12.04 12.98
Occupancy rate at end of period
(%)(6).............................. 94% 96% 93% 87%
</TABLE>
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(2) Equals aggregate net rent received over their respective terms from all
lease transactions during the period, divided by the number of months of
such lease, multiplied by 12, divided by the total net rentable square
feet leased under all lease transactions during the period.
(3) Equals actual tenant improvements. The decrease from 1996 to June 30, 1997
is predominantly due to five of the six transactions being renewals which
incur minimal tenant improvement costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Equals aggregate net rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the number of months of such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
(6) This table includes Keck's occupancy for the years ended December 31, 1995
and 1994 and, under the restructured lease, for the year ended December
31, 1996.
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Industrial Properties
managed by the Company (i.e., all of the Industrial Properties other than the
Contribution Properties and the Prime Contribution Properties) since 1994
(based upon an average of all lease transactions during the respective
periods):
PRIME PROPERTIES-INDUSTRIAL PROPERTIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31, SIX MONTH
------------------------ PERIOD ENDED
1994 1995 1996 JUNE 30, 1997
------- ------- ------ -------------
<S> <C> <C> <C> <C>
Number of lease transactions during
period(1)............................ 2 5 2 3
Rentable square feet during peri-
od(1)................................ 121,362 236,027 41,440 149,421
Net Rent ($)(2)....................... 2.95 2.60 1.82 2.23(2)
Tenant Improvements ($)(3)............ -- 0.28 0.16 --
Leasing Commissions ($)(4)............ 0.58 0.45 0.53 --
Effective Net Rent ($)(5)............. 2.84 2.45 1.72 2.23(5)
Occupancy rate at end of period (%)... 68% 72% 75% 74%
</TABLE>
- --------
(1) Includes only industrial tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(2) Equals aggregate net rent received over their respective terms from all
lease transactions during the period, divided by the number of months of
such lease, multiplied by 12, divided by the total net rentable square
feet leased under all lease transactions during the period.
(3) Equals actual tenant improvements.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Equals aggregate net rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the number of months of such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
71
<PAGE>
THE OFFICE AND INDUSTRIAL PROPERTIES
The following table sets forth certain information relating to each of the
Properties as of June 30, 1997, unless indicated otherwise. After completion
of the Formation Transactions, the Company (through the Operating Partnership)
will own a 100% interest in all of the Office Properties and the Industrial
Properties.
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED EFFECTIVE NET
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET RENT PER
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3) SQ. FT.($)(4)
- -------- -------- ----------- -------- ---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICE PROPER-
TIES:
77 West Wacker Chicago, IL 1992 944,556 84.6 18,263 22.84 15,367 19.22(6)
Drive(5)........
1990 Algonquin
Road/
2000-2060 Algon-
quin Road
(Salt Creek Of-
fice
Center)(7)(8)... Schaumburg, IL 1979/1986 125,922 90.9 1,153 10.07 1,141 9.97
1699 E.
Woodfield Road
(Citibank Office
Plaza)(9)....... Schaumburg, IL 1979 105,400 95.2 932 9.29 922 9.19
555 Huehl Northbrook, IL 1987 74,000 100.0 529 7.15 522 7.05
Road(10)........
201 4th Avenue Nashville, TN 1968/1985 250,566 90.1 1,987 8.80 1,870 8.28(6)
N...............
620 Market Knoxville, TN 1988 93,711 91.4 895 10.45 805 9.40(6)
Street..........
625 Gay Street.. Knoxville, TN 1988 91,426 90.0 701 8.52 589 7.16(6)
4823 Old Knoxville, TN 1988 34,638 100.0 305 8.80 257 7.43(6)
Kingston Pike...
941-961 Weigel Elmhurst, IL 1989/1994 123,077 100.0 1,571 12.76 1,559 12.66
Drive(10).......
4100 Madison Hillside, IL 1978 24,536 51.2 39 3.07 37 2.97
Street(10)......
350 N. Mannheim Hillside, IL 1977/1987 4,850 -- -- -- -- --
Road(10)........
1600-1700 167th Calumet City, IL 1981 65,394 53.1 431 12.41 427 12.31
Street(10)......
4343 Commerce Lisle, IL 1989 170,708 88.9 2,622 17.28 2,607 17.18
Court(10).......
1301 E. Tower Schaumburg, IL 1992 50,400 100.0 524 10.41 519 10.31
Road(10)........
280 Shuman Naperville, IL 1979 65,001 98.8 648 10.09 642 9.99
Blvd.(7)........
<CAPTION>
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE
FEET PER PROPERTY
PROPERTY AS OF 6/30/97
- -------- ------------------------
<S> <C>
OFFICE PROPER-
TIES:
77 West Wacker Donnelley (25.6%)
Drive(5)........ Everen (25.5%)
Jones Day (11.8%)
1990 Algonquin
Road/
2000-2060 Algon-
quin Road
(Salt Creek Of-
fice
Center)(7)(8)... Silicon Graphics
(19.4%)
1699 E.
Woodfield Road
(Citibank Office
Plaza)(9)....... McGladrey &
Pullen (47.5%)
Merrill Lynch (11.3%)
555 Huehl
Road(10)........ Rank Video (100.0%)
201 4th Avenue
N............... SunTrust Bank (49.0%)
620 Market Morton, Lewis, King &
Street.......... Kreig (31.7%)
FNB Financial (20.7%)
625 Gay Street.. Healthsource (28.3%)
4823 Old
Kingston Pike... Talbots (68.1%)
941-961 Weigel Household Financial
Drive(10)....... Corporation (100.0%)(11)
4100 Madison Nardi Group (27.3%)
Street(10)...... Narco Construction
(20.9%)
350 N. Mannheim
Road(10)........ Vacant
1600-1700 167th
Street(10)...... Unger-Sirovatka (11.1%)
4343 Commerce Computer Associates
Court(10)....... (25.3%)
EquiFax (17.2%)
Hinshaw, Culbertson
(11.1%)
1301 E. Tower Household Credit
Road(10)........ Services (100.0%)(12)
280 Shuman EBY-Brown (35.4%)
Blvd.(7)........ Devtech Associates
(14.3%)
General Electric (10.1%)
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3)
- -------- -------- ----------- --------- ---------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
2205-2255 Enter-
prise
Drive(7)....... Westchester, IL 1987 129,574 91.4 1,174 9.91 1,162
--------- ----- ------ ------
Office Proper- 2,353,759 88.0 31,774 15.34 28,426
ties Subtotal..
--------- ----- ------ ------
INDUSTRIAL PROP-
ERTIES:
Warehouse/Distribution
Facilities:
425 E. Algonquin Arlington Heights, IL 1978 304,506 100.0 946 3.11 836
Road...........
1001 Technology Libertyville, IL 1996 212,831 100.0 841 3.95 819
Way(10)........
3818 Grandville/
1200 Northwest-
ern(10) ....... Gurnee, IL 1961/1990 345,232 100.0 1,041 3.02 1,007
306-310 Era Northbrook, IL 1984 36,495 100.0 393 10.77 389
Drive(10)(13)..
2160 McGaw
Road(9)........ Obetz, OH 1974 310,100 100.0 458 1.48 427
4849 Groveport
Road(9)........ Obetz, OH 1968 132,100 100.0 288 2.18 274
2400 McGaw
Road(9)........ Obetz, OH 1972 86,400 100.0 191 2.21 183
5160 Blazer Me-
morial
Parkway
(9)(14)........ Dublin, OH 1983 85,962 64.5 348 6.28 343
600 London Delaware, OH 1981 52,441 100.0 110 2.11 105
Road(9)........
1401 S. Jeffer- Chicago, IL 1965/1985 17,265 100.0 89 5.15 87
son(10)........
1051 N. Kirk Batavia, IL 1990 120,004 100.0 474 3.95 462
Road(10).......
4211 Madison Hillside, IL 1977/1992 90,334 100.0 349 3.87 340
Street(10).....
200 E. Fullerton Carol Stream, IL 1968/1995 66,254 100.0 248 3.75 242
Avenue(10).....
350 Randy Carol Stream, IL 1974 25,200 87.5 129 5.85 127
Road(10).......
4248, 4250 and
4300 Madison
Street(10)..... Hillside, IL 1980 127,129 100.0 597 4.70 585
370 Carol Elmhurst, IL 1977/1994 60,290 100.0 256 4.25 250
Lane(10).......
<CAPTION>
TENANTS LEASING
10% OR MORE OF
ANNUALIZED NET RENTABLE
EFFECTIVE NET SQUARE
RENT PER FEET PER PROPERTY
PROPERTY SQ. FT.($)(4) AS OF 6/30/97
- -------- ------------- ----------------------------
<S> <C> <C>
2205-2255 Enter-
prise
Drive(7)....... 9.81 Census Bureau (14.5%)
National Restaurant
Enterprise (12.6%)
Cherry Communications
(12.3%)
Office Proper- 13.72
ties Subtotal..
INDUSTRIAL PROP-
ERTIES:
Warehouse/Distribution
Facilities:
425 E. Algonquin 2.75(6) Berlin Packaging (34.2%)
Road........... AM International (26.2%)
International Components
(20.8%)
Barnes & Reineke (18.9%)
1001 Technology 3.85 Rank Video (76.0%)
Way(10)........ Arlington Industries (23.9%)
3818 Grandville/
1200 Northwest-
ern(10) ....... 2.92 Rank Video (100.0%)
306-310 Era 10.67 Roche/NICL (62.3%)
Drive(10)(13).. SLJ/Lionstone (37.7%)
2160 McGaw
Road(9)........ 1.38 Spartan Warehouse (100.0%)
4849 Groveport Premier Auto Glass Corp
Road(9)........ 2.08 (100.0%)
2400 McGaw
Road(9)........ 2.11 S.P. Richards (100.0%)
5160 Blazer Me-
morial
Parkway
(9)(14)........ 6.18 Cross Medical (32.2%)
Alkon (32.3%)
600 London 2.01 Schneider National, Inc.
Road(9)........ (100.0%)
1401 S. Jeffer- 5.05 Federal Express Corp
son(10)........ (100.0%)
1051 N. Kirk 3.85 Houghton Mifflin Co., Inc.
Road(10)....... (100.0%)
4211 Madison 3.77 Dynamic Manufacturing Co.
Street(10)..... (71.2%)
Aratex Services, Inc.
(28.8%)
200 E. Fullerton 3.65 Spraying Systems
Avenue(10)..... (100.0%)(15)
350 Randy 5.75 Data Instruments (37.5%)
Road(10)....... Micro Energy (12.5%)
Miller Pharmaceutical Group
(12.5%)
Mar-Cole Music Center
(12.5%)
Installation Services
(12.5%)
4248, 4250 and
4300 Madison
Street(10)..... 4.60 Best Buy Co., Inc. (40.1%)
Micron Industries (28.9%)
Friction Automotive (12.3%)
370 Carol 4.15
Lane(10)....... Semblex Corp (100.0%)
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED EFFECTIVE NET
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET RENT PER
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3) SQ. FT.($)(4)
- -------- -------- -------------- -------- ---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
388 Carol Elmhurst, IL 1979 40,920 88.4 180 4.97 176 4.87
Lane(10)........
342-346 Carol Elmhurst, IL 1989 67,935 100.0 294 4.32 287 4.22
Lane(10)........
343 Carol
Lane(10)........ Elmhurst, IL 1989 30,084 100.0 202 6.71 199 6.61
4160-4190 Madison
Street(10)...... Hillside, IL 1974/1992 79,532 100.0 318 4.00 310 3.90
11039 Gage Ave-
nue(10)......... Franklin Park, IL 1965/1993 21,935 100.0 107 4.90 105 4.80
11045 Gage Ave-
nue(10)......... Franklin Park, IL 1970/1992 140,815 100.0 535 3.80 521 3.70
550 Kehoe
Blvd(10)........ Carol Stream, IL 1997 44,575 100.0 292 6.55 288 6.45
475 Superior Ave-
nue(7).......... Munster, IN 1989 450,000 100.0 1,258 2.80 1,213 2.70
Overhead
Crane/Manufacturing
Facilities:
1301 Ridgeview
Drive(10)(18)... McHenry, IL 1995 217,600 100.0 1,031 4.74 1,009 4.64
515 Huehl Road/
500
Lindberg(10).... Northbrook, IL 1988 201,244 100.0 822 4.08 801 3.98
455 Academy
Drive(10)(19)... Northbrook, IL 1976 105,444 100.0 406 3.85 395 3.75
4411 Marketing
Place(9)........ Groveport, OH 1984 65,804 100.0 227 3.45 220 3.35
Chicago
Enterprise
Center.......... Chicago, IL 1916/1991-1996
13535-A S.
Torrence
Avenue......... 384,806 37.9 321 2.20 321 2.20
13535-B S.
Torrence
Avenue......... 239,752 100.0 649 2.71 432 1.80
13535-C S.
Torrence
Avenue......... 99,333 81.9 210 2.59 106 1.31
13535-D S.
Torrence
Avenue......... 77,325 100.0 236 3.05 213 2.75
13535-E S.
Torrence
<CAPTION>Avenue......... 57,453 15.3 30 3.42 25 2.85
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE
FEET PER PROPERTY
PROPERTY AS OF 6/30/97
- -------- ----------------------------
<S> <C>
388 Carol
Lane(10)........ Ameritech (88.4%)
342-346 Carol 3-D Exhibits (70.5%)
Lane(10)........ Old Kent Financial Corp.
(29.5%)
343 Carol Matsushita Industrial
Lane(10)........ Equipment (100.0%)
4160-4190 Madison
Street(10)...... Evans, Inc. (46.0%)
Dynamic Manufacturing
(32.3%)
Charles A. Levy (21.7%)(16)
11039 Gage Ave- Boston Coach Illinois Corp.
nue(10)......... (100.0%)
11045 Gage Ave-
nue(10)......... Echlin, Inc. (100.0%)(17)
550 Kehoe
Blvd(10)........ Associated Material (100.0%)
475 Superior Ave-
nue(7).......... General Electric (100.0%)
Overhead
Crane/Manufacturing
Facilities:
1301 Ridgeview
Drive(10)(18)... Motorola (100.0%)
515 Huehl Road/
500
Lindberg(10).... Rank Video (100.0%)
455 Academy National Service Industries
Drive(10)(19)... (100.0%)
4411 Marketing
Place(9)........ Wes-Tran Corp. (100.0%)
Chicago
Enterprise
Center..........
13535-A S.
Torrence
Avenue......... Co-Steel Lasco (37.9%)
13535-B S.
Torrence
Avenue......... Welded Tube Company (100.0%)
13535-C S.
Torrence
Avenue......... Sterling Steel (81.9%)
13535-D S.
Torrence
Avenue......... Alpha Processing (100.0%)
13535-E S.
Torrence
Avenue......... Signode (13.9%)
13535-F S.
Torrence
Avenue......... 44,800 100.0 146 3.25 129 2.87
13535-G S.
Torrence
Avenue......... 54,743 -- -- -- -- --
13535-H S.
Torrence
Avenue......... 73,612 56.3 75 1.82 71 1.72(6)
13535-F S.
Torrence
Avenue......... Signode (100.0%)
13535-G S.
Torrence
Avenue......... Vacant
13535-H S.
Torrence
Avenue......... Performance Minerals (42.4%)
Jet Vac, Inc. (13.9%)
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
NET PERCENTAGE ANNUALIZED ANNUALIZED ANNUALIZED
RENTABLE LEASED NET NET ANNUALIZED EFFECTIVE NET
YEAR BUILT/ SQUARE AS OF RENT RENT PER EFFECTIVE NET RENT PER
PROPERTY LOCATION RENOVATED FEET 6/30/97(%) ($000)(1) SQ. FT.($)(2) RENT ($000)(3) SQ. FT.($)(4)
- -------- -------- -------------- --------- ---------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
East Chicago
Enterprise
Center........... East Chicago, IN 1917/1991-1997
Building 2 (4407
Railroad
Avenue)......... 169,435 -- -- -- -- --
Building 3 (4407 291,550 100.0 1,423 4.88 1,273 4.37(6)
Railroad
Avenue).........
Building 4 (4407
Railroad
Avenue)......... 87,483 98.1 286 3.33 277 3.23
4440 Railroad
Avenue(20)...... 40,000 100.0 299 7.47 287 7.17
4635 Railroad
Avenue.......... 14,070 -- -- -- -- --
Hammond
Enterprise
Center........... Hammond, IN 1920-1952
4507 Columbia
Avenue.......... 256,595 98.8 572 2.26 226 .89(6)
4527 Columbia
Avenue(22)...... 16,701 62.8 56 5.36 56 5.36
4531 Columbia
Avenue.......... 250,266 74.1 274 1.48 253 1.36
--------- ------ ------
Industrial Prop- 5,696,355 87.9 17,007 3.40 15,669 3.13
erties Subtotal..
--------- ------ ------
Portfolio Total.. 8,050,114 87.9 48,781 6.89 44,095 6.23
========= ====== ======
OTHER PROPERTIES
398 Unit Parking
Facility......... Knoxville, TN 1981
371-385 N. Gary
Avenue(10)(24)... Carol Stream, IL 1978 11,276
801 Technology Libertyville, IL 1997 68,824 -- -- -- -- --
Way(25)..........
<CAPTION>
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE
FEET PER PROPERTY
PROPERTY AS OF 6/30/97
- -------- ------------------------
<S> <C>
East Chicago
Enterprise
Center...........
Building 2 (4407
Railroad
Avenue)......... Vacant
Building 3 (4407 Acutus-Gladwin (47.1%)
Railroad Metro Metals (52.9%)
Avenue).........
Building 4 (4407
Railroad
Avenue)......... Illiana Steel (98.1%)
4440 Railroad
Avenue(20)...... Inland Steel (100.0%)
4635 Railroad
Avenue.......... Vacant
Hammond
Enterprise
Center...........
4507 Columbia
Avenue.......... A.M. Castle (47.3%)
Slitting Services
(37.8%)(21)
HECO (12.7%)
4527 Columbia The Prime Group, Inc.
Avenue(22)...... (24.2%)(23)
Town & Country (20.4%)
Great Lakes Engineering
LLC
(16.6%)
4531 Columbia
Avenue.......... HECO (41.6%)
Bar Processing (32.5%)
Industrial Prop-
erties Subtotal..
Portfolio Total..
OTHER PROPERTIES
398 Unit Parking
Facility.........
371-385 N. Gary
Avenue(10)(24)...
801 Technology
Way(25).......... Vacant
</TABLE>
- ----
(1) Annualized Net Rent is the monthly net rent due under the lease as
determined in accordance with GAAP, annualized for all leases in effect
on June 30, 1997. Net rent is the amount due under the lease without
including operating expenses, taxes and other similar reimbursements due
from the tenant.
(2) Annualized Net Rent per square foot represents Annualized Net Rent
divided by net rentable square feet for leases in effect at June 30,
1997.
(3) Annualized Effective Net Rent represents total net rent to be received
over their respective terms from all leases in effect at June 30, 1997
minus all Tenant Expenditures for all such leases, divided by the terms
in months for such leases, multiplied by 12. Tenant Expenditures for
Acquisition and Contribution Properties have been estimated at $0.10 per
square foot for leases in effect at June 30, 1997.
(4) Annualized Effective Net Rent per square foot represents Annualized
Effective Net Rent at June 30, 1997 divided by net rentable square feet
leased at June 30, 1997.
(5) One of the Company's other significant tenants at the 77 West Wacker
Drive Building, Keck, has agreed to vacate the Keck Space on or before
November 30, 1997 pursuant to a settlement agreement. Accordingly, the
Keck Space is assumed vacant for purposes of the calculations in this
table from the calculations in this table. See "--The Company's Office
Submarkets--77 West Wacker Drive Building" and "--Legal Proceedings."
(6) For the purpose of this table, the historical Tenant Expenditures for
these Properties developed by Prime have been adjusted for management's
estimate of costs that can be reused for future tenants (77 West Wacker
Drive Building--$24.65 per leased square foot, other Office Properties--
$5.12 per leased square foot and Industrial Properties--$4.20 per leased
square foot).
75
<PAGE>
(7) These Properties are Acquisition Properties.
(8) This property complex is comprised of 1990 Algonquin Road (a two-story
office building) and 2000-2060 Algonquin Road (seven single-story office
buildings), but is treated as one Office Property.
(9) These Properties are Prime Contribution Properties.
(10) These Properties are Contribution Properties.
(11) Household Financial Corporation has a right of first refusal to purchase
941-961 Weigel Drive.
(12) Household Credit Services has both a right of first refusal to purchase
1301 E. Tower Road and a purchase option exercisable prior to December
30, 2001 at fair market value.
(13) Roche/NICL Ltd. has a right of first refusal to purchase 306 Era Drive.
(14) This Property is a mixed use Industrial/Office Property that has been
classified as an Industrial Property.
(15) Spraying Systems has a right of first refusal for 200 E. Fullerton
Avenue.
(16) This lease expired on August 31, 1997 and has not been renewed.
(17) Echlin, Inc. has a right of first refusal to purchase 11045 Gage Avenue.
(18) Motorola has an option to purchase 1301 Ridgeview Drive for $10,375,000
on May 31, 2000, the end of the initial lease term, $11,620,040 on May
31, 2003, the end of the first option period, $13,014,488 on May 31,
2006, the end of the second option period and $14,576,297 on May 31,
2009, the end of the third option period.
(19) National Service Industries, Inc., has a right of first refusal to
purchase the industrial building at 455 Academy Drive, and the land
adjacent thereto.
(20) This property is an office building adjacent to the East Chicago
Enterprise Center.
(21) This space was leased to A.M. Castle on August 1, 1997 for $2.39 per
square foot, at which time A.M. Castle increased its existing space from
121,000 square feet to 218,589 square feet.
(22) This property is an office building within the Hammond Enterprise Center.
(23) The Company will assume this lease upon the completion of the Offering.
(24) This is a retail center.
(25) This industrial property that is under construction and is expected to be
completed during the fourth quarter of 1997. The Property is being
purchased for cash from certain of the IBD Contributors.
76
<PAGE>
SUMMARY LAND PARCEL INFORMATION
Following the completion of the Offering, the Company will own approximately
83.4 acres and have rights to acquire approximately 157.2 acres of developable
land (including rights to acquire one development site located in the Chicago
CBD containing approximately 58,000 square feet) which management believes
could be developed with approximately 1.2 million square feet of additional
office space in the Chicago CBD and approximately 4.4 million square feet of
additional industrial properties primarily in the Chicago Metropolitan Area.
The following table provides additional information with respect to these
undeveloped parcels:
<TABLE>
<CAPTION>
OWNERSHIP
DESCRIPTION LOCATION SIZE STATUS
- ----------- -------- ---- ---------
<S> <C> <C> <C>
425 E. Algonquin Road... Arlington Heights, IL 3.7 Acres Own
Chicago Enterprise Cen-
ter.................... Chicago, IL 51.2 Acres Own
East Chicago Enterprise
Center................. East Chicago, IN 9.1 Acres Own
Hammond Enterprise Cen-
ter.................... Hammond, IN 8.2 Acres Own
455 Academy Drive(1).... Northbrook, IL 2.5 Acres Own
Libertyville Business
Park(2)................ Libertyville, IL 48.5 Acres Under Contract
1301 Ridgeview
Drive(3)............... McHenry, IL 13.0 Acres Second Option
4849 Groveport Road..... Obetz, OH 4.2 Acres Own
600 London Road......... Delaware, OH 4.5 Acres Own
300 N. LaSalle(4)....... Chicago, IL 58,025 Sq. Ft. Option
NAC Properties(5)....... Carol Stream, IL/Batavia, IL 94.4 Acres Under Contract
</TABLE>
- --------
(1) National Services Industries, Inc., the current tenant of the industrial
building at 455 Academy Drive, has a right of first refusal to purchase
this land.
(2) The Company is obligated to purchase this land for $7.4 million (subject
to certain purchase price adjustments) within three years following the
consummation of the Formation Transactions and the completion of the
Offering.
(3) Motorola has an option to lease or purchase this land, exercisable on or
before August 1, 1998.
(4) The Company has a ten-year option to purchase this Chicago CBD development
site at 95.0% of the fair market value at the time of the exercise of the
option.
(5) The Company is obligated to purchase 20.0 acres of this property per year,
starting on the first anniversary of the consummation of the Formation
Transactions and the completion of the Offering, for $3.00 per square
foot, or approximately $2.5 million for each 20.0 acres.
For additional information regarding these parcels, see "--Land for
Development and Option Properties."
OCCUPANCY AND RENTAL INFORMATION
The following table sets forth the average percentage leased and average
annual base rent per leased square foot for the Prime Properties for the six
months ended June 30, 1997 and for the past three calendar years:
<TABLE>
<CAPTION>
AVERAGE AVERAGE ANNUAL BASE
PERCENTAGE RENT PER RENTABLE
YEAR LEASED(%)(1) SQUARE FOOT($)(2)
---- ------------ -------------------
<S> <C> <C>
Office:
June 30, 1997(3).......................... 89.6 20.86
December 31, 1996......................... 94.1 18.71
December 31, 1995......................... 94.7 21.40
December 31, 1994......................... 92.9 19.97
Industrial:
June 30, 1997............................. 73.5 3.21
December 31, 1996......................... 73.2 3.18
December 31, 1995......................... 67.6 2.77
December 31, 1994......................... 64.1 2.51
</TABLE>
- --------
(1) Average of aggregate percentage leased for the beginning and end of the
period ending on date indicated.
(2) Total Base Rent for the period ending on the date indicated divided by the
average of the aggregate rentable square feet leased for the beginning and
end of such period.
(3) Reflects the Keck Space as vacant.
77
<PAGE>
LEASE EXPIRATIONS
The following table sets out a schedule of the lease expirations for the
Prime Properties that are Office Properties for each of the ten years
beginning with July 1, 1997, assuming that none of the tenants exercises
renewal options or termination rights:(1)
<TABLE>
<CAPTION>
AVERAGE ANNUAL
PERCENTAGE OF RENT PER NET
TOTAL LEASED ANNUAL RENTABLE SQUARE
NET RENTABLE SQUARE FEET NET RENT FOOT
NUMBER OF AREA SUBJECT TO REPRESENTED UNDER EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRING EXPIRING BY EXPIRING LEASES EXPIRING
EXPIRATION LEASES LEASES(SQ. FT.) LEASES(%) ($000) LEASES($)
------------- --------- --------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
7/1/97-12/31/97......... 9 35,636 2.90 392 10.99
1998.................... 17 93,421 7.61 892 9.55
1999.................... 15 51,205 4.17 481 9.40
2000.................... 12 72,276 5.89 598 8.28
2001.................... 12 47,535 3.87 433 9.12
2002.................... 9 74,396 6.06 891 11.98
2003.................... 2 25,175 2.05 271 10.76
2004.................... 2 58,981 4.80 655 11.11
2005.................... 1 12,637 1.03 129 10.18
2006.................... 1 4,485 0.37 46 10.29
2007+................... 10 752,060 61.25 17,362 23.09
--- --------- ------ ------
90 1,227,807 100.00 22,150 18.04
=== ========= ====== ======
</TABLE>
- --------
(1) Properties included are the 77 West Wacker Drive Building, 201 4th Avenue
N., 620 Market Street, 625 Gay Street and 4823 Old Kingston Pike.
The following table sets out a schedule of the lease expirations for the
Prime Properties that are Industrial Properties for each of the ten years
beginning with July 1, 1997, assuming that none of the tenants exercises
renewal options or termination rights:(1)
<TABLE>
<CAPTION>
AVERAGE ANNUAL
NET PERCENTAGE OF RENT PER
RENTABLE TOTAL LEASED ANNUAL NET NET RENTABLE
AREA SUBJECT SQUARE FEET RENT UNDER SQUARE FOOT
NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRING LEASES EXPIRING LEASES EXPIRING
EXPIRATION LEASES (SQ. FT.) LEASES(%) ($000) LEASES($)
------------- --------- ------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
7/1/97-12/31/97(2)...... 2 40,279 2.22 300 7.46
1998.................... 2 149,979 8.28 347 2.32
1999.................... 4 218,371 12.06 463 2.12
2000.................... 4 303,966 16.79 793 2.61
2001.................... 3 67,210 3.71 209 3.10
2002.................... 1 2,766 0.15 13 --
2003.................... 1 239,752 13.24 649 2.71
2004.................... -- -- -- -- --
2005.................... 3 247,102 13.65 780 3.16
2006.................... 1 31,240 1.73 58 1.86
2007+................... 5 510,139 28.17 1,911 3.75
--- --------- ------ -----
26 1,810,804 100.00 5,523 3.05
=== ========= ====== =====
</TABLE>
- --------
(1) Properties included are the Industrial Properties in the Chicago
Enterprise Center, East Chicago Enterprise Center and Hammond Enterprise
Center and 425 E. Algonquin Road, as well as the office buildings at the
East Chicago Enterprise Center and the Hammond Enterprise Center.
(2) Excludes the 1997 expiration of space formerly leased by Slitting Services
which was relet to A.M. Castle on August 1, 1997 for $2.39 per square foot
at which time A.M. Castle increased its leased space of 121,000 square
feet from $1.95 to $2.39 per square foot. In 2013, the entire A.M. Castle
lease expires, including this 97,100 square foot space.
78
<PAGE>
The following table sets out a schedule of the lease expirations for the
Acquisition Properties, Prime Contribution Properties and Contribution
Properties that are Office Properties for each of the ten years beginning with
July 1, 1997, assuming that none of the tenants exercises renewal options or
termination rights:(1)
<TABLE>
<CAPTION>
NET PERCENTAGE OF ANNUAL AVERAGE ANNUAL
RENTABLE TOTAL LEASED NET RENT PER NET
AREA SUBJECT SQUARE FEET RENT UNDER RENTABLE SQUARE FOOT
NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRING LEASES EXPIRING LEASES EXPIRING
EXPIRATION LEASES (SQ. FT.) LEASES (%) ($000) LEASES ($)
- ------------- --------- ------------ -------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
7/1/97-12/31/97......... 11 60,588 7.18 1,035 17.08
1998.................... 25 92,200 10.93 1,242 13.47
1999.................... 26 209,749 24.86 2,618 12.48
2000.................... 34 112,350 13.31 1,238 11.02
2001.................... 18 114,847 13.61 1,050 9.14
2002.................... 15 102,908 12.19 1,069 10.39
2003.................... 4 104,113 12.34 926 8.90
2004.................... 3 41,729 4.94 331 --
2005.................... 1 5,400 0.64 114 21.05
2006.................... -- -- -- -- --
2007+................... -- -- -- -- --
--- ------- ------ -----
137 843,884 100.00% 9,623 11.40
=== ======= ====== =====
</TABLE>
- --------
(1) Properties included are 1990 Algonquin Road, 2000-2060 Algonquin Road,
1699 E. Woodfield Road, 941-961 Weigel Drive, 4100 Madison Street, 350 N.
Mannheim Road, 1600-1700 167th Street, 4343 Commerce Court, 555 Huehl
Road, 1301 E. Tower Road, 280 Shuman Boulevard and 2205-2255 Enterprise
Drive.
The following table sets out a schedule of the lease expirations for the
Acquisition Properties, Prime Contribution Properties and Contribution
Properties that are Industrial Properties for each of the ten years beginning
with July 1, 1997, assuming that none of the tenants exercises renewal options
or termination rights:(1)
<TABLE>
<CAPTION>
NET PERCENTAGE OF ANNUAL AVERAGE ANNUAL
RENTABLE TOTAL LEASED NET RENT PER NET
AREA SUBJECT SQUARE FEET RENT UNDER RENTABLE SQUARE FOOT
NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRING LEASES EXPIRING LEASES EXPIRING
EXPIRATION LEASES (SQ. FT.) LEASES (%) ($000) LEASES ($)
- ------------- --------- ------------ -------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
7/1/97-12/31/97......... 3 85,361 2.67 236 2.76
1998.................... 5 467,847 14.64 1,314 2.81
1999.................... 9 675,950 21.15 2,279 3.37
2000.................... 7 427,403 13.37 1,918 4.49
2001.................... 10 931,418 29.15 3,386 3.64
2002.................... -- -- -- -- --
2003.................... 3 232,181 7.27 1,015 4.37
2004.................... 1 60,290 1.89 256 4.25
2005.................... 2 108,335 3.39 299 2.76
2006.................... 1 44,575 1.39 292 6.55
2007+................... 2 162,184 5.08 489 3.02
--- --------- ------ ------
43 3,195,544 100.00% 11,484 3.59
=== ========= ====== ======
</TABLE>
- --------
(1) Properties included are the 1001 Technology Way, 3818 Grandville/1200
Northwestern, 306-310 Era Drive, 2160 McGaw Road, 4849 Groveport Road,
2400 McGaw Road, 5160 Blazer Memorial Parkway, 600 London Road, 1401 S.
Jefferson, 1051 N. Kirk Road, 4211 Madison Street, 200 E. Fullerton
Avenue, 350 Randy Road, 4248, 4250 and 4300 Madison Street, 370 Carol
Lane, 388 Carol Lane, 342-346 Carol Lane, 343 Carol Lane, 4160-4190
Madison Street, 11039 Gage Avenue, 11045 Gage Avenue, 550 Kehoe Boulevard
and 475 Superior Avenue.
79
<PAGE>
The following table set forth detailed lease expiration information for each
of the Properties for leases in place as of July 1, 1997, assuming that none of
the tenants exercise renewal options or terminations rights, if any, at or
prior to the schedule expirations:
OFFICE PROPERTIES
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
--------------------------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ------- ------- ------- ------- ------- ------- ------- ---- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
77 West Wacker
Drive
Square Footage
of Expiring
Leases.......... -- 24,662 1,424 22,067 12,844 55,055 25,175 22,576 -- 4,485 631,159 799,447
Percentage of
Total Leased
Sq. Ft. (%)..... -- 3.08 0.18 2.76 1.61 6.89 3.15 2.82 -- 0.56 78.95 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... -- 251,627 17,871 165,868 166,054 745,532 270,914 206,993 -- 46,147 16,392,310 $18,263,316
Annualized Net
Rent per Square
Foot ($)........ -- 10.20 12.55 7.52 12.93 13.54 10.76 9.17 -- 10.29 25.97 $ 22.84
Percentage of
Total Annualized
Net Rent (%).... -- 1.38 0.10 0.91 0.91 4.08 1.48 1.13 -- 0.25 89.76 100.00%
Number of Leases
Expiring........ -- 4 1 2 2 4 2 1 -- 1 9 26
1699 E. Woodfield
Road (Citibank
Office Plaza)
Square Footage
of Expiring
Leases.......... 3,651 965 6,417 6,841 6,691 63,849 11,909 -- -- -- -- 100,323
Percentage of
Total Leased
Sq. Ft. (%)..... 3.64 0.96 6.40 6.82 6.67 63.64 11.87 -- -- -- -- 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... 23,512 4,534 66,069 34,635 51,702 631,078 120,937 -- -- -- -- $ 932,467
Annualized Net
Rent per Square
Foot ($)........ 6.44 4.70 10.30 5.06 7.73 9.88 10.16 -- -- -- -- $ 9.29
Percentage of
Total Annualized
Net Rent (%).... 2.52 0.49 7.09 3.71 5.54 67.68 12.97 -- -- -- -- 100.00%
Number of Leases
Expiring........ 2 1 3 3 2 6 1 -- -- -- -- 18
2000-2060 Algon-
quin Road (Salt
Creek Office Cen-
ter)
Square Footage
of Expiring
Leases.......... 4,889 13,002 10,521 34,134 15,726 6,600 6,110 -- -- -- -- 90,982
Percentage of
Total Leased
Sq. Ft. (%)..... 5.37 14.29 11.56 37.52 17.28 7.25 6.72 -- -- -- -- 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... 50,178 129,147 92,962 384,738 146,174 50,124 64,882 -- -- -- -- $ 918,205
Annualized Net
Rent per Square
Foot ($)........ 10.26 9.93 8.84 11.27 9.30 7.59 10.62 -- -- -- -- $ 10.09
Percentage of
Total Annualized
Net Rent (%).... 5.46 14.07 10.12 41.90 15.92 5.46 7.07 -- -- -- -- 100.00%
Number of Leases
Expiring........ 2 8 7 9 3 1 1 -- -- -- -- 31
1990 Algonquin
Road (Salt Creek
Office Center)
Square Footage
of Expiring
Leases.......... -- 2,238 10,609 1,103 7,510 1,999 -- -- -- -- -- 23,459
Percentage of
Total Leased
Sq. Ft. (%)..... -- 9.54 45.22 4.70 32.01 8.52 -- -- -- -- -- 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... -- 10,291 117,901 10,752 74,643 21,117 -- -- -- -- -- $ 234,704
Annualized Net
Rent per Square
Foot ($)........ -- 4.60 11.11 9.75 9.94 10.56 -- -- -- -- -- $ 10.00
Percentage of
Total Annualized
Net Rent (%).... -- 4.38 50.23 4.58 31.80 9.00 -- -- -- -- -- 100.00%
Number of Leases
Expiring........ -- 1 2 1 2 1 -- -- -- -- -- 7
555 Huehl Road
Square Footage
of Expiring
Leases.......... -- -- -- -- -- -- 74,000 -- -- -- -- 74,000
Percentage of
Total Leased
Sq. Ft. (%)..... -- -- -- -- -- -- 100.00 -- -- -- -- 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... -- -- -- -- -- -- 528,954 -- -- -- -- $ 528,954
Annualized Net
Rent per Square
Foot ($)........ -- -- -- -- -- -- 7.15 -- -- -- -- $ 7.15
Percentage of
Total Annualized
Net Rent (%).... -- -- -- -- -- -- 100.00 -- -- -- -- 100.00%
Number of Leases
Expiring........ -- -- -- -- -- -- 1 -- -- -- -- 1
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003
------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
201 4th Avenue N.
Square Footage
of Expiring
Leases......... 30,476 13,993 2,789 23,611 19,428 1,988 --
Percentage of
Total Leased
Sq. Ft. (%).... 13.50 6.20 1.24 10.46 8.60 0.88 --
Annualized Net
Rent of
Expiring Leases
($)............ 339,347 156,943 22,704 207,586 144,684 17,647 --
Annualized Net
Rent per Square
Foot ($)....... 11.13 11.22 8.14 8.79 7.45 8.88 --
Percentage of
Total
Annualized Net
Rent (%)....... 17.07 7.90 1.14 10.44 7.28 0.89 --
Number of Leases
Expiring....... 6 3 3 5 4 1 --
620 Market Street
Square Footage
of Expiring
Leases......... 1,760 24,435 8,212 1,820 9,308 10,359 --
Percentage of
Total Leased
Sq. Ft. (%).... 2.06 28.54 9.59 2.13 10.87 12.10 --
Annualized Net
Rent of
Expiring Leases
($)............ 19,616 244,537 64,867 16,380 80,415 79,117 --
Annualized Net
Rent per Square
Foot ($)....... 11.15 10.01 7.90 9.00 8.64 7.64 --
Percentage of
Total
Annualized Net
Rent (%)....... 2.19 27.32 7.25 1.83 8.99 8.84 --
Number of Leases
Expiring....... 1 2 4 1 3 2 --
625 Gay Street
Square Footage
of Expiring
Leases......... 3,400 25,832 13,382 24,778 2,314 5,894 --
Percentage of Total
Leased Sq. Ft.
(%)............ 4.13 31.40 16.27 30.12 2.81 7.16 --
Annualized Net
Rent of
Expiring Leases
($)............ 32,610 205,137 137,189 208,657 17,335 41,889 --
Annualized Net
Rent per Square
Foot ($)....... 9.59 7.94 10.25 8.42 7.49 7.11 --
Percentage of
Total
Annualized Net
Rent (%)....... 4.65 29.27 19.57 29.77 2.47 5.98 --
Number of Leases
Expiring....... 2 4 4 4 1 1 --
4823 Old Kingston
Pike
Square Footage
of Expiring
Leases......... -- 4,499 25,398 -- 3,641 1,100 --
Percentage of Total
Leased Sq. Ft.
(%)............ -- 12.99 73.32 -- 10.51 3.18 --
Annualized Net
Rent of
Expiring Leases
($)............ -- 34,116 238,679 -- 24,943 7,178 --
Annualized Net
Rent per Square
Foot ($)....... -- 7.58 9.40 -- 6.58 6.53 --
Percentage of
Total
Annualized Net
Rent (%)....... -- 11.19 78.28 -- 8.18 2.35 --
Number of Leases
Expiring....... -- 4 3 -- 2 1 --
4343 Commerce
Court
Square Footage
of Expiring
Leases......... 47,144 41,517 29,976 12,549 1,479 7,012 12,094
Percentage of
Total Leased
Sq. Ft. (%).... 31.06 27.36 19.75 8.27 0.97 4.62 7.97
Annualized Net
Rent of
Expiring Leases
($) 901,536 643,953 504,024 208,200 20,460 132,252 211,579
Annualized Net
Rent per Square
Foot ($)....... 19.12 15.51 16.81 16.59 13.83 18.86 17.49
Percentage of
Total
Annualized Net
Rent (%) 34.38 24.56 19.22 7.94 0.78 5.04 8.07
Number of Leases
Expiring....... 4 5 5 3 2 2 1
1600-1700 167th
Street
Square Footage
of Expiring
Leases......... -- 6,299 4,996 5,944 4,922 7,136 --
Percentage of
Total Leased
Sq. Ft. (%).... -- 18.15 14.40 17.13 14.19 20.57 --
Annualized Net
Rent of
Expiring Leases
($) -- 77,359 41,821 62,160 48,840 86,752 --
Annualized Net
Rent per Square
Foot ($)....... -- 12.28 8.37 10.46 9.92 12.16 --
Percentage of
Total
Annualized Net
Rent (%) -- 17.97 9.71 14.44 11.34 20.15 --
Number of Leases
Expiring....... -- 4 2 4 2 1 --
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------
2004 2005 2006 2007+ TOTAL
-------- -------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
201 4th Avenue N.
Square Footage
of Expiring
Leases......... -- 12,637 -- 120,901 225,823
Percentage of
Total Leased
Sq. Ft. (%).... -- 5.60 -- 53.54 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ -- 128,676 -- 969,903 $ 1,987,490
Annualized Net
Rent per Square
Foot ($)....... -- 0 -- 8.02 $ 8.80
Percentage of
Total
Annualized Net
Rent (%)....... -- 6.47 -- 48.80 100.00%
Number of Leases
Expiring....... -- 1 -- 1 24
620 Market Street
Square Footage
of Expiring
Leases......... 29,735 -- -- -- 85,629
Percentage of
Total Leased
Sq. Ft. (%).... 34.73 -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ 390,051 -- -- -- $ 894,983
Annualized Net
Rent per Square
Foot ($)....... 13.12 -- -- -- $ 10.45
Percentage of
Total
Annualized Net
Rent (%)....... 43.58 -- -- -- 100.00%
Number of Leases
Expiring....... 1 -- -- -- 14
625 Gay Street
Square Footage
of Expiring
Leases......... 6,670 -- -- -- 82,270
Percentage of Total
Leased Sq. Ft.
(%)............ 8.11 -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ 58,048 -- -- -- $ 700,865
Annualized Net
Rent per Square
Foot ($)....... 8.70 -- -- -- $ 8.52
Percentage of
Total
Annualized Net
Rent (%)....... 8.28 -- -- -- 100.00%
Number of Leases
Expiring....... 1 -- -- -- 17
4823 Old Kingston
Pike
Square Footage
of Expiring
Leases......... -- -- -- -- 34,638
Percentage of Total
Leased Sq. Ft.
(%)............ -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ -- -- -- -- $ 304,916
Annualized Net
Rent per Square
Foot ($)....... -- -- -- -- $ 8.80
Percentage of
Total
Annualized Net
Rent (%)....... -- -- -- -- 100.00%
Number of Leases
Expiring....... -- -- -- -- 10
4343 Commerce
Court
Square Footage
of Expiring
Leases......... -- -- -- -- 151,771
Percentage of
Total Leased
Sq. Ft. (%).... -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($) -- -- -- -- $ 2,622,004
Annualized Net
Rent per Square
Foot ($)....... -- -- -- -- $ 17.28
Percentage of
Total
Annualized Net
Rent (%) -- -- -- -- 100.00%
Number of Leases
Expiring....... -- -- -- -- 22
1600-1700 167th
Street
Square Footage
of Expiring
Leases......... -- 5,400 -- -- 34,697
Percentage of
Total Leased
Sq. Ft. (%).... -- 15.56 -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($) -- 113,670 -- -- $ 430,602
Annualized Net
Rent per Square
Foot ($)....... -- 21.05 -- -- $ 12.41
Percentage of
Total
Annualized Net
Rent (%) -- 26.40 -- -- 100.00%
Number of Leases
Expiring....... -- 1 -- -- 14
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
--------------------------------------------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTA
--------- --------- --------- --------- --------- --------- --------- ------- -------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4100 Madison
Street
Square Footage
of Expiring
Leases......... -- -- 739 -- 11,812 -- -- -- -- -- -- 12,551
Percentage of
Total Leased
Sq. Ft. (%).... -- -- 5.89 -- 94.11 -- -- -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ -- -- 3,991 -- 34,548 -- -- -- -- -- -- $ 38,539
Annualized Net
Rent per Square
Foot ($)....... -- -- 5.40 -- 2.92 -- -- -- -- -- -- $ 3.07
Percentage of
Total
Annualized Net
Rent (%) -- -- 10.36 -- 89.64 -- -- -- -- -- -- 100.00%
Number of Leases
Expiring....... -- -- 1 -- 2 -- -- -- -- -- -- 3
941-961 Weigel
Drive
Square Footage
of Expiring
Leases......... -- -- 123,077 -- -- -- -- -- -- -- -- 123,077
Percentage of
Total Leased
Sq. Ft. (%).... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ -- -- 1,571,076 -- -- -- -- -- -- -- -- $ 1,571.076
Annualized Net
Rent per Square
Foot ($)....... -- -- 12.76 -- -- -- -- -- -- -- -- $ 12.76
Percentage of
Total
Annualized Net
Rent (%)....... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring....... -- -- 1 -- -- -- -- -- -- -- -- 1
1301 E. Tower
Road
Square Footage
of Expiring
Leases......... -- -- -- -- 50,400 -- -- -- -- -- -- 50,000
Percentage of
Total Leased
Sq. Ft (%)..... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ -- -- -- -- 525,412 -- -- -- -- -- -- $ 524,412
Annualized Net
Rent per Square
Foot ($)....... -- -- -- -- 10.41 -- -- -- -- -- -- $ 10.41
Percentage of
Total
Annualized Net
Rent (%)....... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases
Expiring....... -- -- -- -- 1 -- -- -- -- -- -- 1
280 Shuman Boule-
vard
Square Footage
of Expiring
Leases......... 2,124 6,328 6,533 24,635 1,586 -- -- 22,988 -- -- -- 64,194
Percentage of
Total Leased
Sq. Ft (%)..... 3.31 9.86 10.18 38.38 2.47 -- -- 35.81 -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ 33,564 79,381 75,388 271,954 15,819 -- -- 171,925 -- -- -- $ 648,031
Annualized Net
Rent per Square
Foot ($)....... 15.80 12.54 11.54 11.04 9.97 -- -- -- -- -- -- $ 10.09
Percentage of
Total
Annualized Net
Rent (%)....... 5.18 12.25 11.63 41.97 2.44 -- -- 26.53 -- -- -- 100.00%
Number of Leases
Expiring....... -- 2 1 7 1 -- -- 1 -- -- -- 13
2205-2255 Enter-
prise Drive
Square Footage
of Expiring
Leases......... 2,780 21,851 16,881 27,144 14,721 16,312 -- 18,741 -- -- -- 118,430
Percentage of
Total Leased
Sq. Ft (%)..... 2.35 18.45 14.25 22.92 12.43 13.77 -- 15.82 -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............ 25,837 297,528 145,044 265,123 133,416 147,492 -- 159,507 -- -- -- $ 1,173,947
Annualized Net
Rent per Square
Foot ($)....... 9.29 13.62 8.59 9.77 9.06 9.04 -- 8.51 -- -- -- $ 9.91
Percentage of
Total
Annualized Net
Rent (%)....... 2.20 25.34 12.36 22.58 11.36 12.56 -- 13.59 -- -- -- 100.00%
Number of Leases
Expiring....... 2 4 4 7 3 4 -- 2 -- -- -- 26
OFFICE SUBTOTALS
Square Footage
of Expiring
Leases......... 96,224 185,621 260,954 184,626 162,382 177,304 129,288 100,710 18,037 4,485 752,060 2,071,691
Percentage of
Aggregate
Leased Sq. Ft
(%)............ 4.64 8.96 12.60 8.91 7.84 8.56 6.24 4.86 0.87 0.22 36.30 100.00%
Annualized Net
Rent of
Expiring Leases
($).......... 1,426,200 2,134,553 3,099,586 1,836,053 1,483,445 1,960,178 1,197,266 986,524 242,346 46,147 17,362,213 $31,774,511
Annualized Net
Rent per Square
Foot ($)...... 14.82 11.50 11.88 9.94 9.14 11.06 9.26 9.80 13.44 10.29 23.09 $ 15.34
Percentage of
Total
Annualized Net
Rent (%)....... 4.49 6.72 9.75 5.78 4.67 6.17 3.77 3.10 0.76 0.15 54.64 100.00%
Number of Leases
Expiring....... 20 42 41 46 30 24 6 6 2 1 10 228
</TABLE>
- ------
(1)Represents lease expiration data from July 1, 1997 to December 31, 1997.
82
<PAGE>
INDUSTRIAL PROPERTIES
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
--------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ------- ------- ---- ------- ---- ---- ---- ------- ---- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Warehouse/Distribution
Facilities:
425 E. Algonquin Road
Square Footage of Ex-
piring Leases......... -- -- 57,404 -- -- -- -- -- 247,102 -- -- 304,506
Percentage of Total
Leased Sq. Ft. (%).... -- -- 18.85 -- -- -- -- -- 81.15 -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- 166,657 -- -- -- -- -- 779,610 -- -- $ 946,267
Annualized Net Rent per
Square Foot ($)....... -- -- 2.90 -- -- -- -- -- 3.16 -- -- $ 3.11
Percentage of Total
Annualized Net Rent
(%)................... -- -- 17.61 -- -- -- -- -- 82.39 -- -- 100.00%
Number of Leases Expir-
ing................... -- -- 1 -- -- -- -- -- 3 -- -- 4
1001 Technology Way
Square Footage of Ex-
piring Leases ........ -- -- -- -- 212,831 -- -- -- -- -- -- 212,831
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- 840,589 -- -- -- -- -- -- $ 840,589
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- 3.59 -- -- -- -- -- -- $ 3.59
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- -- 2 -- -- -- -- -- -- 2
3818 Grandville
Square Footage of Ex-
piring Leases ........ -- -- -- -- 189,900 -- -- -- -- -- -- 189,900
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- 489,942 -- -- -- -- -- -- $ 489,942
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- 2.58 -- -- -- -- -- -- $ 2.58
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- -- 1 -- -- -- -- -- -- 1
1200 Northwestern
Square Footage of Ex-
piring Leases ........ -- -- -- -- 155,332 -- -- -- -- -- -- 155,332
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- 551,429 -- -- -- -- -- -- $ 551,429
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- 3.55 -- -- -- -- -- -- $ 3.55
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- -- 1 -- -- -- -- -- -- 1
306-310 Era Drive
Square Footage......... -- 22,721 13,774 -- -- -- -- -- -- -- -- 36,495
Percentage of Total
Leased Sq. Ft. (%).... -- 62.26 37.74 -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- 320,218 72,849 -- -- -- -- -- -- -- -- $ 393,067
Annualized Net Rent per
Square Foot ($)....... -- 14.09 5.29 -- -- -- -- -- -- -- -- $ 10.77
Percentage of Total
Annualized Net Rent
(%)................... -- 81.47 18.53 -- -- -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- 1 1 -- -- -- -- -- -- -- -- 2
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-----------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ------- ---- --------- ------- ---- ------- ---- ---- ---- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1301 Ridgeview Drive
Square Footage of Ex-
piring Leases ........ -- -- -- 217,600 -- -- -- -- -- -- -- 217,600
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- 1,030,568 -- -- -- -- -- -- -- $1,030,568
Annualized Net Rent per
Square Foot ($)....... -- -- -- 4.74 -- -- -- -- -- -- -- $ 4.74
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- 1 -- -- -- -- -- -- -- 1
515 Huehl Road/500 Lind-
berg
Square Footage of Ex-
piring Leases ........ -- -- -- -- -- -- 201,244 -- -- -- -- 201,244
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- -- -- 100.00 -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- -- -- 821,580 -- -- -- -- $ 821,580
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- -- -- 4.08 -- -- -- -- $ 4.08
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- -- -- 100.00 -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- -- -- -- 1 -- -- -- -- 1
455 Academy Drive
Square Footage of Ex-
piring Leases......... -- -- -- -- 105,444 -- -- -- -- -- -- 105,444
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- 405,648 -- -- -- -- -- -- $ 405,648
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- 3.85 -- -- -- -- -- -- $ 3.85
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- -- 1 -- -- -- -- -- -- 1
Chicago Enterprise Cen-
ter(2)
13535-A S. Torrence Ave-
nue
Square Footage of Ex-
piring Leases......... -- 145,941 -- -- -- -- -- -- -- -- -- 145,941
Percentage of Total
Leased Sq. Ft. (%) ... -- 100.00 -- -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- 321,072 -- -- -- -- -- -- -- -- -- $ 321,072
Annualized Net Rent per
Square Foot ($)....... -- 2.20 -- -- -- -- -- -- -- -- -- $ 2.20
Percentage of Total
Annualized Net Rent
(%)................... -- 100.00 -- -- -- -- -- -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- 1 -- -- -- -- -- -- -- -- -- 1
13535-B S. Torrence Ave-
nue
Square Footage of Ex-
piring Leases......... -- -- -- -- -- -- 239,752 -- -- -- -- 239,752
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- -- -- 100.00 -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- -- -- 648,634 -- -- -- -- $ 648,634
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- -- -- 2.71 -- -- -- -- $ 2.71
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- -- -- 100.00 -- -- -- -- 100.00%
Number of Leases Expir-
ing................... -- -- -- -- -- -- 1 -- -- -- -- 1
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ---- ------- ------- ------- ---- ---- ---- ---- ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
13535-C S. Torrence Ave-
nue
Square Footage of Ex-
piring Leases......... -- -- -- 81,328 -- -- -- -- -- -- -- 81,328
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- 210,299 -- -- -- -- -- -- -- $ 210,299
Annualized Net Rent
per Square Foot ($)... -- -- -- 2.59 -- -- -- -- -- -- -- $ 2.59
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Number of Leases Ex-
piring................ -- -- -- 1 -- -- -- -- -- -- -- 1
13535-D S. Torrence
Avenue
Square Footage of
Expiring Leases....... -- -- 77,325 -- -- -- -- -- -- -- -- 77,325
Percentage of Total
Leased Sq. Ft. (%).... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- 235,532 -- -- -- -- -- -- -- -- $ 235,532
Annualized Net Rent
per Square Foot ($)... -- -- 3.05 -- -- -- -- -- -- -- -- $ 3.05
Percentage of Total
Annualized Net Rent
(%)................... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Number of Leases Ex-
piring................ -- -- 1 -- -- -- -- -- -- -- -- 1
13535-E/13535-F S.
Torrence Avenue
Square Footage of
Expiring Leases...... -- -- -- -- 53,600 -- -- -- -- -- -- 53,600
Percentage of Total
Leased Sq. Ft. (%)... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($).. -- -- -- -- 175,667 -- -- -- -- -- -- $ 175,667
Annualized Net Rent
per Square Foot ($).. -- -- -- -- 3.28 -- -- -- -- -- -- $ 3.28
Percentage of Total
Annualized Net Rent
(%).................. -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases
Expiring............. -- -- -- -- 1 -- -- -- -- -- -- 1
13535--H S. Torrence
Avenue
Square Footage of
Expiring Leases...... -- -- -- -- 10,200 -- -- -- -- 31,240 -- 41,440
Percentage of Total
Leased Sq. Ft. (%)... -- -- -- -- 24.61 -- -- -- -- 100.00 -- 100.00%
Annualized Net Rent of
Expiring Leases ($).. -- -- -- -- 17,255 -- -- -- -- 58,046 -- $ 75,301
Annualized Net Rent
per Square Foot ($).. -- -- -- -- 1.69 -- -- -- -- 1.86 -- $ 1.82
Percentage of Total
Annualized Net Rent
(%).................. -- -- -- -- 22.91 -- -- -- -- 100.00 -- 100.00%
Number of Leases
Expiring............. -- -- -- -- 1 -- -- -- -- 1 -- 2
East Chicago Enterprise
Center (2)
4440 Railroad Avenue
Square Footage of
Expiring Leases...... 40,000 -- -- -- -- -- -- -- -- -- -- 40,000
Percent of Total
Leased Sq. Ft. (%)... 100.00 -- -- -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($).. 298,746 -- -- -- -- -- -- -- -- -- -- $ 298,746
Annualized Net Rent
per Square Foot ($).. 7.47 -- -- -- -- -- -- -- -- -- -- $ 7.47
Percentage of Total
Annualized Net Rent
(%).................. 100.00 -- -- -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring............. 1 -- -- -- -- -- -- -- -- -- -- 1
Building 3 (4407
Railroad Avenue)
Square Footage of
Expiring Leases...... -- -- -- -- -- -- -- -- -- -- 291,550 291,550
Percentage of Total
Leased Sq. Ft. (%)... -- -- -- -- -- -- -- -- -- -- 100.00 100.00%
Annualized Net Rent of
Expiring Leases ($).. -- -- -- -- -- -- -- -- -- -- 1,422,636 $1,422,636
Annualized Net Rent
per Square Foot ($).. -- -- -- -- -- -- -- -- -- -- 4.88 $ 4.88
Percentage of Total
Annualized Net Rent
(%).................. -- -- -- -- -- -- -- -- -- -- 100.00 100.00%
Number of Leases
Expiring............. -- -- -- -- -- -- -- -- -- -- 2 2
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
---------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ------- ------ ------- ------ ------ ---- ---- ---- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Building 4 (4407
Railroad Avenue)
Square Footage of
Expiring Leases...... -- -- -- 85,799 -- -- -- -- -- -- -- 85,799
Percentage of Total
Leases Sq. Ft. (%)... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($).. -- -- -- 285,653 -- -- -- -- -- -- -- $285,653
Annualized Net Rent
per Square Foot ($).. -- -- -- 3.33 -- -- -- -- -- -- -- $ 3.33
Percentage of Total
Annualized Net Rent
(%).................. -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring............. -- -- -- 1 -- -- -- -- -- -- -- 1
Hammond Enterprise Cen-
ter
4507 Columbia Avenue
Square Footage of
Expiring Leases...... -- -- 2,280 32,657 -- -- -- -- -- -- 218,589 253,526
Percentage of Total
Leased Sq. Ft. (%)... -- -- 0.90 12.88 -- -- -- -- -- -- 86.22 100.00%
Annualized Net Rent of
Expiring Leases ($).. -- -- 4,970 78,681 -- -- -- -- -- -- 488,195 $571,846
Annualized Net Rent
per Square Foot ($).. -- -- 2.18 2.41 -- -- -- -- -- -- 2.23 $ 2.26
Percentage of Total
Annualized Net Rent
(%).................. -- -- 0.87 13.76 -- -- -- -- -- -- 85.37 100.00%
Number of Leases
Expiring............. -- -- 1 1 -- -- -- -- -- -- 3 5
4531 Columbia Avenue
Square Footage of
Expiring Leases...... -- -- 81,362 104,182 -- -- -- -- -- -- -- 185,544
Percentage of Total
Leased Sq. Ft. (%)... -- -- 43.85 56.15 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Lease ($)... -- -- 55,651 218,030 -- -- -- -- -- -- -- $273,681
Annualized Net Rent
per Square Foot ($).. -- -- .68 2.09 -- -- -- -- -- -- -- $ 1.48
Percentage of Total
Annualized Net
Rent (%)............. -- -- 20.33 79.67 -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring............. -- -- 1 1 -- -- -- -- -- -- -- 2
4527 Columbia Avenue
Square Footage of
Expiring Leases....... 279 4,038 -- -- 3,410 2,766 -- -- -- -- -- 10,493
Percentage of Total
Leased Sq. Ft. (%).... 2.66 38.48 -- -- 32.50 26.36 -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... 1,741 26,287 -- -- 15,584 12,641 -- -- -- -- -- $ 56,253
Annualized Net Rent
per Square Foot ($)... 6.24 6.51 -- -- 4.57 4.57 -- -- -- -- -- $ 5.36
Percentage of Total
Annualized Net Rent
(%)................... 3.09 46.73 -- -- 27.70 22.47 -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. 1 1 -- -- 1 1 -- -- -- -- -- 4
4411 Marketing Place
Square Footage of
Expiring Leases....... -- -- -- 65,804 -- -- -- -- -- -- -- 65,804
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- 226,800 -- -- -- -- -- -- -- $226,800
Annualized Net Rent
per Square Foot ($)... -- -- -- 3.45 -- -- -- -- -- -- -- $ 3.45
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- -- 1 -- -- -- -- -- -- -- 1
2160 McGaw Road
Square Footage of
Expiring Leases....... -- 310,100 -- -- -- -- -- -- -- -- -- 310,100
Percentage of Total
Leased Sq. Ft. (%).... -- 100.00 -- -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- 457,848 -- -- -- -- -- -- -- -- -- $457,848
Annualized Net Rent
per Square Foot ($)... -- 1.48 -- -- -- -- -- -- -- -- -- $ 1.48
Percentage of Total
Annualized Net Rent
(%)................... -- 100.00 -- -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- 1 -- -- -- -- -- -- -- -- -- 1
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
--------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ---- ------ ---- ------- ---- ------- ---- ------- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2400 McGaw Road
Square Footage of
Expiring Leases....... -- -- -- -- -- -- -- -- 86,400 -- -- 86,400
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- -- -- -- -- 100.00 -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- -- -- -- -- 191,352 -- -- $191,352
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- -- -- -- -- 2.21 -- -- $ 2.21
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- -- -- -- -- 100.00 -- -- 100.00%
Number of Leases
Expiring.............. -- -- -- -- -- -- -- -- 1 -- -- 1
4849 Groveport Road
Square Footage of
Expiring Leases....... -- -- -- -- -- -- -- -- -- -- 132,100 132,100
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- -- -- -- -- -- -- 100.00 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- -- -- -- -- -- -- 287,688 $287,688
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- -- -- -- -- -- -- 2.18 $ 2.18
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- -- -- -- -- -- -- 100.00 100.00%
Number of Leases
Expiring.............. -- -- -- -- -- -- -- -- -- -- 1 1
600 London Road
Square Footage of
Expiring Leases....... 52,441 -- -- -- -- -- -- -- -- -- -- 52,441
Percentage of Total
Leased Sq. Ft. (%).... 100.00 -- -- -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... 110,400 -- -- -- -- -- -- -- -- -- -- $110,400
Annualized Net Rent per
Square Foot ($)....... 2.11 -- -- -- -- -- -- -- -- -- -- $ 2.11
Percentage of Total
Annualized Net Rent
(%)................... 100.00 -- -- -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. 1 -- -- -- -- -- -- -- -- -- -- 1
5160 Blazer Memorial
Parkway
Square Footage of
Expiring Leases....... -- -- -- -- 27,680 -- 27,787 -- -- -- -- 55,467
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- 49.90 -- 50.10 -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- 188,112 -- 160,035 -- -- -- -- $348,147
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- 6.80 -- 5.76 -- -- -- -- $ 6.28
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- 54.03 -- 45.97 -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- -- -- 1 -- 1 -- -- -- -- 2
1401 S. Jefferson Street
Square Footage of
Expiring Leases....... -- -- 17,265 -- -- -- -- -- -- -- -- 17,265
Percentage of Total
Leased Sq. Ft. (%).... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- 88,944 -- -- -- -- -- -- -- -- $ 88,944
Annualized Net Rent per
Square Foot ($)....... -- -- 5.15 -- -- -- -- -- -- -- -- $ 5.15
Percentage of Total
Annualized Net Rent
(%)................... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- 1 -- -- -- -- -- -- -- -- 1
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
---------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ------- ------- ------- ------- ---- ------ ---- ---- ---- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1051 N. Kirk Road
Square Footage of
Expiring Leases....... -- 120,004 -- -- -- -- -- -- -- -- -- 120,004
Percentage of Total
Leased Sq. Ft. (%).... -- 100.00 -- -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- 474,012 -- -- -- -- -- -- -- -- -- $474,012
Annualized Net Rent per
Square Foot ($)....... -- 3.95 -- -- -- -- -- -- -- -- -- $ 3.95
Percentage of Total
Annualized Net Rent
(%)................... -- 100.00 -- -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- 1 -- -- -- -- -- -- -- -- -- 1
4211 Madison Street
Square Footage of
Expiring Leases....... -- -- 26,035 -- 64,299 -- -- -- -- -- -- 90,334
Percentage of Total
Leased Sq. Ft. (%).... -- -- 28.82 -- 71.18 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- 108,084 -- 241,116 -- -- -- -- -- -- $349,200
Annualized Net Rent per
Square Foot ($)....... -- -- 4.15 -- 3.75 -- -- -- -- -- -- $ 3.87
Percentage of Total
Annualized Net Rent
(%)................... -- -- 30.95 -- 69.05 -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- 1 -- 1 -- -- -- -- -- -- 2
200 E. Fullerton Avenue
Square Footage of
Expiring Leases....... -- -- 66,254 -- -- -- -- -- -- -- -- 66,254
Percentage of Total
Leased Sq. Ft. (%).... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- 248,448 -- -- -- -- -- -- -- -- $248,448
Annualized Net Rent per
Square Foot ($)....... -- -- 3.75 -- -- -- -- -- -- -- -- $ 3.75
Percentage of Total
Annualized Net Rent
(%)................... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- 1 -- -- -- -- -- -- -- -- 1
350 Randy Road
Square Footage of
Expiring Leases....... -- 3,150 3,150 3,150 9,450 -- 3,150 -- -- -- -- 22,050
Percentage of Total
Leased Sq. Ft. (%).... -- 14.29 14.29 14.29 42.86 -- 14.29 -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- 13,944 21,720 13,512 46,584 -- 33,332 -- -- -- -- $129,092
Annualized Net Rent per
Square Foot ($)....... -- 4.43 6.90 4.29 4.93 -- 10.58 -- -- -- -- $ 5.85
Percentage of Total
Annualized Net Rent
(%)................... -- 10.80 16.83 10.47 36.09 -- 25.82 -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- 1 1 1 1 -- 1 -- -- -- -- 5
4248, 4250 and 4300 Mad-
ison Street
Square Footage of
Expiring Leases....... 15,680 11,872 62,847 36,730 -- -- -- -- -- -- -- 127,129
Percentage of Total
Leased Sq. Ft. (%).... 12.33 9.34 49.44 28.89 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... 52,844 47,484 323,818 173,280 -- -- -- -- -- -- -- $597,426
Annualized Net Rent per
Square Foot ($)....... 3.37 4.00 5.15 4.72 -- -- -- -- -- -- -- $ 4.70
Percentage of Total
Annualized Net Rent
(%)................... 8.85 7.95 54.20 29.00 -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. 1 1 2 1 -- -- -- -- -- -- -- 5
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
--------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
------- ---- ------- ------- ------ ---- ---- ------- ---- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
370 Carol Lane
Square Footage of
Expiring Leases....... -- -- -- -- -- -- -- 60,290 -- -- -- 60,290
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- -- -- -- 100.00 -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- -- -- -- 256,224 -- -- -- $256,224
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- -- -- -- 4.25 -- -- -- $ 4.25
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- -- -- -- 100.00 -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- -- -- -- -- -- 1 -- -- -- 1
388 Carol Lane
Square Footage of
Expiring Leases....... -- -- -- 36,184 -- -- -- -- -- -- -- 36,184
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- 179,760 -- -- -- -- -- -- -- $179,760
Annualized Net Rent per
Square Foot ($)....... -- -- -- 4.97 -- -- -- -- -- -- -- $ 4.97
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- -- 1 -- -- -- -- -- -- -- 1
342-346 Carol Lane
Square Footage of
Expiring Leases....... -- -- -- 67,935 -- -- -- -- -- -- -- 67,935
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- 293,736 -- -- -- -- -- -- -- $293,736
Annualized Net Rent per
Square Foot ($)....... -- -- -- 4.32 -- -- -- -- -- -- -- $ 4.32
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- 100.00 -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. -- -- -- 2 -- -- -- -- -- -- -- 2
343 Carol Lane
Square Footage of
Expiring Leases....... -- -- -- -- -- -- -- -- -- -- 30,084 30,084
Percentage of Total
Leased Sq. Ft. (%).... -- -- -- -- -- -- -- -- -- -- 100.00 100.00%
Annualized Net Rent of
Expiring Leases ($)... -- -- -- -- -- -- -- -- -- -- 201,744 $201,744
Annualized Net Rent per
Square Foot ($)....... -- -- -- -- -- -- -- -- -- -- 6.71 $ 6.71
Percentage of Total
Annualized Net Rent
(%)................... -- -- -- -- -- -- -- -- -- -- 100.00 100.00%
Number of Leases
Expiring.............. -- -- -- -- -- -- -- -- -- -- 1 1
4150-4190 Madison Street
Square Footage of
Expiring Leases....... 17,240 -- 36,625 -- 25,667 -- -- -- -- -- -- 79,532
Percentage of Total
Leased Sq. Ft. (%).... 21.68 -- 46.05 -- 32.27 -- -- -- -- -- -- 100.00%
Annualized Net Rent of
Expiring Leases ($)... 72,516 -- 157,412 -- 88,037 -- -- -- -- -- -- $317,965
Annualized Net Rent per
Square Foot ($)....... 4.21 -- 4.30 -- 3.43 -- -- -- -- -- -- $ 4.00
Percentage of Total
Annualized Net Rent
(%)................... 22.81 -- 49.51 -- 27.69 -- -- -- -- -- -- 100.00%
Number of Leases
Expiring.............. 1 -- 1 -- 1 -- -- -- -- -- -- 3
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-----------------------------------------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007+ TOTAL
-------- --------- --------- --------- --------- ------ --------- ------- --------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11039 Gage Avenue
Square Footage
of Expiring
Leases.......... -- -- -- -- -- -- -- -- 21,935 -- -- 21,935
Percentage of
Total Leased
Sq. Ft. (%)..... -- -- -- -- -- -- -- -- 100.00 -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............. -- -- -- -- -- -- -- -- 107,376 -- -- $ 107,376
Annualized Net
Rent per Square
Foot ($)........ -- -- -- -- -- -- -- -- 4.90 -- -- $ 4.90
Percentage of
Total
Annualized Net
Rent (%)........ -- -- -- -- -- -- -- -- 100.00 -- -- 100.00%
Number of Leases
Expiring........ -- -- -- -- -- -- -- -- 1 -- -- 1
11045 Gage Avenue
Square Footage
of Expiring
Leases.......... -- -- -- -- 140,815 -- -- -- -- -- -- 140,815
Percentage of
Total Leased
Sq. Ft. (%)..... -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............. -- -- -- -- 534,612 -- -- -- -- -- -- $ 534,612
Annualized Net
Rent per Square
Foot ($)........ -- -- -- -- 3.80 -- -- -- -- -- -- $ 3.80
Percentage of
Total
Annualized Net
Rent (%)........ -- -- -- -- 100.00 -- -- -- -- -- -- 100.00%
Number of Leases
Expiring........ -- -- -- -- 1 -- -- -- -- -- -- 1
550 Kehoe Boule-
vard
Square Footage
of Expiring
Leases.......... -- -- -- -- -- -- -- -- -- 44,575 -- 44,575
Percentage of
Total Leased
Sq. Ft. (%)..... -- -- -- -- -- -- -- -- -- 100.00 -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............. -- -- -- -- -- -- -- -- -- 291,972 -- $ 291,972
Annualized Net
Rent per Square
Foot ($)........ -- -- -- -- -- -- -- -- -- 6.55 -- $ 6.55
Percentage of
Total
Annualized Net
Rent (%)........ -- -- -- -- -- -- -- -- -- 100.00 -- 100.00%
Number of Leases
Expiring........ -- -- -- -- -- -- -- -- -- 1 -- 1
475 Superior Ave-
nue
Square Footage
of Expiring
Leases.......... -- -- 450,000 -- -- -- -- -- -- -- -- 450,000
Percentage of
Total Leased
Sq. Ft. (%)..... -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Annualized Net
Rent of
Expiring Leases
($)............. -- -- 1,258,200 -- -- -- -- -- -- -- -- $ 1,258,200
Annualized Net
Rent per Square
Foot ($)........ -- -- 2.80 -- -- -- -- -- -- -- -- $ 2.80
Percentage of
Total
Annualized Net
Rent (%)........ -- -- 100.00 -- -- -- -- -- -- -- -- 100.00%
Number of Leases
Expiring........ -- -- 1 -- -- -- -- -- -- -- -- 1
INDUSTRIAL
SUBTOTALS
Square Footage
of Expiring
Leases......... 125,640 617,826 894,321 731,369 998,628 2,766 471,933 60,290 355,437 75,815 672,323 5,006,348
Percent of Total
Leased Sq. Ft.
(%)............ 2.51 12.34 17.86 14.61 19.95 0.06 9.43 1.20 7.10 1.51 13.43 100.00%
Annualized Net
Rent of
Expiring
Leases ($)..... 536,247 1,660,865 2,742,285 2,710,319 3,594,575 12,641 1,663,581 256,224 1,078,338 350,018 2,400,263 $17,005,356
Annualized Net
Rent per Square
Foot ($)....... 4.27 2.69 3.07 3.71 3.60 4.57 3.53 4.25 3.03 4.62 3.57 $ 3.40
Percentage of
Total
Annualized Net
Rent (%)....... 3.15 9.77 16.13 15.94 21.14 0.07 9.78 1.51 6.34 2.06 14.11 100.00%
Number of Leases
Expiring....... 5 7 13 11 13 1 4 1 5 2 7 69
</TABLE>
90
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-----------------------------------------------------------------------------------------
1997(1) 1998 1999 2000 2001 2002 2003 2004 2005
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OFFICE SUBTOTALS
Square Footage
of Expiring
Leases.......... 96,224 185,621 260,954 184,626 162,382 177,304 129,288 100,710 18,037
Percentage of
Total Leased Sq.
Ft. (%)......... 4.64 8.96 12.60 8.91 7.84 8.56 6.24 4.86 0.87
Annualized Net
Rent of Expiring
Leases ($)...... 1,426,200 2,134,553 3,099,586 1,836,053 1,483,445 1,960,178 1,197,266 986,524 242,346
Annualized Net
Rent per Square
Foot ($)........ 14.82 11.50 11.88 9.94 9.14 11.06 9.26 9.80 13.44
Percentage of
Total Annualized
Net Rent (%).... 4.49 6.72 9.75 5.78 4.67 6.17 3.77 3.10 0.76
Number of Leases
Expiring........ 20 42 41 46 30 24 6 6 2
PORTFOLIO TOTAL
Square Footage
of Expiring
Leases.......... 221,864 803,447 1,155,275 915,995 1,161,010 180,070 601,221 161,000 373,474
Percentage of
Total Leased Sq.
Ft. (%)......... 3.13 11.35 16.32 12.94 16.40 2.54 8.49 2.27 5.28
Annualized Net
Rent of Expiring
Leases ($)...... 1,962,447 3,795,418 5,841,871 4,546,372 5,078,020 1,972,819 2,860,847 1,242,748 1,320,684
Annualized Net
Rent per Square
Foot ($)........ 8.85 4.72 5.06 4.96 4.37 10.96 4.76 7.72 3.54
Percentage of
Total Annualized
Net Rent (%).... 4.02 7.78 11.98 9.32 10.41 4.04 5.86 2.55 2.71
Number of Leases
Expiring........ 25 49 54 57 43 25 10 7 7
</TABLE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------------
2006 2007+ TOTAL
------- ---------- -----------
<S> <C> <C> <C>
OFFICE SUBTOTALS
Square Footage
of Expiring
Leases.......... 4,485 752,060 2,071,691
Percentage of
Total Leased Sq.
Ft. (%)......... 0.22 36.30 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... 46,147 17,362,213 $31,774,511
Annualized Net
Rent per Square
Foot ($)........ 10.29 23.09 $ 15.34
Percentage of
Total Annualized
Net Rent (%).... 0.15 54.64 100.00%
Number of Leases
Expiring........ 1 10 228
PORTFOLIO TOTAL
Square Footage
of Expiring
Leases.......... 80,300 1,424,383 7,078,039
Percentage of
Total Leased Sq.
Ft. (%)......... 1.13 20.12 100.00%
Annualized Net
Rent of Expiring
Leases ($)...... 396,165 19,762,476 $48,779,867
Annualized Net
Rent per Square
Foot ($)........ 4.93 13.87 $ 6.89
Percentage of
Total Annualized
Net Rent (%).... 0.81 40.51 100.00%
Number of Leases
Expiring........ 3 17 297
</TABLE>
- ----
(1) Represents lease expirations data from July 1, 1997 to December 31, 1997.
(2) This table excludes three Industrial Properties and one Office Property
that had no leases in effect at July 1, 1997: (i) 13535-G S. Torrence
Avenue, (ii) East Chicago Enterprise Center Building 2, (iii) 4635
Railroad Avenue and (iv) 350 N. Mannheim Road.
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<PAGE>
TENANT INFORMATION
The Company's tenants include significant corporate and other commercial
enterprises representing a range of industries including, among others,
commercial and financial printing, legal services, investment brokerage,
manufacturing, banking, insurance, consulting and finance. The following table
set forth information as to the Company's ten largest office and industrial
tenants based upon annual net rental revenue for the twelve months ended June
30, 1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
TENANT COMPANY'S
ANNUAL TOTAL
NET RENTAL NET RENTAL INITIAL LEASE LEASE EXPIRATION
REVENUE($)(1) REVENUES(%) DATE DATE
------------- ------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Office Tenants
Donnelley.............. 6,158,276 12.62 July 1, 1992 June 30, 2007
Everen................. 6,009,902 12.32 June 1, 1992 May 31, 2007
Jones Day.............. 3,559,291 7.30 July 6, 1992 June 30, 2007
Household Finance...... 1,571,076 3.22 September 1, 1989 August 31, 1999
SunTrust Bank.......... 992,931 2.04 March 1, 1968 February 28, 2008
Computer Associates.... 850,068 1.74 January 4, 1988 January 3, 1998
Household Credit Serv-
ices.................. 524,412 1.08 January 1, 1992 December 31, 2001
The Prime Group, Inc... 511,445 1.05 June 8, 1992 May 31, 2002
Equifax................ 474,017 0.97 October 1, 1988 September 30, 1998
McGladrey & Pullen..... 465,580 0.95 November 1, 1989 October 31, 2002
----------- -------
Total............... $21,116,998 43.29%
=========== =======
<CAPTION>
PERCENTAGE OF
TENANT COMPANY'S
ANNUAL TOTAL
NET RENTAL NET RENTAL INITIAL LEASE LEASE EXPIRATION
REVENUE($)(1) REVENUES(%) DATE DATE
------------- ------------- ----------------- ------------------
<S> <C> <C> <C> <C>
Industrial Tenants
Rank Video............. 3,160,432 6.48 December 1, 1989 October 30, 2001
General Electric....... 1,258,200 2.58 February 21, 1989 February 20, 1999
Motorola............... 1,030,568 2.11 July 1, 1995 June 30, 2000
Metro Metals........... 887,263 1.82 November 15, 1995 November 30, 2015
Welded Tube............ 648,634 1.33 July 1, 1993 June 30, 2003
Acutus-Gladwin......... 535,373 1.10 March 1, 1997 February 28, 2017
Echlin................. 534,612 1.10 April 1, 1991 March 31, 2001
Houghton Mifflin....... 474,012 0.97 March 1, 1996 February 28, 2006
Spartan Warehouse...... 457,848 0.94 January 1, 1993 May 31, 1998
Major Corp./National
Service Industries ... 405,648 0.83 June 1, 1996 October 30, 2001
----------- -------
Total............... $ 9,392,590 19.26%
=========== =======
</TABLE>
- --------
(1) Determined in accordance with GAAP.
OFFICE PROPERTIES
Approximately 71.7% of the Office Properties (based on net rentable square
feet) are Class A office buildings. The Office Properties contain an aggregate
of approximately 2.4 million net rentable square feet in 16 buildings. Twelve
of the Office Properties are located in the Chicago Metropolitan Area, one in
Nashville, Tennessee and three in Knoxville, Tennessee. As of June 30, 1997,
the Office Properties had an occupancy rate of 88.0%. The Office Properties
range in size from one to 50 stories and are easily accessible from major
highways and major airports. Management believes that the location, quality of
construction and amenities at the
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Office Properties as well as the Company's reputation for providing a high
level of tenant service have enabled the Company to attract and retain a
national tenant base. Management believes that as a result of these factors,
the Office Properties in the Chicago Metropolitan Area achieve among the
highest rent, occupancy and tenant retention rates when compared to other
properties within their respective submarkets.
Approximately 68.8% of the Company's Annualized Net Rent from the Office
Properties is attributable to leases expiring in the year 2002 or beyond and
approximately 54.6% of such income is attributable to leases expiring in the
year 2007 or beyond. In terms of square footage and Annualized Net Rent, the
average annual turnover for the next five years is only 9.2% and 6.9% per
annum, respectively. In addition, several of the Company's largest Office
Property tenants, such as Donnelley, Everen and Jones Day have signed long-
term leases with contractual rent escalations, which provide an average annual
increase in base rents of 2.5% through 2007.
INDUSTRIAL PROPERTIES
Like the Office Properties, the Industrial Properties were designed and
developed to provide above-standard quality and meet the long-term needs of
tenants. While many of the Industrial Properties are occupied by a single
tenant, they have been designed (or redesigned) for multitenant operations and
most can be reconfigured for such use, if necessary. The Industrial Properties
are located in the Chicago Metropolitan Area and the Columbus, Ohio
metropolitan area and are primarily comprised of one-story buildings ranging
in size from approximately 14,100 to 450,000 square feet. Certain of the
Industrial Properties feature supporting office space for management and
administrative functions.
Most of the Industrial Property leases are written on a net basis (i.e., the
tenant has responsibility for its proportionate share of all operating costs,
real estate taxes and common area expenses) with initial terms of three to 20
years and options to renew for up to an additional five to ten years at the
then current fair market value. Approximately 34.0% of the Company's
Annualized Net Rent from the Industrial Properties is attributable to leases
expiring in the year 2002 or beyond and approximately 14.1% of such income is
attributable to leases expiring in the year 2007 or beyond. In terms of square
footage and Annualized Net Rent, the average annual turnover for the next five
years is 13.4% and 13.2% per annum, respectively. The leases generally provide
for rent increases based on specific contractual rent escalations. Several of
the Company's largest Industrial Property tenants, such as Welded Tube Company
and Metro Metals, have signed long-term leases with contractual rent
escalations, which provide an average annual increase in Annualized Net Rent
of 3.2% through 2003.
Certain of the Industrial Properties can support additional development and,
subject to substantial pre- leasing, the Company may develop approximately 4.4
million additional square feet. The Company anticipates that any such
development would be funded at least partially with amounts available under
the Credit Facility. There can be no assurance, however, that the Company will
be able to successfully develop any of the Industrial Properties or obtain
financing for any such development on terms favorable to the Company. See
"Risk Factors--Real Estate Financing Risks--Ability to Obtain Permanent
Financing" and "--No Limitation on Debt."
DEVELOPMENT, LEASING AND MANAGEMENT ACTIVITIES
Since 1981, Prime has developed (or redeveloped) over 10.0 million square
feet of office and industrial space, primarily located in the Chicago
Metropolitan Area, Texas and Tennessee for its own portfolio. Development and
redevelopment activities include site selection, land entitlement, project
design and construction, marketing, leasing, finance, build-to-suit projects,
base building and tenant construction. The Company has successfully developed
numerous sophisticated development projects for some of the nation's most
prominent corporations both in the Chicago Metropolitan Area and around the
country. The Company's extensive experience has enabled it to form key
alliances with major corporate tenants, landowners and contractors in the
Chicago Metropolitan Area. The Company's relationships with tenants and users
has enabled it to receive fees in connection with its role as developer of
various projects, or, in several cases, such as the 77 West Wacker Drive
Building, to develop the land for its own account where such development may
result in an attractive risk-adjusted return on investment. In connection with
the Formation Transactions, the Company will succeed to Prime's rights in and
to Prime's office and industrial development, leasing and management business.
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<PAGE>
The Company will provide its own development, leasing and property
management services for the Properties. The Company's staff of approximately
151 employees will provide these services from the Company's headquarters in
Chicago, Illinois and through on-site staff at the Properties. The Services
Company may provide building management services for independent building
owners for terms that vary in length and which generally provide for
management fees of 1.5% to 5.0% of collected revenue and reimbursement of
expenses. The Services Company also will provide third-party development
services for third parties at market rates.
CONTRIBUTION PROPERTIES
The Company has entered into agreements to acquire the Contribution
Properties prior to or upon completion of the Offering. Acquisition of these
properties is subject to the satisfactory completion of certain closing
conditions. Although each of the acquisitions is expected to be completed
prior to or upon completion of the Offering, there is no assurance that any of
the Contribution Properties will be acquired. Upon the completion of the
Offering and the consummation of the Formation Transactions, the 28
Contribution Properties are expected to be acquired by the Company from the
Contributors, which include several companies founded and managed by
management of the Company. The Company expects to finance the acquisition cost
(approximately $53.5 million in the aggregate) through the assumption of
indebtedness, other borrowings and the issuance of Common Units to certain of
the Contributors.
The Contribution Properties include 20 Industrial Properties and seven
Office Properties. The Contribution Properties encompass an aggregate of
approximately 2.6 million net rentable square feet, of which 97.1% was leased
as of June 30, 1997. Major tenants of the Contribution Properties include Rank
Video, Motorola, Household Finance, Equifax and National Service Industries.
Rank Video, a British videotape company, completely occupies two of the
Industrial Properties (and approximately 76.0% of a third) and has located its
U.S. corporate headquarters in the Office Property. Other tenants include
National Service Industries and Motorola, which have each established large
production facilities in the Properties they lease. The Contribution
Properties are all located in Suburban Chicago. For a further description of
these Properties, see "--Other Chicago Metropolitan Area Office Buildings,"
"--Warehouse/Distribution Industrial Submarket--Description of Chicago
Metropolitan Area Warehouse Distribution Properties," "Overhead
Crane/Manufacturing Industrial Submarket--Description of Chicago Metropolitan
Area Overhead Crane/Manufacturing Properties" and
"--Industrial Properties."
Certain of the NAC Properties in Carol Stream and Batavia, Illinois, as well
as 455 Academy Drive and 1301 Ridgeview Drive, can support additional
development. The NAC Properties include approximately 94.4 additional acres,
455 Academy Drive includes approximately 2.5 additional acres, and 1301
Ridgeview Drive includes approximately 13.0 additional acres for development.
There can be no assurance, however, that the Company will be able to
successfully develop any of the land or obtain financing for any such
development on terms favorable to the Company. Additionally, in connection
with the acquisition of the Contribution Properties (i) the Company is
obligated to purchase an additional 48.5 acres of land in Libertyville,
Illinois in the event that an existing contract for the sale of such property
is terminated and (ii) the Company has an option to purchase one industrial
property, known as 901 Technology Way, in Libertyville, Illinois, for a
purchase price of ten times the pro forma net operating income, but not less
than the development cost nor more than 120.0% of the development cost. See
"--Land for Development and Option Properties" and "Risk Factors--Real Estate
Financing Risks" and "--No Limitation on Debt."
ACQUISITION PROPERTIES
The Company has entered into agreements to acquire the Acquisition
Properties prior to or upon completion of the Offering. Acquisition of each of
these properties is subject to the satisfactory completion of certain closing
conditions. Although each of the acquisitions is expected to be completed
prior to or upon completion of the Offering, there is no assurance that any of
the Acquisition Properties will be acquired. The Company expects to finance
the acquisition cost (approximately $41.4 million in the aggregate) with the
proceeds of the Offering. Unless otherwise indicated, all calculations and
information contained in this Prospectus give pro forma effect to the
acquisition of the Acquisition Properties.
94
<PAGE>
The Acquisition Properties consist of an aggregate of approximately 0.8
million net rentable square feet, of which 97.0% was leased as of June 30,
1997. Major tenants of the facilities include General Electric, Silicon
Graphics and Ticor Title Insurance.
PRIME CONTRIBUTION PROPERTIES
Concurrently with the completion of the Offering, the Prime Contribution
Properties will be acquired by the Company from Prime.
On July 24, 1997, Prime acquired 1699 E. Woodfield Road, one of the Prime
Contribution Properties, which is a Class A office building located in
Schaumburg, Illinois. This building has approximately 105,400 net rentable
square feet, of which 95.2% was leased as of June 30, 1997. The building's
tenants include Citibank, Merrill Lynch and McGladrey & Pullen.
On July 31, 1997, Prime acquired six Industrial Properties located in the
Columbus, Ohio metropolitan area. These properties range in size from 52,000
to 310,000 net rentable square feet and encompass an aggregate of
approximately 732,800 net rentable square feet, of which 95.8% was leased as
of June 30, 1997. Five of these Properties are warehouse/distribution
facilities, and one is a light industrial manufacturing or "flex space"
facility. Major tenants of the facilities include Spartan Warehouse, Premier
Autoglass, S.P. Richards, Alkon Corporation, Danninger Medical, Wes-Tran Corp.
and Schneider National. The Company believes that these Properties are well-
located for warehousing and distribution in the Columbus, Ohio market. For a
further description of these Properties, see "--The Company's Industrial
Submarkets--Columbus Industrial Submarket--Description of Columbus Industrial
Properties."
THE COMPANY'S MARKETS
Because of the Company's primary focus on the Chicago Metropolitan Area,
general economic information on the Chicago Metropolitan Area is presented
below, followed by discussions of the submarkets in which the Company has
Properties, including the Chicago Metropolitan Area office and industrial
markets, as well as Nashville, Tennessee, Knoxville, Tennessee and Columbus,
Ohio. The Company has relied, with permission, on research of the Company's
submarkets performed by RCG, a nationally recognized expert in real estate
consulting and urban economics. The discussion of such submarkets below and
under the caption "Prospectus Summary--The Company's Markets--Chicago
Metropolitan Area" is based upon the findings of RCG. While the Company
believes that these estimates of economic trends are reasonable, there can be
no assurance that these trends will in fact continue.
Information contained in this section contains "forward-looking statements"
relating to the future performance of the economies of the Chicago
Metropolitan Area, Nashville, Tennessee, Knoxville, Tennessee, and Columbus,
Ohio and office and industrial markets thereof. Actual results may differ
materially from those set forth herein as the result of a number of factors,
including, without limitation, the national and regional economic climate
(which may be adversely affected by business layoffs or downsizing, industry
slowdowns, relocations of business, changing demographics, infrastructure
quality and governmental budgetary constraints) and priorities and conditions
in the national, regional and Chicago Metropolitan Area office and industrial
markets (such as oversupply of or reduced demand for office or industrial
space, and increased telecommuting).
The Chicago Metropolitan Area--General Overview. The Company currently owns
or has an interest in office and industrial properties in the suburban and
downtown submarkets of the Chicago Metropolitan Area. The Company believes
that the Chicago Metropolitan Area has been and will continue to be an
excellent market in which to own and operate office and industrial properties
over the long term. The Company believes that this area is attractive for a
number of reasons, including:
. The Chicago Metropolitan Area contains the largest number of jobs of any
MSA in the United States, and is the third most populous MSA, with an
estimated population of over 7.7 million;
. Chicago's manufacturing sector has continued to expand, and the services
sector of the Chicago Metropolitan Area economy has grown even faster,
and has outpaced the manufacturing sector in
95
<PAGE>
additional employment both in absolute terms and as a proportion of the
local economy. This development has diversified Chicago's employment
base, which already leads the nation in four (manufacturing, wholesale
trade and retail trade, transportation, communications and utilities and
construction) out of the seven major employment sectors;
. Employment sectors requiring the use of office and industrial properties
continue to expand with the Chicago Metropolitan Area's continuing
growth and diversification of industries; and
. Since 1992, there has been no increase in the inventory of Chicago CBD
office space and only a slight increase in the inventory of Suburban
Chicago office space.
Chicago is the nation's largest and one of its fastest-growing economies in
terms of absolute job growth. The Chicago Metropolitan Area had approximately
4.0 million jobs as of April 1997, which ranks it as the nation's largest
metropolitan economy. In addition, during the last five years, from April 1992
through April 1997, Chicago ranked second nationwide in terms of total jobs
added. The Chicago Metropolitan Area economy grew by 389,400 jobs over the
last five years compared to first-ranked Atlanta, which added 407,300 jobs and
third-ranked Phoenix, which added 354,800 new jobs over the same period. The
following charts indicate the five largest MSAs in the United States for both
total employment and growth in employment for the last five years.
CHART
96
<PAGE>
The strengths of Chicago's economy include its transportation system, highly
diverse economy, strong high-technology sector, growing international trade
and high per capita income. For example, Chicago retains its preeminent role
in transportation as the location of the world's busiest airport, the hub of
the nation's rail system and the primary port connecting the Great Lakes with
the Mississippi River and the Gulf of Mexico. While Chicago has been (and
continues to be) a national center of heavy manufacturing, Illinois recently
surpassed Massachusetts in high-technology employment and merchandise exports
and is behind only California, New York and Texas, according to a 1997 ranking
by AEA. Furthermore, Chicago, as the home of the CBOT, the CME and the CBOE,
has become the international center of options, futures and commodity trading
and an important center of international finance. In addition, according to
RCG, the Chicago Metropolitan Area's median household income in 1996 was
$59,895, 28.3% above the national average. Based on the foregoing, the Company
believes that the Chicago Metropolitan Area's long-term outlook is positive.
The Chicago Metropolitan Area's top companies include such national leaders
as Sears, Motorola, Ameritech, Allstate, UAL Corporation (United Airlines),
Waste Management, Baxter International, McDonald's, Abbott Laboratories,
Walgreen's, Sara Lee, Donnelley, Arthur Andersen, Amoco and First Chicago NBD.
Regional Financial Associates ("RFA") estimates the Chicago Metropolitan
Area's gross metropolitan product ("GMP") in 1996 will expand 2.3% per year
through the year 2000. The economic fundamentals and steady growth of both the
Midwest and the Chicago Metropolitan Area lead the Company to expect continued
strength in this market.
The Company believes that the solid, diversified local economy in the
Chicago Metropolitan Area is creating continued office space demand and
absorption. Because of the steady expansion of office employment and nearly no
new construction, the overall Class A vacancy rate has steadily declined for
five years and is expected to continue to decline. According to RCG, Class A
rental rates in the Company's largest office market, the Chicago CBD, have
risen as Class A vacancy rates have decreased from 23.1% in 1992 to 9.3% by
the end of the second quarter of 1997.
The Chicago Metropolitan Area also has experienced a very active market in
industrial space in the 1990s. As of the second quarter of 1997, the Chicago
Metropolitan Area's industrial market overall vacancy rate was 7.5%, below the
national average vacancy rate of 8.1%. In addition, 32.6% (in terms of net
rentable square feet) of the Company's Industrial Properties in the Chicago
Metropolitan Area consist of overhead crane facilities which have a relatively
expensive replacement cost substantially in excess of the Company's basis in
its Properties. The Company believes that current rental rates in the overhead
crane/manufacturing submarket are less than the level which would justify the
construction of new overhead crane/manufacturing facilities and, therefore,
the Company believes that there will be little new competition in this area
with the Company's overhead crane/manufacturing Properties.
Increasing Employment. The Chicago Metropolitan Area economy experienced
significant recessionary conditions during the 1989-1993 period. While the
Chicago Metropolitan Area entered the recession earlier than other parts of
the nation, in part due to cutbacks in the manufacturing sector, it also
entered the economic recovery before many other areas. As of April 1997, the
Chicago Metropolitan Area experienced a net increase in employment of
approximately 66,500 jobs, representing an approximately 1.7% increase for the
previous twelve months. Of the total, approximately 38,800 jobs (approximately
58.3% of the total) were created in the services sector. Total employment was
approximately 4.0 million as of April 1997, according to the Bureau of Labor
Statistics. RCG expects an average increase of approximately 50,000 jobs
annually through 1999, representing an annual growth rate of approximately
1.1% to 1.4%.
The Chicago Metropolitan Area's unemployment rate has steadily decreased
from its 1992 peak and is currently below the national average unemployment
rate. The national unemployment rate as of April 1997 was approximately 4.9%
versus approximately 4.7% in the Chicago Metropolitan Area. By comparison, the
1992 unemployment rates for the United States and Illinois were both
approximately 7.4%. According to the Bureau of Labor Statistics, unemployment
in the Chicago Metropolitan Area has been declining for the last five years.
According to RCG, the unemployment rate in the Chicago Metropolitan Area will
probably remain lower than the unemployment rate for the nation as a whole
through the year 2000.
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<PAGE>
Growing Service Economy. Chicago's economy is highly diversified.
Traditionally strong industries such as manufacturing and transportation
continue to be vibrant sectors of the economy, and increasingly, knowledge-
based industries are growing at a rapid pace. The dynamic growth of knowledge-
based industries is evident in the strong growth in subsectors within the
services and finance, insurance and real estate ("FIRE") sectors. During the
year ended April 1997, the services sector, which grew from 25.1% of the total
employment base in 1987 to 31.1% in 1997, grew at a rate of 3.2% compared to a
rate of 3.4% nationally. The following graph illustrates the growing
diversification of Chicago's economic base.
CHART
Growth was particularly strong in the following knowledge-based services
employment subsectors: educational services (5.6%), engineering and management
(5.3%) and business services (4.6%). Tourism-related services also enjoyed
strong growth, with employment in amusement and recreation up 5.2% and hotel
employment up 3.7%. RCG expects that the recent $675.0 million expansion of
the McCormick Place Convention Center will boost visitor volume and tourism-
related services in Chicago. In addition, Chicago has a large legal services
industry. A number of the largest law firms in the U.S. are based in Chicago,
in a concentration second only to New York.
Growth in knowledge-based industries is also occurring in the financial
services industry. As the home of the CBOT, the CME and the CBOE, Chicago is
the international center of options, futures and commodity trading and an
important center of international finance. The CBOT is the world's oldest and
largest futures and options exchange. In February 1997, the CBOT opened its
new 60,000 square foot trading facility, which combined with its existing
facility, makes it the largest trading facility in the world. The CME,
consisting of twin 40-story office towers with one of the world's largest
trading floors is by far the world's largest financial marketplace in terms of
open interest futures and options (open interest represents the positions
outstanding at the close of trading). With the increasing use of options, the
CBOE has grown to become the world's largest options exchange and the second
largest securities exchange in the U.S. Currently, the CBOE captures the
largest share of the U.S. options market and as of December 31, 1996, the
CBOE's options trades accounted for more
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than 47.0% of equity options trading, 95.0% of index options trading and 65.0%
of all options trading nationwide.
Reflecting the importance of Chicago as a center of derivative finance,
employment in the FIRE sector, especially security and commodity broker jobs,
is highly concentrated in Chicago. Employment in these sectors grew
significantly during the year ended April 1997. During such period, employment
in the security and commodity brokers industry increased 2.8%, and employment
in the security brokers and dealers industry increased 3.5%. The high
concentration of financial services employment has significant spillover
effects in other industries, such as business services and publishing. For
example, Donnelley, one of the nation's largest financial publishers, is a
Fortune 500 company headquartered in Chicago at the Company's 77 West Wacker
Drive Building.
The Company believes that strong employment growth in the services and FIRE
sectors is a good sign for the Chicago office market, because employment
growth in these two sectors is a major source of demand for office space,
particularly in the Company's largest market of the Chicago CBD.
Growing Manufacturing Sector. Chicago has historically been, and continues
to be, associated with heavy manufacturing, and it has the second fastest
growing manufacturing employment base nationwide. Much of the fast growth is
occurring in high-wage, high-technology industries, which are relocating and
expanding in the Chicago Metropolitan Area, due to its large pool of educated
workers and affordable cost of living. Illinois recently surpassed
Massachusetts in high-technology employment and is behind only California, New
York and Texas, according to a 1997 ranking by the AEA. Similarly, Illinois is
also ranked fourth for high-technology merchandise exports, according to the
AEA survey. Because of the continued strong presence of heavy manufacturing
and the increased presence of high-technology manufacturing, Chicago's
manufacturing employment base has expanded at an average rate of 1.2% during
the last five years, compared to national growth of 0.2% over the same period.
Similarly, during the year ended April 1997, Chicago's manufacturing
employment increased 1.6% compared to a national rate of 0.1%. During the last
year, the fastest growing manufacturing subsectors have all been high-
technology subsectors such as electronics and other electric equipment (3.3%),
medical instruments (2.2%) and electronic components (2.1%). Several large
high-technology companies are headquartered in Chicago, including Motorola.
The Company believes this growth in high-technology manufacturing, which is
reflected in the Company's tenant base, has strengthened the submarkets in
which the Properties are located, including the Schaumburg submarket, because
Schaumburg contains the headquarters of Motorola, the third-largest tenant of
the Company's Industrial Properties.
While high technology is a fast-growing segment of the manufacturing
industry in Chicago, the steel industry, which contains several of the
Company's largest industrial tenants, remains a stable and important local
industry. Many of the manufacturing subsectors associated with steel
manufacturing and fabrication, such as metal forging and stamping,
metalworking machinery and fabricated metal products, are highly concentrated
in the Chicago Metropolitan Area. Inland Steel Industries and Acme Metals are
the largest local steel processors. Several large steel fabricators are also
based in the Chicago Metropolitan Area, including Tempel Steel Company, a
manufacturer of magnetic steel laminations, and A.M. Castle, a processor of
specialty metals. A.M. Castle is a tenant of the Company's Hammond Enterprise
Center.
Other Sectors. The retail and wholesale trade sectors have enjoyed moderate
growth over the last year. During the year ended April 1997, trade employment
was up 1.1%, compared to 2.8% nationwide. Growth in the retail sector has been
particularly strong, increasing 2.1% during the last year. Sears, a Fortune
500 retail company headquartered in the Chicago Metropolitan Area, is growing
rapidly. Other large retailers headquartered in the Chicago Metropolitan Area
are Walgreen's and Spiegel Inc.
Reflecting its role as a major international trade center, the Chicago
Metropolitan Area has a high concentration of transportation-related
employment. Air transportation is particularly concentrated in the Chicago
Metropolitan Area, because of the size and volume of activity of Chicago
O'Hare International Airport. Chicago
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<PAGE>
O'Hare International Airport has handled more passengers and aircraft
operations than any other airport in the world for the past 30 years. As the
hub of the nation's rail system and the primary port linking the Great Lakes
with the Mississippi River and the Gulf of Mexico, the Chicago Metropolitan
Area also has a high concentration of employment in trucking and warehousing
and transportation services. Employment growth in these two sectors was up a
strong 5.0% and 7.1%, respectively, as of the year ended April 1997.
The Company believes that all three of the sectors described above,
manufacturing, retail and wholesale trade and transportation are important
indicators of demand for warehouse/distribution space.
Forecasted Employment Growth. RCG forecasts that the Chicago Metropolitan
Area employment base will continue to grow at a moderate rate of 1.1% to 1.4%
per year during the next three years, with an absolute growth of approximately
50,000 jobs per year on average. RCG believes that the strongest job growth
will continue to occur in services, finance and manufacturing (particularly
high-technology manufacturing). The following graph illustrates the employment
trends and forecasts for the Chicago Metropolitan Area and the United States.
CHART
THE COMPANY'S OFFICE SUBMARKETS
Chicago Metropolitan Area Office Submarkets
Reflecting the large size of the metropolitan economy, the Chicago
Metropolitan Area was one of the top office markets nationwide in the second
quarter of 1997. The overall metropolitan area office market is third in size,
but the Chicago CBD office market ranks second only to New York's combined
Midtown and Downtown office markets.
100
<PAGE>
The Chicago Metropolitan Area office market has improved significantly over
the last five years; the vacancy rate has declined from 19.3% in 1992 to a low
of 13.2% in the second quarter of 1997. As the largest financial and business
center in the Midwest and the international center of derivative finance, the
Chicago Metropolitan Area has a large and growing office employment sector.
Strong growth in office employment sectors has contributed greatly to the
improved health of the Chicago Metropolitan Area office market. During the
five years from April 1992 to April 1997, office employment (defined as
employment in FIRE and business services) grew by 97,500, ranking the Chicago
Metropolitan Area first among all metropolitan areas nationwide in terms of
office employment growth over the last five years. The Chicago CBD office
market consists of 108.7 million net rentable square feet, in the aggregate,
and the Suburban Chicago office market consists of 79.7 million net rentable
square feet, in the aggregate.
Chicago Metropolitan Area office market vacancy rates have declined steadily
over the last five years; the vacancy rate has declined from a high of 19.3%
in 1993 to a low of 13.2% in the second quarter of 1997. The greatest gains in
the Chicago Metropolitan Area have occurred in the Class A office market,
where the vacancy rate has fallen from a high of 20.5% in 1992 to 9.3% in 1996
and has fallen further recently to 8.5% in the second quarter of 1997. The
Class A office market has had strong net absorption of approximately 2.1
million square feet per year since 1992. The total office market has averaged
net absorption of only 2.2 million square feet per year since 1992, which
reflects the movement of tenants of Class B and Class C space into Class A
spaces, where the rents have remained moderate. However, rents have recently
been increasing at an accelerating pace. The following tables illustrate
historical and forecasted conditions in the Chicago Metropolitan Area overall
office market and Class A office market, respectively.
TOTAL CHICAGO METROPOLITAN AREA OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 190,329 190,534 190,490 189,899 188,849 188,342 189,139 189,549 189,599
New Construction 3,893 205 230 0 216 0 797 1,410 800
Conversion/Demolition 0 0 274 591 1,266 507 507 1,000 750
Net Absorption 1,257 3,510 2,721 1,322 1,059 2,650 3,150 2,700
Occupied Stock 153,596 154,853 158,363 161,084 162,406 163,465 165,056 168,206 170,906
Vacancy Rate 19.3% 18.7% 16.9% 15.2% 14.0% 13.2% 12.7% 11.3% 9.9%
Source: RCG
CHICAGO METROPOLITAN AREA CLASS A OFFICE MARKET (000SF)
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 73,544 73,749 73,979 73,979 74,195 74,195 74,992 76,402 77,202
New Construction 3,893 205 230 0 216 0 797 1,410 800
Net Absorption 759 2,116 2,678 2,425 1,639 591 1,700 1,800 1,400
Occupied Stock 58,452 60,568 63,246 65,671 67,310 67,900 69,010 70,810 72,210
Vacancy Rate 20.5% 17.9% 14.5% 11.2% 9.3% 8.5% 8.0% 7.3% 6.5%
</TABLE>
Source: RCG
Chicago Central Business District Office Submarket
The Company owns and operates the 77 West Wacker Drive Building in the
Chicago CBD submarket.
The Chicago CBD submarket encompasses Chicago's downtown area. The Chicago
CBD submarket is the primary location within the city for financial
institutions, business services companies, law firms and government agencies.
In addition, a number of major corporations have a significant presence in the
Chicago CBD submarket, including Donnelley, Leo Burnett, Helene Curtis,
Wrigley, Everen, Morton International, Aon, Blue Cross/Blue Shield, Quaker
Oats, Amoco and First Chicago NBD.
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<PAGE>
The Chicago CBD office market has improved since 1993, when the office
vacancy rate peaked at 19.6%. In the second quarter of 1997, the overall
Chicago CBD office vacancy rate fell to 14.9%.
RCG believes that the improvement in the Chicago CBD office market is the
result of both strong growth in office employment and the lack of new
construction in the Chicago CBD office market since 1992. During the first
half of 1997, several large tenants, including Commonwealth Edison, the State
of Illinois and Andersen Consulting, leased significant space in the Chicago
CBD. In addition, the Class A office market has been the main beneficiary of
strong office employment growth. As a result, Class A vacancy rates in the
Chicago CBD have declined from a high of 23.1% in 1992 to a low of 9.3% in the
second quarter of 1997.
RCG forecasts a further decline in vacancy rates in the Chicago CBD office
market in 1997 and 1998, due to expected continued strong growth in office
employment, lack of construction of new office space and the conversion of
Class C buildings to other uses. Other than a build-to-suit office building
for Blue Cross/Blue Shield, no new office space is expected during the next
three years, and RCG believes, based on a three-year construction cycle for
large office buildings in the Chicago CBD, that there is little likelihood of
new office space in the Chicago CBD before the year 2001.
The following graph illustrates the historical and forecasted declines in
Chicago CBD office vacancy rates.
CHART
An additional factor contributing to the decline in office vacancy rates is
the conversion of office buildings to other uses. Since 1994, the Chicago CBD
office stock has shrunk by over two million square feet, due to conversions
and demolitions. Older Class C office buildings are being converted, largely
to residential units and hotels. During the first half of 1997, three
conversions resulted in the removal of 507,000 square feet of office space
from the Chicago CBD market. The Chicago Department of Planning and
Development has reported that over 20 conversion projects are either under
construction or being planned. In addition, one of the tax increment financing
districts for the Chicago CBD was amended in February 1997 to enlarge the area
covered by the district and to set aside approximately $300.0 million for the
renovation of the infrastructure and building stock in the older, eastern
portion of the Chicago CBD. Because of the new redevelopment subsidies, the
continuing increases in housing renovation and the expanding demand for hotel
space, RCG expects an acceleration in the rate of conversions of older office
buildings to other uses and a decline in vacancy rates in the overall Chicago
CBD office market. The following tables illustrate historical and forecasted
conditions in the Chicago CBD overall office market and Class A office market,
respectively.
102
<PAGE>
TOTAL CHICAGO CBD OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 111,329 111,329 111,055 110,464 109,198 108,691 108,691 107,691 106,941
New Construction 3,893 0 0 0 0 0 0 0 0
Conversion/Demolition 0 0 274 591 1,266 507 507 1,000 750
Net Absorption N/A (334) 1,334 179 813 661 1,700 1,750 1,500
Occupied Stock 89,843 89,509 90,843 91,022 91,836 92,496 93,536 95,286 96,786
Vacancy Rate 19.3% 19.6% 18.2% 17.6% 15.9% 14.9% 13.9% 11.5% 9.5%
</TABLE>
Source: RCG
CHICAGO CBD CLASS A OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 43,915 43,915 43,915 43,915 43,915 43,915 43,915 43,915 43,915
New Construction 3,893 0 0 0 0 0 0 0 0
Net Absorption 759 1,230 1,669 1,493 1,230 439 800 800 600
Occupied Stock 33,771 35,000 36,669 38,163 39,392 39,831 40,192 40,992 41,592
Vacancy Rate 23.1% 20.3% 16.5% 13.1% 10.3% 9.3% 8.5% 6.7% 5.3%
</TABLE>
Source: RCG
Central Loop Submarket
The Central Loop is the largest submarket in the Chicago CBD and the center
of Chicago's downtown financial district, with a tenant base that consists
primarily of financial institutions, business services companies, law firms,
major corporations and government agencies. The 77 West Wacker Drive Building
is located within the Central Loop.
The Central Loop office vacancy rate declined from a high of 18.2% in 1993
to 15.5% in the second quarter of 1997. The vacancy rate also dropped
substantially in the first half of 1997. The Central Loop Class A vacancy rate
is 9.1%, which is lower than the overall Chicago CBD Class A vacancy rate of
9.3%. The Central Loop had a high amount of net absorption for the first half
of 1997, due in large part to large leases by Commonwealth Edison, Andersen
Consulting and the law firm of O'Donnell, Wicklun, Pigozzi and Peterson.
The Central Loop has had no new additions to office space since 1992, and
although Class A rents are rising, RCG does not expect any new construction of
office space in the Central Loop before 2001. RCG expects the Central Loop,
because of its large base of financial, legal, corporate and government
tenants, to remain a strong submarket. The following table and graph
illustrate historical and forecasted conditions in the Central Loop Class A
office market.
CENTRAL LOOP CLASS A OFFICE SUBMARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 18,999 18,999 18,999 18,999 18,999 18,999 18,999 18,999 18,999
New Construction 2,841 0 0 0 0 0 0 0 0
Net Absorption 3,901 114 931 665 323 171 350 360 240
Occupied Stock 15,066 15,180 16,111 16,776 17,099 17,270 17,449 17,809 18,049
Vacancy Rate 20.7% 20.1% 15.2% 11.7% 10.0% 9.1% 8.2% 6.3% 5.0%
</TABLE>
103
<PAGE>
CHART
Because the book value of the 77 West Wacker Drive Building will be in
excess of 10.0% of the Company's total assets and the gross revenues for the
77 West Wacker Drive Building for the year ended December 31, 1996 were in
excess of 10.0% of the Company's aggregate gross revenues, additional
information regarding this Property is presented hereafter.
77 West Wacker Drive Building. The Company developed, leases, manages and
owns the 77 West Wacker Drive Building, a Class A high-rise, multitenant
corporate office building situated in what the Company considers to be a
premier location in the Chicago CBD. The 77 West Wacker Drive Building was
completed in 1992 to high-quality specifications to address the anticipated
demands of the submarket's tenants. The building, upon its completion, opened
with commitments for long-term leases for over 95.0% of its net rentable
office area even though office space occupancy rates in the Central Loop
submarket averaged 79.3% in 1992. The building has received awards for its
design, structural engineering, lighting and general merit, including the Sun-
Times Real Estate Development of the Year Award for 1993, Chicago's most
prestigious real estate industry award, and the Best New Building Award from
the Friends of Downtown. The Company believes the 77 West Wacker Drive
Building has a premier location in the Chicago CBD submarket for a number of
reasons, including convenience of access to mass transportation, views from
the building and close proximity to hotels, restaurants and other attractions
of downtown Chicago.
The building is comprised of 50 floors, encompassing an aggregate of
approximately 944,600 net rentable square feet, of which 84.6% was leased as
of June 30, 1997. The building has an exterior curtain wall of silver
reflective glass enclosed in a grid of white granite and is topped by a
"Grecian temple," which creates distinctive tenant spaces on the 49th and 50th
floors. The exterior is lighted at night by 540 high-intensity lamps which
accentuate the building's position on Chicago's downtown skyline. One design
feature of the 77 West Wacker Drive Building is its floor plates, which
provide highly efficient, column free space for tenants. The building was
designed and constructed with above-standard floor loadings and floor-to-
ceiling heights to accommodate the weight and raised floors requirements of
computers and other equipment. The building's floors are climate controlled in
16 zones, thus increasing tenant comfort, allowing for separate thermostat
controls for areas housing temperature sensitive equipment and reducing costs
for after-hour operations. In this area, the building has been recognized by
the American Society of Heating, Refrigeration and Air-Conditioning Engineers
for its energy-efficient heating, ventilating and air conditioning systems,
which reduce operating costs for both the Company and its tenants. The
building was designed for tenant efficiency and convenience and features a
very high ratio of elevators to rentable square feet, as well as 24-hour on-
site security and management, and convenient on-site
104
<PAGE>
facilities, such as a health club and dining facilities. Management believes
that because of these and other high-quality features, the 77 West Wacker
Drive Building continues to attract long-term major corporate tenants at rates
above those of other facilities in the Chicago CBD and neighboring submarkets.
Major tenants of the facility include the headquarters of Donnelley, a
financial printer, the headquarters of Everen, a securities firm, and Jones
Day, a law firm. These tenants have been tenants in the building since its
opening. Certain legal action has been taken against Keck, another significant
tenant in the 77 West Wacker Drive Building, to obtain possession of the Keck
Space. A settlement agreement was entered with Keck that provides that the
Keck Space will be vacated no later than November 30, 1997. Unless otherwise
noted, all the occupancy and vacancy rates, Annualized Net Rent and Annualized
Effective Net Rent for the 77 West Wacker Drive Building on or after June 30,
1997 set forth in this Prospectus have excluded Keck's occupancy.
The annual net rent, in accordance with GAAP, per leased square foot of the
77 West Wacker Drive Building for the years ended December 31, 1992, 1993,
1994, 1995 and 1996 was $22.26, $20.79, $21.19, $21.56 and $20.39,
respectively.
The 77 West Wacker Drive Building had a percentage leased rate of 90.5%,
95.3%, 97.0%, 99.6% and 93.6% for each of the five years ended December 31,
1992 through 1996. As of June 30, 1997, Donnelley occupied approximately 25.6%
of the Property's net rentable square feet. The lease for this space commenced
on July 1, 1992 for occupancy of 241,569 square feet. Pursuant to its lease,
Donnelley is obligated to pay net rent per square foot of $29.90 in 1997
(escalating at a rate of 2.5% per annum through June 30, 2007), for an
aggregate of $7,222,913. The current lease term is subject to two ten-year
options to renew at 95% of fair market value basis. As of June 30, 1997,
Everen occupied approximately 25.5% of the Property's net rentable square
feet. The lease for this space commenced on June 1, 1992 for occupancy of
241,225 square feet. Pursuant to its lease, Everen is obligated to pay net
rent per square foot of $29.43 in 1997 (escalating at an annual rate of 200%
of the change in the CPI but not to exceed 2.5% per annum on a cumulative
compounded basis through June 30, 2007), for an aggregate of $7,099,252. The
current lease term is subject to two five-year options to renew at 95% of fair
market value basis. Everen has an option to terminate the lease effective
approximately June 1, 2002, upon two years prior written notice, and upon
payment of a termination fee calculated at more than $37,900,167. As of June
30, 1997, Jones Day occupied approximately 11.8% of the Property's net
rentable square feet. The lease for this space commenced on August 1, 1992 for
occupancy of 111,706 square feet. Pursuant to its lease, Jones Day is
obligated to pay net rent per square foot of $27.32 in 1997 (escalating at an
average rate of 3.2% per annum through April 30, 2007), for an aggregate of
$3,051,808. The current lease term is subject to two five-year options to
renew at 95% of fair market value basis.
Management believes that because of the high quality and strategic location
of the 77 West Wacker Drive Building, it has had higher occupancy, tenant
retention and rental rates than other properties within this submarket. The
vacancy rate of office buildings in the Chicago CBD submarket was
approximately 15.9% for 1996 as compared to approximately 8.8% for the 77 West
Wacker Drive Building for 1996. The average net rental rate in the Chicago CBD
submarket during the second quarter of 1997 was approximately $11.94 per
square foot for Class A office buildings compared to an average net rental
rate of $18.50 per square foot plus three percent per annum for the 77 West
Wacker Drive Building as of June 30, 1997. The Company is aware of the
construction of only one new office building in the Chicago CBD, the new
headquarters for Blue Cross/Blue Shield, a major insurance company. To the
Company's knowledge, no other new construction is being undertaken in the near
future in the Chicago CBD submarket.
The following table sets forth for the 77 West Wacker Drive Building for
each of the ten years following the completion of the Offering: (i) the number
of tenants whose leases will expire, (ii) the total net rentable square feet
covered by such leases, (iii) the percentage of total leased net rentable
square feet represented by
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<PAGE>
such leases, (iv) the annual net rent represented by such leases and (v) the
average annual net rent per net rentable square foot represented by such
leases.
<TABLE>
<CAPTION>
NET PERCENTAGE OF AVERAGE ANNUAL
RENTABLE TOTAL LEASED ANNUAL NET NET RENT PER NET
AREA SUBJECT SQUARE FEET RENT UNDER RENTABLE SQUARE FOOT
NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY
YAR OF LEASEE EXPIRING LEASES EXPIRING LEASES EXPIRING
XPIRATIONE LEASES (SQ. FT.) LEASES (%) ($000) LEASES ($)
- ------------- --------- ------------ -------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
7/1/97-12/31/97......... -- -- -- -- --
1998.................... 4 24,662 3.09 252 10.20
1999.................... 1 1,424 0.18 18 12.55
2000.................... 2 22,067 2.76 166 7.52
2001.................... 2 12,844 1.61 166 12.93
2002.................... 4 55,055 6.89 746 13.54
2003.................... 2 25,175 3.15 271 10.76
2004.................... 1 22,576 2.82 207 9.17
2005.................... -- -- -- -- --
2006.................... 1 4,485 0.56 46 10.29
2007+................... 9 631,159 78.94 16,392 25.97
--- ------- ------ ------
26 799,447 100.00 18,264 22.84
=== ======= ====== ======
</TABLE>
The Company's tax basis in the 77 West Wacker Drive Building for federal
income tax purposes as of December 31, 1996 was approximately $221.0 million
(net of accumulated depreciation and reductions in depreciable basis). The
Property is depreciated using the modified accelerated cost recovery system
straight-line method, based on an estimated useful life ranging from five
years to 39 years, depending upon the date of certain capitalized improvements
to the Property. For the year ended December 31, 1996, the estimated average
depreciation rate for this Property under the modified accelerated cost
recovery system was 3.3%. For the 12- month period ending June 30, 1997, the
Company was assessed property taxes on this Property at an effective annual
rate of approximately 9.3%. Property taxes on this Property for the 12-month
period ending June 30, 1997 totaled approximately $7.0 million, which
represents 1995 taxes paid in 1996. Management does not believe that any
capital improvements made during the 12-month period immediately following the
Offering should result in an increase in annual property taxes.
In the Company's opinion, this Property is adequately covered by insurance.
Chicago Metropolitan Area Suburban Office Submarket
The Company will own and operate twelve Office Properties in the Suburban
Chicago office submarket, with approximately 938,862 aggregate net rentable
square feet.
The Suburban Chicago office submarket consists of the suburbs surrounding
the City of Chicago. The suburban market is comprised of four distinct
submarkets. Besides the Office Properties attached to the Industrial
Properties, the Company owns Office Properties in both the north and northwest
suburbs of Chicago.
The north and northwest suburbs have served as the primary alternative
choice for large corporations which choose not to locate in the Chicago CBD,
and currently, although the Chicago CBD retains its traditional dominance as
the primary home of the Chicago Metropolitan Area's governmental, financial
and legal communities, the north and northwest suburbs contain the
headquarters of several of the Chicago Metropolitan Area's most prominent
companies, ranging from Motorola (in Schaumburg) and McDonald's (in Oak Brook)
to Allstate Insurance, Baxter International, W.W. Grainger and Abbott
Laboratories (in Lake County) and Sears, Ameritech and Siemens (in the
northwest suburbs).
The Suburban Chicago office market has experienced a dramatic decline in
office vacancy rates, from a high of 19.3% in 1992 to 10.9% in the second
quarter of 1997. The Suburban Chicago Class A office market vacancy
106
<PAGE>
rate of 7.3% in the second quarter of 1997 is lower than that of the market as
a whole. RCG believes that this better performance is the result of the
movement of tenants from Class B and Class C space into Class A space, because
during the last five and a half years, Suburban Chicago Class A net absorption
has averaged over 800,000 square feet per year, compared to a total net
absorption of 1.3 million square feet per year in the Suburban Chicago office
market.
RCG believes that Class A office rents in Suburban Chicago have risen to the
point where construction of new Class A office space is economically feasible.
A total of ten new office buildings, with an aggregate of 796,800 net rentable
square feet (representing approximately 1.0% of the existing net rentable
square feet in the Suburban Chicago office market) are scheduled to be
completed during 1997. Nine new office buildings with an aggregate of 1.4
million net rentable square feet are scheduled to be completed in 1998.
Several other office buildings are being planned, but are not scheduled to be
completed before 1999.
RCG believes that the outlook for the Suburban Chicago office market is
strong. RCG believes that, because office employment growth is expected to
remain in the 2.0% range, overall vacancy rates in the Suburban Chicago office
market may rise slightly but will remain relatively low, despite the addition
of new office space. Because of the disparity between the Class A and Class B
office markets, the Company believes that there are increasingly more
development and redevelopment opportunities in Suburban Chicago. The following
graph and tables illustrate Suburban Chicago vacancy rates and historical and
forecasted conditions in the Suburban Chicago office market.
CHART
SUBURBAN CHICAGO OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 79,000 79,205 79,435 79,435 79,651 79,651 80,448 81,858 82,658
New Construction 0 205 230 0 216 0 797 1,410 800
Net Absorption 0 1,591 2,176 2,542 509 398 950 1,400 1,200
Occupied Stock 63,753 65,344 67,520 70,062 70,571 70,969 71,521 72,921 74,121
Vacancy Rate 19.3% 17.5% 15.0% 11.8% 11.4% 10.9% 11.1% 10.9% 10.3%
</TABLE>
Source: RCG
107
<PAGE>
SUBURBAN CHICAGO CLASS A OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 29,629 29,629 29,834 30,064 30,064 30,280 30,077 32,487 33,287
New Construction 0 205 230 0 216 0 797 1,410 800
Net Absorption 1,133 887 1,009 932 410 151 900 1,000 800
Occupied Stock 24,681 25,568 26,577 27,509 27,918 28,070 28,818 29,818 30,618
Vacancy Rate 16.7% 14.3% 11.6% 8.5% 7.8% 7.3% 7.3% 8.2% 8.0%
</TABLE>
Source: RCG
SUBURBAN CHICAGO OFFICE SUBMARKETS: RECENT VACANCY RATE STATISTICS
<TABLE>
<CAPTION>
Change
N.R.A. % Vacant 4Q96-
Submarket 2Q97 2Q97 1Q97 4Q96 2Q97
--------- ---------- ----- -------- ----- ------
<S> <C> <C> <C> <C> <C>
Lake Shore 4,210,145 13.4% 13.4% 13.0% 0.3%
North Suburbs 5,088,456 6.3% 6.2% 6.7% -0.4%
SCHAUMBURG 21,595,252 10.7% 10.9% 12.6% -1.8%
O'Hare 12,847,991 13.0% 13.1% 13.9% -0.9%
OAK BROOK 26,276,766 10.1% 10.3% 9.4% 0.7%
West Cook 1,276,779 14.3% 13.7% 12.9% 1.4%
South Suburbs 2,395,264 12.9% 12.8% 13.3% -0.4%
Lake County 6,070,883 10.5% 12.5% 12.8% -2.3%
Suburban Total 79,761,536 10.9% 11.1% 11.4% -0.6%
</TABLE>
Schaumburg Submarket
The Company will own and operate three Office Properties in the Schaumburg
submarket, two of which are Acquisition Properties, and one of which is an NAC
Property. The Schaumburg submarket encompasses the communities of Schaumburg,
Hoffman Estates, Itasca, Mt. Prospect, Rolling Meadows and Arlington Heights
in northwest Cook County and is located 20 to 30 minutes west of Chicago
O'Hare International Airport. The Schaumburg submarket serves as the
headquarters for some of the Chicago Metropolitan Area's top companies, such
as Motorola and Sears. In addition, several other major office employers have
large facilities in the Schaumburg submarket, including Ameritech, U.S.
Robotics (now 3Com) and Siemens.
The Schaumburg office submarket has the second highest concentration of
office space in the Suburban Chicago office market. During the 1980s,
Schaumburg emerged as a popular business location, and approximately 70.0% of
the submarket's current inventory of 18.8 million square feet of Class A and
Class B office space was built during the 1980s. The Schaumburg Class A office
submarket has experienced the largest decline in vacancy rates of any office
submarket in the Chicago metropolitan area; the Schaumburg Class A office
vacancy rate declined from a high of 20.1% in 1992 to 5.5% in the second
quarter of 1997. During 1996, the Schaumburg submarket recorded the largest
amount of leasing activity of any suburban submarket. Ameritech and U.S.
Robotics (now 3Com) leased large spaces in 1996. In the first half of 1997,
several major tenants, including Prudential Insurance, leased large amounts of
office space. In the second quarter of 1997, the Schaumburg submarket's
overall office vacancy rate declined to 10.7%, less than half of its 1992
vacancy rate of 23.9%. RCG believes that the low vacancy rates in the
Schaumburg Class A office market are beginning to affect vacancy rates to the
Class B market, which still has a relatively high vacancy rate of 16.7% in the
second quarter of 1997.
Absorption of office space in Schaumburg has been extremely strong for the
past four years and has averaged 360,000 and 500,000 square feet per year,
respectively, in the overall and Class A markets. However,
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there has been very little new construction. During the last five years, only
two buildings totaling 110,000 square feet were constructed. RCG believes that
only six office buildings with an aggregate of approximately 384,000 net
rentable square feet will be completed during 1997 and 1998. Two other
proposed buildings are likely to be completed in early 1999.
RCG believes that the outlook for the Schaumburg office market is strong.
Demand for office space is expected to remain strong, but will be constrained
by the lack of new supply of Class A office space. RCG forecasts that Class A
vacancy rates will remain low through 1998. RCG believes that the overall
vacancy rates for the office submarket will slowly decline below 10.0% by
1999. The following tables and graph illustrate historical and forecasted
conditions in the Schaumburg overall and Class A office markets.
SCHAUMBURG SUBMARKET CLASS A OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 10,175 10,175 10,230 10,285 10,285 10,285 10,434 10,719 10,919
New Construction 0 55 55 0 0 0 149 235 200
Net Absorption (51) 265 536 439 206 144 250 250 175
Occupied Stock 8,130 8,394 8,931 9,370 9,575 9,719 9,825 10,075 10,250
Vacancy Rate 20.1% 17.5% 12.7% 8.9% 6.9% 5.5% 5.8% 6.0% 6.1%
</TABLE>
Source: RCG
CHART
Description of Schaumburg Properties
The Company has three Office Properties in the Schaumburg submarket. Each is
easily accessible from Interstate 355 and Interstate 90, which are major
highways providing access to downtown Chicago. Also, these Properties have
convenient access to Chicago O'Hare International Airport, which is
approximately 10 miles away.
1699 E. Woodfield Road. 1699 E. Woodfield Road, also known as the Citibank
Office Plaza, is a five-story Class A office building located in Schaumburg,
across from the Woodfield Mall, a large regional shopping center. The building
is situated on a 5.2 acre parcel of land and includes 410 spaces for surface
parking. It was
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built in 1979 and renovated from 1991 to 1997. It has approximately 105,400
net rentable square feet of office space, of which 95.2% was leased as of June
30, 1997. The building's exterior is clad in pebbled white quartz set in
precast concrete, with bronze-tinted thermopaned windows. The building's
tenants include Citibank, Merrill Lynch and McGladrey & Pullen, the nation's
seventh largest accounting firm.
1990 Algonquin Road and 2000-2060 Algonquin Road. 1990 Algonquin Road and
2000-2060 Algonquin Road constitute a complex of office buildings in
Schaumburg known as the Salt Creek Office Center. The Salt Creek Office Center
comprises one two-story office building and seven single-story office
buildings situated on approximately ten acres of land. The two-story building
is 1990 Algonquin Road, and the seven single-story buildings are 2000-2060
Algonquin Road. The complex includes 478 spaces of surface parking. It was
built in phases from 1979 through 1986. The buildings have masonry exterior
walls with tinted glass windows. The complex has approximately 125,900 net
rentable square feet of office space, of which 90.9% was leased as of June 30,
1997. The buildings are close to, and visible from, Interstate 355 and a ten-
minute drive from O'Hare International Airport. Tenants include Silicon
Graphics and Ticor Title Insurance.
1301 E. Tower Road. 1301 E. Tower Road is a single-story Class B office
building located in Schaumburg, Illinois. The building is situated on a 6.0-
acre parcel of land and includes 23 spaces for surface parking. It was built
in 1992. It has approximately 50,000 net rentable square feet of office space,
of which 100.0% was leased as of June 30, 1997. The building has three docks
and is located near Interstate highways 90 and 290. Household Credit Services
leases the entire building. Household Credit Services has both a right of
first refusal to purchase 1301 E. Tower Road and a purchase option exercisable
prior to December 30, 2001 at fair market value. The Company is aware of
certain environmental contamination at this facility. See "--Governmental
Regulations--Environmental Matters."
Oak Brook Office Submarket
The Company will own and operate five Office Properties in the Oak Brook
submarket, one of which is an Acquisition Property to be acquired upon the
consummation of the Formation Transactions and four of which are Contribution
Properties. The Oak Brook office submarket encompasses the communities of Oak
Brook, Lombard, Downers Grove and Elmhurst in eastern DuPage County. The Oak
Brook submarket was the first suburban office market developed outside of
downtown Chicago that attracted large firms and corporate headquarters in
large numbers. Some of the Oak Brook submarket's largest employers are Waste
Management, McDonalds and Spiegel.
The Oak Brook office submarket has the largest concentration of office space
in the Suburban Chicago office market. The Oak Brook Class A vacancy rate
declined from 17.1% in 1992 to 8.1% in the second quarter of 1997. In the
first half of 1997, several major tenants, including Ameritech, Wausau
Insurance, Deutsche Financial, Raytheon Engineers and Constructors, Rockwell
International and Donnelley, leased large amounts of office space. In the
second quarter of 1997, the Oak Brook submarket's overall office vacancy rate
declined to 8.1%, compared to a vacancy rate of over 16.0% in 1992 and well
below the peak vacancy rate of 24.7% in 1986. Unlike some other submarkets,
Class B and Class C buildings within the Oak Brook office submarket are also
experiencing strong leasing activity; the office vacancy rates for Class B and
Class C office buildings for the second quarter of 1997 were 10.9% and 12.3%,
respectively.
As the largest and one of the most popular of the suburban office markets,
the Oak Brook market has experienced and continues to experience a high volume
of new construction relative to other suburban submarkets. During 1997, four
buildings totalling approximately 476,000 square feet are scheduled to be
completed. Another five buildings totaling approximately 805,000 square feet
are expected to be completed during 1998.
RCG believes that the outlook for the Oak Brook office submarket is strong.
RCG expects that after the delivery of a large supply of office space during
1998, vacancy will decline. RCG also expects Class A vacancy
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rates in Oak Brook to range between 7.0% and 8.0% through 1999 with Class B
vacancy rates remaining slightly higher. The following tables and graph
illustrate historical and forecasted conditions in the Oak Brook overall and
Class A and Class B office markets.
OAK BROOK SUBMARKET CLASS A OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
----- ----- ----- ----- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 9,550 9,550 9,915 9,915 10,159 10,159 10,635 11,440 11,840
New Construction 247 0 365 0 244 0 476 805 400
Net Absorption 316 535 779 30 136 (61) 500 600 475
Occupied Stock 7,917 8,452 9,231 9,261 9,397 9,336 9,897 10,497 10,972
Vacancy Rate 17.1% 11.5% 6.9% 6.6% 7.5% 8.1% 6.9% 8.2% 7.3%
</TABLE>
Source: RCG
OAK BROOK SUBMARKET CLASS B OFFICE MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 10,566 10,759 10,759 10,759 10,759 10,759 10,759 10,759 10,759
New Construction 0 193 0 0 0 0 0 0 0
Net Absorption (190) 235 430 43 215 (53) 75 50 75
Occupied Stock 8,717 8,951 9,382 9,425 9,640 9,587 9,715 9,765 9,840
Vacancy Rate 17.5% 16.8% 12.8% 12.4% 10.4% 10.9% 9.7% 9.2% 8.5%
</TABLE>
Source: RCG
CHART
Description of Oak Brook Properties
941-961 Weigel Drive. 941-961 Weigel Drive is a single-story Class B office
building located in Elmhurst, Illinois. The building is situated on a 10.6-acre
parcel of land. It was built in 1989. It has approximately 123,000
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net rentable square feet of office space, of which 100.0% was leased as of
June 30, 1997. The building is six miles southwest of O'Hare International
Airport, near Interstate highways 88, 290 and 294. The building is leased
entirely by Household Finance Corp., which has a right of first refusal to
purchase the building under certain circumstances.
280 Shuman Boulevard. 280 Shuman Boulevard is a two-story Class B office
building located in Naperville, Illinois. The building is situated on a 5.5-
acre parcel of land and includes 218 spaces for surface parking. It was built
in 1979. It has approximately 65,000 net rentable square feet of office space,
of which 98.8% was leased as of June 30, 1997. The building has a masonry
exterior with a 6,000 square foot two-story, sky-lit atrium. The building is
approximately one mile from Interstate highway 88. The building's tenants
include General Electric and Nexgen Software.
4343 Commerce Court. 4343 Commerce Court is a seven-story Class A office
building located in Lisle, Illinois. The building is situated on a 7.4-acre
parcel of land and includes 559 spaces for surface parking. It was built in
1989 and renovated in 1995. It has approximately 171,000 net rentable square
feet of office space, of which 88.9% was leased as of June 30, 1997. The
building has bronze-tinted ribbon windows and features a striking ten-story
glass atrium. The building's tenants include Computer Associates, the Federal
Bureau of Investigation and Hinshaw & Culbertson, a large Chicago law firm.
4100 Madison Street. 4100 Madison Street is a two-story Class B office
building located in Hillside, Illinois. The building is situated on a 2.3-acre
parcel of land and includes 86 spaces for surface parking. It was completely
renovated from 1978 to 1994. It has approximately 25,000 net rentable square
feet of office space, of which 51.2% was leased as of June 30, 1997. The
building's tenants include the Nardi Group and Narco Construction.
350 N. Mannheim Road. 350 N. Mannheim Road is a single-story Class B office
building located in Hillside, Illinois. The building is situated on a 0.7-acre
parcel of land and includes 51 spaces for surface parking. It was built in
1977 and renovated in 1988. It has approximately 4,900 net rentable square
feet of office space and was vacant as of June 30, 1997. The building is five
miles from O'Hare International Airport.
Other Chicago Metropolitan Area Office Properties
2205-2255 Enterprise Drive. 2205-2255 Enterprise Drive is a complex of six
single-story Class B office buildings located in Westchester, Illinois. The
complex is situated on a 9.7-acre parcel of land and includes 518 spaces for
surface parking. It was built in 1987. It has approximately 130,000 net
rentable square feet of office space, of which 91.4% was leased as of June 30,
1997. The buildings' tenants include the regional office for the U.S. Census
Bureau and National Restaurant Enterprise, the owner and operator of over 200
Burger King restaurants in the Midwest and Southeast. The complex is located
less than two miles from each of Interstate highways 88, 290 and 294.
555 Huehl Road. 555 Huehl Road is a two-story Class A office building
located in Northbrook, Illinois. It was built in 1987 and has approximately
74,000 net rentable square feet of office space, of which 100% was leased as
of June 30, 1997 and contains three interior docks. The building is leased
entirely by Rank Video, a video duplication company, as its corporate
headquarters. The building also houses Rank Video's U.S. computer and
communication centers.
1600-1700 167th Street. 1600-1700 167th Street is a complex of two single-
story Class B office buildings located in Calumet City, Illinois. The building
is situated on a 5.2-acre parcel of land. It was built in 1981 and remodeled
in 1982. It has approximately 65,000 net rentable square feet of office space,
of which 53.1% was leased as of June 30, 1997. The building has a masonry and
brick exterior and ceiling skylights. The building's tenants include Conrail
Corp., IBM and the General Services Administration.
Nashville and Knoxville Office Submarkets
The Company owns and operates four Office Properties and owns a parking
facility in Tennessee. The Company believes that the inclusion of the
Tennessee Properties in the portfolio of Properties provides some
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measure of balance in the portfolio from an exclusive focus on the Chicago
Metropolitan Area, and provides valuable contacts in and information about
these growing markets to the Company.
The Nashville Office Market
The Company owns and operates one Office Property in the Nashville office
submarket. Nashville, the capital of the state of Tennessee, has a population
of approximately 1.1 million and is home to a number of major employers,
including Vanderbilt University, Gaylord Entertainment and Kroger. According
to RCG, during the five years from April 1992 to April 1997, employment growth
in Nashville averaged 3.7% per year compared to a 2.3% average annual rate for
the nation as a whole. For the year ended in April 1997, total employment
growth in Nashville decreased to 1.3% compared with the national growth rate
of 2.2%. RCG believes that weaker Nashville growth resulted from cyclical
weakness in the manufacturing sector. Office employment in Nashville grew at
an average annual rate of 5.0% from April 1992 to April 1997, compared to a
3.2% average annual rate for the nation as a whole. For the year ended April
1997, office employment grew 3.4%, compared with the national growth rate of
3.1%.
Description of Nashville Property
201 4th Avenue N. 201 4th Avenue N. is a 20-story office building centrally
located in downtown Nashville. It was built in 1968, renovated in 1985,
acquired by Prime in 1993 and further redeveloped. It has approximately
250,600 net rentable square feet of office space, of which 90.1% was leased as
of June 30, 1997. The building is the regional headquarters of SunTrust Bank,
which leases approximately 49.0% of the net rentable square footage.
The Knoxville Office Market
The Company owns three Office Properties and a parking facility in the
Knoxville office submarket. Each of the Knoxville Office Properties was
developed by Prime and is among the highest quality buildings in Knoxville.
Knoxville has a diverse economy and real estate market and has benefited
from, among other things, the presence of the University of Tennessee, the
Tennessee Valley Authority and several large apparel manufacturers, as well as
the proximity of the U.S. Department of Energy's Oak Ridge facility.
Knoxville's economy has grown rapidly and steadily during the 1990s. From
April 1992 to April 1997, employment growth in Knoxville averaged 2.1% per
year compared with an average national employment growth rate of 2.3%. For the
year ended April 1997, Knoxville employment declined 0.1% and office
employment declined 0.3%. RCG believes that these declines are temporary and
were primarily the result of a large 2.4% decline in the manufacturing sector.
Description of Knoxville Properties
620 Market Street. 620 Market Street, also known as One Centre Square, is a
six-story Class A office building located in downtown Knoxville. Prime built
One Centre Square in 1988, and the same year, the building won the First Place
Certificate of Merit for Quality Construction from the Associated Builders and
Contractors. The building has approximately 93,700 net rentable square feet of
office space, of which 91.4% was leased as of June 30, 1997. One Centre Square
shares the Knoxville parking facility with Two Centre Square. Major tenants
include Morton, Lewis, King & Kreig, a major local law firm, which leases
approximately 31.7% of the building and FNB Financial Corp., a bank, which
leases approximately 20.7% of the building.
625 Gay Street. 625 Gay Street, also known as Two Centre Square, is a six-
story Class A office building located in downtown Knoxville adjacent to One
Centre Square. Prime built Two Centre Square in 1988, and in 1989, the
building, along with One Centre Square, won the Grand Certificate of Merit for
Quality Construction from the Associated Builders and Contractors. It has
approximately 91,400 net rentable square feet of office space, of which
approximately 90.0% was leased as of June 30, 1997. Two Centre Square shares
the Knoxville parking facility with One Centre Square. Major tenants of the
building include Healthsource, a health maintenance organization, and
PaineWebber.
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4823 Old Kingston Pike. 4823 Old Kingston Pike is a three-story Class A
office building located in western Knoxville, in the premium
residential/office neighborhood in Knoxville. Prime built 4823 Old Kingston
Pike in 1988, and the building, like the Company's other Office Properties in
Knoxville, is one of the highest-quality buildings in Knoxville. It has
approximately 34,600 net rentable square feet of office space, of which
approximately 100.0% was leased as of June 30, 1997. Talbots operates one of
its two national telemarketing centers in 4823 Old Kingston Pike and leases
approximately 68.1% of the office space.
Knoxville Parking Facility. The Company also owns a 398-space parking
facility in downtown Knoxville. The parking facility was built in 1981 and
acquired by Prime in 1987. It services the One Centre Square and Two Centre
Square buildings.
THE COMPANY'S INDUSTRIAL SUBMARKETS
Chicago Metropolitan Area Industrial Submarkets--General Overview
The Company owns and operates 38 Industrial Properties in the Chicago
Metropolitan Area. Seventeen Industrial Properties are Prime Properties
located in four industrial parks which were acquired by Prime between 1988 and
1992 and subsequently substantially renovated, and six Industrial Properties
are Contribution Properties, which will be acquired upon the consummation of
the Formation Transactions. The industrial parks acquired from Prime are
located in East Chicago, Indiana; Hammond, Indiana; the city of Chicago; and
Arlington Heights, Illinois.
The Chicago Metropolitan Area's manufacturing employment, already the
highest of any metropolitan area in the nation, is also the second-fastest
growing. According to RCG, Chicago's manufacturing employment base has
expanded at an average rate of 1.2% during the last five years, compared to
national growth of 0.2% over the same period. Similarly, during the year ended
April 1997, Chicago's manufacturing employment increased 1.6%, compared to a
national rate of 0.1%, and growth in manufacturing in the Chicago Metropolitan
Area is expected by RCG to outpace the nation over the next several years.
Chicago has one of the nation's largest industrial markets, second only to
Los Angeles in terms of the total square footage of its vacant and occupied
stock of industrial space. Chicago's industrial vacancy rate of 7.5% in the
second quarter of 1997 (which reflects conditions in both overhead
crane/manufacturing facilities and warehouse/distribution facilities) was
lower than the national average industrial vacancy rate of 8.1%.
The Chicago Metropolitan Area industrial market benefits from strong
manufacturing and trade-related demand. The Chicago Metropolitan Area is the
nation's largest metal-processing market and one of the nation's major
manufacturing centers. In addition, both the Chicago Metropolitan Area's
central location and its highly efficient and extensive, well-integrated
transportation system contribute to the high volume of trade conducted through
the area's distribution system. Located mid-way between the East and West
coasts and between Canada and Mexico, with the world's busiest airport, the
hub of the nation's rail system and the primary port connecting the Great
Lakes with the Mississippi River and the Gulf of Mexico, Chicago plays a
preeminent role in U.S. trade and transportation. The following table and
graph illustrate historical and forecasted conditions in the Chicago
Metropolitan Area overall industrial market and vacancy rates in and additions
to the Chicago Metropolitan Area industrial market.
TOTAL CHICAGO METROPOLITAN AREA INDUSTRIAL MARKET (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock -- -- 858,378 870,377 888,264 898,298 906,264 918,264 928,264
New Construction -- -- -- 11,999 17,887 10,034 18,000 12,000 10,000
Net Absorption -- -- -- 26,169 9,373 7,065 13,000 11,000 12,000
Occupied Stock -- -- 788,678 814,847 824,220 831,285 837,220 848,220 860,220
Vacancy Rate 8.5% 8.4% 8.1% 6.4% 7.2% 7.5% 7.6% 7.6% 7.3%
</TABLE>
Source: RCG
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<PAGE>
CHART
The Chicago Metropolitan Area industrial market comprises over 898.0 million
square feet of space. Demand for industrial space has been strong over the
last two years, with net absorption averaging approximately 17.5 million
square feet per year. Gross leasing activity, which RCG considers a good
measure of demand, has also been robust. During the first half of 1997, gross
leasing activity in the Chicago Metropolitan Area was nearly double 1996's
level and close to the peak of 45.1 million square feet in 1995. Although the
vacancy rate increased to 7.5% in the second quarter of 1997, RCG believes
that this reflects new space coming into the market, rather than a weakness in
demand. The greatest vacancy rates were in larger buildings of over 100,000
square feet. The following graph illustrates gross leasing activity in the
Chicago Metropolitan Area.
CHART
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The Industrial Parks. The industrial parks acquired from Prime consist of
certain industrial properties commonly referred to as the Enterprise Centers,
which consist of overhead crane/manufacturing facilities and one
warehouse/distribution facility. The East Chicago Enterprise Center (the
"ECEC"), Hammond Enterprise Center (the "HEC") and Chicago Enterprise Center
(the "CEC") are primarily composed of high bay, heavy overhead crane warehouse
facilities. The fourth park, 425 East Algonquin Road, also known as the
Arlington Heights Enterprise Center (the "AHEC"), contains a
warehouse/distribution facility. Each of the parks also contains a small
portion of office space available for lease. For a description of the office
space available for lease, see "--Description of Chicago Metropolitan Area
Overhead Crane/Manufacturing Properties." The AHEC, CEC and ECEC contain
acreage sufficient for the construction of build-to-suit opportunities: up to
80,000 square feet at the AHEC; 670,000 square feet at the CEC; and 250,000
square feet at the ECEC.
The industrial parks were acquired by Prime between 1988 and 1992, and all
four had previously been utilized as single tenant sites. Upon acquiring the
Properties, Prime redeveloped the parks to reposition them as multi-tenant
facilities. Among the improvements Prime made to the parks were the separation
of utilities, installation of demising walls, exterior wall and roof repair
(or replacement), repair of uneven floors, insulation, lighting,
paint/signage/graphics, reconfiguration of site lay-outs and construction of
railroad spurs to service the sites. The industrial parks were redeveloped
using funds provided by the issuance of Tax-Exempt Bonds. For a description,
see "--Tax-Exempt Bonds."
The ECEC, CEC and HEC are located in close proximity to the steel industry
of northwest Indiana and contain primarily tenants who service the steel
industry. These tenants are primarily steel processors, who perform functions
formerly performed by more vertically integrated steel companies before the
downsizing of those companies. These steel processors purchase steel from
steel producers and process it for end users in various ways, including
slitting, cutting, leveling, straightening, strengthening and
electrogalvanizing the steel. Other tenants include a manufacturer of steel
roll strapping, a refurbisher of steel mill generators, a steel caster repair
and maintenance firm and a metallurgist. The AHEC is located in the northwest
suburb of Arlington Heights and contains a wide variety of tenants. Each of
these Industrial Properties has convenient access to Interstate highways and
the ECEC, CEC and HEC is each served by rail. The Company is aware of
environmental contamination at certain of the industrial parks. For a
description, see "--Government Regulations--Environmental Matters."
Warehouse/Distribution Industrial Submarket
The Company owns four warehouse/distribution Industrial Properties located
in Suburban Chicago, which contain an aggregate of approximately 899,100
rentable square feet. At June 30, 1997, the Company's warehouse/distribution
Industrial Properties were 100.0% leased to more than five tenants.
The strength of trade in the industrial market is reflected in the growth of
transportation services at 5.5% per year for the last five years. Chicago
remains the hub of the nation's rail system, and trucking and warehousing
employment has grown significantly during the last five years, increasing 5.0%
to 11.0% per year since 1992.
RCG believes that the warehouse/distribution submarket is strong. After four
consecutive years of declining vacancy rates, the vacancy rate in this
submarket increased to 11.4% in the second quarter of 1997. RCG believes that
this reflects new space coming into the market, rather than a weakness in
demand. Gross leasing activity, which RCG considers a good measure of demand,
is particularly strong, averaging over 20.0 million square feet per year for
the last five years. RCG believes that while demand in this market continues
to be strong, increases in new construction will keep the vacancy rate from
declining significantly in the near term. The following graph illustrates
vacancy rates in and additions to the Chicago Metropolitan Area
warehouse/distribution submarket.
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LOGO
Description of Chicago Metropolitan Area Warehouse/Distribution Properties
475 Superior Avenue. 475 Superior Avenue is a distribution facility located
in Munster, Indiana. The building is situated on an approximately 31-acre
parcel of land. It was built in 1989. It has approximately 450,000 net
rentable square feet of space, of which 100.0% was leased as of June 30, 1997.
The facility is served by 58 truck docks and three rail spurs which connect to
the CSX railroad. The facility is approximately two miles from Interstate 80.
The facility is 100% leased by GE Appliances, which has located one of its
eight national distribution centers in the facility. GE Appliances' lease
expires on March 31, 1999; certain tax abatements for local property taxes
also expire in 1999. The facility includes approximately 11 acres of vacant
land.
3818 Grandville/1200 Northwestern. 3818 Grandville/1200 Northwestern is a
warehouse/distribution facility built in 1990 and located in Gurnee, Illinois.
The building has approximately 345,000 net rentable square feet of space, of
which 100.0% was leased as of June 30, 1997, located on an approximately 15.0
acre parcel of land. The building has ten exterior docks. Rank Video leases
the entire facility.
425 E. Algonquin Road. 425 E. Algonquin Road, also known as the Arlington
Heights Enterprise Center, is a warehouse/distribution facility located in
Arlington Heights, Illinois. It was built in 1978 for a single user and
acquired by Prime in 1992. Prime redeveloped the AHEC by demising the facility
into four separate spaces in order to convert the single-user building into a
multitenant facility. The building has approximately 304,500 net rentable
square feet of space, of which 100.0% was leased as of June 30, 1997, located
on an approximately 17 acre parcel of land. The existing facility may be
expanded by an additional 80,000 square feet to 385,000 square feet by
expansion along the southern portion of the property. This expansion option is
currently being marketed as a build-to-suit opportunity for prospective
tenants. The building has 23 truck docks and excellent access to the local
Interstate highways. Major tenants include Berlin Packaging Corp., a personal
products packaging company, AM International, Inc., an office machine supply
company, and International Components Corp., which uses its space for
distribution and some light assembly for Motorola.
1001 Technology Way. 1001 Technology Way is a warehouse/distribution
facility built in 1996 and located in Libertyville, Illinois. The building has
approximately 212,800 net rentable square feet of space, of which 100.0% was
leased as of June 30, 1997. Located on an approximately 13.1 acre parcel of
land, the building has 15 exterior docks. Major tenants include Rank Video.
11045 Gage Avenue. 11045 Gage Avenue is a distribution facility located in
Franklin Park, Illinois. The building is situated on a 7.0-acre parcel of land
and includes 211 spaces for surface parking. It was built in 1970
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and renovated in 1992. It has approximately 141,000 net rentable square feet
of space, of which 100.0% was leased as of June 30, 1997. The building has
nine docks and is near Interstate highway 294. Echlin Inc., which leases the
entire facility, has a right of first refusal to purchase the building.
4248, 4250 and 4300 Madison Street. 4248, 4250 and 4300 Madison Street is a
distribution facility located in Hillside, Illinois. The building is situated
on a 4.7-acre parcel of land and includes 105 spaces for surface parking. It
was built in 1980 and renovated in 1994. It has approximately 127,000 net
rentable square feet of office space, of which 100.0% was leased as of June
30, 1997. The building has eleven docks and is located five miles from O'Hare
International Airport, near Interstate highways 88, 290 and 294. The
building's tenants include Micron Industries and Best Buy Co., Inc.
1051 N. Kirk Road. 1051 N. Kirk Road is a distribution facility located in
Batavia, Illinois. The building is situated on a 8.9-acre parcel of land and
includes 52 spaces for surface parking. It was built in 1990. It has
approximately 120,000 net rentable square feet of space, of which 100.0% was
leased as of June 30, 1997. The building has 12 docks. Houghton Mifflin Co.,
Inc. leases the entire facility.
4211 Madison Street. 4211 Madison Street is a distribution facility located
in Hillside, Illinois. The building is situated on a 3.4-acre parcel of land
and includes 120 spaces for surface parking. It was built in 1977 and
renovated in 1993. It has approximately 90,000 net rentable square feet of
space, of which 100.0% was leased as of June 30, 1997. The building has nine
docks and is located five miles from O'Hare International Airport, near
Interstate highways 88, 290 and 294. The building's tenants are Dynamic
Manufacturing Co. and Aratex Services, Inc.
4160-4190 Madison Street. 4160-4190 Madison Street is a distribution
facility located in Hillside, Illinois. The building is situated on a 3.9-acre
parcel of land and includes 86 spaces for surface parking. It was built in
1973 and renovated in 1992. It has approximately 80,000 net rentable square
feet of space, of which 100.0% was leased as of June 30, 1997. The building
has eight docks and is five miles from O'Hare International Airport. The
building's tenants include Dynamic Manufacturing Co. and Evans, Inc.
342-346 Carol Lane. 342-346 Carol Lane is a distribution facility located in
Elmhurst, Illinois. The building is situated on a 3.6-acre parcel of land and
includes 151 spaces for surface parking. It was built in 1989 and remodeled in
1995. It has approximately 68,000 net rentable square feet of space, of which
100.0% was leased as of June 30, 1997. The building has six docks and is six
miles southwest of O'Hare International Airport, near Interstate highways 88,
290 and 294. The building's tenants include Old Kent Financial Corporation and
3-D Exhibits Inc.
200 E. Fullerton Avenue. 200 E. Fullerton Avenue is a distribution facility
located in Carol Stream, Illinois. The building is situated on a 4.5-acre
parcel of land and includes 122 spaces for surface parking. It was built in
1993 and renovated in 1995. It has approximately 66,000 net rentable square
feet of space, of which 100.0% was leased as of June 30, 1997. Spraying
Systems Co., which has a right of first refusal to purchase the facility,
leases the entire facility.
370 Carol Lane. 370 Carol Lane is a distribution facility located in
Elmhurst, Illinois. The building is situated on a 2.8-acre parcel of land and
includes 39 spaces for surface parking. It was built in 1977 and renovated in
1994. It has approximately 60,000 net rentable square feet of distribution and
office space, of which 100.0% was leased as of June 30, 1997. The building has
four docks and is six miles southwest of O'Hare International Airport, near
Interstate highways 88, 290 and 294. Semblex Corp. leases the entire facility.
550 Kehoe Boulevard. 550 Kehoe Boulevard is a distribution facility located
in Carol Stream, Illinois. The building is situated on a 3.4-acre parcel of
land and includes 102 spaces for surface parking. It was built in 1996. It has
approximately 45,000 net rentable square feet of space, of which 100.0% was
leased as of June 30, 1997. Associated Material leases the entire facility.
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388 Carol Lane. 388 Carol Lane is a distribution facility located in
Elmhurst, Illinois. The building is situated on a 2.0-acre parcel of land and
includes 24 spaces for surface parking. It was built in 1979 and remodeled in
1982. It has approximately 41,000 net rentable square feet of space, of which
88.4% was leased as of June 30, 1997. The building has two docks and is six
miles southwest of O'Hare International Airport, near Interstate highways 88,
290 and 294. Ameritech leases substantially all of the facility.
306-310 Era Drive. 306-310 Era Drive is a warehouse/distribution facility
built in 1984 and located in Northbrook, Illinois. The building has
approximately 36,500 net rentable square feet of space, of which 100.0% was
leased as of June 30, 1997. Located on an approximately 2.09 acre parcel of
land, the building has three interior docks. The facility is 62.3% leased by
Roche/NICL Ltd., which has installed a high end clinical testing laboratory on
the Property. Roche/NICL Ltd. has a right of first refusal to purchase such
facility.
343 Carol Lane. 343 Carol Lane is a distribution facility located in
Elmhurst, Illinois. The building is situated on a 2.1-acre parcel of land and
includes 57 spaces for surface parking. It was built in 1989. It has
approximately 30,000 net rentable square feet of space, of which 100.0% was
leased as of June 30, 1997. The building is six miles southwest of O'Hare
International Airport, near Interstate highways 88, 290 and 294. Matsushita
Industrial Equipment leases the entire facility.
350 Randy Road. 350 Randy Road is a distribution facility located in Carol
Stream, Illinois. The building is situated on a 1.9-acre parcel of land and
includes 55 spaces for surface parking. It was built in 1974. It has
approximately 25,000 net rentable square feet of space, of which 87.5% was
leased as of June 30, 1997. The building's tenants include Micro Energy Inc.
and Miller Pharmacal Group, Inc.
11039 Gage Avenue. 11039 Gage Avenue is a distribution facility located in
Franklin Park, Illinois. The building is situated on a 1.6-acre parcel of land
and includes 18 spaces for surface parking. It was built in 1965 and renovated
in 1993. It has approximately 22,000 net rentable square feet of space, of
which 100.0% was leased as of June 30, 1997. The building is located near
Interstate highway 294. Boston Coach Illinois Corp. leases the entire
facility.
1401 S. Jefferson Street. 1401 S. Jefferson Street is a distribution
facility located in Chicago. The building is situated on a 0.6-arce parcel of
land. It was built in 1965 and renovated in 1985. It has approximately 17,300
net rentable square feet of space, of which 100.0% was leased as of June 30,
1997. The building has two docks. Federal Express Corp. leases the entire
facility.
801 Technology Way. 801 Technology Way is a distribution facility located in
the Libertyville Business Park in Libertyville, Illinois. It is a single-story
building scheduled to be completed in the fourth quarter of 1997. The exterior
is pre-cast concrete with tinted glass windows with blue aluminum accents. The
building has approximately 68,800 net rentable square feet. Moore USA, which
recently signed a lease to rent approximately 43,600 square feet of the
facility, will be the building's first tenant; the remaining space is being
actively marketed to other prospective tenants.
371-385 N. Gary Avenue. 371-385 N. Gary Avenue is a retail facility located
in Carol Stream, Illinois. The building is situated on a 1.3-acre parcel of
land and includes 48 spaces for surface parking. It was built in 1978 and
remodeled in 1992. It has approximately 11,000 net rentable square feet of
space, of which 64.6% was leased as of June 30, 1997. The building's tenants
include American General Finance.
Overhead Crane/Manufacturing Industrial Submarket
The Company owns 19 overhead crane/manufacturing Industrial Properties
located in the Chicago Metropolitan Area, which contain an aggregate of
approximately 2.7 million rentable square feet. At June 30, 1997, the
Company's overhead crane/manufacturing Industrial Properties were 75.7% leased
to more than 20 tenants. RCG believes that the manufacturing submarket is
strong. In the second quarter of 1997, the manufacturing vacancy rate declined
to 7.5%. RCG believes that the decline resulted from a relatively moderate
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pace of construction of manufacturing space, which allowed the continuing
demand to shrink the available supply of manufacturing space. Gross leasing
activity, which RCG considers a good measure of demand, has averaged
approximately 14.6 million square feet between December 1991 and December
1996. RCG believes that the manufacturing submarket will continue to
experience moderate to strong growth in demand, which in conjunction with
moderate levels of new construction, will result in stable vacancy rates in
the near term. The following graph illustrates vacancy rates in and additions
to the Chicago Metropolitan Area manufacturing submarket.
CHART
Three of the overhead crane/manufacturing facilities are manufacturing
facilities located in the north suburbs of the Chicago Metropolitan Area. The
remaining overhead crane/manufacturing facilities are located in three of the
industrial parks, the ECEC, CEC and HEC, each of which contain both
manufacturing and overhead crane buildings. The market for overhead crane
buildings in the Chicago Metropolitan Area is closely tied to the local steel-
processing industry, the nation's largest, which produces 23.0% of the
nation's steel output. Over the past few years, major steel companies have
outsourced certain steel processing operations, such as those performed in the
Company's overhead crane buildings, and smaller companies, which have proven
able to process steel at a lower cost, have fulfilled some of the demand for
this outsourced steel processing. These developments have increased the demand
for overhead crane facilities that can accommodate such operations. The
Company believes this development is a positive signal of future demand for
large crane buildings in this market. The Company also believes that its
overhead crane buildings are well-positioned to take advantage of this demand,
due to, among other things, the relatively high cost of constructing
appropriate replacement buildings in that submarket.
RCG believes that the overhead crane market, which has a vacancy rate of
less than 4.0%, is strong. The vacancy rate is low primarily because during
the last five years, strong industrial output, particularly of large durable,
steel-intensive products like automobiles, has increased the demand for
overhead crane facilities to handle the processing and distribution of steel.
In addition, while demand has grown for these facilities during the last ten
to 15 years, particularly in markets like Chicago, which is the nation's
largest steel-processing market, few overhead crane buildings have been built
during the last seven years. Because of high land costs and greater structural
reinforcing required for overhead crane facilities as opposed to more
conventional manufacturing
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facilities, the cost to erect a 100,000 square-foot building with 20-ton
cranes is approaching $60.00 per square foot, and RCG estimates that the rents
required to justify new construction are currently close to $8.00 per square
foot compared to a market rent of $3.25 to $4.50 per square foot for the
Company's Properties.
Description of Chicago Metropolitan Area Overhead Crane/Manufacturing
Properties
The Company's overhead crane/manufacturing Properties in the Chicago
Metropolitan Area industrial market consist of certain of the Contribution
Properties and the ECEC, HEC and CEC.
1301 Ridgeview Drive. 1301 Ridgeview Drive is a manufacturing facility built
in 1995 and located in McHenry, Illinois. It has approximately 217,600 net
rentable square feet of space, of which 100% was leased as of June 30, 1997.
Located on an approximately 20.0 acre parcel of land, the Company has an
option to purchase 13.0 acres of land adjacent to this Property. The building
has 18 exterior docks, rail access and excellent access to the local highway
system. The Property is occupied by Cellular Infrastructure Group, a division
of Motorola, which has installed a high-tech manufacturing and assembly
facility. Motorola has an option to lease or purchase this land, exercisable
on or before August 1, 1998.
515 Huehl Road/500 Lindberg. 515 Huehl Road/500 Lindberg is a manufacturing
facility built in 1988 and located in Northbrook, Illinois. The building has
approximately 201,200 net rentable square feet of space, of which 100% was
leased as of June 30, 1997. Located on an approximately 7.9 acre parcel of
land, the building has two interior docks and eight exterior docks. Rank Video
uses the entire building for its video duplication and packaging facility,
which currently operates around the clock seven days a week.
455 Academy Drive. 455 Academy Drive is a manufacturing facility built in
1976 and located in Northbrook, Illinois. The building has approximately
105,400 net rentable square feet of space, of which 100% was leased as of June
30, 1997. Located on an approximately 6.7 acre parcel of land, the existing
facility may be expanded by an additional 50,000 square feet to approximately
155,000 square feet. The building has four interior docks. This Property is
occupied by National Service Industries, which uses it as a production,
warehouse and distribution center for commercial lighting reflectors. National
Service Industries has a right of first refusal to purchase this Property. The
Company is aware of environmental contamination at this Property and will
receive indemnification for such contamination from National Service
Industries. For a description, see "--Government Regulations--Environmental
Matters."
Chicago Enterprise Center. The CEC is an overhead crane facility located on
the south side of Chicago. The facility consists of four main buildings of
overhead crane steel processing space and four light manufacturing/warehouse
buildings situated on approximately 113.0 acres of land. The crane facilities
contain overhead cranes with a lifting capacity of 7.5 tons to 40.0 tons. The
warehouse buildings are suited for light manufacturing and distribution. The
facility was built in multiple phases from 1916 through 1991 and was acquired
and redeveloped by Prime in 1990. The facility has approximately 1.0 million
net rentable square feet of space, of which 62.0% was leased as of June 30,
1997. The existing facility may be expanded by an additional 670,000 square
feet of manufacturing and distribution space to approximately 1.7 million
square feet. The CEC has convenient access to all of the steel mills in
northwest Indiana, as well as all Interstate highways in the area. It is
located within one mile of a four-way entrance/exit ramp to the Calumet
Expressway and within four miles of a four-way entrance/exit ramp to
Interstate 90. The facility is also served by the Norfolk & Southern, EJ&E,
Conrail and Indiana Harbor Belt railways. Major tenants include Co-Steel
Lasco, Inc., Welded Tube Company, Alpha Processing, Inc. and Sterling Steel
Services, Inc., which are all steel processing companies.
East Chicago Enterprise Center. The ECEC is an overhead crane facility
located in East Chicago, Indiana. The facility consists of three main
buildings of overhead crane steel processing space, one warehouse building and
one office building situated on approximately 41.3 acres of land. The crane
facilities contain high bays and overhead cranes with lifting capacities
ranging from five tons to 100 tons. The warehouse building is a single-story,
free standing metal clad building with approximately 14,100 net rentable
square feet. The facility was built in multiple phases from 1917 through 1952
and was acquired by Prime in 1988. Prime redeveloped facilities at
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the ECEC by insulating and heating certain facilities, installing new roofs,
refinishing floors and purchasing new cranes. The ECEC (excluding the office
building) has approximately 548,468 net rentable square feet of industrial
space, of which 67.1% was leased as of June 30, 1997. The existing facility
contains a 9.1 acre parcel of land on which the Company may construct an
additional 250,000 square feet of manufacturing and distribution space. The
ECEC has convenient access to all of the steel mills in northwest Indiana, as
well as all Interstate highways in the area. The facility is located within
two miles of an entrance to Interstate 90 and within five miles of a four-way
entrance/exit ramp to Interstate 80/94. It is also served by rail, and the
three industrial buildings have rail spurs located within the crane bay areas,
providing access to the Indiana Harbor Belt railroad. Major tenants include
Acutus-Gladwin, Metro Metals and Illiana Steel, which are all steel processing
companies.
Hammond Enterprise Center. The HEC is an overhead crane facility located in
Hammond, Indiana. The facility consists of two buildings of overhead crane
steel processing space and one office building situated on approximately 37
acres of land. It was built in multiple phases from 1920 through 1952 and was
acquired and redeveloped by Prime in 1989. The HEC (excluding the office
building) has approximately 506,900 net rentable square feet of industrial
space, of which 86.6% was leased as of June 30, 1997. The HEC has convenient
access to all of the steel mills in northwest Indiana, as well as Interstate
highways in the area. It is located within one half-mile of an entrance to
Interstate 90 and within four miles of a four-way entrance/exit ramp to
Interstate 90. It is also served by rail, and the two industrial buildings
have rail spurs located within the crane bay areas providing access to the CSX
railroad. Major tenants include HECO, A.M. Castle and Bar Processing.
4440 Railroad Avenue. 4440 Railroad Avenue is a single-story office building
located adjacent to the East Chicago Enterprise Center in East Chicago,
Indiana. It was built in 1917, renovated in 1991 and has approximately 40,000
net rentable square feet of office space, of which 100% was leased as of June
30, 1997. The building is leased entirely by Inland Steel as the headquarters
for its human resources department.
4527 Columbia Avenue. 4527 Columbia Avenue is a single-story office building
located within the Hammond Enterprise Center in Hammond, Indiana. It was built
in phases from 1920 through 1952 and has approximately 16,700 net rentable
square feet of office space, of which 62.8% was leased as of June 30, 1997.
Tenants of the building include the Company, Town & Country and Great Lakes
Engineering LLC.
The Columbus Metropolitan Area Industrial Market
The Company owns and operates six Industrial Properties in the Columbus
industrial market. Columbus, the capital of the state of Ohio, has a
population of approximately 1.5 million and is home to a number of major
employers, including The Ohio State University, CompuServe and The Limited,
and to a large manufacturing facility of Lucent Technologies.
Columbus' employment base has expanded at an average rate of 2.6% during the
last five years, compared to national growth of 2.0% over the same period.
However, during the year ended April 1997, Columbus' employment grew 1.3%
compared to 2.3% for the nation as a whole.
The Columbus industrial market, which is comprised of approximately 92.0
million square feet of industrial space, had a vacancy rate of 5.1% as of the
second quarter of 1997, which was lower than the national average industrial
vacancy rate of 8.1%. RCG believes that the outlook for the Columbus
industrial market is strong, with an industrial vacancy rate of 6.0% to 7.0%
over the next three years.
Employment in the transportation, communications and public utilities sector
increased by 2.8% during the year ended April 1997, reflecting, in part,
expansion in cargo shipping operations at Rickenbacker International Airport
and Port Columbus International Airport. Although manufacturing employment was
down slightly for
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the year ended April 1997, according to RCG, several large companies,
including Kraft Foods, AK Steel, Coca-Cola, Crane Plastics Company and General
Castings Company (a manufacturer of iron castings and provider of machine shop
services) have proposed expansions in the Columbus, Ohio metropolitan area.
Forecasted Employment Growth. RCG forecasts that the Columbus metropolitan
area employment base will continue to grow at a moderately strong rate of 1.8%
to 2.2% per year during the next three years, with growth in the services
sector accelerating in the next two to three years.
Description of Columbus, Ohio Properties
2160 McGaw Road. 2160 McGaw Road is a warehouse/distribution building built
in 1974 and located in Obetz, Ohio. The building has approximately 310,100 net
rentable square feet of space, of which 100.0% was leased as of June 30, 1997,
located on an approximately 18.1 acre parcel of land. Spartan Warehouse leases
the entire facility.
4849 Groveport Road. 4849 Groveport Road is a warehouse/distribution
building built in 1968 and located in Obetz, Ohio. The building has
approximately 132,100 net rentable square feet of space, of which 100.0% was
leased as of June 30, 1997, located on an approximately 11.7 acre parcel of
land. Approximately 4.2 acres of this land can be further developed. Premier
Auto Glass Corp. leases the entire facility.
2400 McGaw Road. 2400 McGaw Road is a warehouse/distribution building built
in 1972 and located in Obetz, Ohio. The building has approximately 86,400 net
rentable square feet of space, of which 100.0% was leased as of June 30, 1997,
located on an approximately 6.1 acre parcel of land. S.P. Richards leases the
entire facility.
5160 Blazer Memorial Parkway. 5160 Blazer Memorial Parkway is a light
industrial warehouse/distribution/office or "flex" building built in 1983 and
located in Dublin, Ohio. The building has approximately 86,000 net rentable
square feet of space, of which 64.5% was leased as of June 30, 1997, located
on an approximately 10.0 acre parcel of land. Major tenants include Alkon
Corporation and Cross Medical. Most of the leased space in this Property is
currently used as office space, but could be converted to light industrial or
warehouse use.
4411 Marketing Place. 4411 Marketing Place is a manufacturing building built
in 1984 and located in Groveport, Ohio. The building has approximately 65,800
net rentable square feet of space, of which 100.0% was leased as of June 30,
1997, located on an approximately 5.4 acre parcel of land. Wes Tran Corp.
leases the entire facility.
600 London Road. 600 London Road is a warehouse/distribution building built
in 1980 and located in Delaware, Ohio. The building has approximately 52,440
net rentable square feet of space, of which 100.0% was leased as of June 30,
1997, located on an approximately 9.2 acre parcel of land. Approximately 4.5
acres of this land can be further developed. Schneider National Inc. leases
the entire facility.
LAND FOR DEVELOPMENT AND OPTION PROPERTIES
The Company has significant experience in the development of both Office
Properties, such as the 77 West Wacker Drive Building, and Industrial
Properties, such as the Contribution Properties. The Company expects to
continue to develop properties, both for "build-to-suit" projects and under
pre-leasing arrangements. The Company already owns several prime parcels of
developable land in the Chicago Metropolitan Area. Following the completion of
the Offering, the Company will own approximately 83.4 acres and have rights to
acquire approximately 157.2 acres of developable land (including rights to
acquire one development site located in the Chicago CBD containing
approximately 58,000 square feet), which management believes could be
developed with approximately 1.2 million square feet of additional office
space in the Chicago CBD and approximately
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4.4 million square feet of additional industrial properties primarily in the
Chicago Metropolitan Area. The following table provides additional information
with respect to these undeveloped parcels:
<TABLE>
<CAPTION>
OWNERSHIP
DESCRIPTION LOCATION SIZE STATUS
----------- -------- ---- --------------
<S> <C> <C> <C>
425 E. Algonquin Road... Arlington Heights, IL 3.7 Acres Own
Chicago Enterprise Cen-
ter.................... Chicago, IL 51.2 Acres Own
East Chicago Enterprise
Center................. East Chicago, IN 9.1 Acres Own
Hammond Enterprise Cen-
ter.................... Hammond, IN 8.2 Acres Own
455 Academy Drive(1).... Northbrook, IL 2.5 Acres Own
Libertyville Business
Park(2)................ Libertyville, IL 48.5 Acres Under contract
1301 Ridgeview
Drive(3)............... McHenry, IL 13.0 Acres Second Option
4849 Groveport Road..... Obetz, OH 4.2 Acres Own
600 London Road......... Delaware, OH 4.5 Acres Own
300 N. LaSalle(4)....... Chicago, IL 58,025 Sq. Ft. Option
NAC Properties(5)....... Carol Stream, IL/Batavia, IL 94.4 Acres Under Contract
</TABLE>
- --------
(1) National Service Industries, the current tenant of the industrial building
at 455 Academy Drive, has a right of first refusal to purchase such
building which includes this land.
(2) The Company is obligated to purchase this land for $7.4 million (subject
to certain purchase price adjustments), within three years following the
consummation of the Formation Transactions and the completion of the
Offering.
(3) Motorola has an option to lease or purchase this land, exercisable on or
before August 1, 1998.
(4) The Company has a ten-year option to purchase this Chicago CBD development
site at 95.0% of the fair market value at the time of the exercise of the
option.
(5) The Company is obligated to purchase 20.0 acres of this property per year,
starting on the first anniversary of the consummation of the Formation
Transactions and the completion of the Offering, for $3.00 per square
foot, or approximately $2.5 million for each 20.0 acres.
The Company has successfully developed land both for its own portfolio and
for other parties. For example, in 1991, Prime developed a build-to-suit
project and in 1996 sold a parcel of land formerly attached to the CEC, and in
1996, sold a parcel of land formerly attached to the ECEC. The Company
believes that it has developed close working relationships with quality
subcontractors in its markets, and that its reputation in its current markets
for developing properties for its own account and others has aided and will
aid it in working with potential clients and tenants on a "build-to-suit" or
pre-lease basis.
Following are descriptions of certain developable parcels of land which the
Company owns or has an option to purchase. For a description of the parcels of
land attached to Properties, see the descriptions of those Properties above.
Libertyville Business Park. Libertyville Business Park is a site located in
the north suburb of Libertyville, Illinois. The Company has entered into an
agreement with the current owner to purchase the entire 48.5 acre undeveloped
portion of the site over the next three years. The parcel is suitable for
industrial development, is zoned for the development of an approximately 1.1
million square feet of office or industrial space and is located adjacent to
several buildings, including 801 Technology Way, 901 Technology Way and 1001
Technology Way, which were developed by certain members of management.
901 Technology Way. 901 Technology Way is an industrial building located in
the Libertyville Business Park in Libertyville, Illinois. It is a single-story
building developed by certain members of management and completed in early
1997. The building is pre-cast concrete and has tinted glass windows with blue
aluminum accents. The building has approximately 68,800 net rentable square
feet. 901 Technology Way has one tenant, Production Associates, a display
company, which leases approximately 12,000 square feet, or approximately 18.3%
of the net rentable square feet, for use as a light production and
warehouse/distribution center. The
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building is being actively marketed by the owner to prospective tenants. Upon
completion of the Offering, the Company will receive an option to purchase the
building, which is currently owned by one of the Contributors. The option on
the property is exercisable for three years or until 16 days after the leasing
of substantially all of the property to a non-affiliate of the Contributor.
Under the terms of the option, the Company may buy the property for a purchase
price of the product of ten times the pro forma net operating income from the
property for the following 12 months. The purchase price may be no less than
the direct out-of-pocket cost to develop and construct the property and no
more than 120.0% of such cost.
300 N. LaSalle. 300 N. LaSalle is a site located in the Chicago CBD and
currently contains a parking facility. Prime owns the site. Upon the
consummation of the Formation Transactions, Prime will grant the Company a
ten-year option to purchase this site consisting of approximately 58,000
square feet for a purchase price equal to 95.0% of the then fair market value
of such site. The parcel is in the heart of downtown Chicago and is a highly
suitable site for a variety of developments. In management's opinion, this
site is suitable for the development of a major office or mixed-use project
containing up to 1.2 million rentable square feet of space.
Huntley Property. The Company has a 15-year right of first offer to develop
(or develop and acquire an ownership interest in) all or any portion of 360
acres of undeveloped office and industrial land in the Huntley Business Park
currently owned and controlled by an affiliate of Prime subject to a
participation interest in such property held by a third-party lender. The
right of first offer will apply to the extent that Prime determines that such
parcel shall be utilized for the construction of an office or industrial
facility to be owned and leased to third parties by Prime or held by Prime for
sale to a third party.
The following are properties which the Company has an obligation to purchase
under certain circumstances.
300 Craig Place. 300 Craig Place is a distribution facility located in
Hillside, Illinois. The building is situated on a 9.2-acre parcel of land near
Interstate highways 88, 290 and 294. The facility is five miles south of
O'Hare International Airport and was built in 1997. It has approximately
163,000 net rentable square feet of space, of which 100.0% was leased as of
June 30, 1997. The building's tenants include Storopak, Inc. This property is
currently owned by an affiliate of the NAC General Partner. The Company is
obligated to purchase this property for approximately $7.5 million if this
property is leased on certain terms within 180 days following the consummation
of the Formation Transactions and the completion of the Offering.
2050 Hammond Drive. 2050 Hammond Drive is a distribution facility located in
Schaumburg, Illinois. The building is situated on a 3.2-acre parcel of land,
12 miles northwest of O'Hare International Airport, near Interstate highways
90 and 290. The facility was built in 1985 and has approximately 66,600 net
rentable square feet of space, of which 100.0% was leased as of June 30, 1997.
Autotype USA leases the entire facility. This property is currently owned by
an affiliate of the NAC General Partner and a third party partner. The Company
is obligated to purchase this property for approximately $3.1 million if the
consent of a third party partner is obtained within 180 days following the
consummation of the Formation Transactions and the completion of the Offering.
5600 Proviso Drive. 5600 Proviso Drive is a distribution facility located in
Berkeley, Illinois. The building is situated on a 9.4-acre parcel of land,
near Interstate highway 290 and was built in 1985 and renovated in 1994. It
has approximately 219,000 net rentable square feet, of which 100.0% was leased
as of June 30, 1997. Banta Corp. leases the entire facility. This property is
currently owned by an affiliate of the NAC General Partner and a third party
partner. The Company is obligated to purchase this property for approximately
$8.0 million if the consent of the third party partner is obtained with 180
days following the consummation of the Formation Transactions and the
completion of the Offering.
130 E. Rawls Road. 130 E. Rawls Road is a distribution facility located in
Des Plaines, Illinois. The facility is situated on a 3.5-acre parcel of land,
near Interstate highway 90 and was expanded and remodeled in 1988. The
facility has approximately 71,400 net rentable square feet, of which 100.0%
was leased as of June 30, 1997. Reynolds Fasteners, Inc. leases the entire
facility. This property is currently owned by an affiliate of the NAC General
Partner. The Company is obligated to purchase this property for approximately
$2.5 million if this property is leased on certain terms within 180 days
following the consummation of the Formation Transactions and the completion of
the Offering.
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COMPETITION
The Company may be competing with other owners and developers that may have
greater resources and more experience than the Company. Additionally, the
number of competitive properties in any particular market or submarket in
which the Properties are located could have a material adverse effect on both
the Company's ability to lease space at the Properties or any newly-acquired
property and on the rents charged at the Properties. The Company believes that
the Offering, the Credit Facility and the Company's access as a public company
to the capital markets to raise funds during periods when conventional sources
of financing may be unavailable or prohibitively expensive will provide the
Company with substantial competitive advantages. Further, the Company believes
that its capital structure and ability to acquire properties in exchange for
Common Units, and thereby defer a seller's potential taxable gain, will
enhance the ability of the Company to consummate transactions quickly and to
structure more competitive acquisitions than other real estate companies in
the market which lack the Company's access to capital and ability to acquire
property with Common Units. See "Business Objective and Growth Strategies--
Acquisition Strategy." The Company believes that the number of real estate
developers has decreased as a result of the recessionary market conditions and
tight credit markets during the early 1990s as well as the reluctance on the
part of more conventional financing sources to fund development and
acquisition projects. In addition, the Company believes that it will be one of
a limited number of publicly-traded real estate companies primarily focusing
on the office and industrial market in the Chicago Metropolitan Area.
TAX-EXEMPT BONDS
The development or redevelopment of certain of the Industrial Properties and
the Office Properties in Tennessee were financed in part by proceeds from the
issuance of the Tax-Exempt Bonds. The Tax-Exempt Bonds are credit enhanced by
letters of credit. Subject to compliance by the Company with the applicable
loan covenants, upon completion of the Offering, the $225.0 million Credit
Facility may be used to provide funds for acquisitions and development
activities and to provide the replacement letters of credit for the $74.5
million of Tax-Exempt Bonds. The Company expects that the interest rate with
respect to such Tax-Exempt Bonds will fluctuate with changes in market
interest rates.
INSURANCE
Management believes that the Properties are covered by adequate
comprehensive liability, rental loss, and all-risk insurance, provided by
reputable companies, with commercially reasonable deductibles, limits and
policy specifications customarily carried for similar properties. There are,
however, certain types of losses which may be either uninsurable or not
economically insurable, such as losses due to floods, riots or acts of war.
Should an uninsured loss occur, the Company could lose both its invested
capital in, and anticipated profits from, the property.
GOVERNMENT REGULATIONS
Many laws and governmental regulations are applicable to the Properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Costs of Compliance with Americans with Disabilities Act. Under the ADA, all
public accommodations and commercial facilities are required to meet certain
federal requirements related to access and use by disabled persons. These
requirements became effective in 1992. Compliance with the ADA requirements
could require removal of access barriers, and noncompliance could result in
the imposition of fines by the federal government or an award of damages to
private litigants. Although the Company believes that the Properties are
substantially in compliance with these requirements, the Company may incur
additional costs to comply with the ADA. Although the Company believes that
such costs will not have a material adverse effect on the Company, if required
changes involve a greater amount of expenditures than the Company currently
anticipates, the Company's ability to make expected distributions could be
adversely affected.
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Environmental Matters. Under various federal, state and local laws,
ordinances and regulations relating to the protection of the environment, an
owner or operator of real property may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in such
property. These laws often impose liability without regard to whether the
owner or operator was responsible for, or even knew of, the presence of such
hazardous or toxic substances. The costs of investigation, removal or
remediation of such substances may be substantial, and the presence of such
substances may adversely affect the owner's or operator's ability to rent or
sell the property or to borrow using such property as collateral and may
expose such owner or operator to liability resulting from any release of or
exposure to such substances. Persons who arrange for the disposal or treatment
of hazardous or toxic substances at another location also may be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility, whether or not such facility is owned or operated by such
person. Certain environmental laws impose liability for release of asbestos-
containing materials into the air, and third parties may also seek recovery
from owners or operators of real properties for personal injury associated
with asbestos-containing materials and other hazardous or toxic substances. In
connection with the ownership (direct or indirect), operation, management and
development of real properties, the Company may be considered an owner or
operator of such properties or as having arranged for the disposal or
treatment of hazardous or toxic substances and therefore potentially liable
for removal or remediation costs, as well as certain other related costs,
including governmental penalties and injuries to persons and property.
All of the Properties were subject to Phase I or similar environmental
assessments by independent environmental consultants in connection with the
formation of the Company. Phase I assessments are intended to discover
information regarding, and to evaluate the environmental condition of, the
surveyed property and surrounding properties. Phase I assessments generally
include an historical review, a public records review, an investigation of the
surveyed site and surrounding properties, and preparation and issuance of a
written report, but do not include soil sampling or subsurface investigations.
The Company is aware of environmental contamination at certain of the older
Industrial Properties, which are already in remediation programs sponsored by
the appropriate state environmental agencies. Prime has contractually agreed
to retain liability, and indemnify the Company, for environmental remediation
with regard to these Industrial Properties, which environmental consultants
have estimated will cost, in the aggregate, approximately $3.2 million.
Investigation of the CEC by Prime and its environmental consultants revealed
contamination from petroleum underground storage tanks located on the
Property. In August 1996, Prime submitted the CEC into the Illinois Site
Remediation Program of the Illinois Environmental Protection Agency (the
"IEPA"). The environmental consultants prepared a site assessment and
submitted it to the IEPA as the basis for a remedial action plan, as required
by the IEPA. They estimate that the remedial action will cost approximately
$2.5 million. In August 1996, the Company filed suit against a former tenant,
seeking past and future costs of remediation associated with the presence of
hazardous substances at the CEC. Substantial settlement negotiations between
Prime and the tenant have been conducted recently. In June 1997, Prime filed
suit against one of its former environmental consultants for negligence in
failing to disclose the presence of the petroleum underground storage tanks at
the CEC. The former consultant has not yet responded in court.
Investigation of the ECEC by Prime and its environmental consultants
revealed contamination on the Property. In March 1997, Prime submitted the
ECEC into the Indiana Department of Environmental Management ("IDEM")
Voluntary Remediation Program. Upon completion of any necessary remediation
approved by IDEM, the Company will receive a Covenant Not to Sue from the
Governor of Indiana. The environmental consultants estimate that the remedial
action will cost approximately $371,000.
In addition, IDEM has requested that the owner of the ECEC participate,
along with numerous other property owners, in the development of a Natural
Resources Damage Assessment (the "Assessment") for the Grand Calumet River and
Indiana Harbor Canal System in northwest Indiana. No lawsuit has been filed or
threatened, and no claim for specified damages has been received in connection
with this matter. The Company anticipates that the Assessment will take more
than twelve months to complete and that prior to that time, the quantity of
environmental damage, if any, and the identity of the parties responsible for
any damage will remain unknown. Until additional information is known, the
likelihood that this matter could result in a liability cannot be determined.
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Investigation of the HEC by Prime and its environmental consultants revealed
contamination on the Property. In March 1997, Prime submitted the HEC into the
IDEM Voluntary Remediation Program. Upon completion of any necessary
remediation approved by IDEM, the Company will receive a Covenant Not to Sue
from the Governor of Indiana. The environmental consultants estimate that the
remedial action will cost approximately $295,000.
The Company also is aware of contamination at 455 Academy Drive, one of the
Contribution Properties. The current tenant of the Property, National Service
Industries, has provided the Company with an indemnity for all of the costs of
environmental remediation regarding the Property caused by National Service
Industries either knowingly or unknowingly.
The Company also is aware of contamination at 1301 E. Tower Road, one of the
NAC Properties. The Property has been submitted into a remediation program
sponsored by the Illinois Environmental Protection Agency. The Company's
environmental consultants estimate that the remedial action will cost
approximately $200,000.
The Company believes that the other Properties are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances. The Company has not been
notified by any governmental authority, and is not otherwise aware, of any
material noncompliance, liability or claim relating to hazardous or toxic
substances in connection with any of its other Properties. None of the
Company's environmental assessments of the Properties has revealed any
environmental liability that, after giving effect to the contractual
indemnities described above, the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liability. Nonetheless, it is possible that the Company's assessments do not
reveal all environmental liabilities or that there are material environmental
liabilities of which the Company is unaware. Moreover, there can be no
assurance that (i) future laws, ordinances or regulations will not impose any
material environmental liability or (ii) the current environmental condition
of the Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks) or by third parties unrelated to the Company. If
compliance with the various laws and regulations, now existing or hereafter
adopted, exceeds the Company's budgets for such items, the Company's ability
to make expected distributions to shareholders could be adversely affected.
Other Regulations. The Properties are also subject to various federal, state
and local regulatory requirements, such as state and local fire and life
safety requirements. Failure to comply with these requirements could result in
the imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
material compliance with all such regulatory requirements. However, there can
be no assurance that these requirements will not be changed or that new
requirements will not be imposed which would require significant unanticipated
expenditures by the Company and could have an adverse effect on the Company's
Funds from Operations and expected distributions.
Except as described in this Prospectus, there are no other laws or
regulations which have a material effect on the Company's operations, other
than typical state and local laws affecting the development and operation of
real property, such as zoning laws. See "Risk Factors--Environmental Risks,"
"Certain Provisions of Maryland Law and of the Company's Declaration of Trust
and Bylaws," "Partnership Agreement," "Certain Federal Income Tax
Considerations" and "ERISA Considerations."
MANAGEMENT AND EMPLOYEES
The Operating Partnership has been structured as the entity through which
the Company will conduct substantially all of its operations. The Services
Company has been structured as an entity through which the Company will
conduct substantially all of its management, leasing, acquisition and
development activities and related operations. The Company generally has full,
exclusive and complete responsibility and discretion in the management and
control of the Operating Partnership, but not of the Services Company.
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The Company (primarily through the Operating Partnership and the Services
Company) initially will employ approximately 151 persons. The Company, the
Operating Partnership and the Services Company will employ substantially all
of the professional employees of Prime that are currently engaged in asset
management and administration. The Company, the Operating Partnership and the
Services Company believe that relations with their employees are good.
LEGAL PROCEEDINGS
Neither the Company nor any of the Properties is subject to any material
litigation nor, to the Company's knowledge, is any material litigation
threatened against any of them, other than routine litigation arising in the
ordinary course of business, which is expected to be covered by liability
insurance. Legal action has been taken against Keck to obtain the possession
of the Keck Space. A settlement agreement has been entered with Keck that
provides for the dismissal with prejudice of the legal action and requires,
pursuant to court order, that Keck will vacate certain of the Keck Space
immediately and will vacate all of the Keck Space by no later than November
30, 1997. In addition, Keck has paid $500,000 as past due rent in connection
with the settlement. The Company has also sued various parties in connection
with environmental remediation at one of its Industrial Properties. See "--
Government Regulations--Environmental Matters."
PRIME ASSETS NOT ACQUIRED BY THE COMPANY
Prime will retain substantial other assets and liabilities, including
certain commercial and residential real estate interests, which will not be
transferred to the Company in the Formation Transactions. These assets are
either not office or industrial properties or were determined to be
inconsistent with the Company's investment objectives. The excluded assets
include (i) minority limited partnership interests in two partnerships which
own two industrial buildings one of which properties is located in
Massachusetts and the other of which properties, located in Chicago, Illinois,
is subject to a condemnation proceeding, and (ii) an approximately 2,650-acre
development site in Huntley, Illinois which has land available for office and
industrial development, which consists of approximately 2,290 acres which are
zoned for residential and other non-offices and industrial uses and
approximately 360 acres of which is zoned for office and industrial use and
subject to a right of first offer described herein, (iii) an approximately
12,000 square foot distribution facility located at 341 Enterprise Drive in
Powell, Ohio and (iv) the 300 N. LaSalle property, which is subject to an
option by the Company to purchase. See "--Land for Development and Option
Properties--Huntley Property." The development or transfer by Prime of all or
any portion of the 2,650 acres of the Huntley property is subject to obtaining
a third-party lender's prior consent.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of investment objectives and policies,
financing policies, conflict of interest policies and other policies with
respect to certain other activities of the Company. The policies with respect
to these activities have been determined by the Board of Trustees of the
Company and may be amended or revised from time to time at the discretion of
the Board of Trustees without a vote of the shareholders of the Company,
except that (i) the Company cannot change its policy of holding its assets and
conducting its business only through the Operating Partnership and other
subsidiaries, (ii) changes in certain policies with respect to conflicts of
interest must be consistent with legal requirements and (iii) the Company
cannot take any action intended to terminate the Company's status as a REIT
without the approval of the holders of a majority of the Common Shares
entitled to vote thereon and outstanding at the time, voting together as a
single class. No assurance can be given that the Company's investment
objectives will be attained or that the value of the Company will not
decrease.
INVESTMENT OBJECTIVES AND POLICIES
The Company's investment objectives are to provide regular quarterly cash
dividends to its shareholders and achieve long-term capital appreciation
through increases in cash flow from the Company's properties. The Company will
seek to accomplish these objectives through the ownership and the enhanced
operation of the Properties, the selective acquisition and development of
additional office and industrial properties and, where appropriate,
renovations and expansions of these properties. See "Business Objective and
Growth Strategies--Acquisition Strategies." One of the key criteria for new
investments will be that they offer the opportunity for growth in Funds from
Operations per Common Share. All of the Company's investment activities will
be conducted through the Operating Partnership and the Property Partnerships,
although the Company also may hold temporary cash investments from time to
time pending investment or distribution to shareholders. The Company will not
have any limit on the amount or percentage of assets invested in any Property.
The Company may purchase or lease properties for long-term investment,
expand and improve the properties presently owned, or sell such properties, in
whole or in part, when circumstances warrant. The Company also may participate
with other entities in property ownership, through partnerships or other types
of co-ownership arrangements.
While the Company emphasizes equity real estate investments, it may in its
discretion invest in mortgages, stock of other REITs and other real estate
interests. Such mortgage investments may include participating or convertible
mortgages. The Company does not currently intend to invest in the securities
of other issuers except in connection with the Company's acquisitions of
indirect interests in properties (normally through partnership interests in
special purpose partnerships owning title to properties) and investments in
short-term income producing investments. Any such investments in the
securities of other issuers will be subject to the asset valuation of
ownership limitations and gross income tests necessary for REIT qualification
for federal income tax purposes. Further, equity investments by the Company
may be subject to existing mortgage financing and other indebtedness which
have priority over the equity interest of the Company. See "Certain Federal
Income Tax Considerations--Requirements for Qualification." In any event, the
Company does not intend that its investment in securities will require it to
register as an "investment company" under the Investment Company Act of 1940,
as amended, and the Company would intend to divest securities before any such
registration would be required.
FINANCING STRATEGY
The Company will be conservatively capitalized immediately subsequent to the
Offering; the Company's total debt will constitute approximately 25.2% of its
total market capitalization. The Company expects to operate with a debt-to-
total market capitalization ratio in the range of 25.0% to 40.0%. The Company
has based its debt policy on the relationship between its debt and its total
market capitalization, rather than the book value of its assets or other
historical measures that typically have been employed by publicly traded
REITs, because management believes that market capitalization more accurately
reflects the Company's ability to borrow money and meet its debt service
requirements. In this regard, the Company believes that most industry analysts
relate share prices of real estate companies directly to the cash flow
generated by the assets of these companies, and that lenders to real estate
companies generally utilize cash flow related measures, as opposed to book
values, in
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establishing collateral values, loan to value ratios and estimated debt
capacities. Market capitalization is, however, more variable than book value
of assets or other historical measures. Because market capitalization is a
function of the market price of the Company's Common Shares, the Company's
ratio of debt-to-total market capitalization may be affected by changes in
that market price, which are beyond the control of the Company. Although the
organizational documents of the Company do not limit the amount or percentage
of indebtedness that the Company may incur, the Company may from time to time
modify its debt policy in light of then current economic conditions, relative
costs of debt and equity capital, the market values of its properties, general
conditions in the market for debt and equity securities, fluctuations in the
fair market prices of the Common Shares, growth and acquisition opportunities
and other factors. Accordingly, the Company may increase or decrease its debt-
to-total market capitalization ratio above or below the limit described above.
See "Risk Factors--Real Estate Financing Risks--Company's Ability to Increase
Its Debt Could Adversely Affect the Company's Cash Flows." If the Board of
Trustees determines that additional funding is required, the Company may raise
such funds through additional equity offerings, debt financing, retention of
cash flow (subject to provisions in the Code concerning taxability of
undistributed REIT taxable income) or a combination of these methods.
In the event that the Board of Trustees determines to raise additional
equity capital, it has the authority, without shareholder approval, to issue
additional shares of Common Shares or Preferred Shares of the Company in any
manner and on such terms and for such consideration it deems appropriate,
including in exchange for property. Existing shareholders would have no
preemptive right to purchase shares issued in any offering and any such
offering might cause a dilution of a shareholder's ownership interest in the
Company.
It is anticipated that any additional borrowings will be made through the
Operating Partnership, the Property Partnerships or new property partnerships;
however, the Company itself may incur indebtedness, which may be re-loaned to
the Operating Partnership. Indebtedness incurred by the Company may be in the
form of bank borrowings, secured or unsecured, and publicly or privately
placed debt instruments. Indebtedness incurred by the Operating Partnership,
the Property Partnerships or any new property partnership may be in the form
of purchase money obligations to the sellers of properties, long-term, tax-
exempt bonds or other publicly or privately placed debt instruments, financing
from banks, institutional investors or other lenders, any of which
indebtedness may be unsecured or may be secured by mortgages or other
interests in the property owned by the Operating Partnership, the Property
Partnerships or any new property partnership. Such indebtedness may be
recourse to all or any part of the property of the Company, the Operating
Partnership, any Property Partnership or any new property partnership, or may
be limited to the particular property to which the indebtedness relates. The
proceeds from any borrowings by the Company, the Operating Partnership, any
Property Partnership or any new property partnership may be used for the
payment of distributions, for working capital, to refinance existing
indebtedness or to finance acquisitions, expansions or development of new
properties; provided, that the Company cannot borrow to pay distributions to
shareholders except through the Operating Partnership.
CONFLICTS OF INTEREST POLICIES
The Company has adopted certain policies and entered into various agreements
designed to reduce conflicts of interest involving the owners and management
of the Company. For a discussion of such conflicts, see "Risk Factors--
Conflicts of Interest; Benefits to Prime."
Michael W. Reschke, the Chairman of the Board of the Company and the
principal stockholder of Prime, will continue to devote a considerable portion
of his time to the management of Prime's continuing commercial real estate
operations. Pursuant to the Non-Compete Agreement, Mr. Reschke and Prime have
agreed that, so long as Prime and/or its affiliates own a 5.0% or greater
economic interest in the Company or Mr. Reschke is Chairman of the Board of
the Company, neither Mr. Reschke nor Prime (including its affiliates) will own
or manage office or industrial properties (except any ownership resulting from
foreclosure of indebtedness). Excluded from the foregoing restrictions are all
properties in which Prime had an interest prior to the Formation Transactions
and Prime's or Mr. Reschke's ownership of less than 5.0% of any class of
securities listed on a national securities exchange or on the Nasdaq National
Market. See "Certain Relationships and Related Transactions--Non-Compete
Agreement."
In addition, Stephen J. Nardi, an affiliate of the NAC General Partner, will
be a trustee of the Company. Neither the Company nor the NAC General Partner
may (other than in accordance with the Put Option
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Agreement) withdraw from the Operating Partnership or transfer its general
partner interest, nor may another general partner be admitted to the Operating
Partnership without the consent of the other general partner.
Richard S. Curto will enter an employment agreement that contains
noncompetition provisions designed to reduce potential conflicts of interest.
These provisions prohibit Mr. Curto from engaging directly or indirectly in
the development or acquisition of office properties during the period he is
employed with the Company and for an additional 24-month period following any
termination of such employment either by the Company for cause or by Mr. Curto
voluntarily. See "Management."
As holders of Common Units, the Limited Partners and the NAC General Partner
may suffer different and more adverse tax consequences than the Company upon
the sale or refinancing of the properties and therefore the Limited Partners
and the NAC General Partner, on the one hand, and the Company, on the other
hand, may have different objectives regarding the appropriate pricing and
timing of any sale or refinancing of such properties. The decision to proceed
with any such sale or refinancing will be made by the Board of Trustees. The
Partnership Agreement provides that the Company has no obligation to consider
the separate interests of the Limited Partners or the NAC General Partner,
including tax consequences to the Limited Partners or the NAC General Partner,
in deciding whether to sell a property. However, the Company has entered into
tax indemnification agreements with the NAC General Partner and the IBD
Contributors. So long as the tax indemnity continues for either the NAC
General Partner or the IBD Contributors and Prime is responsible to the
Company for such indemnity, the Company will use its best efforts to not
create such tax liability due to a refinancing or debt repayment with regard
to the relevant Properties and to utilize Section 1031 tax-free exchanges to
the extent any of the relevant Properties is sold. See "Risk Factors--
Conflicts of Interest; Benefits to Prime" and "Certain Relationships and
Related Transactions--Tax Indemnification Agreements."
The Declaration of Trust provides that each trustee will be obligated to
offer to the Company any opportunity which comes to such trustee and which the
Company could reasonably be expected to have an interest in pursuing. The
Declaration of Trust also provides that any contract or transaction between
the Company and any trustee or any entity in which the trustee has a material
financial interest would not be voidable solely because of such trustee's
interest if (a) it is approved after disclosure of the interest, by an
affirmative vote of a majority of disinterested trustees or by the affirmative
vote of a majority of the votes cast by disinterested shareholders or (b) it
is fair and reasonable to the Company.
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves (and when not sufficient,
access to borrowings) in amounts the Board of Trustees determines to be
adequate to meet normal contingencies in connection with the operation of the
Company's business and investments.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer its shares of beneficial interest or
other equity or debt securities in exchange for property and to repurchase or
otherwise reacquire its shares or any other securities and may engage in such
activities in the future. Similarly, the Company may offer additional
interests in the Operating Partnership that are exchangeable into Common
Shares or, at the Company's option, cash, in exchange for property. The
Company also may make loans to the Operating Partnership. The Company expects
to issue Common Shares to holders of interests in the Operating Partnership
upon exchange thereof, subject to certain restrictions and limitations. Any
election by the Company with respect to Common Units held by Prime or any
other officer or trustee of the Company will be made with the approval of the
independent trustees. Except in connection with the Formation Transactions,
the Company has not issued or caused to be issued Common Shares, interests in
the Operating Partnership or other securities. The Company has not made loans
to any entities or persons, including its officers and trustees. The Company
has not engaged in trading, underwriting or agency distribution or sale of
securities of other issuers and does not intend to do so. At all times, the
Company intends to make investments in such manner as to be consistent with
the requirements of the Code for the Company to qualify as a REIT unless,
because of changing circumstances or changes in the Code (or in the Treasury
Regulations), the Board of Trustees with the consent of the holders of the
majority of the votes entitled to be cast on such matter, determines that it
is no longer in the best interests of the Company to qualify as a REIT.
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MANAGEMENT
TRUSTEES, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning each of the
Company's trustees, executive officers and key employees serving in such
capacities upon completion of the Offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael W. Reschke...... 41 Chairman of the Board, Trustee
Richard S. Curto........ 45 President and Chief Executive Officer, Trustee
W. Michael Karnes....... 51 Executive Vice President and Chief Financial Officer
Robert J. Rudnik........ 43 Executive Vice President, General Counsel and
Secretary
Jeffrey A. Patterson.... 38 Executive Vice President and Chief Investment Officer
Kevork M. Derderian..... 46 President--Office Division
Edward S. Hadesman...... 64 President--Industrial Division
John O. Wilson.......... 43 President--Prime Group Realty Services, Inc.
Donald H. Faloon........ 50 Executive Vice President--Development
Philip A. Hoffer........ 47 Senior Vice President--Real Estate Operations
Steven R. Baron......... 48 Senior Vice President--Marketing and Leasing/CBD
Office
Faye I. Oomen........... 48 Senior Vice President--Development and Leasing--
Suburban Office
Christopher "Kit" J. 31 Senior Vice President--Industrial Operations
Sultz..................
Tucker B. Magid......... 32 Senior Vice President--Industrial Development
S. Craig Nardi.......... 32 Senior Vice President--Industrial Marketing and
Leasing
Murray J. Alscher....... 41 Senior Vice President--Acquisitions
James F. Hoffman........ 35 Vice President--Associate General Counsel
Kathryn A. Deane........ 49 Vice President--Controller
Donald E. Anderson...... 55 Vice President--Industrial Property
Management/Redevelopment
Phillip E. Waters....... 38 Vice President--Marketing and Leasing
Rolanda H. Derderian.... 42 Vice President--Real Estate Tax Specialist
Patrick L. McGaughy..... 56 Vice President--Assistant Treasurer
James F. Runnion........ 53 Vice President--Asset Management
Scott D. McKibben....... 28 Vice President--Acquisitions
Stephen J. Nardi(1)..... 64 Trustee Designee
James R. Thompson(1).... 61 Independent Trustee Designee
Jacque M. Ducharme(1)... 48 Independent Trustee Designee
Christopher J. 35 Independent Trustee Designee
Nassetta(1)............
Thomas J. Saylak(1)(2).. 37 Independent Trustee Designee
</TABLE>
- --------
(1) Prior to or upon the effectiveness of the Registration Statement that
contains this Prospectus, the Company will nominate and elect this person
to serve as a trustee of the Company.
(2) This person has been designated by Blackstone to be elected as a trustee.
Michael W. Reschke. Michael W. Reschke serves as the Chairman of the Board
of Trustees of the Company. Mr. Reschke founded Prime in 1981 and, since that
time, has acted as Prime's Chairman and Chief Executive Officer. Mr. Reschke
is also Chairman of the Executive Committee of Prime and is Chairman of the
Board of Prime Retail, Inc. and Brookdale Living Communities, Inc. and a
member of the Board of Directors of Ambassador Apartments, Inc. For the last
17 years, Mr. Reschke has directed and managed the acquisition, development,
finance, construction, leasing, marketing, renovation and property management
activities of Prime. Mr. Reschke is licensed to practice law in the State of
Illinois and is a certified public accountant. Mr. Reschke is a member of the
Chairman's Roundtable and the Executive Committee of the National Realty
Committee and is a full member of the Urban Land Institute. Mr. Reschke also
serves on the Board of Visitors of the University of Illinois Law School.
Richard S. Curto. Richard S. Curto serves as President, Chief Executive
Officer and Trustee of the Company. Mr. Curto joined Prime in May 1994 and,
since that time, has served as Executive Vice President.
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Since joining Prime, Mr. Curto has been responsible for the capital markets
transactions and other project-related financings of Prime. From September
1981 to April 1994, Mr. Curto was employed by Kemper Financial Services, a $65
billion money management firm overseeing the activities of the lending and
equity investment group related to real property, most recently serving as
Senior Vice President. Mr. Curto held various positions with Northwestern
Mutual Life Insurance Co. in the Real Estate Department prior to 1981. Mr.
Curto is a member of the Urban Land Institute and the National Realty
Committee.
W. Michael Karnes. W. Michael Karnes serves as Executive Vice President and
Chief Financial Officer of the Company. From July 1997 to immediately prior to
the Offering, Mr. Karnes was employed by Prime as an Executive Vice President.
From April 1996 to June 1997, Mr. Karnes served as Senior Executive Vice
President, Finance and Chief Financial Officer of Capstar Hotel Company. From
1994 to April 1996, Mr. Karnes served as Senior Vice President and Chief
Financial Officer of Tucker Properties Corporation, a publicly-traded REIT.
From 1991 to 1994, Mr. Karnes served as Senior Vice President, Finance and
Administration for Banyan Management Corp., a company that provides management
services for five public REITs and three master limited partnerships. Prior to
that, from 1989 to 1991, Mr. Karnes served as Chief Operating Officer of
Miglin-Beitler, Inc., a private real estate development, management and
leasing firm.
Robert J. Rudnik. Robert J. Rudnik serves as Executive Vice President,
General Counsel and Secretary of the Company. Mr. Rudnik joined Prime in April
1984 and, since that time, has served as Executive Vice President, General
Counsel and Secretary of Prime, responsible for all legal, insurance and human
resource matters for Prime. Mr. Rudnik continues to serve in such capacity for
Prime and serves as General Counsel and Secretary for Brookdale Living
Communities, Inc.
Jeffrey A. Patterson. Jeffrey A. Patterson serves as Executive Vice
President and Chief Investment Officer of the Company. From 1989 to
immediately prior to the Offering, Mr. Patterson was Executive Vice President
of Prime, with primary responsibility for the acquisition, financing and
redevelopment of office and mixed-use properties. Mr. Patterson also was asset
manager for Prime's office properties and has provided real estate advisory
services for several major institutional investors related to office
buildings. Prior to joining Prime, Mr. Patterson served as Director of
Development in Tishman Speyer Properties' Chicago office and as a Senior
Financial Analyst at the Metropolitan Life Insurance Company's Real Estate
Investment Group. Mr. Patterson is an associate member of the Urban Land
Institute.
Kevork M. Derderian. Kevork M. Derderian serves as President--Office
Division of the Company. From 1989 to immediately prior to the Offering, Mr.
Derderian was employed by Continental Offices Ltd. ("Continental"), most
recently serving as its President and Chief Executive Officer. At Continental,
he oversaw all business operations, including office property management,
leasing and construction. Continental managed in excess of $650.0 million in
properties. Mr. Derderian is a member of the Urban Land Institute and BOMA
International and a member of the board of the U.S. Green Buildings Council.
Mr. Derderian is the husband of Ms. Rolanda Derderian, the Vice President--
Real Estate Tax Specialist of the Company.
Edward S. Hadesman. Edward S. Hadesman serves as President--Industrial
Division of the Company. In such capacity, Mr. Hadesman is responsible for the
acquisition, development, operation of the properties and the management
personnel of the Industrial Division. Prior to joining the Company, Mr.
Hadesman was the President and Chief Executive of Industrial Building and
Development Company ("IBD"), which he formed in 1965. IBD owned, operated,
leased and managed in excess of 1.1 million square feet and developed and
constructed over 1.6 million square feet, consisting primarily of high quality
warehouse, distribution, manufacturing and office buildings. Mr. Hadesman, as
founder and President of IBD, personally supervised all aspects of IBD's
business, including development, leasing, acquisition and management.
John O. Wilson. John O. Wilson serves as President--Prime Group Realty
Services, Inc. of the Company. From January 1995 to immediately prior to the
Offering, Mr. Wilson served as President of Prime's Corporate Real Estate
Services department. Over a 15-year period prior to joining Prime, Mr. Wilson
served as President and Chief Executive Officer of Realsource, Inc., a
regional real estate service firm, which he co-founded in 1981.
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Mr. Wilson's responsibilities included overseeing all aspects of property
marketing, corporate client services and the implementation of management
plans. Prior to 1981, Mr. Wilson was an officer in the Chicago office of
Cushman & Wakefield. He is a Charter Member of the Chicago Office Leasing
Brokers Association and The International Development and Research Council.
Donald H. Faloon. Donald H. Faloon serves as Executive Vice President--
Development of the Company. From January 1989 to immediately prior to the
Offering, Mr. Faloon was employed by Prime in its commercial development
activities. Previous responsibilities for Prime included overseeing Prime's
Diagonal Mar project in Barcelona, Spain and serving as Executive Project
Manager for the 77 West Wacker Drive Building. Prior to joining Prime, Mr.
Faloon had 17 years of experience in the management of real estate development
at Homart Development Co. and Urban Investment and Development Co.
Philip A. Hoffer. Philip A. Hoffer serves as Senior Vice President--Real
Estate Operations of the Company. From February 1996 to immediately prior to
the Offering, Mr. Hoffer was Vice President and Chief Operating Officer of
Continental, where he was responsible for all real estate operations including
asset management, construction and leasing for the owned and third party
portfolio. From 1989 to 1996, Mr. Hoffer served as Chief Operating Officer for
Insignia/Frain Camins & Swartchild, where he oversaw third party institutional
property management and leasing for 13 million square feet of office,
industrial and retail space located in Chicago and Los Angeles. He has over 15
years of experience in real estate development, management, construction and
brokerage in Chicago, California and New York. Past responsibilities also
include serving as project manager for the 676 North Michigan Avenue Building
in Chicago.
Steven R. Baron. Steven R. Baron serves as Senior Vice President--Marketing
and Leasing/CBD Office of the Company. From December 1996 to immediately prior
to the Offering, Mr. Baron was employed by Prime as Senior Vice President
responsible for commercial development and sales at a 2650-acre planned
development in Huntley, Illinois. From February 1996 to December 1996, he
served as Senior Vice President of Benjamin E. Sherman & Sons, a real estate
company, where he oversaw the management portfolio and leasing activity. From
February 1994 to December 1995, he was the Managing Director of PM Realty
Group's Midwest Division where he oversaw the leasing and management
portfolio. From 1988 to 1994, Mr. Baron was employed by Prime as Executive
Vice President responsible for the leasing and marketing of the 77 West Wacker
Drive Building. Mr. Baron is a licensed real estate broker and is an
instructor at Kellogg School of Management where he lectures on commercial
real estate development, leasing and marketing.
Faye I. Oomen. Faye I. Oomen serves as Senior Vice President--Development
and Leasing--Suburban Office of the Company. From 1978 to immediately prior to
the Offering, Ms. Oomen was employed by Continental, most recently serving as
Vice President of Leasing and Construction. She has over 23 years of
experience in real estate leasing, marketing and development. At Continental,
she negotiated more than 200 leasing transactions for more than 1.5 million
square feet of Continental's portfolio, including Continental Towers,
Continental Office Plaza, Regency Office Plaza and The Marquette Building. She
also was responsible for development and base building construction at One
Financial Place and Continental Towers. She has received numerous awards,
including being named the 1995 Sun-Times Suburban Property Representative of
the Year.
Christopher "Kit" J. Sultz. Christopher J. Sultz serves as Senior Vice
President--Industrial Operations of the Company. From June 1994 to immediately
prior to the Offering, Mr. Sultz was employed by Prime in its Industrial
Division as Vice President--Asset Management. Prior to joining Prime, Mr.
Sultz was employed by Coopers & Lybrand, LLP from August 1991 to June 1994 in
its real estate consulting practice. Mr. Sultz is a certified public
accountant.
Tucker B. Magid. Tucker B. Magid serves as Senior Vice President--Industrial
Development of the Company. In such capacity, he is responsible for overseeing
the development activities of the industrial division. From 1991 to
immediately prior to the Offering, Mr. Magid was Senior Vice President of IBD,
where he was responsible for the management, leasing and operations of the
approximately 1.2 million square foot industrial portfolio and development of
the Motorola Building and Libertyville Business Park. Mr. Magid is a member of
the Association of Industrial Real Estate Brokers ("AIREB").
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S. Craig Nardi. S. Craig Nardi serves as Senior Vice President--Industrial
Marketing and Leasing of the Company. From 1989 to immediately prior to the
Offering, Mr. Nardi served as Vice President of Operations of The Nardi Group
Ltd., a corporate real estate development firm, and as Executive Vice
President of Nardi Asset Management, the property management arm of The Nardi
Group Ltd. Prior to joining The Nardi Group Ltd. and Nardi Asset Management,
Mr. Nardi worked as a real estate broker in New York City. Mr. Nardi is a
member of the International Association of Corporate Real Estate Executives
("NACORE"), the National Association of Industrial and Office Parks ("NAIOP")
and the Elmhurst Economic Development Corporation ("EEDC"). Mr. Nardi is the
son of Stephen J. Nardi, the Vice Chairman of the Board and a Trustee of the
Company.
Murray J. Alscher. Murray J. Alscher serves as Senior Vice President--
Acquisitions for the Company. From April 1997 to immediately prior to the
Offering, Mr. Alscher acted as a consultant to Prime in its acquisition
efforts. From November 1996 to April 1997, Mr. Alscher was a self-employed
real estate consultant. From May 1983 through November 1996, Mr. Alscher was
employed (most recently as Senior Vice President) by Metropolitan Structures,
a private real estate investment, development and management company, where he
was responsible for investment, development and asset management matters.
James F. Hoffman. James F. Hoffman serves as Vice President--Associate
General Counsel of the Company. From January 1991 to immediately prior to the
Offering, Mr. Hoffman served as Assistant General Counsel of Prime. Prior to
his employment with Prime, Mr. Hoffman was an associate with the law firm of
Mayer, Brown & Platt from September 1987 to December 1990.
Kathryn A. Deane. Kathryn A. Deane serves as Vice President-Controller of
the Company. From March 1997 to immediately prior to the Offering, Ms. Deane
was Chief Financial Officer of Continental. From August 1995 to February 1997,
Ms. Deane was Vice President of Operational Accounting and Vice President of
Investor Relations for Equity Group Investments, Inc. and its affiliate EGI
Capital Markets, LLC. From January 1992 to August 1995, Ms. Deane was Director
of Finance and Administration for Lowe Construction and Management Co., Inc.
Ms. Deane is a certified public accountant and is a member of the Illinois CPA
Society and Chicago Building Owners and Managers Association ("BOMA").
Donald E. Anderson. Donald E. Anderson serves as Vice President--Industrial
Property Management/Redevelopment of the Company. From 1992 to immediately
prior to the Offering, Mr. Anderson was employed by Prime as the Manager of
the Property Management and Redevelopment section of its Industrial
Development Group. Mr. Anderson's primary responsibilities at Prime involved
the oversight and redevelopment of Prime's four industrial parks: the AHEC,
CEC, ECEC and HEC. From 1983 to 1992 Mr. Anderson was employed by JMB Realty
as Vice President of Construction and Acquisition Review.
Phillip E. Waters. Phillip E. Waters serves as the Vice President--Marketing
and Leasing for the Company. From January 1995 to immediately prior to the
Offering, Mr. Waters was employed by Prime as the Director of Marketing of its
Industrial Development Group. Mr. Waters' primary responsibilities at Prime
involved the development and implementation of a marketing program for
industrial properties, the repositioning of properties as multitenant
facilities and the formation of build-to-suit projects. From 1990 to 1995, Mr.
Waters worked for the M-B Sales Division of the Havi Group, creating private
partnerships for a multifamily redevelopment project. Mr. Waters is a licensed
real estate broker in Illinois and Indiana. He serves on the Board of
Directors of the Northwest Indiana Forum, a regional development group, and
the East Chicago Chamber of Commerce.
Rolanda H. Derderian. Rolanda H. Derderian serves as the Vice President--
Real Estate Tax Specialist of the Company. From 1976 to immediately prior to
the Offering, Ms. Derderian served as Vice President and Chief Information
Officer of Continental. Ms. Derderian's primary responsibilities at
Continental involved real estate tax defense strategies and computer system
design and implementation. Ms. Derderian serves as Co-Chairman of the Real
Estate Tax Committee of the Chicago Development Council. She is the wife of
Mr. Kevork Derderian, the President--Office Division of the Company.
Patrick L. McGaughy. Patrick L. McGaughy serves as Vice President--Assistant
Treasurer of the Company. From 1992 to immediately prior to the Offering, Mr.
McGaughy was employed by Prime as Controller
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of its commercial development and management division. From 1989 to 1992, Mr.
McGaughy served as Chief Financial Officer of Sudler Marling, Inc., and prior
thereto, as Vice President and Controller of Rubloff, Inc.
Mr. McGaughy is a certified public accountant.
James F. Runnion. James F. Runnion serves as Vice President--Asset
Management of the Company. From October 1991 to immediately prior to the
Offering, Mr. Runnion was employed by Prime as Vice President--Management with
primary responsibility for the 77 West Wacker Drive Building. Prior to joining
Prime, Mr. Runnion had 19 years of experience in the development, leasing and
management of commercial office properties. Mr. Runnion holds the Real
Property Administrator designation from BOMA.
Scott D. McKibben. Scott D. McKibben serves as Vice President--Acquisitions
of the Company. From 1994 to immediately prior to the Offering, Mr. McKibben
was employed by Continental, most recently serving as Development Analyst,
where his primary responsibilities included conducting financial analyses for
over $300 million in commercial and medical office and land development
projects and assisting in arranging the financing of several prospective land
development projects. From 1993 through 1994, Mr. McKibben was employed by
Marshall Erdman & Associates, where his primary responsibilities included
analyzing development opportunities. Mr. McKibben received his Juris Doctorate
degree from University of Wisconsin--Madison Law School in May 1994 and is a
licensed Illinois real estate broker.
Stephen J. Nardi. Stephen J. Nardi has agreed to serve as a Trustee of the
Company and will be appointed a Trustee and Vice Chairman of the Board prior
to or upon the effectiveness of the Registration Statement that contains this
Prospectus. For the past thirty-five years Mr. Nardi has served as President
and Chief Executive Officer of The Nardi Group Ltd., a corporate real estate
development firm which has designed, built and managed millions of square feet
of properties throughout the Chicago Metropolitan Area and other parts of the
country, and which has a portfolio of over 1.9 million square feet of
office/industrial property in the Chicago Metropolitan Area. Mr. Nardi is a
member of the Chicago Real Estate Board, the National Association of Realtors,
the Society of Industrial and Office Realtors ("SIOR"), NAIOP and the Urban
Land Institute. Mr. Nardi is the father of S. Craig Nardi, the Senior Vice
President--Industrial Marketing and Leasing of the Company.
Governor James R. Thompson. James R. Thompson has agreed to serve as a
Trustee of the Company and will be appointed a Trustee prior to or upon the
effectiveness of the Registration Statement that contains this Prospectus.
Governor Thompson is the Chairman of the law firm of Winston & Strawn and has
been a partner with the firm since 1991. Prior to joining Winston & Strawn,
Governor Thompson served as the Governor of Illinois from 1977-1991. Governor
Thompson serves on the board of directors of FMC Corporation, the Chicago
Board of Trade, Jefferson Smurfit Group (Dublin), International Advisory
Council of the Bank of Montreal, Pechiney International, Prime Retail, Inc.,
Union Pacific Resources Company, Hollinger International, Inc. and American
National Can Co. Governor Thompson received his Juris Doctorate degree from
the Northwestern University Law School.
Jacque M. Ducharme. Jacque M. Ducharme has agreed to serve as a Trustee of
the Company and will be appointed a Trustee prior to or upon the effectiveness
of the Registration Statement that contains this Prospectus. Since 1972, Mr.
Ducharme has been employed by Julien J. Studley, Inc., a real estate corporate
and tenant services firm, where he currently serves as Senior Executive Vice
President and is the Chicago and Midwest Regional Manager. His clients include
some of the largest companies in the Chicago Metropolitan Area, including
Quaker Oats, Arthur Andersen and First Chicago. Mr. Ducharme is a past
president of the Chicago Office Leasing Brokers Association.
Christopher J. Nassetta. Christopher J. Nassetta has agreed to serve as a
Trustee of the Company and will be appointed a Trustee prior to or upon the
effectiveness of the Registration Statement that contains this Prospectus.
From October 1995 to the present, Mr. Nassetta has acted as the Executive Vice
President and Chief Operating Officer of Host Marriott Corporation, where he
is responsible for acquisitions, real estate operations, asset management,
lodging partnerships and administration and serves on its Executive Committee.
From October 1991 through October 1995, Mr. Nassetta served as President of
Bailey Capital Corporation, a real estate
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investment and advisory firm that he co-founded, where he oversaw all
operations. Prior to founding Bailey Capital Corporation, Mr. Nassetta was
employed by The Oliver Carr Company, a commercial real estate company, for
seven years, where he served as Development Director, Vice President and
Regional Partner and ultimately Chief Development Officer, as well as serving
on its management committee. Mr. Nassetta serves on the McIntire School of
Commerce Advisory Board for the University of Virginia.
Thomas J. Saylak. Thomas J. Saylak has agreed to serve as a Trustee of the
Company and will be appointed a Trustee prior to or upon the effectiveness of
the Registration Statement that contains this Prospectus. Mr. Saylak is
presently a Senior Managing Director of The Blackstone Group and of Blackstone
Real Estate Advisors ("BREA"). Since joining BREA in 1993, Mr. Saylak's major
accomplishments include creating the Interstone Hotel acquisitions joint
venture, as well as leading the multi-billion dollar restructurings of two
large regional mall owners, Edward J. DeBartolo Corp. and Cadillac Fairview,
Inc. Prior to joining BREA, from 1987 to 1993, Mr. Saylak was a principal in
Trammell Crow Ventures, the investment advisory arm of Trammell Crow Company,
a real estate development and management firm, where he completed over $3.0
billion of real estate acquisitions and financings and led the firm's
Distressed Portfolio Initiative. Mr. Saylak currently serves as a director of
Interstate Hotel Corporation and Cadillac Fairview, Inc. Mr. Saylak also
serves on the Executive Committee of the National Realty Committee and is a
charter member of The Columbia Real Estate Forum.
COMMITTEES OF THE BOARD OF TRUSTEES
Audit Committee. Promptly following the closing of the Offering, the Board
of Trustees of the Company will establish an Audit Committee that will
initially consist of three Independent Trustees. The Audit Committee will be
established to make recommendations concerning the engagement of independent
public accountants, to review with the independent accountants the plans and
results of the audit engagement, to approve professional service provided by
the independent public accountants, to review the independence of the
independent public accountants, to consider the range of audit and non-audit
fees and to review the adequacy of the Company's internal accounting controls.
Executive Committee. Promptly following the closing of the Offering, the
Board of Trustees of the Company will establish an Executive Committee.
Subject to the Company's conflicts of interest policies, the Executive
Committee may be granted certain authority to acquire and dispose of real
property and the power to authorize, on behalf of the full Board of Trustees,
the execution of certain contracts and agreements, including those related to
the borrowing of money by the Company, and, consistent with the Partnership
Agreement, to cause the Operating Partnership to take such actions. The
Executive Committee will initially consist of Michael W. Reschke and Richard
S. Curto.
Executive Compensation Committee. Promptly following the closing of the
Offering, the Board of Trustees of the Company will establish an Executive
Compensation Committee to determine compensation for the Company's executive
officers and to implement and administer the Company's Share Incentive Plan.
The Executive Compensation Committee will initially consist of two or more
Independent Trustees.
COMPENSATION OF TRUSTEES
The Company intends to pay its trustees who are not employees of the Company
or affiliated with Prime or the Company a fee for their services as trustees.
They will receive annual compensation of $26,000 plus a fee of $1,000 for
attendance at each meeting of the Board of Trustees and $500 for attendance at
each committee meeting, and will receive reimbursement of all travel and
lodging expenses related to their attendance at both board and committee
meetings. Each non-employee trustee also will receive a grant of options to
purchase 5,000 Common Shares under the Company's Share Incentive Plan, which
will vest at the rate of 33.3% per year over the next three years commencing
on the first anniversary of their date of grant and will have a term of ten
years. See "--Share Incentive Plan." Further, the Company has entered a
consulting agreement with Mr. Nardi, pursuant to which he is to be granted
options for an aggregate of 75,000 Common Shares upon completion of the
Offering. Such options will vest at the rate of 33.3% per year over three
years commencing on the first
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anniversary of their date of grant and will have a term of ten years. See
"Certain Relationships and Related Transactions--Consulting Agreement with
Stephen J. Nardi."
EXECUTIVE COMPENSATION
The Company was organized in July 1997, did not conduct any prior operations
and, accordingly, did not pay any compensation to its executive officers for
the year ended December 31, 1996. The following table sets forth the annual
base salary for the year following completion of the Offering that the Company
intends to establish for the Chairman of the Board, the Chief Executive
Officer and the four other persons who are expected to be the most highly
compensated executive officers of the Company during that period. In addition
to base salaries, the Executive Compensation Committee may authorize the
payment of cash bonuses based upon performance.
<TABLE>
<CAPTION>
ANNUAL
NAME TITLE BASE SALARY
---- ----- -----------
<S> <C> <C>
Michael W. Reschke...... Chairman of the Board of Trustees $150,000
Richard S. Curto........ President and Chief Executive Officer $275,000
W. Michael Karnes....... Executive Vice President and Chief Financial Officer $200,000
Jeffrey A. Patterson.... Executive Vice President and Chief Investment Officer $200,000
Kevork M. Derderian..... President--Office Division $200,000
Edward S. Hadesman...... President--Industrial Division $200,000
</TABLE>
EMPLOYMENT AGREEMENTS
The Company will enter employment agreements with each of the executive
officers named in the table above. These agreements provide that the executive
officers shall devote substantially all of their business time to the
operation of the Company, except Mr. Reschke, who shall only be required to
devote such time as he deems necessary to fulfill his duties and obligations
to the Company as Chairman of the Board. The agreements establish the initial
base salaries set forth in the table above and provide for an initial term of
three years, which, in the case of Messrs. Reschke's, Curto's and Hadesman's
agreements only, are automatically extended for an additional year after
expiration of the initial term and any extension period unless either the
Company provides the applicable officer with at least six months prior written
notice or the applicable officer provides the Company with at least thirty
days prior written notice, that such term shall not be extended. The
agreements also contain (i) an agreement not to solicit, attempt to hire or
hire any employee or client of the Company or solicit or attempt to lease
space to or lease space to any tenant of the Company for two years following
termination of employment and (ii) with the exception of Mr. Derderian's
agreement, non-compete provisions restricting the executive officers from
developing, acquiring or operating office or industrial properties (within a
ten mile radius of any facility of the Company) for two years following
termination of employment if the employment is terminated either by the
Company for cause or by the executive officer voluntarily (with certain
limited exceptions in the case of Mr. Hadesman's agreement).
The agreements also set forth the potential bonuses to which the executive
officers are entitled. In the case of Messrs. Reschke, Curto, Karnes,
Patterson and Hadesman, they are each entitled to receive a discretionary
bonus based on achievement of such corporate and individual goals and
objectives as may be established by the Board of Trustees or its Compensation
Committee. In the case of Mr. Derderian, he is entitled to receive a bonus in
an amount of up to 100% of his base salary determined pursuant to the
following formula: (i) up to 75% of his base salary based upon the extent to
which actual Funds from Operations (as defined in his agreement) exceed the
projected budget for Funds from Operations and (ii) up to 25% of his base
salary based on achievement of such corporate and individual goals and
objectives as may be established by the Board of Trustees or its Compensation
Committee.
If any agreement is terminated by the Company (i) without cause (as defined
in the agreements), (ii) by the executive following the occurrence of a
"change of control" and a resulting "diminution event" (as defined in the
agreements) or (iii)(a) in the case of Mr. Reschke's agreement, by Mr. Reschke
if he is removed as a director
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of the Company or (b) in the case of Mr. Curto's agreement, by the Company the
event of Mr. Curto's disability (as defined in the agreement), the applicable
executive shall be entitled to a lump sum termination payment. With respect to
Messrs. Reschke and Curto, such payment will be (x) an amount equal to two
times their then current annual base salary, if the termination is by the
Company without cause or following Mr. Reschke's or Mr. Curto's disability or
(y) an amount equal to two times the applicable average base salary and bonus
for the two prior years, if the termination is by Mr. Reschke or Mr. Curto, as
the case may be, due to the occurrence of a change of control and diminution
event. With respect to each of Mr. Karnes and Mr. Patterson, such payment will
be an amount equal to the greater of 100.0% of his then current base salary
and 100.0% of his aggregate base salary for the remainder of the term of his
employment agreement, if the termination is either by the Company without
cause or by the executive due to the occurrence of a change of control and
resulting diminution event (or in the case of Mr. Karnes only, a relocation of
his office outside the Chicago metropolitan area). With respect to each of Mr.
Derderian and Mr. Hadesman, such payment will be (xx) an amount equal to the
product of (A) his then current base salary plus his last annualized bonus
multiplied by (B) a fraction, the numerator of which is the number of days
remaining in the term of his employment agreement at the time of termination
(but in no event less than 365 in the case of Mr. Derderian's agreement) and
the denominator of which is 365, if the termination is by the Company without
cause or (yy) an amount equal to the product of two times the sum of his then
current base salary plus his last annualized bonus, if the termination is by
the executive due to the occurrence of a change of control and resulting
diminution event. See "Certain Relationships and Related Transactions."
In addition, the employment agreement with Mr. Karnes provides for a grant
to Mr. Karnes of 10,000 Common Shares.
SHARE INCENTIVE PLAN
The Company has established a Share Incentive Plan (the "Share Incentive
Plan") for the purpose of attracting and retaining trustees, executive
officers and other key employees. The Share Incentive Plan is administered by
the Compensation Committee and permits the grant of stock options, stock
appreciation rights, restricted stock, restricted units and performance units
to officers and other key employees of the Company, its subsidiaries, the
Operating Partnership, the Services Company and Company-owned partnerships.
The Share Incentive Plan also permits the grant of stock options to
nonemployee Trustees. Although the Share Incentive Plan permits the
Compensation Committee to grant a wide variety of awards, it does not obligate
the Compensation Committee to do so. The variety of awards authorized under
the Share Incentive Plan is intended to give the Compensation Committee
flexibility to adapt the Company's compensation structure to changes in the
business and regulatory environment.
Under the Share Incentive Plan, up to 1.85 million Common Shares may be
issued or transferred to Participants. The maximum aggregate number of Common
Shares and Share equivalent units that may be subject to awards granted during
any calendar year to any one participant under the Share Incentive Plan,
regardless of the type of awards, will be 200,000. This limit will apply
regardless of whether such compensation is paid in Common Shares or in cash.
If any award is canceled, terminates, expires or lapses for any reason, any
Common Shares subject to such award will again be available for grant under
the Share Incentive Plan, except that such Common Shares will still be counted
for purposes of the annual individual award limit described above. In the
event of any change in capitalization of the Company, such as a share split,
or a corporate transaction, such as a merger or consolidation or any
reorganization, or any partial or complete liquidation of the Company, an
adjustment may be made in the number and class of Common Shares that may be
delivered under the Share Incentive Plan, in the number and class of and/or
price of Common Shares subject to outstanding awards, and in the annual
individual award limit set forth above, as may be determined to be appropriate
and equitable by the Compensation Committee to prevent dilution or enlargement
of rights.
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The Compensation Committee currently anticipates granting options under the
Share Incentive Plan to purchase Common Shares. The Compensation Committee may
grant "incentive stock options" (within the meaning of Section 422 of the
Code) and/or nonqualified stock options to employees of the Company and its
corporate subsidiaries. Other employees, including employees of the Operating
Partnership and the Services Company, and nonemployee directors may only
receive nonqualified stock options. The exercise price of any option will be
at least equal to 100% of the fair market value of a Common Share on the date
the option is granted. Each option will expire no later than the tenth
anniversary of the date of grant.
Upon completion of the Offering, the Compensation Committee will grant
options to purchase Common Shares (the "Initial Grants") to the following key
officers and employees of the Company: Michael W. Reschke (175,000); Richard
S. Curto (175,000); W. Michael Karnes (70,000); Robert J. Rudnik (85,000);
Jeffrey A. Patterson (85,000); Kevork M. Derderian (70,000); Edward S.
Hadesman (70,000); John O. Wilson (30,000); Donald H. Faloon (40,000); Philip
A. Hoffer (30,000); Steven R. Baron (30,000); Faye I. Oomen (30,000); Tucker
B. Magid (22,500); Christopher J. Sultz (22,500); S. Craig Nardi (20,000);
James F. Hoffman (18,000); Kathryn A. Deane (7,500); Donald E. Anderson
(15,000); Philip E. Waters (15,000); Rolanda H. Derderian (12,500); Patrick L.
McGaughy (10,000); James F. Runnion (15,000); Murray J. Alscher (10,000);
Scott D. McKibben (5,000); and certain other employees (50,000).
The Initial Grants will vest, subject to certain conditions being met, at a
rate of 33.3% per year over three years commencing on the first anniversary of
their date of grant and will have a term of ten years. The exercise price of
the options issued pursuant to the Initial Grants will be the initial public
offering price of the Common Shares. The exercise price for any option is
generally payable in cash or, in certain circumstances, by the surrender, at
the fair market value on the date on which the option is exercised, of Common
Shares.
All unvested options held by an optionee will automatically be forfeited if
the optionee leaves employment for any reason other than the optionee's death
or disability on or after the first anniversary of their date of grant. Upon a
"change in control" (as defined in the Share Incentive Plan), all unvested
options will vest. The rights of any participants to exercise a option may not
be transferred in any way other than by will or applicable laws of descent and
distribution.
The Compensation Committee also anticipates that it will grant options for
an aggregate of 5,000 Common Shares to each of its independent trustees, and
75,000 Common Shares to Mr. Nardi pursuant to his consulting agreement, that
will vest at the rate of 33.3% per year over three years commencing on the
first anniversary of their date of grant and will have a term of ten years.
The exercise price of these options will be the initial public offering price
of the Common Shares. The exercise price for any of these options will
generally be payable in cash or, in certain circumstances, by the surrender,
at the fair market value on the date on which the option is exercised, of
Common Shares.
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The following table contains information concerning the grant of options to
occur on the completion of the Offering under the Company's Share Incentive
Plan. The table also lists potential realizable values of such options on the
basis of assumed annual compounded share appreciation rates of 5.0% and 10.0%
over the life of the options.
SHARE OPTION GRANTS IN CONNECTION WITH THE FORMATION TRANSACTIONS
<TABLE>
<CAPTION>
POTENTIAL
NUMBER OF REALIZABLE VALUE AT
SECURITIES ASSUMED
UNDERLYING ANNUAL RATES OF
OPTIONS EXERCISE OR SHARE PRICE
GRANTED BASE PRICE EXPIRATION APPRECIATION
(#)(1) PER SHARE(2) DATE(3) FOR OPTION TERM(4)
---------- ------------ ---------- -------------------
(IN THOUSANDS)
5% 10%
--------- ---------
<S> <C> <C> <C> <C> <C>
Michael W. Reschke....... 175,000 $20.00 $ 2,202 $ 5,577
Richard S. Curto......... 175,000 20.00 2,202 5,577
W. Michael Karnes........ 70,000 20.00 881 2,231
Jeffrey A. Patterson..... 85,000 20.00 1,069 2,709
Kevork M. Derderian...... 70,000 20.00 881 2,231
Edward S. Hadesman....... 70,000 20.00 881 2,231
</TABLE>
- --------
(1) The options granted will vest in three equal installments on the first,
second and third anniversaries of the date of the grant.
(2) The option price will be equal to the initial public offering price of the
Common Shares.
(3) The expiration date of the options will be ten years after the date of the
grant.
(4) The potential realizable value is reported net of the option price, but
before the income taxes associated with exercise. These amounts represent
assumed annual compounded rates of appreciation at 5.0% and 10.0% only
from the date of grant to the expiration date of the option.
INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Declaration of Trust contains a provision permitted under Maryland law
eliminating (with limited exceptions) each trustee's personal liability for
monetary damages for breach of any duty as a trustee. In addition, the
Declaration of Trust and Bylaws authorize the Company to indemnify its present
and former trustees and officers and to pay or reimburse expenses for such
individuals in advance of the final disposition of a proceeding to the maximum
extent permitted from time to time under Maryland law. Maryland law provides
that indemnification of a person who is a party, or threatened to be made a
party, to legal proceedings by reason of the fact that such a person is or was
a trustee, officer, employee or agent of a corporation, or is or was serving
as a trustee, officer, employee or agent of a corporation or other firm at the
request of a corporation, against expenses, judgments, fines and amounts paid
in settlement, is mandatory in certain circumstances and permissive in others,
subject to authorization by the Board of Trustees.
The Company intends to enter into indemnification agreements with each of
the Company's trustees and certain of its executive officers. The
indemnification agreements will require, among other things, that the Company
indemnify such trustees and officers to the fullest extent permitted by law,
and advance to the trustees and officers all related expenses, subject to
reimbursement if it is subsequently determined that indemnification is not
permitted. The Company also must indemnify and advance all expenses incurred
by trustees and officers seeking to enforce their rights under the
indemnification agreements and cover trustees and officers under the Company's
trustees' and officers' liability insurance. Although the form of
indemnification agreement offers substantially the same scope of coverage
afforded by provisions in the Declaration of Trust and Bylaws, it provides
greater assurance to trustees and officers that indemnification will be
available, because as a contract, it cannot be unilaterally modified by the
Board of Trustees or by the shareholders to eliminate the rights it provides.
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Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers or persons controlling the
registrant pursuant to the foregoing provisions, 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 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 trustee, officer, or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such trustee, 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 and will be governed by the final adjudication of such
issue.
STRUCTURE AND FORMATION OF THE COMPANY
The Company was formed on July 21, 1997. The Operating Partnership and the
Services Company were formed in March 1997.
FORMATION TRANSACTIONS
Prior to or simultaneous with the completion of the Offering, the Company,
the Operating Partnership, the Services Company, the NAC General Partner and
the Limited Partners will engage in the Formation Transactions designed to
enable the Company to continue and expand the office and industrial real
estate operations of Prime, consolidate the ownership interests in the
Properties and the office and industrial development, leasing and property
management business of Prime, facilitate the Offering, enable the Company to
qualify as a REIT for federal income tax purposes commencing with its taxable
year ending December 31, 1997, and preserve certain tax advantages for the
existing owners of the Properties.
The Company, the Operating Partnership, the Services Company and the
Property Partnerships will engage in the following series of transactions with
Prime and certain other parties:
. The Company will contribute the $269.9 million of the estimated net
proceeds from the Offering (after the deduction of underwriting discounts
and commissions but before payment of costs and expenses incurred in
connection with the Formation Transactions and the Offering) to the
Operating Partnership in exchange for 12,380,000 GP Common Units and
2,000,000 Preferred Units. The Company will be the managing general
partner of the Operating Partnership. See "Partnership Agreement--
Distributions" and "Description of Shares of Beneficial Interest--
Convertible Preferred Shares" and "--Common Shares".
. Prime will contribute to the Operating Partnership (i) its ownership
interests in the Property Partnerships that own the Prime Properties and
Prime Contribution Properties, (ii) its rights to purchase the
subordinate mortgage encumbering the Property Partnership that owns the
77 West Wacker Drive Building from certain third-party lenders and its
rights to acquire certain third parties' ownership interests in the
Property Partnerships that own the Prime Properties and (iii)
substantially all of its assets and liabilities relating to its office
and industrial development, leasing and management business. The
foregoing assets had an aggregate deficit book value of approximately
$140.3 million (as determined at June 30, 1997 in accordance with GAAP).
In exchange, Prime will receive 3,465,000 Common Units, representing a
15.5% limited partnership interest in the Operating Partnership (with an
aggregate value of $69.3 million). As described below, Prime will
contribute 3,375,000 of such Common Units to the Primestone Joint
Venture, resulting in the direct ownership by Prime of a 0.5% limited
partnership interest in the Operating Partnership. The Operating
Partnership will pay approximately $1.9 million in transfer taxes related
to Prime's contribution of the assets described herein and will pay on
behalf of Prime, or reimburse Prime for, approximately $5.2 million of
expenses incurred by it in connection with the Formation Transactions and
the Offering. In addition, Mr. Patterson is contributing his interest in
the assets of the office and industrial division of Prime. In exchange,
Mr. Patterson will receive 110,000 Common Units, representing
approximately a 0.5% limited partnership interest in the Operating
Partnership.
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. The NAC Contributors will contribute the NAC Properties to the Operating
Partnership. In exchange, the NAC Contributors will receive 927,100 GP
Common Units, representing a 4.1% general partnership interest in the
Operating Partnership (with an aggregate value of $18.5 million). In
addition, the Operating Partnership will pay the NAC Contributors
approximately $23.5 million in cash and will pay approximately $0.4
million in transfer taxes related to transfer of the NAC Properties.
. The IBD Contributors will contribute to the Operating Partnership their
ownership interests in the IBD Properties in exchange for 919,450 Common
Units representing a 4.1% limited partnership interest in the Operating
Partnership and having an aggregate value of $18.4 million. In addition,
the Operating Partnership will pay the IBD Contributors approximately
$5.2 million in cash, will assume approximately $6.4 million in debt and
will pay approximately $0.2 million in transfer taxes related to the
transfer of the IBD Properties.
. Prime, BRE/Primestone Investment L.L.C., a Delaware limited liability
company, and BRE/Primestone Management Investment L.L.C., a Delaware
limited liability company (each of which is an affiliate of Blackstone),
will form the Primestone Joint Venture to invest in LP Common Units. To
capitalize the Primestone Joint Venture, Prime will contribute to the
Primestone Joint Venture 3,375,000 of the Common Units it receives in
exchange for its contributions to the Operating Partnership. Blackstone
will contribute $45.0 million in cash to the Primestone Joint Venture. In
exchange for such capital contributions, Prime will receive a 60.0%
interest and Blackstone will receive a 40.0% interest. The Primestone
Joint Venture will also borrow $40.0 million and use the proceeds of such
loan and the cash contributed by Blackstone to purchase 4,569,893 LP
Common Units from the Operating Partnership, at a price per Common Unit
equal to the per share initial public offering price of the Common
Shares, net of an amount equal to the underwriting discount applicable to
the Common Shares offered hereby, simultaneously with the other Formation
Transactions. As a result, the Primestone Joint Venture will own, in the
aggregate, 7,944,893 Common Units, representing a 35.5% limited
partnership interest in the Operating Partnership. In connection with the
purchase of the LP Common Units, Blackstone has designated Mr. Saylak to
be elected as one of the Company's trustees. The consummation of the
Primestone Joint Venture is subject to various conditions precedent.
There can be no assurance that such conditions precedent will be met. See
"Certain Relationships and Related Transactions--The Primestone Joint
Venture".
. The Operating Partnership is expected to borrow $83.5 million under the
New Mortgage Notes that are secured by certain of the Contribution
Properties. The Company currently has no commitment for such financing,
and there can be no assurance that such financing will be available to
the Company on favorable terms, if at all.
. The Operating Partnership will repay third-party lenders approximately
$350.8 million (including prepayment fees) of obligations of the Property
Partnerships or indebtedness encumbering the Properties.
. The Operating Partnership will utilize the Credit Facility to replace the
outstanding letters of credit which secure the payment of principal and
interest on the $74.5 million of certain Tax-Exempt Bonds. Upon the
replacement of the outstanding letters of credit, Prime will receive the
return of approximately $15.0 million of cash and $7.2 million of certain
securities previously pledged by Prime as additional collateral to secure
certain of its guarantee obligations in connection with the existing
letters of credit.
. The Operating Partnership will pay approximately $41.4 million to acquire
the Acquisition Properties and approximately $5.9 million to acquire the
Continental Management Business from third parties. The purchase price
for the Acquisition Properties and the Continental Management Business
were in each case negotiated in arm's-length transactions with third
parties based on a multiple of the net operating income of each of the
Acquisition Properties and the Continental Management Business,
respectively.
. The Operating Partnership will pay approximately $1.7 million in cash to
third parties for the balance of the ownership interests and subordinate
debt interests relating to certain of the Prime Properties.
. The Operating Partnership will pay approximately $1.7 million in fees to
obtain the Credit Facility and the New Mortgage Notes.
. The Operating Partnership will contribute the Continental Management
Business, the health club facility located in the 77 West Wacker Drive
Building and the office and industrial development, leasing and
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property management business of Prime to the Services Company in exchange
for (i) 100% of the Preferred Stock of the Services Company and (ii) the
Note. Messrs. Reschke and Curto will contribute an aggregate of $50,000
for 100% of the Services Company's voting common stock. The Operating
Partnership is expected to receive approximately 95.0% of the economic
benefits of the operations of the Services Company by virtue of payments
on the Note and distributions in respect of its ownership of the Preferred
Stock.
As a result of the foregoing transactions, the Company will own 12,380,000
Common Units, representing approximately a 55.3% general partner interest in
the Operating Partnership and will own 2.0 million Preferred Units. The NAC
General Partner will own 927,100 Common Units, representing a 4.1% general
partnership interest in the Operating Partnership, the Primestone Joint
Venture will own 7,944,893 Common Units representing a 35.5% limited partner
interest in the Operating Partnership, the IBD Contributors will own 919,450
Common Units, representing an approximate 4.1% limited partnership interest in
the Operating Partnership, Mr. Patterson will own 110,000 Common Units,
representing an approximate 0.5% limited partnership interest in the Operating
Partnership and Prime will own 90,000 Common Units, representing an
approximate 0.5% limited partnership interest in the Operating Partnership.
The Company will be the managing general partner and retain management control
over the Operating Partnership.
Pursuant to the Partnership Agreement and subject to certain conditions,
each Common Unit held by a Limited Partner may be exchanged for one Common
Share or, at the option of the Company, cash equal to the fair market value of
a Common Share at the time of exchange. However, neither Prime nor the
Contributors may exchange any Common Units for Common Shares if actual or
constructive ownership of such Common Shares would violate the Ownership Limit
with respect to the Common Shares. See "Description of Shares of Beneficial
Interest--Restrictions on Ownership and Transfer."
The Limited Partners have agreed not to exchange their Common Units for
Common Shares if, upon such exchange, the Operating Partnership will cease to
qualify as a partnership for federal income tax purposes or the Company will
not continue to qualify as a REIT.
REASONS FOR THE ORGANIZATION OF THE COMPANY
The Company believes that the benefits of the Formation Transactions
outweigh the detriments to the Company. The benefits of the Company's REIT
status and structure include the following:
. Access to Capital. The Company's structure will, in the Company's
judgment, provide it with greater access to capital for refinancing and
growth. Sources of capital include the Common Shares sold in the Offering
and possible future issuances of debt or equity through public offerings
or private placements. The financial strength of the Company should
enable it to obtain financing at better rates and on better terms than
would otherwise be available to the Property Partnerships, some of which
are single asset entities.
. Growth of the Company. The Company's structure will allow shareholders,
and the Limited Partners through their ownership of Common Units, an
opportunity to participate in the growth of the real estate market
through an ongoing business enterprise. In addition to the existing
portfolio of Properties, the Company gives shareholders and the Limited
Partners an interest in all future development by the Company and in the
office and industrial development, leasing and property management
business being contributed by the Company to the Services Company.
. Liquidity. The equity interests in the Property Partnerships are
typically not marketable. The Company's structure allows shareholders,
and the Limited Partners, the opportunity to liquidate their capital
investment through the disposition of Common Shares or Common Units.
Pursuant to the Partnership Agreement and subject to certain conditions,
each LP Common Unit held by the Limited Partners may be exchanged for one
Common Share (subject to adjustment) or, at the option of the Company,
cash equal to the fair market value of a Common Share at the time of
exchange. However, the Limited Partners have agreed not to exchange any
LP Common Units for Common Shares if actual or constructive ownership
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of such Common Shares would violate the Ownership Limit with respect to
the Common Shares. See "Description of Shares of Beneficial Interest--
Restrictions on Ownership and Transfer." Further, the Limited Partners
have agreed not to, among other things, sell or exchange any Common Units,
without the consent of Prudential Securities Incorporated, on behalf of
the Underwriters, for their respective Holding Periods.
. Tax Deferral. The Formation Transactions provide to the Limited Partners
and the NAC General Partner the opportunity to defer the tax consequences
that would arise from a sale or contribution of their interests in the
Properties and other assets to the Company or to a third party.
COMPARISON OF COMMON SHARES AND COMMON UNITS
Conducting the Company's operations through the Operating Partnership allows
the Limited Partners and the NAC General Partner to defer certain tax
consequences by contributing their interests in Properties to the Operating
Partnership and also offers favorable methods of accessing capital markets and
acquiring additional properties. Common Units in the Operating Partnership
will be held by the Limited Partners, the NAC General Partner and the Company.
Each Common Unit was designed to result in a distribution per Common Unit
equal to a distribution per Common Share (assuming the Company distributes to
its shareholders all amounts it receives as distributions from the Operating
Partnership). Distributions in respect of the Common Shares and Common Units
are not permitted unless all current and any accumulated distributions in
respect of the Convertible Preferred Shares and Preferred Units, respectively,
have been paid in full. Pursuant to the Partnership Agreement and subject to
certain conditions, each Common Unit held by the Limited Partners may be
exchanged for one Common Share (subject to adjustment) or, at the option of
the Company, cash equal to the fair market value of a Common Share at the time
of exchange. However, the Limited Partners may not exchange any Common Units
for Common Shares if actual or constructive ownership of such Common Shares
would violate the Ownership Limit with respect to the Common Shares. See
"Description of Shares of Beneficial Interest--Restrictions on Ownership and
Transfer." The Limited Partners have agreed not to, among other things, sell
or exchange any Common Units, without the consent of Prudential Securities
Incorporated, on behalf of the Underwriters, for the applicable Holding
Periods.
There are, however, certain differences between the ownership of Common
Shares and Common Units, including:
. Voting Rights. Holders of Common Shares will elect the Board of Trustees
of the Company, which, as the general partner of the Operating
Partnership, controls the business of the Operating Partnership. Holders
of Common Units may not elect trustees of the Company.
. Transferability. The Common Shares sold in the Offering will be freely
transferable under the Securities Act by holders who are not affiliates
of the Company or the Underwriters. The Common Units and the Common
Shares for which they are exchangeable are subject to transfer
restrictions under applicable securities laws and under the Partnership
Agreement, including the required consent of the general partners to the
admission of any new limited partner. See "Shares Eligible for Future
Sale" for a description of the Registration Rights Agreement applicable
to holders of Common Units.
. Distributions. Because the relative tax bases of the contributions by the
public investors and the Limited Partners are expected to be different,
it is possible that the public investors' distribution will include a
return of capital that exceeds that of the Limited Partners. See "Certain
Federal Income Tax Considerations."
ADVANTAGES AND DISADVANTAGES OF THE FORMATION TRANSACTIONS TO UNAFFILIATED
SHAREHOLDERS
The potential advantages of the Formation Transactions to unaffiliated
shareholders of the Company include their ability to participate, through
ownership of the Company, in the cash flow of the Properties and all future
office and industrial property acquisitions and developments by the Company.
The potential disadvantages of such transactions to unaffiliated shareholders
of the Company may be several, including the impact of shares available for
future sale, substantial and immediate dilution in the tangible book value per
share and the lack of arm's-length negotiations to determine the terms of the
transfers of certain of the Properties to the Company and the Operating
Partnership. See "Risk Factors."
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BENEFITS OF THE FORMATION TRANSACTIONS AND THE OFFERING
Prime and certain of its affiliates will receive certain material benefits
in connection with the Formation Transactions and the Offering, including the
following:
Benefits to Prime
. Assuming that each Common Unit held by Prime has a value equal to that of
a Common Share and that the initial public offering price of the Common
Shares offered in the Common Share Offering is $20.00, representing the
midpoint of the price range, and all of the 3,465,000 Common Units issued
in the Formation Transactions are exchanged for Common Shares, Prime will
receive 15.5% of the Common Shares (or 14.3% if the Underwriters' over-
allotment option is exercised in full).
. Prime will receive the return of approximately $15.0 million of cash and
$7.2 million of securities previously pledged as additional collateral by
Prime to secure its limited recourse guarantee obligations to the issuers
of the letters of credit which secure the payment of principal and
interest of the Tax-Exempt Bonds. Such collateral will be returned to
Prime upon the completion of the Offering and the replacement of such
letters of credit by the Operating Partnership.
. Prime will realize an immediate increase in the net tangible book value
of its investment in the Company of $55.24 per Common Unit upon the
completion of the Offering. The assets to be transferred by Prime in the
Formation Transactions had an aggregate deficit book value of
approximately $140.3 million (as determined at June 30, 1997 in
accordance with GAAP).
. Prime will no longer be liable as a general partner of the Property
Partnerships that own certain of the Properties. In addition, Prime will
be released from various limited recourse guaranties and obligations to
indemnify the lenders in connection with the Tax-Exempt Bonds encumbering
certain of the Properties and $60.0 million of other debt.
. The Operating Partnership will pay on behalf of Prime, or reimburse Prime
for, approximately $5.2 million of expenses incurred by or on behalf of
Prime in connection with the Formation Transactions and the Offering.
. Prime will defer certain tax consequences to it from certain of the
Formation Transactions through the contribution to the Operating
Partnership of its interests in the Properties and the business related
thereto for Common Units.
. Prime will obtain improved liquidity of its investment in its office and
industrial real estate business as a result of the Formation Transactions
through the ownership of Common Units, which are exchangeable for Common
Shares or cash, at the option of the Company.
Benefits to IBD Contributors
. The IBD Contributors will receive $5.2 million in cash.
. The IBD Contributors will have improved liquidity of their interests in
the Properties and increased diversification of their investment.
. Indebtedness on the IBD Properties in the aggregate net amount of
approximately $33.9 million will be repaid.
. The IBD Contributors will defer certain tax consequences of taxable
disposition or refinancings of assets through the creation of the
Operating Partnership and the contribution of their interests in the
Properties to the Operating Partnership in exchange for Common Units
having an aggregate value of $18.4 million (assuming a value of the
Common Units equal to the initial public offering price of the Common
Shares).
. The IBD Contributors will enter a tax indemnification agreement with the
Company providing, in certain circumstances, the reimbursement by the
Company of taxes payable by the IBD Contributors resulting from the sale
or refinancing of the IBD Properties.
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Benefits to the NAC Contributors and the NAC General Partner
. The NAC Contributors will receive $23.5 million in cash.
. Stephen J. Nardi, an affiliate of the NAC General Partner, will enter a
two-year consulting agreement with the Company and will be nominated and
elected a trustee of the Company.
. Indebtedness on the NAC Properties in the aggregate net amount of
approximately $56.0 million will be repaid.
. The NAC General Partner will defer certain tax consequences of taxable
disposition or refinancings of assets through the creation of the
Operating Partnership and the contribution of their interests in the
Properties to the Operating Partnership in exchange for Common Units
having an aggregate value of $18.5 million (assuming a value of the
Common Units equal to the initial public offering price of the Common
Shares).
. The NAC General Partner will enter a tax indemnification agreement with
the Company providing for, in certain circumstances, the reimbursement by
the Company of taxes payable by the NAC General Partner resulting from
the sale or refinancing of the NAC Properties.
. The NAC General Partner will enter the Put Option Agreement providing the
NAC General Partner the ability to require the Company to repurchase its
interests in the Operating Partnership for cash.
DETERMINATION AND VALUATION OF OWNERSHIP INTERESTS
Determination and Valuation of Ownership Interests. The Company's percentage
interest in the Operating Partnership was determined based upon the percentage
of estimated cash available for distribution required to pay estimated cash
distributions to shareholders, resulting in an annual distribution rate equal
to 6.75% of an assumed initial public offering price of the Common Shares of
$20.00 per share, representing the midpoint of the price range. The
Contributors will receive cash of $28.7 million and 1,846,550 Common Units
based on the negotiated value of the Contribution Properties, and the
remaining interest in the Operating Partnership having a value of
approximately $71.5 million (before giving effect to the Primestone Joint
Venture transactions) will be allocated to Prime and Mr. Patterson in
connection with the Formation Transactions. The parameters and assumptions
used in deriving the estimated cash available for distribution are described
under the caption "Distribution Policy."
In connection with the Offering, the initial offering price of the
Convertible Preferred Shares will be determined by the Company and Security
Capital Preferred Growth.
ACQUISITION OF THE PROPERTIES AND THE BUSINESS FROM PRIME
The Operating Partnership will acquire Prime's interests in the Properties
and the office and industrial development, leasing and property management
business of Prime pursuant to an agreement relating to the Formation
Transactions with Prime (the "Formation Agreement"). The obligations of Prime
to transfer under their agreement is or will be conditioned upon the
completion of the Offering, the closing under the other agreements and normal
and customary conditions to the closing of real estate transactions. The
Formation Agreement also contains representations and warranties to the
Operating Partnership concerning the operation of the Prime Properties and
environmental matters and certain other covenants, representations and
warranties customarily found in real estate purchase agreements. Claims for
indemnification for any breach under the Formation Agreement could be made by
the Company for two years from the completion of the Offering. In the event
that any of such representations or warranties is breached, the Company's
recovery will be limited to the value of the Common Units received by Prime in
the Formation Transactions. See "Risk Factors--Conflicts of Interest; Benefits
to Prime."
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FORMATION OF THE SERVICES COMPANY
The Services Company was formed in March 1997 under the laws of the state of
Maryland to succeed to the office and industrial property management, leasing
and corporate advisory services business of Prime. Following the consummation
of the Formation Transactions, Messrs. Reschke and Curto together will own
100% of the voting common stock of the Services Company, for which they will
contribute an aggregate of $50,000. The Operating Partnership will own 100.0%
of the Preferred Stock of the Services Company and the Note to be issued by
the Services Company in an initial principal amount of approximately $4.2
million. The Preferred Stock of the Services Company will have a dividend rate
of 8.5%, will pay dividends on a cumulative and participating basis, and will
not be redeemable by the Services Company or convertible into other securities
of the Services Company. The ownership structure of the Services Company is
necessary to permit the Company to share in the Service Company's income and
also maintain its status as a REIT for federal income tax purposes. Although
the Company anticipates that it will receive substantially all of the economic
benefit of the business carried on by the Services Company (by virtue of the
Company's right to receive (i) dividends through the Operating Partnership's
investment in the Preferred Stock and (ii) interest payments on the Note held
by the Operating Partnership), the Company will not be able to elect the
Services Company's officers or directors and, consequently, will not have the
ability to control the operations of the Services Company. The Operating
Partnership and the Services Company will enter the Management Contracts in
connection with the Formation Transactions pursuant to which the Services
Company will render development, leasing and property management services for
third parties. See "Risk Factors--Managed Property Business and Non-REIT
Services--Lack of Control Over the Services Company," "The Company" and
"Certain Relationships and Related Transactions."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In addition to the Formation Transactions which are described in the section
entitled "Structure and Formation of the Company," the following transactions
have occurred or will occur simultaneously with the completion of the
Offering.
FORMATION AGREEMENT
Concurrently with the completion of the Offering and pursuant to the
Formation Agreement, Prime will contribute to the Operating Partnership,
subject to certain liabilities, (i) all of its ownership interests in the
Prime Properties and the Prime Contribution Properties, (ii) its rights to
purchase the subordinate mortgage encumbering the Property Partnership that
owns the 77 West Wacker Drive Building from certain third-party lenders and
its rights to acquire certain third parties' ownership interests in the
Property Partnerships that own the Prime Properties and (iii) substantially
all of the assets and liabilities relating to its office and industrial
development, leasing and management business in exchange for an aggregate of
3,465,000 Common Units, representing a 15.5% limited partnership interest in
the Operating Partnership (with an aggregate value of approximately $69.3
million). The obligations of Prime to transfer the Prime Properties and other
interests will be conditioned upon the completion of the Offering, the closing
under the other agreements and normal and customary conditions to the closing
of real estate transactions, including the consents of various lenders. Prime
has agreed to pay the transfer taxes relating to the transfer to the Company
of the Prime Properties and Prime Contribution Properties to the extent such
taxes exceed $2.5 million. The Formation Agreement also contains
representations and warranties to the Operating Partnership concerning the
operation of the Prime Properties and environmental matters and certain other
covenants, representations and warranties customarily found in real estate
purchase agreements. Claims for indemnification for any breach by Prime under
the Formation Agreement could be made by the Company for two years from the
completion of the Offering. In the event of any such breach by Prime, the
Company's recovery will be limited to the value of the Common Units received
by Prime in the Formation Transactions. See "Risk Factors--Conflicts of
Interest; Benefits to Prime."
PARTNERSHIP AGREEMENT
The Company, the NAC General Partner and the Limited Partners have entered
into the Partnership Agreement which sets forth the terms of such partnership
and establishes the Company as the managing general partner of the Operating
Partnership with primary responsibility and discretion in the management and
control of the Operating Partnership. For a summary description of the
Partnership Agreement, see "Partnership Agreement."
EXCHANGE RIGHTS AND REGISTRATION RIGHTS
For a description of certain exchange and registration rights held by the
Limited Partners, see "Shares Eligible for Future Sale--Exchange Rights and
Registration Rights."
THE PRIMESTONE JOINT VENTURE
Pursuant to a contribution agreement relating to the Primestone Joint
Venture, immediately following the Offering, Prime will contribute to the
Primestone Joint Venture 3,375,000 of the Common Units it receives in exchange
for its contributions to the Operating Partnership. Blackstone will contribute
$45.0 million in cash to the Primestone Joint Venture. In exchange, Prime will
receive a 60.0% interest, and Blackstone will receive a 40.0% interest in the
Primestone Joint Venture. The Primestone Joint Venture will also borrow $40.0
million from a financial institution and use such loan proceeds together with
the $45.0 million contributed by Blackstone to purchase 4,569,893 Common Units
from the Operating Partnership, at a price per Common Unit equal to the per
share initial public offering price of the Common Shares, net of an amount
equal to the underwriting discounts and commissions applicable to the Common
Shares, simultaneously with the other Formation Transactions. As a result, the
Primestone Joint Venture will own, in the aggregate, 7,944,893 Common Units,
representing a 35.5% limited partnership interest in the Operating
Partnership. It is anticipated that PSCC, an affiliate of Prudential
Securities Incorporated, will make the $40.0 million loan to the Primestone
Joint Venture, which loan will be secured by all of the Common Units held by
the Primestone Joint Venture. In connection with the purchase of the Common
Units, Blackstone has designated Mr. Saylak to be elected one of the
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Company's trustees. Blackstone will have the right after 30 months following
the completion of the Offering, or earlier under certain circumstances, to
require Prime or the Primestone Joint Venture to purchase or redeem
Blackstone's interest in the Primestone Joint Venture. After 30 months
following the completion of the Offering, or earlier upon the occurrence of
certain events, Prime may require Blackstone to sell its interests in the
Primestone Joint Venture to Prime or the Primestone Joint Venture. Up to 50.0%
of the price payable upon the exercise of Prime's call right may, under
certain circumstances, be made by the delivery of Common Units or Common
Shares. After three years following the completion of the Offering or a Change
in Control Event (as defined in the agreement forming the Primestone Joint
Venture), either Prime or Blackstone may withdraw from Primestone and require
a pro rata distribution of such party's respective interest.
The Company has granted the Primestone Joint Venture registration rights for
the Common Shares it receives from exchanging Common Units. Blackstone, and
Prime with the consent of Blackstone, are permitted, under the agreement
forming the Primestone Joint Venture, to pledge their interests in the
Primestone Joint Venture to third-party lenders. Any such lender which is
expected to be PSCC, an affiliate of Prudential Securities Incorporated, may
become a partner in the Primestone Joint Venture, in the event of a default
under the respective loan documents and upon the foreclosure of such pledge
and assumption of certain obligations, with all the rights of the party to
whose interest they have succeeded.
IBD CONTRIBUTION AGREEMENT
The IBD Contributors and Prime have entered the IBD Contribution Agreement
pursuant to which the IBD Contributors will contribute to the Operating
Partnership their interests in the IBD Contribution Properties. In exchange,
the IBD Contributors will receive an aggregate of 919,450 Common Units of
limited partnership interest, representing an aggregate 4.1% limited
partnership interest in the Operating Partnership and cash of $5.2 million.
Pursuant to the IBD Contribution Agreement, certain of the IBD Contributors
have elected to have a portion of the Common Units they will receive in the
foregoing exchange subject to an arrangement pursuant to which upon the
earlier of (i) the exchange of the subject Common Units for Common Shares and
sale thereof by the holder not earlier than two years following the completion
of the Offering or (ii) the third anniversary date of the completion of the
Offering, either (x) Prime shall transfer to such holder an amount in cash or
Common Units (based on the then current market price) equal to the excess, if
any, of an annual pre-tax return of 16.8% on the subject Common Units to the
date of transfer over the actual return on such Common Units during such
period or (y) such holder shall transfer to Prime an amount in cash or Common
Units (based on the then current market price) equal to the excess, if any, of
the actual return on such Common Units over an annual pre-tax return of 19.8%
on such Common Units.
NAC CONTRIBUTION AGREEMENT; PUT OPTION AGREEMENT
The NAC Contributors, Prime, the Company and the Operating Partnership have
entered the NAC Contribution Agreement pursuant to which the NAC Contributors
will contribute to the Operating Partnership their interests in the NAC
Contribution Properties. In exchange, the NAC Contributors will receive
927,100 GP Common Units, representing a 4.1% general partnership interest in
the Operating Partnership, and cash of $23.5 million. All of the GP Common
Units will be held by the NAC General Partner.
After 21 months following the completion of the Offering, pursuant to a
certain Put Option Agreement, the NAC General Partner will have the right to
cause the Operating Partnership and the Company to purchase for cash at least
50.0% of the NAC General Partner's GP Common Units at a price per Common Unit
equal to 95.0% of the then current per share market value of the Common
Shares. Further, after 32 months following the completion of the Offering, the
NAC General Partner shall have the right to cause the Operating Partnership
and the Company to purchase for cash all, but not less than all, of the NAC
General Partner's then-remaining GP Common Units at a price per Common Unit
equal to 95.0% of the then current per share market value of the Common
Shares.
TAX INDEMNIFICATION AGREEMENTS
The Operating Partnership has entered a tax indemnification agreement with
the IBD Contributors pursuant to which the Operating Partnership is required
to indemnify the IBD Contributors for, among other things,
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income or gain which they might realize upon the refinancing or sale by the
Operating Partnership of the Properties they contributed. Under the terms of
such agreement, the Operating Partnership will indemnify the IBD Contributors
for certain tax liabilities based on income or gain which an IBD Contributor
is required to include in its gross income for federal or state income tax
purposes. The percentage of the tax liabilities which the Operating
Partnership is required to indemnify is 100.0% for the taxable years ending on
or before December 31, 1998, and declines by 10.0% each year thereafter until
December 31, 2007. The Operating Partnership is not required to indemnify the
IBD Contributors for income or gain realized by them after the taxable year
ended December 31, 2007. Prime has entered an agreement with the Operating
Partnership pursuant to which Prime has agreed to indemnify the Operating
Partnership for any amounts paid by the Operating Partnership to the IBD
Contributors pursuant to such agreement; provided, that Prime shall be liable
to the Operating Partnership for such amounts only to the extent that the
Operating Partnership used its best efforts to avoid such tax liability
(including exploring the opportunity for a tax-free exchange under Section
1031 of the Code for the transaction that gave rise to the obligation under
such agreement).
The Operating Partnership has also entered a tax indemnification agreement
with certain principals of the NAC Contributors, pursuant to which the
Operating Partnership is required to indemnify such principals of the NAC
Contributors for, among other things, income or gain which they might realize
upon the refinancing or sale by the Operating Partnership of the NAC
Properties. Under the terms of such agreement, the Operating Partnership will
indemnify such principals of the NAC Contributors for certain tax liabilities
based on income or gain which such a principal is required to include in its
gross income for federal, applicable state and certain local income tax
purposes. The Operating Partnership is not required to indemnify the NAC
Contributors for income or gain realized by them for any taxable year
beginning after the tenth anniversary of the date upon which the NAC General
Partner is no longer a general partner in the Operating Partnership. Prime has
also entered an agreement with the Operating Partnership pursuant to which
Prime has agreed to indemnify the Operating Partnership for any amounts paid
by the Operating Partnership to such principals of the NAC Contributors
pursuant to such agreement; provided, that Prime shall be liable to the
Operating Partnership for such amounts only to the extent that the Operating
Partnership used its best efforts to avoid such tax liability (including
exploring the opportunity for a tax-free exchange under Section 1031 of the
Code for the transaction that gave rise to the obligation under such
agreement).
NON-COMPETE AGREEMENT BETWEEN PRIME AND MICHAEL W. RESCHKE
The Company, Prime and Michael W. Reschke, Chairman of the Board and a
Trustee of the Company, will enter a Non-Compete Agreement that will provide
that, so long as Prime and/or its affiliates own a 5.0% or greater economic
interest in the Company or Mr. Reschke is Chairman of the Board of the
Company, neither Mr. Reschke nor Prime (including its affiliates) will own or
manage office or industrial properties (except any ownership resulting from
foreclosure of indebtedness). Excluded from the foregoing restrictions are all
properties in which Prime had an interest prior to the Formation Transactions
and Prime's or Mr. Reschke's ownership of less than 5.0% of any class of
securities listed on a national securities exchange or on the Nasdaq National
Market.
CONSULTING AGREEMENT WITH STEPHEN J. NARDI
The Company will also enter into a consulting agreement with Stephen J.
Nardi, a Trustee Designee of the Company. The consulting agreement will be for
a term of two years and will require Mr. Nardi to devote substantially all of
his time and energy to performing consulting services on behalf of the
Company. In addition to the initial base fee of $200,000 per annum, Mr. Nardi
will be entitled to receive additional incentive compensation in an amount up
to 100.0% of his base fee based on achievement of such corporate and
individual goals and objectives as may be established by the Board of Trustees
or its Compensation Committee. The consulting agreement contains non-compete
provisions restricting Mr. Nardi from developing, acquiring or operating
office or industrial properties for two years following termination of the
consulting agreement. In addition, upon completion of the Offering and
pursuant to the consulting agreement, the Compensation Committee will grant
Mr. Nardi 75,000 options to purchase Common Shares.
OPTION TO PURCHASE AND RIGHT OF FIRST OFFER
Following the consummation of the Formation Transactions and the completion
of the Offering, the Company will have a ten-year option to purchase a
property at 300 N. LaSalle in the Chicago CBD from Prime.
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300 N. LaSalle contains approximately 58,000 square feet suitable for
development. The Company will have an option to purchase the property at 95.0%
of the then fair market value of the property.
The Company also will have a 15-year right of first offer to develop (or
develop and acquire an ownership interest in) all or any portion of 360 acres
of undeveloped office and industrial land in the Huntley Business Park in
Huntley, Illinois. The right of first offer will apply to the extent that
Prime determines, that such parcel shall be utilized for the construction of
an office or industrial facility to be owned and leased to third parties by
Prime or held by Prime for sale to a third party. The site is subject to a
participation interest held by an unaffiliated third-party lender.
The foregoing option and right of first offer may be exercised only with the
approval of the Company's independent trustees.
The Company also will have obligations to purchase 2050 Hammond Drive for
approximately $3.1 million and 5600 Proviso Drive for approximately $8.0
million. These properties are each owned by joint ventures between an
affiliate of the NAC General Partner and a third party partner. The Company
will be obligated to purchase 2050 Hammond Drive or 5600 Proviso Drive if the
respective third party partner gives its consent to the purchase within 180
days following the consummation of the Formation Transactions and the
completion of the Offering.
The Company also will have obligations to purchase 300 Craig Place for
approximately $7.5 million and 130 E. Rawls Road for approximately $2.5
million. The properties are each owned by an affiliate of the NAC General
Partner. The Company will be obligated to purchase 300 Craig Place or 130 E.
Rawls Road if the respective property is leased on certain terms within 180
days following the consummation of the Formation Transactions and the
completion of the Offering.
PATTERSON CONTRIBUTION AGREEMENT
Jeffrey A. Patterson, Executive Vice President and Chief Investment Officer
of the Company, and Prime have entered a contribution agreement pursuant to
which Mr. Patterson has agreed to contribute his interests in the assets of
the office and industrial division of Prime to the Operating Partnership in
exchange for 110,000 Common Units.
LEASES WITH PRIME AFFILIATES
Certain entities in which Prime has a controlling ownership interest have
leased space in the 77 West Wacker Drive Building. These entities include (i)
Brookdale Living Communities, Inc., which is leasing approximately 13,500
square feet for five years, pursuant to a lease which commenced October 1,
1997 and (ii) The Prime Group, Inc., which will lease approximately 22,600
square feet for five years, pursuant to a lease which will commence on
November 1, 1997. These leases each contain standard market rental terms.
SALE OF COMMON SHARES TO MR. RESCHKE
Prior to the Offering, the Company sold 100 unregistered Common Shares to
Michael W. Reschke for $10 per share, or an aggregate consideration of $1,000.
Such Common Shares were purchased by Mr. Reschke solely to facilitate the
organization of the Company. Upon completion of the Offering, all of the
shares so acquired by Mr. Reschke will be redeemed by the Company for an
aggregate redemption price of $1,000.
OTHER TRANSACTIONS
Prime has in the past provided asset and property management, leasing,
acquisition, renovation, development, construction management, legal and
administrative services for the Property Partnerships owning certain of the
Properties. Prime received fees relating to these services in the amounts of
$2,277, $2,698, $2,533 (in thousands) for the years ended December 31, 1996,
1995 and 1994, respectively. Following the Offering, all such services with
respect to the Properties will be performed by personnel of the Company.
The Operating Partnership will pay on behalf of Prime, or reimburse Prime,
for approximately $5.2 million of expenses incurred in connection with the
Formation Transactions and the Offering.
The Company is aware of contamination at certain of the Industrial
Properties. Prime has contractually agreed to retain liability for, and
indemnify the Company for, environmental costs with regard to these
Properties.
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PARTNERSHIP AGREEMENT
The following summary of the Amended and Restated Agreement of Limited
Partnership of Prime Group Realty, L.P. (the "Partnership Agreement"), and the
descriptions of certain provisions set forth elsewhere in this Prospectus, are
qualified in their entirety by reference to the Partnership Agreement, which
is filed as an exhibit to the Registration Statement of which this Prospectus
is a part. See "Additional Information."
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. The Company will be the
managing general partner of, and will initially hold approximately 55.3% of
the economic interests in, the Operating Partnership. The Company will conduct
substantially all of its business through the Operating Partnership, except
for office and industrial development, leasing and property management
services, which will be conducted through the Services Company in order to
preserve the Company's REIT status. The Operating Partnership will own a 95.0%
economic interest in the Services Company through the ownership of 100.0% of
the Services Company's Preferred Stock and the Note. Generally, pursuant to
the Partnership Agreement, the Company, as the managing general partner of the
Operating Partnership, will have full, exclusive and complete responsibility
and discretion in the management and control of the Operating Partnership,
including the ability to cause the Operating Partnership to enter into certain
major transactions, including acquisitions, dispositions and refinancings and
to cause changes in the Operating Partnership's line of business and
distribution policies.
The Limited Partners in their capacities as limited partners of the
Operating Partnership will have no authority to transact business for, or
participate in the management or decisions of, the Operating Partnership,
except as provided in the Partnership Agreement and as required by applicable
law. However, any decision of the Operating Partnership to effect certain
amendments to the Partnership Agreement, to take title to any property other
than in the name of the Operating Partnership or a Property Partnership or, to
institute any proceeding for bankruptcy or make a general assignment for the
benefit of creditors generally would require the consent of a majority in
interest of the Common Units (including the interests of the Company, which
will represent approximately 55.3% of the total partner interests upon
completion of the Offering). Further, the Operating Partnership may not be
dissolved prior to December 31, 2050 (which is the expiration of the Operating
Partnership's term) without the consent of a majority in interest of the LP
Common Units so long as the Limited Partners hold more than 10.0% of the
Common Units. The Limited Partners have no right to remove the Company or the
NAC General Partner from their respective capacities as general partners of
the Operating Partnership.
INDEMNIFICATION
To the extent permitted by law, the Partnership Agreement provides for
indemnification of the Company, as managing general partner, its officers and
trustees and such other persons as the Company may designate to the same
extent indemnification is provided to officers and trustees of the Company in
the Declaration of Trust, and limits the liability of the Company and its
officers and trustees to the Operating Partnership to the same extent
liability of officers and trustees of the Company is limited under the
Declaration of Trust.
TRANSFERABILITY OF INTERESTS
Except for a transaction described in the following two paragraphs, the
Partnership Agreement provides that neither the Company nor the NAC General
Partner (other than in accordance with the Put Option Agreement) may withdraw
from the Operating Partnership or transfer or assign its general partner
interest in the Operating Partnership, nor may another general partner be
admitted to the Operating Partnership, without the consent of the other
general partner. A Limited Partner may transfer its interests in the Operating
Partnership to a transferee subject to certain conditions, including that such
transferee assumes all obligations of the transferor Limited Partner and
provided further that such transfer does not cause a termination of the
Operating Partnership for federal or state income tax purposes and does not
cause the Company to cease to comply with requirements under the Code for
qualification as a REIT. Pursuant to the Partnership Agreement, except as
described below under
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"--Limited Partner Exchange Rights," Prime, the Primestone Joint Venture and
the IBD Contributors have agreed not to transfer, assign, sell, encumber or
otherwise dispose of the Common Units evidencing their Common Units, or any
Common Shares issued upon exchange of such Common Units, for a period of two
years and one year, respectively, from the completion of the Offering without
the consent of the Company and Prudential Securities Incorporated, as
representative of the Underwriters, other than to (i) the Company, (ii) family
members, (iii) Affiliates (as defined in the Partnership Agreement), (iv)
shareholders, members, partners or beneficiaries and (v) a charitable
beneficiary or charitable foundation, in each case, provided the transferee
agrees to assume the obligations of the transferor.
EXTRAORDINARY TRANSACTIONS
The Partnership Agreement provides that the Company may not generally engage
in any merger, consolidation or other combination with or into another person
or sale of all or substantially all of its assets, or any reclassification,
recapitalization or change of outstanding Common Shares (a "Business
Combination"), unless the holders of LP Common Units will receive, or have the
opportunity to receive, the same consideration per Common Unit as holders of
Common Shares receive per Common Share in the transaction; if holders of LP
Common Units will not be treated in such manner in connection with a proposed
Business Combination, the Company may not engage in such transaction unless
Limited Partners holding more than 50.0% of the LP Common Units vote to
approve the Business Combination. In addition, as provided in the Operating
Partnership Agreement, the Company will not consummate a Business Combination
in which the Company conducted a vote of the shareholders unless the matter
would have been approved had holders of LP Common Units been able to vote
together with the shareholders on the transaction. The foregoing provision of
the Partnership Agreement would under no circumstances enable or require the
Company to engage in a Business Combination which required the approval of the
Company's shareholders if the Company's shareholders did not in fact give the
requisite approval. Rather, if the Company's shareholders did approve a
Business Combination, the Company would not consummate the transaction unless
(i) the Company as managing general partner first conducts a vote of holders
of Common Units (including the Company and the NAC General Partner) on the
matter, (ii) the Company votes the Common Units held by it in the same
proportion as the shareholders of the Company voted on the matter at the
shareholder vote and (iii) the result of such vote of the Common Unit holders
(including the proportionate vote of the Company's Common Units) is that had
such vote been a vote of shareholders, the Business Combination would have
been approved by the shareholders. As a result of these provisions of the
Operating Partnership, a third party may be inhibited from making an
acquisition proposal that it would otherwise make, or the Company, despite
having the requisite authority under its Declaration of Trust, may not be
authorized to engage in a proposed Business Combination.
ISSUANCE OF ADDITIONAL COMMON UNITS
As managing general partner of the Operating Partnership, the Company has
the ability to cause the Operating Partnership to issue additional Common
Units representing general and limited partnership interests in the Operating
Partnership, including preferred Common Units of limited partnership
interests.
CAPITAL CONTRIBUTIONS
The Partnership Agreement provides that if the Operating Partnership
requires additional funds at any time or from time to time in excess of funds
available to the Operating Partnership from borrowings or capital
contributions, the Company may borrow such funds from a financial institution
or other lender or through public or private debt offerings and lend such
funds to the Operating Partnership on comparable terms and conditions as are
applicable to the Company's borrowing of such funds. As an alternative to
borrowing funds required by the Operating Partnership, the Company may
contribute the amount of such required funds as an additional capital
contribution to the Operating Partnership. The Partnership Agreement and the
Share Incentive Plan also provide that in the event the Company issues
additional shares of beneficial interest (including any issuance of Common
Shares pursuant to the Company's Share Incentive Plan), the Company is
required to contribute to the Operating Partnership as an additional capital
contribution any net proceeds from such issuance in exchange for
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additional partnership interests with preferences and rights corresponding to
the beneficial interests so issued. If the Company so contributes additional
capital to the Operating Partnership, the Company's partnership interest in
the Operating Partnership will be increased on a proportionate basis.
Conversely, the partnership interests of the Limited Partners will be
decreased on a proportionate basis in the event of additional capital
contributions by the Company. See "Policies With Respect to Certain
Activities--Financing Policies."
AWARDS UNDER SHARE INCENTIVE PLAN
If options granted in connection with the Share Incentive Plan are exercised
at any time or from time to time, the Partnership Agreement requires the
Company to contribute to the Operating Partnership as an additional
contribution the exercise price received by the Company in connection with the
issuance of Common Shares to such exercising participant. Upon such
contribution the Company will be issued a number of Common Units in the
Operating Partnership equal to the number of Common Shares so issued, subject
to certain adjustments.
DISTRIBUTIONS
The Partnership Agreement sets forth the manner in which the net cash flow
of the Operating Partnership (which includes operating revenues and proceeds
from sales or refinancings less certain expenditures) will be distributed with
respect to the Preferred Units and the Common Units. Pursuant to the
Partnership Agreement, each Preferred Unit will entitle the Company as holder
to receive, prior to the payment by the Operating Partnership of distributions
with respect to the Common Units, a cash distribution in an amount equal to
the dividend declared or paid in respect of a Convertible Preferred Share. The
Partnership Agreement further provides that net cash revenues available after
the declaration or payment of distributions with respect to the Preferred
Units will be distributed ratably to the holders of the Common Units from time
to time (but not less frequently than quarterly) in an aggregate amount
determined by the Company.
OPERATIONS
The Partnership Agreement requires that the Operating Partnership be
operated in a manner that will enable the Company to satisfy the requirements
for being classified as a REIT and to avoid any federal income or excise tax
liability. The Partnership Agreement provides that the net operating cash
revenues of the Operating Partnership, as well as net sales and refinancing
proceeds, will be distributed from time to time as determined by the Company
(but not less frequently than quarterly) pro rata in accordance with the
partners' respective percentage interests. Pursuant to the Partnership
Agreement, the Operating Partnership will assume and pay when due, or
reimburse the Company for payment of, all expenses it incurs relating to the
ownership and operation of, or for the benefit of, the Operating Partnership
and all costs and expenses relating to the operations of the Company.
LIMITED PARTNER EXCHANGE RIGHTS
Subject to certain conditions, each LP Common Unit held by a Limited Partner
may be exchanged for one Common Share (subject to adjustment) or, at the
option of the Company, cash equal to the fair market value of a Common Share
at the time of exchange. However, no Limited Partner may exchange any LP
Common Units for Common Shares if such entity's actual or constructive
ownership of such Common Shares would violate the Ownership Limit with respect
to the Common Shares. See "Description of Shares of Beneficial Interest--
Restrictions on Ownership and Transfer." Following the expiration of the
foregoing restrictions, any Common Shares issued to the Limited Partners upon
exchange of their respective LP Common Units may be sold in the public market
pursuant to the registration statements which the Company will be obligated to
file pursuant to the exercise of registration rights that have been granted by
the Company or available exemptions from registration. See "Shares Eligible
for Future Sale."
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REGISTRATION RIGHTS
For a description of certain registration rights held by the Limited
Partners, see "Shares Eligible for Future Sale--Exchange Rights and
Registration Rights."
TAX MATTERS
Pursuant to the Partnership Agreement, the Company will be the "tax matters
partner" of the Operating Partnership and, as such, will have authority to
make certain tax decisions under the Code on behalf of the Operating
Partnership.
The net income or net loss of the Operating Partnership generally will be
allocated to each class of Partners in accordance with the relative aggregate
percentage interests of each such class, and within each class, to the
Partners in accordance with their respective percentage interests in such
class, subject to compliance with the provisions of Sections 704(b),
respecting allocations generally, and 704(c), respecting allocations with
respect to contributed properties, of the Code and the applicable Treasury
Regulations. For further discussion of such allocations, see "Certain Federal
Income Tax Considerations--Income Taxation of the Partnerships and Their
Partners."
DUTIES AND CONFLICTS
Except as otherwise set forth in "Policies with Respect to Certain
Activities--Conflicts of Interest Policies" and "Management--Employment
Agreements," any Limited Partner may engage in other business activities
outside the Operating Partnership, including business activities that directly
compete with the Operating Partnership.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2050 or until sooner dissolved and terminated upon the
dissolution, bankruptcy, insolvency or termination of the Company (unless the
Limited Partners elect to continue the Operating Partnership), the election of
the Company with the consent of a majority in interest of the Limited
Partners, the sale or other disposition of all or substantially all the assets
of the Operating Partnership or by operation of law.
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PRINCIPAL SHAREHOLDERS OF THE COMPANY
The following table sets forth certain information regarding the beneficial
ownership of the Common Shares and Common Units immediately following the
consummation of the Offering and the Formation Transactions, by (a) each
person known by the Company to be the beneficial owner of more than 5.0% of
the Common Shares, (b) each trustee of the Company, (c) each executive officer
of the Company and (d) all trustees and executive officers of the Company as a
group. Unless otherwise indicated in the footnotes, all of such interests are
owned directly, and the indicated person or entity has sole voting and
investment power. The number of shares represents the number of Common Shares
or Common Units the person holds. The extent to which a person holds Common
Shares as opposed to Common Units is set forth in the notes to the following
table. The Partnership Agreement provides that the LP Common Units may be
exchanged, subject to certain limitations and only after the first year
following completion of the Offering, for Common Shares or, at the option of
the Company, cash equal to the fair market value of a Common Share at the time
of exchange. Each of the Limited Partners has agreed not to sell or exchange
any LP Common Units, without the consent of Prudential Securities
Incorporated, on behalf of the Underwriters, for the applicable Holding
Periods. See "Partnership Agreement--Limited Partner Exchange Rights."
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES/
COMMON UNITS PERCENTAGE OF PERCENTAGE OF ALL
NAME BENEFICIALLY OWNED COMMON SHARES(1) COMMON SHARES(2)
---- ------------------------ ---------------- -----------------
<S> <C> <C> <C>
The Primestone Joint
Venture(3)............. 7,944,893 39.09% 37.05%
The Prime Group,
Inc.(3)................ 4,856,936 28.18 22.65
Michael W.
Reschke(3)(4).......... 4,856,936 28.18 22.65
Richard S. Curto(4)(5).. -- -- --
W. Michael Karnes(4).... 10,000 0.08 0.05
Robert J. Rudnik(4)(5).. -- -- --
Jeffrey A.
Patterson(4)........... 110,000 0.88 0.51
Kevork M. Derderian(4).. -- -- --
Edward S.
Hadesman(4)(6)......... 859,161 6.49 4.01
Stephen J. Nardi(4)..... 927,100 -- 4.32(7)
James R. Thompson(4).... -- -- --
Jacque M. Ducharme(4)... -- -- --
Christopher J.
Nassetta(4)............ -- -- --
Thomas J. Saylak(4)..... -- -- --
Trustees and Executive
Officers of the Company
as a group
(21 persons)........... 6,796,330 35.44 31.69
</TABLE>
- --------
(1) Assumes exchange only of Common Units owned by such beneficial owner for
Common Shares.
(2) Assumes exchange of all outstanding Common Units for Common Shares.
(3) The shares shown for this person are not beneficially owned because the
Common Units held by such person may not be exchanged for Common Shares
for at least one year following the completion of the Offering and are
disclaimed for beneficial ownership purposes. Such shares are shown to
illustrate the beneficial ownership resulting from an exchange of Common
Units for Common Shares by such person after such prohibition expires.
(4) This person has also received certain Share Options pursuant to the Share
Incentive Plan which Share Options begin vesting in installments beginning
one year after the completion of the Offering and which are excluded from
this table. See "Management--Share Incentive Plan."
(5) This person owns a substantial, but not a controlling, interest in The
Prime Group, Inc., and therefore will not be deemed to beneficially own
the Common Units that are beneficially owned by The Prime Group, Inc.
(6) The Common Units shown for Mr. Hadesman include an aggregate of 397,118
Common Units which are held in separate trusts for his spouse and
children. Mr. Hadesman disclaims beneficial ownership of such Common
Units.
(7) The GP Common Units beneficially owned by Mr. Nardi, an affiliate of the
NAC General Partner, are not exchangeable for Common Shares; however, this
amount illustrates the common equity of the Operating Partnership
beneficially owned by Mr. Nardi.
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The Company was formed as a real estate investment trust under the laws of
the State of Maryland. Rights of shareholders are governed by Title 8 of the
Corporations and Associations Article, Annotated Code of Maryland (the
"Maryland REIT Law") and certain provisions of the MGCL and by the Declaration
of Trust and Bylaws. The following summary of the terms of the shares of
beneficial interest of the Company does not purport to be complete and is
subject to and qualified in its entirety by reference to the Declaration of
Trust and Bylaws, forms of which are filed as exhibits to the Registration
Statement of which this Prospectus is a part. Immediately prior to the closing
of the Offering, the Company will amend and restate its Declaration of Trust
to authorize the capitalization described below.
AUTHORIZED SHARES
The Declaration of Trust provides that the Company may issue up to 100.0
million Common Shares, par value $.01 per share, 65.0 million shares of Excess
Shares, par value $.01 per share ("Excess Shares"), and 30.0 million Preferred
Shares, par value $.01 per share (the "Preferred Shares"). The Declaration of
Trust designates 2.0 million Preferred Shares as the Convertible Preferred
Shares. Excess Shares are to be issued automatically upon any automatic
conversion of Common Shares or Preferred Shares which are purported to be
held, transferred or acquired by any person in violation of the ownership
limitations contained in the Declaration of Trust. See "--Restrictions on
Ownership and Transfer." As of July 21, 1997, in connection with the formation
of the Company, 100 Common Shares were issued to Michael W. Reschke and are
outstanding. Upon completion of the Offering and the consummation of the
Formation Transactions, there will be 12,380,000 Common Shares issued and
outstanding, excluding the 1,857,000 shares which are subject to the
Underwriters' over-allotment option.
Under the Maryland REIT Law, a shareholder is not liable for obligations of
the Company solely as a result of his status as a shareholder. The Declaration
of Trust provides that no shareholder shall be liable for any debt or
obligation of the Company by reason of being a shareholder nor shall any
shareholder be subject to any personal liability in tort, contract or
otherwise to any person in connection with the property or affairs of the
Company by reason of being a shareholder. The Company's Bylaws further provide
that the Company shall indemnify each present or former shareholder against
any claim or liability to which the shareholder may become subject by reason
of being or having been a shareholder and that the Company shall reimburse
each shareholder for all reasonable expenses incurred by him in connection
with any such claim or liability. However, with respect to tort claims,
contractual claims where shareholder liability is not so negated, claims for
taxes and certain statutory liability, the shareholders may, in some
jurisdictions, be personally liable to the extent that such claims are not
satisfied by the Company. Inasmuch as the Company carries public liability
insurance which it considers adequate, any risk of personal liability to
shareholders is limited to situations in which the Company's assets plus its
insurance coverage would not be sufficient to satisfy the claims against the
Company and its shareholders.
CONVERTIBLE PREFERRED SHARES
Dividends
Subject to the preferential rights of the holders of any Preferred Shares
that rank senior in the payment of dividends to the Convertible Preferred
Shares, the holders of the Convertible Preferred Shares shall be entitled to
receive, when, as and if declared by the Board of Trustees, out of funds
legally available for the payment of dividends, cumulative preferential
dividends payable in cash in an amount per Convertible Preferred Share equal
to the greater of (i) (x) an annual rate equal to the product of the Issue
Price times 0.07 for Dividend Periods ending before November , 1998 and (y)
an annual rate equal to the product of the Issue Price times 0.075 for
Dividend Periods ending after November , 1998 or (ii) the regular cash
dividends (determined on each Dividend Payment Date) on the Common Shares, or
portion thereof, into which a Convertible Preferred Share is
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convertible. The amount of dividends referred to in clause (i) above payable
for each full Dividend Period on the Convertible Preferred Shares, other than
the Dividend Period commencing October 1, 1998, shall be computed by dividing
the annual dividend rate by four. For the Dividend Period commencing October
1, 1998, the amount of dividends through November , 1998 on the Convertible
Preferred Shares shall be computed by dividing the product of Issue Price
times 0.07 by 365 and multiplying the result by number of days from October 1,
1998 through November , 1998 and dividends from November , 1998 through
December 31, 1998 on the Convertible Preferred Shares shall be computed by
dividing the product of the Issue Price times .075 by 365 and multiplying the
result by the number of days from November , 1998 through December 31, 1998.
The amount of dividends referred to in clause (ii) above shall equal the
number of Common Shares, or portion thereof, into which a Convertible
Preferred Share will be convertible on or after the Conversion Date (as
defined below), multiplied by the most current quarterly dividend on a Common
Share on or before the applicable Dividend Payment Date.
"Dividend Payment Date" shall mean (i) for any Dividend Period with respect
to which the Company pays a dividend on the Common Shares, the date on which
such dividend is paid, or (ii) for any Dividend Period with respect to which
the Company does not pay a dividend on the Common Shares, a date to be set by
the Board of Trustees, which date shall not be later than the thirtieth
calendar day after the end of the applicable Dividend Period.
"Dividend Periods" shall mean quarterly dividend periods commencing on
January 1, April 1, July 1 and October 1 of each year and ending on and
including the day preceding the first day of the next succeeding Dividend
Period with respect to any Convertible Preferred Shares (other than the
initial Dividend Period, which shall commence on the Issue Date for such
Convertible Preferred Shares and end on and include the last day of the
calendar quarter immediately following such Issue Date, and other than the
Dividend Period during which any Convertible Preferred Shares shall be
redeemed or converted as described below, which shall end on and include the
redemption date with respect to the Convertible Preferred Shares being
redeemed).
Dividends with respect to the Convertible Preferred Shares shall begin to
accrue and shall be fully cumulative from the first day of the applicable
Dividend Period, whether or not in any Dividend Period or Periods there shall
be funds of the Company legally available for the payment of such dividends,
and shall be payable quarterly, when, as and if declared by the Board of
Trustees, in arrears on Dividend Payment Dates. The initial Dividend Period
for the Convertible Preferred Shares will include a partial dividend for the
period from the date on which the Convertible Preferred Shares are issued (the
"Issue Date") until the last day of the calendar quarter immediately following
such Issue Date. The amount of dividends payable for such period, or any other
period shorter than a full Dividend Period, on the Convertible Preferred
Shares shall be computed by dividing the number of days in such period by 365
and multiplying the result by the product of the Issue Price times the annual
dividend rate. Dividends shall be payable in arrears to the holders of record
of the Convertible Preferred Shares as they appear in the records of the
Company at the close of business on such record dates, not less than 10 nor
more than 50 days preceding such Dividend Payment Dates thereof, as shall be
fixed by the Board of Trustees.
Any dividend payment made on the Convertible Preferred Shares shall first be
credited against the earliest accrued but unpaid dividend due with respect to
the Convertible Preferred Shares which remains payable. Holders of Convertible
Preferred Shares shall not be entitled to any dividends, whether payable in
cash, property or shares, in excess of cumulative dividends on the Convertible
Preferred Shares. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on the Convertible
Preferred Shares which may be in arrears.
So long as any Convertible Preferred Shares are outstanding, no dividends,
except as described in the immediately following sentence, shall be declared
or paid or set apart for payment on any class or series of Parity Shares (as
defined below) for any period unless full cumulative dividends have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment on the Convertible Preferred
Shares for all Dividend Periods terminating on or prior to the dividend
payment date on such class or series of Parity Shares. When dividends are not
paid in full or a sum sufficient for such payment is
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not set apart, all dividends declared upon the Convertible Preferred Shares
and all dividends declared upon any other class or series of Parity Shares
shall be declared ratably in proportion to the respective amounts of dividends
accumulated and unpaid on the Convertible Preferred Shares and accumulated and
unpaid on such Parity Shares.
So long as any Convertible Preferred Shares are outstanding, no dividends
(other than dividends or distributions paid solely in shares of, or options,
warrants or rights to subscribe for or purchase shares of, Fully Junior
Shares) shall be declared or paid or set apart for payment or other
distribution shall be declared or made or set apart for payment upon Junior
Shares, nor shall any Junior Shares be redeemed, purchased or otherwise
acquired (other than a redemption, purchase or other acquisition of Common
Shares made for purposes of an employee incentive or benefit plan of the
Company or any subsidiary) for any consideration (or any moneys be paid to or
made available for a sinking fund for the redemption of any Junior Shares) by
the Company, directly or indirectly (except by conversion into or exchange for
Fully Junior Shares), unless in each case (i) the full cumulative dividends on
all outstanding Convertible Preferred Shares and any other Parity Shares of
the Company shall have been or contemporaneously are declared and paid or
declared and set apart for payment for all past Dividend Periods with respect
to the Convertible Preferred Shares and all past dividend periods with respect
to such Parity Shares and (ii) sufficient funds shall have been or
contemporaneously are declared and paid or declared and set apart for the
payment of the dividend for the current Dividend Period with respect to the
Convertible Preferred Shares and the current Dividend Period with respect to
such Parity Shares.
"Fully Junior Shares" shall mean the Common Shares and any other class or
series of shares of beneficial interest of the Company now or hereafter issued
and outstanding over which the Convertible Preferred Shares have preference or
priority in both (i) the payment of dividends and (ii) the distribution of
assets on any liquidation, dissolution or winding up of the Company.
"Junior Shares" shall mean the Common Shares and any other class or series
of shares of beneficial interest of the Company now or hereafter issued and
outstanding over which the Convertible Preferred Shares have preference or
priority in the payment of dividends or in the distribution of assets on any
liquidation, dissolution or winding up of the Company.
No dividends on the Convertible Preferred Shares shall be declared by the
Board of Trustees or paid or set apart for payment by the Company at such time
as the terms and provisions of any agreement of the Company, including any
agreement relating to its indebtedness, prohibits such declaration, payment or
setting apart for payment or provides that such declaration, payment or
setting apart for payment would constitute a breach thereof or a default
thereunder, or if such declaration or payment shall be restricted or
prohibited by law.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, subject to the prior preferences and other
rights of any series of shares of beneficial interest ranking senior to the
Convertible Preferred Shares upon liquidation, distribution or winding up of
the Company, before any payment or distribution of the assets of the Company
(whether capital or surplus) shall be made to or set apart for the holders of
Junior Shares, the holders of the Convertible Preferred Shares shall be
entitled to receive dollars and cents ($ ) (the
"Liquidation Preference") per Convertible Preferred Share plus an amount equal
to all dividends (whether or not earned or declared) accrued and unpaid
thereon to the date of final distribution to such holders (the "Liquidation
Preference Amount").
If, upon any liquidation, dissolution or winding up of the Company, the
assets of the Company, or proceeds thereof, distributable among the holders of
the Convertible Preferred Shares shall be insufficient to pay in full the
Liquidation Preference Amount and liquidating payments on any other shares of
any class or series of Parity Shares, then such assets, or the proceeds
thereof, shall be distributed among the holders of the Convertible Preferred
Shares and any such other Parity Shares ratably in accordance with the
respective amounts that would be payable on such Convertible Preferred Shares
and any such other Parity Shares if all amounts payable thereon were paid in
full.
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A consolidation or merger of the Company with one or more corporations, real
estate investment trusts or other entities, a sale, lease or conveyance of all
or substantially all of the Company's property or business or a statutory
share exchange shall not be deemed to be a liquidation, dissolution or winding
up, voluntary or involuntary, of the Company.
Subject to the rights of the holders of shares of any series or class or
classes of shares of beneficial interest ranking on a parity with or prior to
the Convertible Preferred Shares upon liquidation, dissolution or winding up,
upon any liquidation, dissolution or winding up of the Company, after payment
shall have been made in full to the holders of the Convertible Preferred
Shares, the holders of the Convertible Preferred Shares shall have no other
claim to the remaining assets of the Company and any other series or class or
classes of Junior Shares shall, subject to the respective terms and provisions
(if any) applying thereto, be entitled to receive any and all assets remaining
to be paid or distributed, and the holders of the Convertible Preferred Shares
shall not be entitled to share therein.
Redemption
The Convertible Preferred Shares shall not be redeemable by the Company
prior to November , 2007 except under certain limited circumstances
described below. On and after November , 2007, the Company, at its option,
may redeem the Convertible Preferred Shares, in whole at any time or from time
to time in part out of funds legally available therefor at a redemption price
payable in cash equal to 100.0% of the Liquidation Preference per Convertible
Preferred Share (plus all accumulated, accrued and unpaid dividends as
described below).
Upon any redemption of Convertible Preferred Shares, the Company shall pay
all accrued and unpaid dividends, if any, thereon to the redemption date,
without interest. If the redemption date falls after a dividend payment record
date and prior to the corresponding Dividend Payment Date, then each holder of
Convertible Preferred Shares at the close of business on such dividend payment
record date shall be entitled to the dividend payable on such shares on the
corresponding Dividend Payment Date notwithstanding any redemption of such
shares before such Dividend Payment Date. Except as provided above, the
Company shall make no payment or allowance for unpaid dividends, whether or
not in arrears, on Convertible Preferred Shares called for redemption.
If full cumulative dividends on the Convertible Preferred Shares and any
other class or series of Parity Shares of the Company have not been declared
and paid or declared and set apart for payment, the Convertible Preferred
Shares may not be redeemed in part and the Company may not purchase or acquire
Convertible Preferred Shares, otherwise than pursuant to a purchase or
exchange offer made on the same terms to all holders of Convertible Preferred
Shares.
Notice of the redemption of any Convertible Preferred Shares (other than as
described below) shall be mailed by first-class mail to each holder of record
of Convertible Preferred Shares to be redeemed at the address of each such
holder as shown on the Company's records, not less than 30 nor more than 90
days prior to the redemption date. Neither the failure to mail any required
notice nor any defect therein or in the mailing thereof, to any particular
holder, shall affect the sufficiency of the notice or the validity of the
proceedings for redemption with respect to the other holders. Each such mailed
notice shall state, as appropriate: (i) the redemption date; (ii) the number
of Convertible Preferred Shares to be redeemed; (iii) the redemption price;
(iv) the place or places at which certificates for such Convertible Preferred
Shares are to be surrendered; (v) the then-current conversion price; and (vi)
that dividends on the shares to be redeemed shall cease to accrue on such
redemption date except as otherwise provided below. If fewer than all the
Convertible Preferred Shares held by any holder are to be redeemed, the notice
mailed to such holder shall also specify the number of Convertible Preferred
Shares to be redeemed from such holder. If notice of redemption of any
Convertible Preferred Shares has been properly given, from and after the
redemption date (unless the Company shall fail to make available an amount of
cash necessary to effect such redemption), except as otherwise described
below, dividends on the Convertible Preferred Shares so called for redemption
shall cease to accrue, such shares shall no longer be deemed to be outstanding
and all
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rights of the holders thereof as holders of Convertible Preferred Shares shall
cease (except the rights to convert and to receive the cash payable upon such
redemption, without interest thereon, upon surrender and endorsement of their
certificates if so required and to receive any dividends payable thereon).
If fewer than all the outstanding Convertible Preferred Shares are to be
redeemed, shares to be redeemed shall be selected by the Company from
outstanding Convertible Preferred Shares not previously called for redemption
pro rata (as nearly as may be), by lot or by any other method determined by
the Company in its sole discretion to be equitable. If fewer than all the
Convertible Preferred Shares represented by any certificate are redeemed, then
new certificates representing the unredeemed shares shall be issued without
cost to the holder thereof.
Notwithstanding anything above to the contrary, beginning on
, 1998 and ending on , 1998, the Company, at
its option, may redeem all, but not less than all, of the Convertible
Preferred Shares at a premium (the "Special Redemption Price") calculated to
result in a total internal rate of return to the holder (including the receipt
of dividends and calculated on an annual compounded basis as if the holder had
owned the shares since the Issue Date) of 20.0%. The Special Redemption Price
may be paid, at the Company's option, in any combination of (i) cash and (ii)
Common Shares valued at fair market value; provided that the cash portion of
the Special Redemption Price shall equal at least 75.0% of the Special
Redemption Price.
"Weighted Average Trading Price" shall mean, for any period, the number
obtained by dividing (i) the sum of the products, for each sale of Common
Shares on each trading day in such period, of (a) the sale price per Common
Share and (b) the number of Common Shares sold by (ii) the total number of
Common Shares sold during such period.
Notice of the special redemption of any Convertible Preferred Shares shall
be mailed by first-class mail to each holder of record of Convertible
Preferred Shares to be redeemed at the address of each such holder as shown on
the Company's records, not less than 30 nor more than 90 days prior to the
Special Redemption Call Date. Neither the failure to mail any notice required
nor any defect therein or in the mailing thereof, to any particular holder,
shall affect the sufficiency of the notice or the validity of the proceedings
for redemption with respect to the other holders. Each such mailed notice
shall state, as appropriate: (1) the Special Redemption Call Date; (2) the
Special Redemption Price (including the amount of the Special Redemption Price
consisting of cash and the amount of the Special Redemption Price consisting
of Common Shares, together with calculations supporting the determination of
the number of Common Shares constituting a portion of the Special Redemption
Price); (3) the place or places at which certificates for such shares are to
be surrendered; and (4) that dividends on the shares to be redeemed shall
cease to accrue on such redemption date except as otherwise provided herein.
Notice having been mailed as aforesaid, from and after the Special Redemption
Call Date (unless the Company shall fail to make available an amount of cash
necessary to effect such redemption), (i) except as otherwise provided herein,
dividends on the Convertible Preferred Shares so called for redemption shall
cease to accrue, (ii) such shares shall no longer be deemed to be outstanding
and (iii) all rights of the holders thereof as holders of Convertible
Preferred Shares shall cease (except the right to receive the Special
Redemption Price, without interest thereon, upon surrender and endorsement of
their certificates if so required).
"Fair Market Value" shall mean the Weighted Average Trading Price for the
Common Shares for the 20 trading days of the special redemption (the "Special
Redemption Call Date").
Conversion
A holder of Convertible Preferred Shares shall have the right, at his or her
option, upon the earliest to occur of (i) September , 1998, (ii) the first
day on which a Change of Control occurs, (iii) the occurrence of a REIT
Termination Event or (iv) such date as determined by the Company (the
"Conversion Date"), to convert all or any portion of such shares (or such
shares as determined by the Company if pursuant to clause (iv) above) into the
number of fully paid and non-assessable Common Shares obtained by dividing the
aggregate Liquidation Preference Amount of such shares by the conversion price
by surrendering such shares to be converted. In the case of Convertible
Preferred Shares called for redemption, conversion rights shall expire at the
close of business on the fifth business day prior to the redemption date fixed
for such redemption.
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"Change of Control" means each occurrence of any of the following: (i) the
acquisition, directly or indirectly, by any individual or entity or group (as
such term is used in Section 13(d)(3) of the Exchange Act) of beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act, except that such
individual or entity shall be deemed to have beneficial ownership of all
shares that any such individual or entity has the right to acquire, whether
such right is exercisable immediately or only after passage of time) of more
than 25.0% of the Company's outstanding shares of beneficial interest with
voting power, under ordinary circumstances, to elect Trustees of the Company;
(ii) other than with respect to the election, resignation or replacement of
any trustee designated, appointed or elected by the holders of the Convertible
Preferred Shares (each a "Preferred Trustee"), during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Trustees of the Company (together with any new trustees whose
election by such Board of Trustees or whose nomination for election by the
shareholders of the Company was approved by a vote of 66 2/3% of the trustees
of the Company (excluding Preferred Trustees) then still in office who were
either trustees at the beginning of such period, or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Trustees then in office; and (iii) (A)
the Company consolidating with or merging into another entity or conveying,
transferring or leasing all or substantially all of its assets (including, but
not limited to, real property investments) to any individual or entity or (B)
any corporation consolidating with or merging into the Company, which in
either event (A) or (B) is pursuant to a transaction in which the outstanding
voting shares of beneficial interest of the Company is reclassified or changed
into or exchanged for cash, securities or other property; provided, however,
that the events described in clause (iii) above shall not be deemed to be a
Change of Control (a) if the sole purpose of such event is that the Company is
seeking to change its domicile or to change its form of organization from a
trust to a corporation or (b) if the holders of the exchanged securities of
the Company immediately after such transaction beneficially own at least a
majority of the securities of the merged or consolidated entity normally
entitled to vote in elections of trustees.
"REIT Termination Event" shall mean the earliest to occur of:
(i) the filing of a federal income tax return by the Company for any
taxable year on which the Company does not elect to be taxed as a real
estate investment trust;
(ii) the approval by the shareholders of the Company of a proposal for
the Company to cease to qualify as a real estate investment trust;
(iii) a determination by the Board of Trustees, based on the advice of
counsel, that the Company has ceased to qualify as a real estate investment
trust; or
(iv) a "determination" within the meaning of Section 1313(a) of the Code,
that the Company has ceased to qualify as a real estate investment trust.
Holders of Convertible Preferred Shares at the close of business on a
dividend payment record date shall be entitled to receive the dividend payable
on such shares on the corresponding Dividend Payment Date notwithstanding the
conversion thereof following such dividend payment record date and prior to
such Dividend Payment Date. However, Convertible Preferred Shares surrendered
for conversion during the period between the close of business on any dividend
payment record date and the opening of business on the corresponding Dividend
Payment Date (except shares converted after the issuance of notice of
redemption with respect to a redemption date during such period, such
Convertible Preferred Shares being entitled to such dividend on the Dividend
Payment Date) must be accompanied by payment of an amount equal to the
dividend payable on such shares on such Dividend Payment Date. A holder of
Convertible Preferred Shares on a dividend payment record date who (or whose
transferee) tenders any such shares for conversion into Common Shares on the
corresponding Dividend Payment Date will receive the dividend payable by the
Company on such Convertible Preferred Shares on such date, and the converting
holder need not include payment of the amount of such dividend upon surrender
of Convertible Preferred Shares for conversion. Except as provided above, the
Company shall make no payment or allowance for unpaid dividends, whether or
not in arrears, on converted shares or for dividends on the Common Shares
issued upon such conversion.
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Each conversion shall be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for Convertible
Preferred Shares shall have been surrendered and such notice shall have been
received by the Company (and if applicable, payment of an amount equal to the
dividend payable on such shares shall have been received by the Company as
described above), and the person or persons in whose name or names any
certificate or certificates for Common Shares shall be issuable upon such
conversion shall be deemed to have become the holder or holders of record of
the shares represented thereby at such time on such date and such conversion
shall be at the conversion price in effect at such time on such date unless
the share transfer books of the Company shall be closed on that date, in which
event such person or persons shall be deemed to have become such holder or
holders of record at the close of business on the next succeeding day on which
such share transfer books are open, but such conversion shall be at the
conversion price in effect on the date on which such shares shall have been
surrendered and such notice received by the Company.
No fractional shares or scrip representing fractions of Common Shares shall
be issued upon conversion of the Convertible Preferred Shares. Instead of any
fractional interest in a Common Share that would otherwise be deliverable upon
the conversion of a Convertible Preferred Share, the Company shall pay to the
holder of such share an amount in cash based upon the current market price of
the Common Shares on the trading day immediately preceding the date of
conversion. If more than one share shall be surrendered for conversion at one
time by the same holder, the number of full Common Shares issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
Convertible Preferred Shares so surrendered.
The conversion price is subject to adjustments upon the occurrence of any of
the following events:
(i) If the Company shall after the Issue Date (A) pay a dividend or make
a distribution on its capital shares in Common Shares, (B) subdivide its
outstanding Common Shares into a greater number of shares, (C) combine its
outstanding Common Shares into a smaller number of shares or (D) issue any
shares of beneficial interest by reclassification of its Common Shares;
(ii) If the Company shall issue after the Issue Date rights, options or
warrants to all holders of Common Shares entitling them (for a period
expiring within 45 days after the record date mentioned below) to subscribe
for or purchase Common Shares at a price per share less than 94.0% (100.0%
if a stand-by underwriter is used and charges the Company a commission) of
the fair market value per Common Share on the record date for the
determination of shareholders entitled to receive such rights, options or
warrants;
(iii) If the Company shall distribute to all holders of its Common Shares
any securities of the Company (other than Common Shares) or evidence of its
indebtedness or assets (excluding cumulative cash dividends or
distributions paid with respect to the Common Shares after December 31,
1996 which are not in excess of the following: the sum of (A) the Company's
cumulative undistributed Funds from Operations at December 31, 1996, plus
(B) the cumulative amount of Funds from Operations, as determined by the
Board of Trustees, after December 31, 1996, minus (C) the cumulative amount
of dividends accrued or paid in respect of the Convertible Preferred Shares
or any other class or series of preferred shares of beneficial interest of
the Company after the Issue Date or rights, options or warrants to
subscribe for or purchase any of its securities (excluding those rights,
options and warrants issued to all holders of Common Shares entitling them
for a period expiring within 45 days after the record date referred to in
clause (ii) above to subscribe for or purchase Common Shares, which rights,
options and warrants are referred to in and treated under clause (ii)
above)); or
(iv) In case a tender or exchange offer (which term shall not include
open market repurchases by the Company) made by the Company or any
subsidiary of the Company for all or any portion of the Common Shares shall
expire and such tender or exchange offer shall involve the payment by the
Company or such subsidiary of consideration per Common Share having a fair
market value (as determined in good faith by the Board of Trustees, whose
determination shall be conclusive and described in a resolution of the
Board of Trustees), at the last time (the "Expiration Time") tenders or
exchanges may be made pursuant to such tender or exchange offer, that
exceeds the current market price per Common Share on the trading day next
succeeding the Expiration Time.
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No adjustment in the conversion price shall be required unless such adjustment
would require a cumulative increase or decrease of at least 1.0% in such
price; provided, however, that any adjustments that by reason of the
immediately preceding clause are not required to be made shall be carried
forward and taken into account in any subsequent adjustment until made. The
adjustments to be made in each such event are set forth in the Declaration of
Trust.
If the Company shall be a party to any transaction (including, without
limitation, a merger, consolidation, statutory share exchange, self tender
offer for all or substantially all of its Common Shares, sale of all or
substantially all of the Company's assets or recapitalization of the Common
Shares) (each of the foregoing being referred to herein as a "Transaction"),
in each case as a result of which all or substantially all of the Company's
Common Shares are converted into the right to receive shares, securities or
other property (including cash or any combination thereof), each Convertible
Preferred Share which is not redeemed or converted into the right to receive
shares, securities or other property prior to such Transaction shall
thereafter be convertible into the kind and amount of shares, securities and
other property (including cash or any combination thereof) receivable upon the
consummation of such Transaction by a holder of that number of Common Shares
into which one Convertible Preferred Share was convertible immediately prior
to such Transaction.
Limitation on Issuance of Additional Preferred Shares and Indebtedness
Without the written consent of the holders of two-thirds of the issued and
outstanding Convertible Preferred Shares, none of the Company, the Operating
Partnership or any of their subsidiaries may issue any additional preferred
securities of any such entity or incur any indebtedness (other than trade
payables or accrued expenses incurred in the ordinary course of business) if,
immediately following such issuance and after giving effect to such issuance
and the application of the net proceeds therefrom, such entity would be
reasonably expected to not satisfy one or both of the following ratios:
(i) Total Debt and liquidation value of non-convertible preferred shares
of beneficial interest to Total Market Capitalization of less than .65 to
1.0; or
(ii) Consolidated EBITDA to Consolidated Fixed Charges of at least 1.4 to
1.0.
In the event that the Company fails to satisfy one or both of the tests in
clause (i) or (ii) above for two consecutive quarters, the holders of
Convertible Preferred Shares shall have the right to require that the Company,
to the extent that the Company shall have funds legally available therefor,
repurchase any or all of each holder's Convertible Preferred Shares at a
repurchase price payable in cash in an amount equal to 100% of the liquidation
preference thereof, plus accrued and unpaid dividends whether or not declared,
if any (the "Repurchase Payment"), to the date of repurchase or the date
payment is made available (the "Repurchase Date"), pursuant to the offer
described below (the "Repurchase Offer").
Within 15 days following the second consecutive quarter that the Company
fails to satisfy one or both of the tests in clause (i) or (ii) above, the
Company shall mail by first class mail or overnight courier a notice to all
holders of Convertible Preferred Shares stating (i) that the Company failed to
satisfy one or both of the tests (naming the test(s) failed), (ii) that the
holders of Convertible Preferred Shares have the right to require the Company
to repurchase any or all Convertible Preferred Shares then held by such holder
in cash, (iii) the date of repurchase (which shall be a business day, no
earlier than 120 days and no later than 150 days from the date such notice is
mailed, or such later date as may be necessary to comply with the requirements
of the Exchange Act), (iv) the repurchase price for the repurchase and (v) the
instructions determined by the Company that the holder must follow in order to
have its Convertible Preferred Shares repurchased.
On the Repurchase Date, the Company will, to the extent lawful, accept for
payment Convertible Preferred Shares or portions thereof tendered pursuant to
the Repurchase Offer and promptly mail by first class mail or overnight
courier or by wire transfer of immediately available funds to the holder of
Convertible Preferred Shares, as directed by such holder, payment in an amount
equal to the Repurchase Payment in respect of all Convertible Preferred Shares
or portions thereof so tendered.
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"Total Debt" means the sum of (without duplication) any indebtedness,
whether or not contingent, in respect of borrowed money or evidenced by bonds,
notes, debentures, or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or representing the balance
deferred and unpaid of the purchase price of any property (including pursuant
to capital leases), except any such balance that constitutes an accrued
expense or trade payable, if and to the extent such indebtedness would appear
as a liability upon a balance sheet of such entity prepared on a consolidated
basis in accordance with Generally Accepted Accounting Principles ("GAAP"),
and also includes, to the extent not otherwise included, the guarantee of
items which would be included within this definition.
"Total Market Capitalization" means the sum of: (a) the fair market value of
the outstanding Common Shares, assuming (i) the full exchange of outstanding
partnership units (in each case not held by the Company) of the Operating
Partnership for Common Shares and (ii) the conversion of the outstanding
shares of Convertible Preferred Shares into Common Shares; (b) the aggregate
Liquidation Preference of any outstanding preferred shares of beneficial
interest other than the Convertible Preferred Shares; and (c) the Total Debt
of the Company.
"Consolidated EBITDA" for any period means the consolidated net income of
the Company (before extraordinary income or gains) as reported in the
Company's financial statements filed with the Securities and Exchange
Commission increased by the sum of the following (without duplication):
(i) all income and state franchise taxes paid or accrued according to
GAAP for such period (other than income taxes attributable to
extraordinary, unusual or non-recurring gains or losses except to the
extent that such gains were not included in Consolidated EBITDA);
(ii) all interest expense paid or accrued in accordance with GAAP for
such period (including financing fees and amortization of deferred
financing fees and amortization of original issue discount);
(iii) depreciation and depletion reflected in such reported net income;
(iv) amortization reflected in such reported net income, including,
without limitation, amortization of capitalized debt issuance costs (only
to the extent that such amounts have not been previously included in the
amount of Consolidated EBITDA pursuant to clause (ii) above), goodwill,
other intangibles and management fees; and
(v) any other non-cash charges or discretionary prepayment penalties, to
the extent deducted from consolidated net income (including, but not
limited to, income allocated to minority interests).
"Consolidated Fixed Charges" for any period means the sum of:
(i) all interest expense paid or accrued in accordance with GAAP for such
period (including financing fees and amortization of deferred financing
fees and amortization of original issue discount);
(ii) preferred shares of beneficial interest dividend requirements for
such period, whether or not declared or paid; and
(iii) regularly scheduled amortization of principal during such period
(other than any balloon payments at maturity).
Ranking
Any class or series of shares of beneficial interest of the Company shall be
deemed to rank: (i) prior to the Convertible Preferred Shares, as to the
payment of dividends and as to distribution of assets upon liquidation,
dissolution or winding up, if the holders of such class or series shall be
entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of Convertible Preferred Shares; (ii) on a parity with
the Convertible Preferred Shares, as to the payment of dividends and as to
distribution of assets upon liquidation, dissolution or winding up, whether or
not the dividend rates, dividend payment dates or redemption or liquidation
prices per share thereof shall be different from those of the Convertible
Preferred Shares, if the holders of such class or series and the Convertible
Preferred Shares shall be entitled to the receipt of dividends and of amounts
distributable upon liquidation, dissolution or
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winding up in proportion to their respective amounts of accrued and unpaid
dividends per share or liquidation preferences, without preference or priority
one over the other ("Parity Shares"); (iii) junior to the Convertible
Preferred Shares, as to the payment of dividends or as to the distribution of
assets upon liquidation, dissolution or winding up, if such class or series
shall be Junior Shares; and (iv) junior to the Convertible Preferred Shares,
as to the payment of dividends and as to the distribution of assets upon
liquidation, dissolution or winding up, if such class or series shall be Fully
Junior Shares.
Voting Rights
If and whenever (i) two consecutive quarterly dividends payable on the
Convertible Preferred Shares or any series or class of Parity Shares shall be
in arrears (which shall, with respect to any such quarterly dividend, mean
that any such dividend has not been paid in full), whether or not earned or
declared, or (ii) for two consecutive quarterly dividend periods the Company
fails to pay dividends on the Common Shares in an amount per share at least
equal to $ , the number of trustees then constituting the Board of
Trustees shall be increased by one (unless the then current Board of Trustees
consists of more than 10 trustees in which can it shall be increased by two)
and the holders of Convertible Preferred Shares, together with the holders of
shares of every other series of Parity Shares (any such other series, the
"Voting Preferred Shares"), voting as a single class regardless of series,
shall be entitled to elect the one or two additional trustees to serve on the
Board of Trustees at any annual meeting of shareholders or special meeting
held in place thereof, or at a special meeting of the holders of the
Convertible Preferred Shares and the Voting Preferred Shares called as
described below.
Whenever all arrears in dividends on the Convertible Preferred Shares and
the Voting Preferred Shares then outstanding shall have been paid and
dividends thereon for the current quarterly dividend period shall have been
paid or declared and set apart for payment, or the Company has paid dividends
on the Common Shares in an amount per share at least equal to $ for two
consecutive quarters, then the right of the holders of the Convertible
Preferred Shares and the Voting Preferred Shares to elect such additional
trustee(s) shall cease (but subject always to the same provision for the
vesting of such voting rights in the case of any similar future arrearage in
quarterly dividends), and the terms of office of all persons elected as
trustees by the holders of the Convertible Preferred Shares and the Voting
Preferred Shares shall forthwith terminate and the number of the Board of
Trustees shall be reduced accordingly.
So long as any Convertible Preferred Shares are outstanding, in addition to
any other vote or consent of shareholders required by law or by the
Declaration of Trust, the affirmative vote of at least 66 2/3% of the votes
entitled to be cast by the holders of the Convertible Preferred Shares given
in person or by proxy, either in writing without a meeting or by vote at any
meeting called for the purpose, shall be necessary for effecting or
validating: (i) any amendment, alteration or repeal of any of the provisions
of the Declaration of Trust that materially and adversely affects the voting
powers, rights or preferences of the holders of the Convertible Preferred
Shares; provided, however, that the amendment of the provisions of the
Declaration of Trust so as to authorize or create or to increase the
authorized amount of, any Fully Junior Shares, Junior Shares that are not
senior in any respect to the Convertible Preferred Shares or any Parity Shares
shall not be deemed to materially adversely affect the voting powers, rights
or preferences of the holders of Convertible Preferred Shares; or (ii) a share
exchange that affects the Convertible Preferred Shares, a consolidation with
or merger of the Company into another entity, or a consolidation with or
merger of another entity into the Company, unless in each such case each
Convertible Preferred Share (A) shall remain outstanding without a material
and adverse change to its terms and rights or (B) shall be converted into or
exchanged for convertible preferred shares of the surviving entity having
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms or conditions of
redemption thereof identical to that of a Convertible Preferred Share (except
for changes that do not materially and adversely affect the holders of the
Convertible Preferred Shares); provided, however, that no such vote of the
holders of Convertible Preferred Shares shall be required if, at or prior to
the time when such amendment, alteration or repeal is to take effect, or when
the issuance of any such prior shares or convertible security is to be made,
as the case may be, provision is made for the redemption of all Convertible
Preferred Shares at the time outstanding to the extent such redemption is
authorized. See "--Redemption."
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Each Convertible Preferred Share shall have one vote per share, except that
when any other series of Preferred Shares shall have the right to vote with
the Convertible Preferred Shares as a single class on any matter, then the
Convertible Preferred Shares and such other series shall have with respect to
such matters one vote per $ .
Registration Rights
The Company has granted Security Capital Preferred Growth certain "demand"
and "piggyback" registration rights with respect to the Common Shares acquired
by it upon conversion of the Convertible Preferred Shares into Common Shares.
Subject to certain conditions, such demand registration rights permit holders
of such Shares to request one demand registration. Subject to certain
conditions, such piggyback registration rights permit the holders of such
Shares to include their Common Shares in the registration by the Company of
its equity securities other than in connection with the registration by the
Company under the Securities Act of any of its securities (i) pursuant to a
shelf registration statement, (ii) in connection with mergers or acquisitions
or (iii) in connection with an employee benefit, share dividend, share
ownership or dividend reinvestment plan.
General
The transfer agent and registrar for the Convertible Preferred Shares is
.
The Company does not intend to list or qualify the Convertible Preferred
Shares for trading on any exchange or on the Nasdaq National Market.
The Convertible Preferred Shares will, when issued, be duly authorized,
fully paid and nonassessable and will have no preemptive rights.
COMMON SHARES
All Common Shares offered hereby will, when issued, be duly authorized,
fully paid and nonassessable. Subject to the preferential rights of the
Convertible Preferred Shares and any other class or series of shares of
beneficial interest and to the provisions of the Declaration of Trust
regarding the Excess Shares and Convertible Preferred Shares, holders of
Common Shares will be entitled to receive distributions on such shares if, as
and when authorized and declared by the Board of Trustees out of assets
legally available therefor and to share ratably in the assets of the Company
legally available for distribution to the shareholders in the event of the
liquidation, dissolution or winding-up of the Company after payment of, or
adequate provision for, all known debts and liabilities of the Company. The
Company intends to pay quarterly distributions, beginning with the quarter
ending December 31, 1997. See "Distribution Policy."
The Convertible Preferred Shares are entitled to payment of distributions at
the rate declared on the Common Shares if such rate is greater than the stated
distribution rate on the Convertible Preferred Shares. Accordingly, at such
time as the distribution rate on the Common Shares is greater than the stated
rate on the Convertible Preferred Shares, holders of Convertible Preferred
Shares will be entitled to participate in any further growth of Funds from
Operations together with the holders of Common Shares.
Subject to the provisions of the Declaration of Trust regarding Excess
Shares and Convertible Preferred Shares, each outstanding Common Share
entitles the holder to one vote on all matters submitted to a vote of
shareholders, including the election of trustees and, except as otherwise
required by law or except as provided with respect to any other class or
series of shares of beneficial interest, the holders of such shares will
possess exclusive voting power. There is no cumulative voting in the election
of trustees, which means that the holders of a majority of the outstanding
Common Shares can elect all of the trustees then standing for election, and
the holders of the remaining shares will not be able to elect any trustees.
Holders of the Convertible Preferred Shares and Common Shares have no
conversion, sinking fund, redemption rights, exchange rights or preemptive
rights to subscribe for any securities of the Company.
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Subject to the provisions of the Declaration of Trust regarding Excess
Shares, Common Shares will have equal dividend, distribution, liquidation and
other rights, and will have no preference, appraisal (except as provided by
Maryland law) or exchange rights.
Pursuant to Maryland REIT Law, a Maryland real estate investment trust
generally cannot dissolve, amend its declaration of trust or merge, unless
approved by the affirmative vote or written consent of shareholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be
cast on the matter) is set forth in the trust's declaration of trust. The
Company's Declaration of Trust contains such a provision providing for a
lesser percentage, a majority of outstanding shares, with respect to
transactions pursuant to which the Company's assets will be combined with
those of one or more other entities (whether by merger, sale or other transfer
of assets, consolidation or share exchange).
The transfer agent and registrar for the Common Shares is LaSalle National
Bank.
The Company has applied for listing of the Common Shares on the NYSE under
the trading symbol "PGE."
ADDITIONAL PREFERRED SHARES
Additional Preferred Shares may be issued from time to time, in one or more
series, as authorized by the Board of Trustees. Other than the Convertible
Preferred Shares, no Preferred Shares are currently issued or outstanding.
Prior to the issuance of shares of each series, the Board of Trustees is
required by the Maryland REIT Law and the Declaration of Trust to fix for each
series the terms, preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms or
conditions of redemption, as permitted by Maryland law. Because the Board of
Trustees has the power to establish the preferences, powers and rights of each
series of Preferred Shares, it may afford the holders of any series of
Preferred Shares preferences, powers and rights, voting or otherwise, senior
to the rights of holders of Common Shares. The issuance of additional series
of Preferred Shares could have the effect of delaying or preventing a change
of control of the Company that might involve a premium price for holders of
Common Shares or otherwise be in their best interest. The Board of Trustees
has no present plans to issue any additional series of Preferred Shares.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For the Company to qualify as a REIT under the Code, among other things, no
more than 50.0% in value of its outstanding shares of beneficial interest may
be owned, actually or constructively under the applicable attribution rules of
the Code, by five or fewer individuals (as defined in the Code to include
certain tax-exempt entities other than, in general, qualified domestic pension
funds) during the last half of a taxable year (other than the first year for
which the election to be taxed as a REIT has been made) or during a
proportionate part of a shorter taxable year (the "five or fewer
requirement"). In addition, if the Company, or an owner of 10.0% or more of
the Company, actually or constructively owns 10.0% or more of a tenant of the
Company (or a tenant of any partnership in which the Company is a partner),
the rent received by the Company (either directly or through any such
partnership) from such tenant will not be qualifying income for purposes of
the REIT gross income tests of the Code. A REIT's stock or beneficial
interests must also be owned by 100 or more persons during at least 335 days
of a taxable year of 12 months or during a proportionate part of a shorter
taxable year (other than the first year for which an election to be treated as
a REIT has been made).
Because the Company expects to qualify as a REIT, the Declaration of Trust
contains restrictions on the ownership and transfer of Common Shares which are
intended to assist the Company in complying with these requirements. The
Ownership Limit set forth in the Declaration of Trust provides that, subject
to certain specified exceptions, no person or entity may own, or be deemed to
own by virtue of the applicable constructive ownership provisions of the Code,
more than 9.9% (by number or value, whichever is more restrictive) of the
outstanding Common Shares. The constructive ownership rules of the Code are
complex, and may cause Common Shares owned actually or constructively by a
group of related individuals and/or entities to be deemed to be
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constructively owned by one individual or entity. As a result, the acquisition
of less than 9.9% of the Common Shares (or the acquisition of an interest in
an entity that owns, actually or constructively, Common Shares) by an
individual or entity, could, nevertheless cause that individual or entity, or
another individual or entity, to be deemed to own constructively in excess of
9.9% of the outstanding Common Shares and thus to violate the Ownership Limit,
or such other limit as provided in the Declaration of Trust or as otherwise
permitted by the Board of Trustees. Pension plans and mutual funds are among
the entities that are not treated as holders of stock or beneficial interests
under the five or fewer requirement and instead the beneficial owners of such
entities are counted as holders for this purpose. The Board of Trustees may,
but in no event will be required to, waive the Ownership Limit or such other
limit as provided in the Declaration of Trust with respect to a particular
shareholder if it determines that such ownership will not jeopardize the
Company's status as a REIT and the Board of Trustees otherwise decides such
action would be in the best interest of the Company. As a condition of such
waiver, the Board of Trustees may require a ruling from the IRS or an opinion
of counsel satisfactory to it with respect to preserving the REIT status of
the Company.
The Company has waived the Ownership Limitation set forth in the Declaration
of Trust with respect to the Common Shares to permit Security Capital
Preferred Growth to own, at any one time, the Common Shares issuable upon
conversion of the Convertible Preferred Shares.
The Declaration of Trust further prohibits (i) any person from actually or
constructively owning shares of beneficial interest of the Company that would
result in the Company being "closely held" under Section 856(h) of the Code
(i.e., a violation of the five or fewer requirement) or otherwise cause the
Company to fail to qualify as a REIT and (ii) any person from transferring
shares of beneficial interest of the Company if such transfer would result in
shares of beneficial interest of the Company being owned by fewer than 100
persons.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of beneficial interest of the Company that
will or may violate any of the foregoing restrictions on transferability of
ownership is required to give notice immediately to the Company and provide
the Company with such other information as the Company may request in order to
determine the effect of such transfer on the Company's status as a REIT.
If any purported transfer of Common Shares of the Company or any other event
would otherwise result in any person violating the Ownership Limit or such
other limit as provided in the Declaration of Trust then any such purported
transfer will be void and of no force or effect with respect to the purported
transferee (the "Prohibited Transferee") as to that number of shares in excess
of the Ownership Limit or such other limit as provided in the Declaration of
Trust and the Prohibited Transferee shall acquire no right or interest in such
excess shares. Any such excess shares described above will be converted
automatically into an equal number of Excess Shares (the "Shares-in-Trust")
and transferred automatically, by operation of law, to a trust (the "Share
Trust"), the beneficiary of which will be selected by the Company (the
"Beneficiary"). Such automatic transfer shall be deemed to be effective as of
the close of business on the business day prior to the date of such violative
transfer. At any time after the expiration of a 90-day period which commences
upon the receipt of notice from the Company of the transfer of Shares-in-Trust
to the Share Trust and during which the Company shall have the right to
purchase such Shares-in-Trust, the trustee of the Share Trust (who shall be
designated by the Company and be unaffiliated with the Company or any
Prohibited Transferee) shall have the right to sell such Shares-in-Trust to a
person or entity who could own such shares without violating the Ownership
Limit or such other limit as provided in the Declaration of Trust and
distribute to the Prohibited Transferee an amount equal to the lesser of the
price paid by the Prohibited Transferee for such Shares-in-Trust or the sales
proceeds received by the Share Trust for such Shares-in-Trust. In the case of
any Shares-in-Trust issued as a result of any event other than a transfer, or
from a transfer for no consideration (such as a gift), the trustee will be
required to sell such Shares-in-Trust to a qualified person or entity and
distribute to the Prohibited Transferee an amount equal to the lesser of the
Market Price (as defined in the Declaration of Trust) of such Shares-in-Trust
as of the date of such event or the sales proceeds received by the trust for
such Shares-in-Trust. In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee will be distributed to the
Beneficiary. Prior to a sale of any
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such Shares-in-Trust by the Share Trust, the trustee will be entitled to
receive, in trust for the Beneficiary, all dividends and other distributions
paid by the Company with respect to such Shares-in-Trust, and also will be
entitled to exercise all voting rights with respect to such Shares-in-Trust.
Subject to Maryland law, effective as of the date that such Shares-in-Trust
have been transferred to the Share Trust, (i) any vote cast by a Prohibited
Transferee prior to the discovery by the Company that such Shares-in-Trust
have been transferred to the Share Trust will be void and of no force or
effect and (ii) the trustee shall have the authority to recast such vote in
accordance with the desires of the trustee acting for the benefit of the
Beneficiary. Any dividend or other distribution paid to the Prohibited
Transferee (prior to the discovery by the Company that such Shares-in-Trust
have been automatically transferred to the Share Trust as described above)
will be required to be repaid to the trustee for distribution to the
Beneficiary.
In addition, Shares-in-Trust held in the Share Trust shall be deemed to have
been offered for sale to the Company, or its designee, at a price per share
equal to the lesser of (i) the price per share in the transaction that
resulted in such transfer to the Share Trust (or in the case of a devise or
gift, the Market Price at the time of such devise or gift) and (ii) the Market
Price on the date the Company, or its designee, accepts such offer. The
Company shall have the right to accept such offer for a period of 90 days.
If any purported transfer of Common Shares would cause the Company to be
beneficially owned by fewer than 100 persons, such transfer will be null and
void in its entirety and the intended transferee will acquire no rights to
Common Shares.
The foregoing restrictions on transferability and ownership will not apply
if the Board of Trustees determines that it is no longer in the best interest
of the Company to attempt to qualify, or to continue to qualify, as a REIT and
such determination is approved by an affirmative vote of two-thirds of the
votes entitled to be cast on such matter at a regular or special meeting of
the shareholders of the Company. Except as otherwise described above, any
change in the Ownership Limit would require an amendment to the Declaration of
Trust. Subject to certain limited exceptions, amendments to the Declaration of
Trust require the affirmative vote of holders owning at least two-thirds of
the shares of beneficial interest of the Company outstanding and entitled to
vote thereon.
All certificates representing Common Shares of the Company will bear a
legend referring to the restrictions described above.
If the foregoing transfer restrictions are determined to be void or invalid
by virtue of any legal decision, statute, rule or regulation, then the
intended transferee of any Excess Shares may be deemed, at the option of the
Company, to have acted as agent on behalf of the Company in acquiring such
Excess Shares and to hold such Excess Shares on behalf of the Company.
Under the Declaration of Trust, every owner of more than 5% (or such lower
percentage as required by the Code or Treasury Regulations) of the outstanding
Common Shares must file, within 30 days after January 1 of each year, a
written notice with the Company containing information regarding their
ownership of such shares. Under current Treasury Regulations, the percentage
will be set between one-half of 1% and 5%, depending upon the number of record
holders of the Company's shares. Further, each shareholder shall upon demand
be required to disclose to the Company in writing such information as the
Company may request in order to determine the effect, if any, of such
shareholder's actual and constructive ownership of Common Shares on the
Company's status as a REIT.
The foregoing ownership limitations may have the effect of precluding
acquisition of control of the Company without the consent of the Board of
Trustees and, consequently, shareholders may be unable to realize a premium
for their shares over the then-prevailing market price which is customarily
associated with such acquisitions and to ensure compliance with the Ownership
Limit, or such other limit as provided in the Declaration of Trust.
These restrictions will not preclude settlement for transactions through the
NYSE.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S DECLARATION OF TRUST
AND BYLAWS
The following paragraphs summarize certain provisions of Maryland law and of
the Declaration of Trust and the Bylaws of the Company. This summary does not
purport to be complete and is subject to and qualified in its entirety by
reference to the MGCL, the Maryland REIT Law, the Declaration of Trust and the
Bylaws, forms of which are exhibits to the Registration Statement of which
this Prospectus is a part.
CLASSIFICATION OF THE BOARD OF TRUSTEES
The Declaration of Trust provides that the number of trustees of the Company
shall be seven (subject to the rights of the holders of Convertible Preferred
Shares to elect additional trustees upon the occurrence of certain events),
which number may be increased or decreased pursuant to the Bylaws, but shall
not be fewer than three. The Bylaws currently provide that the Board of
Trustees will consist of not fewer than three nor more than thirteen trustees.
Any vacancy will be filled, at any regular meeting or at any special meeting
called for that purpose, by the affirmative vote of a majority of the
remaining trustees, even though less than a quorum of the Board of Trustees
may exist.
Pursuant to the terms of the Declaration of Trust, the Board of Trustees is
divided into three classes as nearly equal in size as practicable. One class
will hold office initially for a term expiring at the annual meeting of
shareholders to be held in 1999, another class will hold office initially for
a term expiring at the annual meeting of shareholders to be held in 2000 and
another class will hold office initially for a term expiring at the annual
meeting of shareholders to be held in 2001. As the term of each class expires,
trustees in that class will be elected for a term of three years and until
their successors are duly elected and qualified, and the trustees in the other
two classes will continue in office. The Company believes that classification
of the Board of Trustees will help to assure the continuity and stability of
the Company's business strategies and policies as determined by the Board of
Trustees.
The classified board provision could have the effect of making the removal
of incumbent trustees more time-consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its shareholders. At least two annual meetings of
shareholders, instead of one, will generally be required to effect a change in
a majority of the Board of Trustees. Thus, the classified board provision
could increase the likelihood that incumbent trustees will retain their
positions. Holders of Common Shares will have no right to cumulative voting
for the election of trustees. Consequently, at each annual meeting of
shareholders, the holders of a majority of the Common Shares will be able to
elect all of the successors of the class of trustees whose term expires at
that meeting. See "Risk Factors."
REMOVAL OF TRUSTEES
While the Declaration of Trust empowers the Shareholders to fill vacancies
in the Board of Trustees that are caused by the removal of a trustee, the
Declaration of Trust also precludes shareholders from removing incumbent
trustees except upon a substantial affirmative vote. Specifically, the
Declaration of Trust provides that a trustee may be removed only for cause and
only by the affirmative vote of at least two-thirds of the votes then entitled
to be cast in the election of trustees. Under the Maryland REIT law, the term
"cause" is not defined and is, therefore, subject to Maryland common law and
to judicial interpretation and review in the context of the unique facts and
circumstances of any particular situation. This provision, when coupled with
the provision in the Bylaws authorizing the Board of Trustees to fill vacant
trusteeships, precludes shareholders from removing incumbent trustees except
upon a substantial affirmative vote and filling the vacancies created by such
removal with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, as applicable to Maryland REITs, certain "business
combinations" (including a merger, consolidation, share exchange or, in
certain circumstances, an asset transfer or issuance or reclassification of
equity securities) between the Company and any Interested Shareholder or an
affiliate thereof are prohibited for
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five years after the most recent date on which the Interested Shareholder
became an Interested Shareholder. Thereafter, any such business combination
must be recommended by the Board of Trustees and approved by the affirmative
vote of at least (a) 80.0% of the votes entitled to be cast by holders of the
Company's outstanding voting shares of beneficial interest and (b) two-thirds
of the votes entitled to be cast by holders of the Company's outstanding
voting shares of beneficial interest other than shares held by the Interested
Shareholder with whom the business combination is to be effected, unless,
among other things, the Company's shareholders receive a minimum price (as
defined in the MGCL) for their shares of beneficial interest and the
consideration is received in cash or in the same form as previously paid by
the Interested Shareholder for its shares. These provisions of the MGCL do not
apply, however, to business combinations that are approved or exempted by the
Board of Trustees of the Company prior to the time that the Interested
Shareholder becomes an Interested Shareholder. As permitted by the MGCL, the
Board of Trustees of the Company has opted out of the business combinations
provisions of the MGCL with respect to any business combination involving
Prime, the Primestone Joint Venture or any of the Contributors, or any of
their respective affiliates (including Mr. Reschke). In addition, the
Partnership Agreement requires that any merger or sale of all or substantially
all of the assets of the Operating Partnership be approved by the holders of
at least 50.0% of the Common Units, including the Common Units held by the
Company.
CONTROL SHARE ACQUISITIONS
The MGCL, as applicable to Maryland REITs, provides that "control shares" of
a Maryland real estate investment trust acquired in a "control share
acquisition" have no voting rights except to the extent approved by a vote of
two-thirds of the votes entitled to be cast on the matter, excluding shares of
beneficial interest owned by the acquiror or by officers or trustees who are
employees of the trust.
"Control shares" are voting shares which, if aggregated with all other such
shares previously acquired by the acquiror or in respect of which the acquiror
is able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing trustees within one of the following ranges of voting power:
(i) one-fifth or more but less than one-third, (ii) one-third or more but less
than a majority or (iii) a majority or more of all voting power. Control
shares do not include shares the acquiring person is then entitled to vote as
a result of having previously obtained shareholder approval. A "control share
acquisition" means the acquisition of control shares, subject to certain
exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Trustees to call a special meeting of shareholders to
be held within 50 days of demand to consider the voting rights of the shares.
If no request for a meeting is made, the Company may itself present the
question at any shareholders' meeting.
If voting rights are not approved at the shareholders' meeting or if the
acquiring person does not deliver an acquiring person statement as required by
the MGCL, then, subject to certain conditions and limitations, the trust may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
shareholders at which the voting rights of such shares of beneficial interest
are considered and not approved. If voting rights for control shares are
approved at a shareholders' meeting and the acquiror becomes entitled to vote
a majority of the shares of beneficial interest entitled to vote, all other
shareholders may exercise appraisal rights. The fair value of the shares of
beneficial interest as determined for purposes of such appraisal rights may
not be less than the highest price per share paid by the acquiror in the
control share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context
of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the Company is a party to the
transaction or to acquisitions approved or exempted by the trust's declaration
of trust or bylaws.
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The Bylaws contain a provision exempting from the control share acquisition
statute any and all acquisitions by any person of the Company's shares of
beneficial interest. There can be no assurance that such provision will not be
amended or eliminated at any point in the future.
If the foregoing exemption in the Bylaws is rescinded, the control share
acquisition statute could have the effect of discouraging offers to acquire
the Company and of increasing the difficulty of consummating any such offer.
AMENDMENT TO THE DECLARATION OF TRUST
The Declaration of Trust, with certain limited exceptions, may be amended
with the affirmative vote of the holders of not less than a majority of the
aggregate number of shares of beneficial interest outstanding and entitled to
vote thereon voting generally in the election of trustees. The provisions
relating to the classification of the Board of Trustees and removal of
trustees may be amended only by the affirmative vote of the holders of not
less than two-thirds of the aggregate number of shares of beneficial interest
outstanding and then entitled to vote thereon voting generally in the election
of trustees.
Under the Maryland REIT Law, a declaration of trust may permit the trustees
by a two-thirds vote to amend the declaration of trust from time to time to
qualify as a REIT under the Code or the Maryland REIT Law without the
affirmative vote or written consent of the shareholders. The Company's
Declaration of Trust permits such action by the Board of Trustees. Also under
the Maryland REIT Law, a declaration of trust may permit the board of trustees
to amend the declaration of trust to increase or decrease the aggregate number
of shares of beneficial interest or the number of shares of any class without
shareholder approval. Pursuant to this statute, the Declaration of Trust
authorizes the Board of Trustees to increase or decrease the aggregate number
of shares of beneficial interest of the Company or the number of shares of
beneficial interest of any class of beneficial interest of the Company without
shareholder approval.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS
The Bylaws provide that (a) with respect to an annual meeting of
shareholders, nominations of persons for election to the Board of Trustees and
the proposal of business to be considered by shareholders may be made only (i)
pursuant to the Company's notice of the meeting, (ii) by the Board of Trustees
or (iii) by a shareholder who is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in the Bylaws and (b)
with respect to special meetings of shareholders, only the business specified
in the Company's notice of meeting may be brought before the meeting of
shareholders and nominations of persons for election to the Board of Trustees
may be made only (i) pursuant to the Company's notice of meeting, (ii) by the
Board of Trustees or (iii) provided that the Board of Trustees has determined
that trustees shall be elected at such meeting, by a shareholder who is
entitled to vote at the meeting and has complied with the advance notice
procedures set forth in the Bylaws.
The provisions in the Declaration of Trust on classification of the Board of
Trustees and amendments to the Declaration of Trust and removal of trustees if
the applicable provision in the Bylaws is revoked, control shares acquisition
provisions of the MGCL, and the advance notice provisions of the Bylaws could
have the effect of discouraging a takeover or other transaction in which
holders of some, or a majority, of the Common Shares might receive a premium
for their shares over the then-prevailing market price or which such holders
might believe to be otherwise in their best interests.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland REIT, the Maryland REIT Law
requires that the Company hold, either directly or indirectly, at least 75.0%
of the value of its assets in real estate assets, mortgages or mortgage
related securities, government securities, cash and cash equivalent items,
including high-grade short-term securities and receivables. The Maryland REIT
Law also prohibits using or applying land for farming, agricultural,
horticultural or similar purposes.
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MEETINGS OF SHAREHOLDERS
The Declaration of Trust and the Bylaws provide for annual meetings of
shareholders, commencing with the year 1999, to elect the Board of Trustees
and transact such other business as may properly be brought before the
meeting. Special meetings of shareholders may be called by the President, the
Board of Trustees or the Chairman of the Board and shall be called at the
request in writing of the holders of 50.0% or more of the outstanding shares
of beneficial interest of the Company entitled to vote.
The Bylaws provide that any action required or permitted to be taken at a
meeting of shareholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by each
shareholder entitled to vote on the matter and a written waiver of any right
to dissent is signed by each shareholder entitled to notice of the meeting but
not entitled to vote at it.
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SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon the completion of the Offering and the consummation of the Formation
Transactions, the Company will have outstanding 2,000,000 Convertible
Preferred Shares and 12,380,000 Common Shares (or 14,237,000 Common Shares if
the Underwriters' over-allotment option is exercised in full). In addition,
the Company has reserved 11,064,343 Common Shares for issuance upon the
exchange of LP Common Units held by Limited Partners or conversion of the
Convertible Preferred Shares. All of the Common Shares offered in the Common
Share Offering will be freely tradeable in the public market by persons other
than "affiliates" of the Company without restriction or registration under the
Securities Act. However, it is unlikely that an active trading market will
develop for the Convertible Preferred Shares, because the Company does not
intend to list or qualify any Convertible Preferred Shares on any exchange or
the Nasdaq National Market.
In addition, upon completion of the Offering and the consummation of the
Formation Transactions, the Company will have 9,064,343 LP Common Units
outstanding issued to the Limited Partners. The Limited Partners have agreed
not to, directly or indirectly, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose of (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of
any option to purchase or other sale or disposition) any LP Common Units or
Common Shares or other shares of beneficial interest of the Company, or any
securities convertible or exercisable or exchangeable for any LP Common Units
or Common Shares or other shares of beneficial interest of the Company for the
applicable Holding Period, and the Company has agreed not to offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) any (other than pursuant to the Share Incentive Plan) Common
Shares or other shares of beneficial interest of the Company, or any
securities convertible or exercisable for any LP Common Units or Common Shares
or other shares of beneficial interest of the Company, for a period of 180
days from the date of this Prospectus, in each case without the prior written
consent of Prudential Securities Incorporated, on behalf of the Underwriters,
subject to certain limited exceptions. Prudential Securities Incorporated, at
any time and without notice, may release all or any portion of the Common
Shares subject to the foregoing lock-up agreements. Following the expiration
of the foregoing restrictions, any Common Shares issued to the Limited
Partners upon exchange of their respective LP Common Units may be sold in the
public market pursuant to registration statements which the Company will be
obligated to file pursuant to the exercise of registration rights that have
been granted by the Company or available exemptions from registration. See "--
Exchange Rights and Registration Rights."
The Common Shares owned by "affiliates" of the Company and the Common Shares
issuable upon exchange of Common Units (other than those issued pursuant to
registration rights, as described below), will be subject to Rule 144
promulgated under the Securities Act ("Rule 144") and may not be sold in the
absence of registration under the Securities Act unless an exemption from
registration is available, including exemptions contained in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated with them in accordance with Rule 144) who has
beneficially owned "restricted securities" (defined generally as securities
acquired from the issuer or an affiliate of the issuer in a transaction not
involving a public offering) for at least one year, and including the holding
period of any prior owner unless such prior owner is an affiliate, would be
entitled to sell within any three-month period a number of Common Shares that
does not exceed the greater of 1.0% of the then-outstanding number of Common
Shares or 1.0% of the average weekly trading volume of the Common Shares on
the NYSE during the four calendar weeks preceding each such sale. Sales under
Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. Any person (or persons whose shares are aggregated with them in
accordance with Rule 144) who is not deemed to have been an affiliate of the
Company at any time during the three months preceding a sale, and who has
beneficially owned shares for at least two years (including any period of
ownership of preceding non-affiliated holders), would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, notice requirements or public information
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requirements. An "affiliate" of the Company is a person that directly, or
indirectly through one or more intermediaries, controls, or is controlled by,
or under common control with, the Company.
The Company has established the Share Incentive Plan for the purpose of
attracting and retaining executive officers, trustees and other key employees.
See "Management--Share Incentive Plan." Upon the completion of the Offering,
it is expected that the Company will issue in the aggregate options to
purchase 1,113,000 Common Shares to executive officers, trustees and certain
key employees and will reserve 737,000 additional Common Shares for future
issuance under the Share Incentive Plan. The Company intends to file a
registration statement under the Securities Act registering the Common Shares
reserved for issuance upon the exercise of options granted under the Share
Incentive Plan. See "Management--Share Incentive Plan." This registration
statement is expected to be filed soon after the date of this Prospectus and
will become effective automatically upon filing. Accordingly, (i) Common
Shares issued upon exercise of options registered under such registration
statement and (ii) Common Shares issuable upon the exchange of Common Units or
the conversion of the Convertible Preferred Shares that are sold pursuant to
an effective registration statement pursuant to the registration rights
discussed below under "--Exchange Rights and Registration Rights," in each
case, will be available for sale in the open market, unless such shares are
Convertible Preferred Shares or subject to vesting restrictions with the
Company and except to the extent that the holders of such options are subject
to the lock-up agreements described above.
Prior to the date of this Prospectus, there has been no public market for
the Common Shares. It is expected that the Common Shares will be approved for
listing on the NYSE, subject to official notice of issuance. No prediction can
be made as to the effect, if any, that future sales of Common Shares
(including sales pursuant to Rule 144) or the availability of Common Shares
for future sale will have on the market price prevailing from time to time.
Sales of substantial amounts of Common Shares (including Common Shares issued
upon the exercise of options, the exchange of Common Units or conversion of
Convertible Preferred Shares) or the perception that such sales could occur,
could adversely affect prevailing market prices of the Common Shares and
impair the Company's ability to obtain additional capital through the sale of
equity securities. See "Risk Factors--Possible Adverse Effects on Share Price
Arising from Shares Eligible for Future Sale." For a description of certain
restrictions on transfers of Common Shares held by certain shareholders of the
Company, see "Description of Shares of Beneficial Interest--Restrictions on
Ownership and Transfer."
EXCHANGE RIGHTS AND REGISTRATION RIGHTS
Subject to certain conditions, beginning 12 months following the completion
of the Offering, each LP Common Unit held by a Limited Partner may be
exchanged for one Common Share (subject to adjustment) or, at the option of
the Company, for cash equal to the fair market value of a Common Share at the
time of exchange. In addition, the Limited Partners have agreed not to sell,
pledge or otherwise transfer their LP Common Units for the applicable Holding
Period without the consent of Prudential Securities Incorporated, on behalf of
the Underwriters. In order to protect the Company's status as a REIT, each
holder of LP Common Units is prohibited from exchanging such LP Common Units
for Common Shares to the extent that as a result of such exchange any person
would own or would be deemed to own, actually or constructively, more than
9.9% of the Common Shares, except to the extent such holder has been granted
an exception to the Ownership Limit. See "Description of Shares of Beneficial
Interest--Convertible Preferred Shares--Certain Registration Rights."
The Company has granted the Limited Partners receiving Common Units in
connection with the Formation Transactions certain "demand" and "piggyback"
registration rights (collectively, the "Registration Rights") with respect to
the Common Shares acquired by them upon exchange of Common Units for Common
Shares. Subject to certain conditions, the demand registration rights permit
the Limited Partners to request up to two demand registrations per year.
Subject to certain conditions, the piggyback registration rights permit the
Limited Partners to include their Common Shares in the registration by the
Company of its Common Shares or other similar equity securities issued by the
Company other than in connection with the registration by the Company under
the Securities Act of any of its securities in connection with mergers,
acquisitions, exchange offers,
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subscription offers, share options or other employee benefit plans. The
Limited Partners may exercise their demand registration rights after one year
following the completion of the Offering. The Limited Partners are classified
by investor groups and may each require up to two registrations per calendar
year per group. The Company has granted the Limited Partners piggyback
registration rights with respect to Common Shares acquired by them by any
means. The Company also has agreed to provide the Registration Rights to any
other person who may become an owner of Common Units, provided such person
provides the Company with satisfactory undertakings. In addition, the Company
has granted registration rights to Security Capital Preferred Growth with
respect to the Common Shares acquired by it upon the conversion of the
Convertible Preferred Shares into Common Shares. See "Description of Shares of
Beneficial Interest--Convertible Preferred Shares--Registration Rights." The
Company will bear expenses arising from the exercise of all of the foregoing
registration rights, except that the Company shall not pay any underwriting
discounts or commissions, transfer taxes, Securities and Exchange Commission
or Blue Sky registration fees relating to registration of such Common Shares.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of material federal income tax considerations
that may be relevant to a prospective holder of Common Shares who purchases
such shares in the Offering. Winston & Strawn has acted as special tax counsel
("Tax Counsel") to the Company in connection with the Offering and the
preparation of this Prospectus. This summary should not be construed as tax
advice. The discussion contained herein does not address all aspects of
federal income taxation that may be relevant to particular holders in light of
their personal investment or tax circumstances, or to certain types of holders
(including, without limitation, insurance companies, financial institutions,
broker-dealers, persons whose functional currency is other than the United
States dollar, persons who hold the Common Shares as part of a straddle,
hedging, or conversion transaction or, except as specifically described
herein, tax-exempt entities and foreign persons) who are subject to special
treatment under the federal income tax laws. In addition, this summary is
generally limited to investors who will hold the Common Shares as "capital
assets" (generally, property held for investment) within the meaning of
Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code").
The statements in this summary are based on current provisions of the Code,
Treasury Regulations promulgated thereunder and administrative and judicial
interpretations thereof, as of the date hereof, all of which are subject to
change, possibly with retroactive effect. The provisions of the Code, the
Treasury Regulations promulgated thereunder and the administrative and
judicial interpretations thereof that concern REITs are highly technical and
complex, and this summary is qualified in its entirety by such Code
provisions, Treasury Regulations, and administrative and judicial
interpretations. No assurance can be given that future legislative, judicial,
or administrative actions or decisions will not affect the accuracy of any
statements in this summary. In addition, no ruling will be sought from the
Internal Revenue Service (the "IRS") with respect to any matter discussed
herein, and there can be no assurance that the IRS or a court will agree with
the statements made herein.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP, AND SALE OF COMMON SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED
AS A REIT, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
GENERAL
The Company intends to make an election to be taxed as a REIT under Sections
856 through 860 of the Code and the applicable Treasury Regulations
promulgated thereunder, which together set forth the requirements for
qualifying as a REIT (the "REIT Requirements"), beginning with its taxable
year ending December 31, 1997. The Company believes that it will be organized
and will operate in such a manner to qualify for taxation as a REIT under the
Code. No assurance can be given, however, that the Company actually will
operate in such a manner to so qualify as a REIT or will continue to operate
in such a manner so as to remain qualified as a REIT.
Subject to the qualifications stated herein and in its opinion, Tax Counsel
has given the Company an opinion that the Company will qualify to be taxed as
a REIT under the Code beginning with its taxable year ending December 31,
1997. An opinion of counsel is not binding on the IRS or a court and there can
be no assurance that the IRS or a court will not take a position different
from that expressed by Tax Counsel. It also must be emphasized that Tax
Counsel's opinion is based on various assumptions and is conditioned upon
numerous representations made by the Company and the Operating Partnership as
to factual matters, including those related to their businesses and properties
as set forth in this Prospectus. Tax Counsel has not independently verified
the Company's representations. Moreover, the Company's qualification and
taxation as a REIT depend upon the Company's ability to meet on a continuing
basis the actual operating results, distribution levels, diversity of
ownership and the various other qualification tests imposed by the Code as
discussed below. Tax Counsel will not review the Company's compliance with
these tests on a continuing basis. Accordingly, no assurance can be
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given that the actual results of the Company's operations for any given
taxable year will satisfy the requirements for qualification and taxation as a
REIT. See "Certain Federal Income Tax Considerations--Failure to Qualify."
Additionally, under the Taxpayer Relief Act of 1997 (the "1997 Tax Act")
various changes have been made to the tax treatment of REITs effective for
taxable years beginning after August 5, 1997. For the Company, these
provisions will be effective beginning January 1, 1998. See "--1997 Taxpayer
Relief Act of 1997--Significant REIT provisions."
TAXATION OF THE COMPANY
For any taxable year in which the Company qualifies for taxation as a REIT,
it generally will not be subject to federal corporate income tax on that
portion of its ordinary income or capital gain that is currently distributed
to its shareholders. The REIT provisions of the Code generally allow a REIT to
deduct dividends paid to its shareholders. This deduction for dividends paid
to shareholders substantially eliminates the federal "double taxation" on
earnings (once at the corporate level and once again at the shareholder level)
that generally results from an investment in a corporation.
Even if the Company continues to qualify for taxation as a REIT, it may be
subject to federal income tax in certain circumstances. First, the Company
will be taxed at regular corporate rates on any undistributed "REIT taxable
income" and undistributed net capital gains. Second, under certain
circumstances, the Company may be subject to the corporate "alternative
minimum tax" on its items of tax preference, if any. Third, if the Company has
(i) net income from the sale or other disposition of "foreclosure property"
which is held primarily for sale to customers in the ordinary course of
business or (ii) other nonqualifying income from foreclosure property, the
Company will be subject to tax on such income at the highest regular corporate
rate (currently 35%). Fourth, if the Company has net income from prohibited
transactions (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of
business, other than foreclosure property), such income will be subject to a
100% tax. Fifth, if the Company should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below), but nonetheless
maintains its qualification as a REIT because certain other requirements are
met, the Company will be subject to a 100% tax on the greater of the amount by
which the Company fails the 75% or the 95% test, multiplied by a fraction
intended to reflect the Company's profitability. Sixth, if the Company should
fail to distribute for each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
periods, the Company will be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. Finally, if the
Company acquires any asset from a C corporation (i.e., generally a corporation
subject to full corporate level tax) in a transaction in which the basis of
the asset in the Company's hands is determined by reference to the basis of
the asset (or any other property) in the hands of the C corporation, and the
Company subsequently recognizes gain on the disposition of such asset during
the ten-year period (the "Recognition Period") beginning on the date on which
the asset was acquired by the Company, then, pursuant to guidelines issued by
the IRS, the excess of (i) the fair market value of the asset as of the
beginning of the applicable Recognition Period, over (ii) the Company's
adjusted basis in such asset as of the beginning of such Recognition Period
(i.e., "built-in gain") will be subject to tax at the highest regular
corporate rate. Pursuant to the 1997 Tax Act, the Company also will be taxed
on any built-in gains during the Recognition Period attributed to the
disposition of assets of an acquired corporation which is a "qualified REIT
subsidiary." See "Certain Federal Income Tax Considerations--Requirements for
Qualification--Qualified REIT Subsidiary."
If the Company invests in properties in foreign countries, the Company's
profits from such investments will generally be subject to tax in the
countries where such properties are located. The precise nature and amount of
any such taxation will depend on the laws of the countries where the
properties are located. If the Company satisfies the annual distribution
requirements for qualification as a REIT and is therefore not subject to
federal corporate income tax on that portion of its ordinary income and
capital gain that is currently distributed to its shareholders, the Company
will generally not be able to recover the cost of any foreign tax imposed on
profits from its foreign investments by claiming foreign tax credits against
its U.S. tax liability on such profits. Moreover, a REIT is not able to pass
foreign tax credits through to its shareholders.
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The Company will use the calendar year for both federal income tax purposes
and financial reporting purposes.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, the Company must meet and continue to meet the
requirements, discussed below, relating to the Company's organization, the
sources of its gross income, the nature of its assets, and the level of
distributions to its shareholders.
Organizational Requirements
The Code requires that a REIT be 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 compliance
with the REIT Requirements;
(iv) which is neither a financial institution nor an insurance company
subject to certain special provisions of the Code;
(v)the beneficial ownership of which is held by 100 or more persons;
(vi) at any time during the last half of each taxable year not more than
50% in value of the outstanding stock or shares of beneficial interest
of which is owned, directly or indirectly through the application of
certain attribution rules, by or for five or fewer individuals (as
defined in the Code to include certain tax-exempt entities other than,
in general, qualified domestic pension funds); and
(vii) which meets certain other tests, described below, regarding the
nature of its income and assets and distribution requirements.
The Code provides that conditions (i) through (iv), inclusive, must be met
during the entire taxable year and that condition (v) 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.
The Company intends to issue sufficient Common Shares to enough holders to
allow the Company to satisfy the requirement set forth in (v) above (the "100
holder" requirement). For purposes of determining ongoing compliance with the
100 holder requirement, Treasury Regulations require the Company to issue
letters to certain shareholders demanding information regarding the amount of
shares each such shareholder actually or constructively owns ("shareholder
demand letters").
As set forth in (vi) above, to qualify as a REIT, the Company must also
satisfy the requirement set forth in Section 856(a)(6) of the Code that it not
be closely held. The Company will not be closely held so long as at all times
during the last half of any taxable year of the Company (other than the first
taxable year for which the REIT election is made) not more than 50% in value
of its outstanding shares of beneficial interest is owned, directly or
constructively under the applicable attribution rules of the Code, by five or
fewer individuals (as defined in the Code to include certain tax-exempt
entities, other than, in general, qualified domestic pension funds) (the "five
or fewer" requirement). Although the Company's Declaration of Trust contains
certain restrictions on the ownership and transfer of the Common Shares, the
restrictions do not ensure that the Company will be able to satisfy the "five
or fewer" requirement. If the Company fails to satisfy the "five or fewer"
requirement, the Company's status as a REIT will terminate, and the Company
will not be able to prevent such termination. However, the 1997 Tax Act states
that, for taxable years beginning after the date of enactment of the 1997 Tax
Act, if the Company complies with the procedures prescribed in Treasury
Regulations for issuing shareholder demand letters and does not know, or with
the exercise of reasonable diligence would not have known, that the five or
fewer requirement was violated, the requirement will be deemed to be satisfied
for the year. See "Certain Federal Income Tax Considerations--Failure to
Qualify."
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Ownership of a Partnership Interest
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT is deemed to own its proportionate share of
the assets of the partnership corresponding to the REIT's capital interest in
such partnership and is deemed to be entitled to the income of the partnership
attributable to such proportionate share. In addition, the character of the
assets and gross income of the partnership retain the same character in the
hands of the REIT for purposes of the REIT Requirements, including satisfying
the gross income tests and the asset tests. Accordingly, the Company's
proportionate share of the assets, liabilities and items of income of the
Operating Partnership, including the Operating Partnership's proportionate
share of the assets, liabilities and items of income of each Property
Partnership, are treated as assets, liabilities and items of income of the
Company for purposes of applying the REIT Requirements, provided that the
Operating Partnership and each of the Property Partnerships are treated as
partnerships for federal income tax purposes. See "Certain Federal Income Tax
Considerations--Tax Aspects of the Company's Investments in Partnerships--
Partnership Classification."
Qualified REIT Subsidiary
If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary,"
within the meaning of section 856(i) of the Code, that subsidiary is
disregarded for federal income tax purposes, and all assets, liabilities, and
items of income, deduction, and credit of the subsidiary are treated as
assets, liabilities and such items of the REIT itself. A "qualified REIT
subsidiary" is a corporation all of the capital stock of which has been owned
by the REIT from the commencement of such corporation's existence. Pursuant to
the 1997 Tax Act, an existing corporation, all of the capital stock of which
is owned by a REIT, could be a "qualified REIT Subsidiary" so long as the
acquired corporation is considered to have liquidated for federal income tax
purposes and any pre-acquisition earnings and profits are distributed before
the end of the REIT's taxable year. Any corporation formed directly by the
Company to act as a general partner in any of the Property Partnerships will
be a qualified REIT subsidiary and thus all of its assets, liabilities, and
items of income, deduction, and credit will be treated as assets, liabilities,
and items of income, deduction and credit of the Company.
Income Tests
To maintain its qualification as a REIT, the Company must satisfy three
gross income requirements annually. First, at least 75% of the Company's gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived directly or indirectly from investments relating to real
property or mortgages on real property (including "rents from real property"
and, in certain circumstances, interest) or from certain types of temporary
investments. Second, at least 95% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must be
derived from such real property investments and from dividends, interest, and
gain from the sale or disposition of stock or securities or from any
combination of the foregoing. Third, gain from the sale or other disposition
of stock or securities held for less than one year, gain from prohibited
transactions, and gain from the sale or other disposition of real property
held for less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of the Company's gross
income (including gross income from prohibited transactions) for each taxable
year. The 1997 Tax Act repeals the 30% limitation for taxable years beginning
after the date of enactment.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent received or accrued with
respect to any property must not be based in whole or in part on the income or
profits derived by any person from such property, although an amount 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 gross receipts or gross sales. Rents received from a tenant that are based
on the tenant's income from the property will not be treated as rents based on
income or profits and thus excluded from the term "rents from real property"
if the tenant derives substantially all of its income with respect to such
property from the leasing or subleasing of
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substantially all of such property, provided that the tenant receives from
subtenants only amounts that would be treated as rents from real property if
received directly by a REIT. Second, rents received from a tenant will not
qualify as "rents from real property" in satisfying the gross income tests if
the REIT, or an owner of 10% or more of the REIT, directly or constructively
owns 10% or more of such tenant (a "Related Party Tenant"). Third, if rent
attributable to personal property, leased in connection with a lease of real
property, is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
"rents from real property." Finally, a REIT generally must not operate or
manage the property or furnish or render services to the tenants of such
property, other than through an "independent contractor" from whom the REIT
derives no income. The independent contractor requirement, however, does not
apply to the extent the services rendered by the REIT are customarily
furnished or rendered in connection with the rental of the real property such
that they are services that a tax-exempt organization could provide to its
tenants without causing its rental income to be unrelated business taxable
income under the Code. A tax-exempt organization may provide services which
are "usually or customarily rendered" in connection with the rental of space
for occupancy only and are not otherwise considered "rendered to the
occupant," without incurring unrelated business taxable income. Pursuant to
the 1997 Tax Act, a de minimis amount of non-customary services will not
disqualify income as rents from real property so long as the value of the
impermissible services does not exceed 1.0% of the gross income for the
property. For these purposes, the services may not be valued at less than 150%
of the REIT's direct cost of providing the services.
Substantially all of the gross income of the Company is expected to be
attributable to investments in real property and specifically to rents
attributable to and gains from the disposition of real property. The Company
does not expect to receive rents based on the net income or profits of a
tenant. Moreover, the Company believes that it will not receive rents in
excess of a de minimis amount (generally rent from certain office space leased
to Prime affiliates) from a Related Party Tenant. The Company also does not
expect to receive any rent attributable to personal property leased in
connection with a lease of real property that exceeds 15% of the total rents
received under any such lease (for this purpose the Company took into account
as personal property the overhead cranes in use at certain of its Industrial
Properties).
The Operating Partnership expects to provide certain services with respect
to the Properties, but does not satisfy the "independent contractor"
requirements described above. To the extent necessary to preserve the
Company's status as a REIT, the Operating Partnership will arrange to have
services provided by independent contractors from whom the Company or
Operating Partnership does not derive or receive any income.
The Operating Partnership may also receive fees in exchange for the
performance of certain usual and customary services relating to properties not
owned entirely by the Operating Partnership. The ratable portion of these fees
attributable to the part of the property not owned by the Operating
Partnership does not constitute qualifying income under the 75% or 95% gross
income tests. The remainder of these fees is ignored under the 75% and 95%
gross income test so long as the Company has a significant interest in such
property. The Company believes that the aggregate amount of such nonqualifying
fees (and any other nonqualifying income) in any taxable year will not exceed
the limits on nonqualifying income under the gross income tests described
above.
The Properties include a 398-space parking facility for which the Company,
through the Operating Partnership, receives fees. This parking facility will
be operated through an independent contractor from whom the Company will
derive no income.
The Services Company, pursuant to contractual arrangements, will perform
management services with respect to properties not owned by the Company or the
Operating Partnership. The health club located in the 77 West Wacker Drive
Building (which is available for use at certain membership fees by employees
of tenants as well as by the general public) will be contributed to the
Services Company. The income from such services and the revenues from the
health club will be taxed to the Services Company at the regular corporate tax
rates. Note payments and dividends paid by the Services Company to the
Operating Partnership will constitute qualifying income for purposes of the
95% gross income test but not for the purposes of the 75% gross income test.
Should the potential amount of nonqualifying income in the future create a
risk as to the qualification of the Company as a REIT, the Company intends to
take action to avoid not qualifying as a REIT. The Company may
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for instance transfer certain nonqualifying activities to a taxable
corporation such as the Services Company, from which it would receive
dividends. If this should occur, the Operating Partnership would be entitled
to receive dividends as a stockholder of such corporation. The amount of
dividends available for distribution to the Company would be reduced below the
comparable amount of fee income that would otherwise be received by the
Operating Partnership because such a corporation would be subject to a
corporate level tax on its taxable income, thereby reducing the amount of cash
available for distribution. Furthermore, the Company would be required to
structure the stock interest owned by the Operating Partnership in such a
corporation to ensure that the various asset tests described below were not
violated (i.e., the Operating Partnership would not own more than 10% of the
voting securities of such corporation and the value of the stock interest
would not exceed 5% of the value of the Company's total assets).
If the Company fails to satisfy one or both of the 75% or the 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will be generally available if (i) the Company's
failure to meet such test(s) was due to reasonable cause and not due to
willful neglect, (ii) the Company reported the nature and amount of each item
of its income included in the test(s) for such taxable year on a schedule
attached to its return, and (iii) any incorrect information on the schedule
was not due to fraud with intent to evade tax. It is not possible, however, to
state whether, in all circumstances, the Company would be entitled to the
benefit of these relief provisions. For example, if the Company fails to
satisfy the gross income tests because nonqualifying income that the Company
intentionally earns exceeds the limits on such income, the IRS could conclude
that the Company's failure to satisfy the tests was not due to reasonable
cause. As discussed above in "--Taxation of the Company" even if these relief
provisions apply, the Company will still be subject to a 100% tax on the
greater of the amount by which the Company failed the 75% or the 95% test,
multiplied by a fraction intended to reflect the Company's profitability. See
"--Failure to Qualify."
Asset Tests
At the close of each quarter of its taxable year, the Company also must
satisfy three tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets, including its allocable share of
assets held by the Operating Partnership and each Property Partnership in
which the Operating Partnership is a partner, must be represented by real
estate assets (which for this purpose includes stock or debt instruments held
for not more than one year purchased with proceeds of a stock offering or a
long-term (at least five years) debt offering of the Company), cash, cash
items and U.S. government securities. Second, not more than 25% of the
Company's total assets may be represented by securities other than those in
the 75% asset class. Third, 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 may not
own more than 10% of any one issuer's outstanding voting securities. By virtue
of its partnership interest in the Operating Partnership, the Company will be
deemed to own for purposes of the three asset tests its pro rata share of the
assets of the Operating Partnership, and the assets of each Property
Partnership in which the Operating Partnership is a partner. The Operating
Partnership owns 100% of the Preferred Stock of the Services Company and the
Note issued by the Services Company, but none of that corporation's voting
stock. The Company does not believe that its pro rata share of the stock and
securities (i.e., the Note) the Operating Partnership owns in such corporation
exceeds 5% of the total value of the Company's assets. No independent
appraisals will be obtained to support this conclusion, and Tax Counsel, in
rendering its opinion as to the qualification of the Company as a REIT, is
relying on the Company's representation that the Preferred Stock and Note
issued by the Services Company and held by the Operating Partnership does not
cause the Company to fail the 5% value test.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy any of the
asset tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance
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with the asset tests, and to take such other action within 30 days after the
close of any quarter as may be required to cure any noncompliance.
Annual Distribution Requirements
To continue to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its shareholders each year in
an amount at least equal to (i) the sum of (A) 95% of the Company's "REIT
taxable income" (computed without regard to the dividends paid deduction and
the Company's net capital gain) plus (B) 95% of the net income (after tax), if
any, from foreclosure property, minus (ii) the sum of certain items of non-
cash income. 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. A distribution which is not pro rata
within a class of beneficial interest entitled to a dividend or which is not
consistent with the rights to distributions between classes of beneficial
interest (a "preferential dividend") is not taken into consideration for the
purpose of meeting the distribution requirement. Accordingly, the payment of a
preferential dividend could affect the Company's ability to meet this
distribution requirement.
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 or ordinary corporate tax rates, as the case may be.
Furthermore, if the Company should fail to distribute for each calendar year
at least the sum of (i) 85% of its REIT ordinary income for such year, (ii)
95% of its REIT capital gain net income for such year, plus (iii) any
undistributed taxable income from prior periods, the Company will 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 all
of the annual distribution requirements. The Company anticipates that it will
generally have sufficient cash or liquid assets to enable it to satisfy these
distribution requirements. It is possible that, from time to time, the Company
may not have sufficient cash or other liquid assets to meet the 95%
distribution requirement due to the insufficiency of cash flow from the
Operating Partnership in a particular year or to timing differences between
the actual receipt of income and actual payment of deductible expenses, on the
one hand, and the inclusion of such income and deduction of such expenses in
computing the Company's "REIT taxable income," on the other hand. In the event
that such an insufficiency or such timing differences occur, in order to meet
the 95% distribution requirement, the Company may find it necessary to cause
the Operating Partnership to pay dividends in the form of taxable stock
dividends, to borrow funds, or to liquidate assets.
If the Company fails to meet the 95% distribution requirement as a result of
an adjustment to the Company's tax return by the IRS upon audit, the Company
may retroactively cure the failure by paying "deficiency dividends" to its
shareholders in a later year, which may then be included in the Company's
deduction for dividends paid for the earlier year. The Company may thus be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest to the IRS based upon
the amount of any deduction taken for deficiency dividends.
Penalty Tax on Prohibited Transactions
The Company's share of any gain realized on the sale of any property held as
inventory or otherwise primarily for sale to customers in the ordinary course
of its trade or business generally will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. Under existing law, whether
property is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business is a question of fact that depends on
all the facts and circumstances with respect to the particular transaction.
The Operating Partnership, through the Property Partnerships, intends to hold
the Properties for investment with a view to long-term appreciation, to engage
in the business of acquiring, developing, owning and operating the Properties
and to make such occasional sales of the Properties as are consistent with the
Company's investment objectives.
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Based upon such investment objectives, the Company believes that in general
the Properties should not be considered inventory or other property held
primarily for sale to customers in the ordinary course of a trade or business
and that the amount of income from prohibited transactions, if any, will not
be material.
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 will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which
the Company fails to qualify as a REIT will not be required and, if made, will
not be deductible by the Company. As a result, the Company's failure to
qualify as a REIT will reduce the cash available for distribution by the
Company to its shareholders. In addition, if the Company fails to qualify as a
REIT, all distributions to the Company's shareholders will be taxable as
ordinary dividend income to the extent of the Company's then current and
accumulated earnings and profits, and, subject to certain limitations in the
Code, corporate distributees may be eligible for the dividends-received
deduction. Unless entitled to relief under specific statutory provisions, the
Company also will be ineligible for qualification as a REIT during the four
taxable years following the year during which qualification was lost. It is
not possible to determine whether the Company would be entitled to such
statutory relief in all circumstances.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN PARTNERSHIPS
The Company holds direct or indirect interests in the Operating Partnership
and each of the Property Partnerships (each individually a "Partnership" and,
collectively, the "Partnerships"). The following discussion summarizes certain
federal income tax considerations applicable solely to the Company's
investments in the Partnerships. The discussion does not address state or
local tax laws or any federal tax laws other than income tax laws.
Partnership Classification
The Company is entitled to include in its income its distributive share of
the income, and to deduct its distributive share of the losses, of each of the
Partnerships only if each such Partnership is classified for federal income
tax purposes as a partnership rather than as an association (or publicly-
traded partnership) taxable as a corporation.
Prior to January 1, 1997, an organization formed as a partnership was
treated as a partnership for federal income tax purposes rather than a
corporation only if it had no more than two of the four corporate
characteristics that the Treasury Regulations in effect at that time used to
distinguish a partnership from a corporation for tax purposes. These four
characteristics were (i) continuity of life, (ii) centralization of
management, (iii) limited liability and (iv) free transferability of
interests. Under final Treasury Regulations which became effective January 1,
1997, the four factor test has been eliminated, and an entity with two or more
members formed as a partnership under relevant state law will be taxed as a
partnership for federal income tax purposes unless it specifically elects
otherwise. The final regulations also provide that the IRS will not challenge
the classification of an existing partnership for tax periods prior to January
1, 1997 so long as (1) the entity had a reasonable basis for its claimed
classification, (2) the entity and all its members recognized the federal
income tax consequences of any changes in the entity's classification within
the 60 months prior to January 1, 1997, and (3) neither the entity nor any
member of the entity had been notified in writing on or before May 8, 1996,
that the classification of the entity was under examination by the IRS.
The Company believes that each Partnership formed on or after January 1,
1997 will be treated as a partnership for federal income tax purposes because
each was or will be formed as a partnership under state law and will have two
or more partners. Further, for each Partnership that was formed prior to
January 1, 1997, the Company expects that such Partnership will be treated as
a partnership for federal income tax purposes for the periods before January
1, 1997 as (1) such Partnership had a reasonable basis for its claimed
classification, (2)
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such Partnership and all its partners recognized the federal income tax
consequences of any changes in the partnership's classification within the 60
months prior to January 1, 1997, and (3) neither the Partnership nor any
member of the Partnership had been notified in writing on or before May 8,
1996, that the classification of the entity was under examination by the IRS.
Additionally, the Company believes that none of the Partnerships will be
treated as publicly traded partnerships within the meaning of Code section
7704 that is taxed as a corporation for federal income tax purposes because,
under the applicable Treasury Regulations, none of the interests in the
Partnerships are registered under the Securities Act or traded on an
established securities market and none of the Partnerships have more than 100
partners for purposes of Code Section 7704 (or will otherwise fall within one
of the other "safe harbors" for the Partnership to avoid being treated as
having interests which are "readily tradeable on a secondary market (or the
substantial equivalent thereof)"). The Company further believes that none of
the Partnerships will be treated as a publicly traded partnership on the basis
of the gross income exception that 90% or more of its annual gross income will
be from certain passive sources, such as rents from real property, interest,
and the sale or disposition of real property and capital assets, and that none
of the Partnerships would be described as an investment company if it were a
domestic corporation.
If for any reason any of the Partnerships were taxable as a corporation
rather than as a partnership for federal income tax purposes, the character of
the Company's assets and items of gross income would change, and, as a result,
the Company would most likely be unable to satisfy the income and asset tests,
which would thus prevent the Company from qualifying as a REIT. In addition,
any change in the status for tax purposes of any of the Partnerships might be
treated as a taxable event, in which case the Company could incur a tax
liability without any related cash distribution. Further, if any of the
Partnerships were to be treated as an association taxable as a corporation,
items of income, gain, loss, deduction and credit of such Partnership would
not pass through to its partners; instead, the Partnership would be taxable as
a corporation, subject to entity-level taxation on its net income at regular
corporate tax rates. The partners of any such Partnership would be treated for
federal income tax purposes as stockholders, with distributions to such
partners being treated as dividends. See "--Requirements for Qualification--
Income Tests" and "--Asset Tests."
INCOME TAXATION OF THE PARTNERSHIPS AND THEIR PARTNERS
Partners, Not Partnerships, Subject to Tax
A partnership (that is not a publicly traded partnership) is not subject to
tax as an entity for federal income tax purposes. Rather, partners are
allocated their proportionate share of the items of income, gain, loss,
deduction and credit of the partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive any distributions from
the partnership. The Company will be required to take into account its
allocable 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--Income Tests."
Partnership Allocations
Although a partnership agreement will generally determine the allocation of
a partnership's income and losses among the partners, such allocations will be
disregarded for tax purposes under Section 704(b) of the Code if they do not
comply with the provisions of Section 704(b) and the Treasury Regulations
promulgated thereunder. If an allocation is not recognized for federal income
tax purposes, the item subject to the allocation will be reallocated in
accordance with the partners' interests in the partnership, which will be
determined by taking into account all of the facts and circumstances relating
to the economic arrangement of the partners with respect to such item. The
Company believes that the allocations of taxable income and loss contained in
the partnership agreements for each of the Partnerships complies with the
requirements of Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder.
Tax Allocations With Respect to the Properties
Pursuant to Section 704(c) of the Code, income, gain, loss, and deduction
attributable to appreciated or depreciated property that is contributed to a
partnership (such as interests in the Property Partnerships that own
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the Properties) in exchange for an interest in the partnership must be
allocated for federal income tax purposes in a manner such that the
contributing partner is charged with, or benefits from, respectively, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of such unrealized gain or unrealized loss 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 the time of contribution (a "Book-Tax Difference"). Such
allocations are solely for federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners.
The Operating Partnership was formed by way of contributions, including
contributions of appreciated property (including interests in the Property
Partnerships that own the Properties), by certain Limited Partners.
Consequently the Partnership Agreement requires allocations of income, gain,
loss and deduction attributable to such contributed property to be made in a
manner that is consistent with Section 704(c) of the Code.
In general, these allocations tend to eliminate the Book-Tax Differences
over the life of the Partnerships by allocating to the Limited Partners of the
Operating Partnership, solely for tax purposes, lower amounts of depreciation
deductions and increased taxable income and gain on the sale by the Property
Partnerships of the Properties than would ordinarily be the case for economic
or book purposes. The Operating Partnership and the Company will elect to use
the "traditional method" under Treasury Regulation section 1.704-3(c) as the
method of accounting for the Book-Tax Differences with respect to properties
contributed to the Partnerships. However, this allocation method may not
always entirely rectify a Book-Tax Difference on an annual basis or with
respect to a specific taxable transaction such as a sale. Moreover, the
application of Section 704(c) principles in tiered partnership arrangements is
not entirely clear. Accordingly, the IRS may assert that a different
allocation should be used to eliminate any such Book-Tax Difference.
With respect to any property purchased by any of the Property Partnerships
subsequent to the formation of the Company, such property will initially have
a tax basis equal to its fair market value and Section 704(c) of the Code will
not apply.
Depreciation Deductions Available to the Operating Partnership
Certain assets owned by the Operating Partnership and the Property
Partnerships consist of property contributed by their partners. In general,
when property is contributed in a tax-free transaction under section 721 of
the Code, the transferee partnership is treated in the same manner as the
contributing partner for purposes of computing depreciation. The effect of
this rule is to continue the historic basis, placed in service dates and
depreciation methods with respect to property contributed to a partnership. In
general, this will result in the Operating Partnership and the Property
Partnerships claiming less depreciation than if they had purchased the
contributed properties in a taxable transaction and could result in the
Company being allocated less depreciation than if the contributed properties
were purchased in a taxable transaction.
Basis in Partnership Interest
The Company's adjusted tax basis in its partnership interest in the
Operating Partnership is generally (i) equal to the amount of cash and the
basis of any other property contributed to the Operating Partnership by the
Company, (ii) increased by (A) the Company's allocable share of the Operating
Partnership's income and (B) the Company's allocable share of indebtedness of
the Operating Partnership, and (iii) reduced, but not below zero, by (A) the
Company's allocable share of the Operating Partnership's losses and (B) the
amount of cash and the basis of any other property distributed by the
Operating Partnership to the Company, including any constructive cash
distributions resulting from a reduction in the Company's allocable share of
indebtedness of the Operating Partnership.
If the allocation to the Company of its distributive share of any loss of
the Operating Partnership would reduce the adjusted tax basis in its
partnership interest in the Operating Partnership below zero, the recognition
of such excess loss will be deferred until such time and to the extent that
the Company has sufficient tax basis in
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its partnership interest so that the recognition of such loss would not reduce
the amount of such 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 (each such decrease being considered
a constructive cash distribution to the Company), would reduce the Company's
adjusted tax basis in its partnership interest below zero, such excess
distributions (including such constructive distributions) would constitute
taxable income to the Company. Such distributions and constructive
distributions will normally be characterized as a capital gain, and if the
Company has held its partnership interest in the Operating Partnership for
longer than the long-term capital gain holding period (currently one year),
the distributions and constructive distributions will constitute long-term
capital gains.
The rules described above with respect to basis apply equally to the
Operating Partnership in its capacity as a partner in any Property
Partnership, as well as to the Company in its capacity as a partner in any
Property Partnership.
TAXATION OF TAXABLE U.S. SHAREHOLDERS
As used herein, the term "U.S. Shareholder" means a holder of Common Shares
who (for United States federal income tax purposes) (i) is a citizen or
resident of the United States, (ii) is a corporation, partnership, or other
entity created or organized in or under the laws of the United States or of
any political subdivision thereof, (iii) is a trust if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more United States fiduciaries have the authority to
control all substantial decisions of the trust or (iv) is an estate subject to
taxation in the United States, regardless of its source of income.
As long as the Company continues to qualify as a REIT, distributions made by
the Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
U.S. Shareholders as ordinary income. Such distributions will not be eligible
for the dividends-received deduction in the case of U.S. Shareholders that are
corporations.
Dividends paid to U.S. Shareholders will be treated as portfolio income.
Such income, therefore, will not be subject to reduction by losses from
passive activities (i.e., any interest in a rental activity or in a trade or
business in which the holder does not materially participate, such as certain
interests held as a limited partner) of any holder who is subject to the
passive activity loss rules. Such distributions will, however, be considered
investment income which may be offset by certain investment expense
deductions.
Distributions made by the Company that are properly designated by the
Company as capital gain dividends will be taxable to U.S. Shareholders as
long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Shareholder has held his/her Common Shares. U.S. Shareholders
that are corporations may, however, be required to treat up to 20% of certain
capital gain dividends as ordinary income. Pursuant to the 1997 Tax Act, the
Company may elect to retain amounts representing long-term capital gain income
on which the Company will be taxed at regular corporate capital gains tax
rates. In that case, each shareholder will be taxed on a proportionate share
of the total long-term capital gains retained by the Company and will also
receive a credit for a proportionate share of the tax paid by the Company.
Finally, each shareholder would increase the adjusted basis in his/her shares
by the amount of the allocable long-term capital gain. If the Company should
elect to retain long-term capital gains, it will notify each shareholder of
the relevant tax information within 60 days after the close of the taxable
year.
To the extent that the Company makes distributions (not designated as
capital gain dividends) in excess of its current and accumulated earnings and
profits, such distributions will be treated first as a tax-free return of
capital to each U.S. Shareholder, reducing the adjusted basis which such U.S.
Shareholder has in his/her Common Shares for tax purposes by the amount of
such distribution (but not below zero), with distributions in excess of a U.S.
Shareholder's adjusted basis in his/her shares taxable as capital gains
(provided that the shares have been held as a capital asset). Dividends
declared by the Company in October, November or December of
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any year and payable to a shareholder of record on a specified 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 on or before January 31 of the following calendar
year. Shareholders may not include in their own income tax returns any net
operating losses or capital losses of the Company.
Upon any sale or other disposition of Common Shares, the holder will
generally recognize gain or loss for federal income tax purposes in an amount
equal to the difference between (i) the amount of cash and the fair market
value of any property received on such sale or other disposition and (ii) the
holder's adjusted basis in the shares. Such gain or loss will generally be
capital gain or loss and will be long-term gain or loss if such shares have
been held for more than one year. In general, any loss recognized by a U.S.
Shareholder upon the sale or other disposition of Common Shares that have been
held for six months or less (after applying certain holding period rules) will
be treated as a long-term capital loss, to the extent of distributions
received by such U.S. Shareholder from the Company which were required to be
treated as long-term capital gains.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
The IRS has issued a revenue ruling in which it held that amounts
distributed by a REIT to a tax-exempt employees' pension trust do not
constitute "unrelated business taxable income," even though the REIT may have
financed certain of its activities with acquisition indebtedness. Although
revenue rulings are interpretive in nature and are subject to revocation or
modification by the IRS, based upon the revenue ruling and the analysis
therein, distributions made by the Company to a U.S. Shareholder that is a
tax-exempt entity (such as an individual retirement account ("IRA") or a
401(k) plan) should not constitute unrelated business taxable income unless
such tax-exempt U.S. Shareholder has financed the acquisition of its shares
with "acquisition indebtedness" within the meaning of the Code, or the shares
are otherwise used in an unrelated trade or business conducted by such U.S.
Shareholder.
Special rules apply to certain tax-exempt pension funds (including 401(k)
plans but excluding IRAs or government pension plans) that own more than 10%
(measured by value) of a "pension-held REIT" at any time during a taxable year
beginning after December 31, 1993. Such a pension fund may be required to
treat a certain percentage of all dividends received from the REIT during the
year as unrelated business taxable income. The percentage is equal to the
ratio of the REIT's gross income (less direct expenses related thereto)
derived from the conduct of unrelated trades or businesses determined as if
the REIT were a tax-exempt pension fund, to the REIT's gross income (less
direct expenses related thereto) from all sources. The special rules will not
apply to require a pension fund to recharacterize a portion of its dividends
as unrelated business taxable income unless the percentage computed is at
least 5%.
A REIT will be treated as a "pension-held REIT" if the REIT is predominantly
held by tax-exempt pension funds and if the REIT would otherwise fail to
satisfy the "five or fewer" ownership requirements discussed above, see "--
Requirements for Qualification--Organizational Requirements," if the stock or
beneficial interests of the REIT held by such tax-exempt pension funds were
not treated as held directly by their respective beneficiaries. A REIT is
predominantly held by tax-exempt pension funds if at least one tax-exempt
pension fund holds more than 25% (measured by value) of the REIT's stock or
beneficial interests, or if one or more tax-exempt pension funds (each of
which owns more than 10% (measured by value) of the REIT's stock or beneficial
interests) own in the aggregate more than 50% (measured by value) of the
REIT's stock or beneficial interests. The Company believes that it will not be
treated as a pension-held REIT. However, because the shares of the Company
will be publicly traded, no assurance can be given that the Company is not or
will not become a pension-held REIT.
TAXATION OF NON-U.S. SHAREHOLDERS
The rules governing United States federal income taxation of any person
other than (i) a citizen or resident of the United States, (ii) a corporation
or partnership created in the United States or under the laws of the United
States or of any state thereof, (iii) an estate whose income is includable in
income for U.S. federal income tax
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purposes regardless of its source or (iv) a trust if a court within the United
States is able to exercise primary supervision over the administration of the
trust and one or more United States fiduciaries have the authority to control
all substantial decisions of the trust (collectively, "Non-U.S. Shareholders")
are highly complex, and the following discussion is intended only as a summary
of such rules. Prospective Non-U.S. Shareholders should consult with their own
tax advisors to determine the impact of United States federal, state, and
local income tax laws on an investment in Common Shares, including any
reporting requirements.
In general, Non-U.S. Shareholders are subject to regular United States
income tax with respect to their investment in Common Shares in the same
manner as a U.S. Shareholder if such investment is "effectively connected"
with the Non-U.S. Shareholder's conduct of a trade or business in the United
States. A corporate Non-U.S. Shareholder that receives income with respect to
its investment in Common Shares that is (or is treated as) effectively
connected with the conduct of a trade or business in the United States also
may be subject to the 30% branch profits tax imposed by the Code, which is
payable in addition to regular United States corporate income tax. The
following discussion addresses only the United States taxation of Non-U.S.
Shareholders whose investment in Common Shares is not effectively connected
with the conduct of a trade or business in the United States.
Ordinary Dividends
Distributions made by the Company that are not attributable to gain from the
sale or exchange by the Company of United States real property interests and
that are not designated by the Company as capital gain dividends will be
treated as ordinary income dividends to the extent made out of current or
accumulated earnings and profits of the Company. Generally, such ordinary
income dividends will be subject to United States withholding tax at the rate
of 30% on the gross amount of the dividend paid unless reduced or eliminated
by an applicable United States income tax treaty. The Company expects to
withhold United States income tax at the rate of 30% on the gross amount of
any such dividends paid to a Non-U.S. Shareholder unless a lower treaty rate
applies and the Non-U.S. Shareholder has filed an IRS Form 1001 with the
Company, certifying the Non-U.S. Shareholder's entitlement to treaty benefits.
Non-Dividend Distributions
Distributions made by the Company in excess of its current and accumulated
earnings and profits to a Non-U.S. Shareholder who holds 5.0% or less of the
Common Shares (after application of certain ownership rules) will not be
subject to U.S. income or withholding tax. If it cannot be determined at the
time a distribution is made whether or not such distribution will be in excess
of the Company's current and accumulated earnings and profits, the
distribution will be subject to withholding at the rate applicable to a
dividend distribution. However, the Non-U.S. Shareholder may seek a refund
from the IRS of any amount withheld if it is subsequently determined that such
distribution was, in fact, in excess of the Company's then current and
accumulated earnings and profits.
Capital Gains Dividends
As long as the Company continues to qualify as a REIT, distributions made by
the Company that are attributable to gain from the sale or exchange by the
Company of any United States real property interests ("USRPI") will be taxed
to a Non-U.S. Shareholder under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-
U.S. Shareholder as if such distributions were gains "effectively connected"
with the conduct of a trade or business in the United States. Accordingly, a
Non-U.S. Shareholder will be taxed on such distributions at the same capital
gain rates applicable to U.S. Shareholders (subject to any applicable
alternative minimum tax and a special alternative minimum tax in the case of
non-resident alien individuals). Distributions subject to FIRPTA also may be
subject to the 30% branch profits tax in the case of a corporate Non-U.S.
Shareholder that is not entitled to treaty relief or exemption. The Company
will be required to withhold tax from any distribution to a Non-U.S.
Shareholder that could be designated by the Company as a USRPI capital gain
dividend in an amount equal to 35% of the gross
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distribution. The amount of tax withheld is fully creditable against the Non-
U.S. Shareholder's FIRPTA tax liability, and if such amount exceeds the Non-
U.S. Shareholder's federal income tax liability for the applicable taxable
year, the Non-U.S. Shareholder may seek a refund of the excess from the IRS.
In addition, if the Company designates prior distributions as capital gain
dividends, subsequent distributions, up to the amount of such prior
distributions, will be treated as capital gain dividends for purposes of
withholding.
Disposition of Shares of Beneficial Interest of the Company
Gain recognized by a Non-U.S. Shareholder upon the sale or exchange of
Common Shares generally will not be subject to United States taxation unless
the Common Shares constitute a USRPI within the meaning of FIRPTA. The Common
Shares will not constitute a USRPI so long as the Company is a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock or
beneficial interests are held directly or indirectly by Non-U.S. Shareholders.
The Company believes that it will be a "domestically controlled REIT," and
therefore that the sale of Common Shares will not be subject to taxation under
FIRPTA. However, because the Common Shares will be publicly traded, no
assurance can be given that the Company is or will continue to be a
"domestically-controlled REIT." Notwithstanding the foregoing, gain from the
sale or exchange of Common Shares not otherwise subject to FIRPTA will be
taxable to a Non-U.S. Shareholder if the Non-U.S. Shareholder is a nonresident
alien individual who is present in the United States for 183 days or more
during the taxable year and has a "tax home" in the United States. In such
case, the nonresident alien individual will be subject to a 30% United States
withholding tax on the amount of such individual's gain.
If the Company did not constitute a "domestically-controlled REIT," gain
arising from the sale or exchange by a Non-U.S. Shareholder of Common Shares
would be subject to United States taxation under FIRPTA as a sale of a USRPI
unless (i) the Common Shares are "regularly traded" (as defined in the
applicable Treasury regulations) and (ii) the selling Non-U.S. Shareholder's
interest (after application of certain constructive ownership rules) in the
Company is 5.0% or less at all times during the five years preceding the sale
or exchange. If gain on the sale or exchange of the Common Shares were subject
to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to regular
United States income tax with respect to such gain in the same manner as a
U.S. Shareholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations), and the purchaser of the Common Shares (including the Company)
would be required to withhold and remit to the IRS 10% of the purchase price.
Additionally, in such case, distributions on the Common Shares to the extent
they represent a return of capital or capital gain from the sale of the Common
Shares, rather than dividends, would be subject to a 10% withholding tax.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Shareholder in two cases; (i) if the Non-U.S.
Shareholder's investment in the Common Shares of the Company is effectively
connected with a U.S. trade or business conducted by such Non-U.S.
Shareholder, the Non-U.S. Shareholder will be subject to the same treatment as
a U.S. shareholder with respect to such gain, or (ii) if the Non-U.S.
Shareholder is a nonresident alien individual who was present in the United
States for 183 days or more during the taxable year and has a "tax home" in
the United States, the nonresident alien individual will be subject to a 30%
tax on the individual's capital gain.
Estate Tax
Common Shares of the Company owned or treated as owned by an individual who
is not a citizen or resident (as specially defined for U.S. federal estate tax
purposes) of the United States at the time of death will be includable in the
individual's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise. Such individual's estate may
be subject to U.S. federal estate tax on the property includable in the estate
for U.S. federal estate tax purposes.
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INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its U.S. Shareholders and to 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 U.S.
Shareholder may be subject to backup withholding at the rate of 31% on
dividends paid unless such U.S. Shareholder (i) is a corporation or falls
within certain other exempt categories and, when required, can demonstrate
this fact, or (ii) 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 U.S. Shareholder
who does not provide the Company with his correct taxpayer identification
number also may be subject to penalties imposed by the IRS. Any amount paid as
backup withholding will be creditable against the U.S. Shareholder's federal
income tax liability. In addition, the Company may be required to withhold a
portion of any capital gain distributions made to U.S. Shareholders who fail
to certify their non-foreign status to the Company. See "--Taxation of Non-
U.S. Shareholders."
Additional issues may arise pertaining to information reporting and backup
withholding with respect to Non-U.S. Shareholders, and Non-U.S. Shareholders
should consult their tax advisors with respect to any such information
reporting and backup withholding requirements.
SPECIAL RULES REGARDING THE TAXATION OF HOLDERS OF CONVERTIBLE PREFERRED
SHARES
Redemption of Convertible Preferred Shares. A redemption of shares of
Convertible Preferred Shares will be treated under Section 302 of the Code as
a distribution taxable as a dividend (to the extent of the Company's current
and accumulated earnings and profits) at ordinary income rates unless the
redemption satisfies one of the tests set forth in Section 302(b) of the Code
and is therefore treated as a sale or exchange of the redeemed shares. The
redemption will be treated as a sale or exchange under Section 302(b) if it
(i) is "substantially disproportionate" with respect to the holder, (ii)
results in a "complete termination" of the holder's stock interest in the
Company, or (iii) is "not essentially equivalent to a dividend" with respect
to the holder within the meaning of Section 302(b)(2) of the Code. In
determining whether any of these tests have been met, Common Shares (and other
equity interests in the Company) considered to be owned by the holder by
reason of certain constructive ownership rules set forth in Section 318 of the
Code, as well as Common Shares actually owned by the holder, must generally be
taken into account. Because the determination as to whether any of the
alternative tests of Section 302(b) of the Code will be satisfied with respect
to any particular holder of Convertible Preferred Shares depends upon the
facts and circumstances at the time that the determination must be made,
holders of Convertible Preferred Shares are advised to consult their own tax
advisors to determine such treatment.
If a redemption of shares of Convertible Preferred Shares is not treated as
a distribution taxable as a dividend to a particular holder, it will be
treated, as to that holder, as a taxable sale or exchange. As a result, such
holder will recognize gain or loss for federal income tax purposes in an
amount equal to the difference between (i) the amount of cash and the fair
market value of any property received (less any portion thereof attributed to
accumulated and declared but unpaid dividends, which will be taxable as a
dividend to the extent of the Company's current and accumulated earnings and
profits), and (ii) the holder's adjusted basis in the shares of Convertible
Preferred Shares for tax purposes. Generally, such gain or loss will be
capital gain or loss if the shares of Convertible Preferred Shares have been
held as a capital asset, and will be long-term gain or loss if such shares
have been held for more than eighteen months.
If a redemption of shares of Convertible Preferred Shares is treated as a
distribution taxable as a dividend, the amount of the distribution will be
measured by the amount of cash and the fair market value of any project
received by the holder. The holder's adjusted basis in the redeemed shares of
Convertible Preferred Shares for tax purposes will be transferred to the
holder's remaining Common Shares in the Company, if any. If the holder owns no
other Common Shares, such basis may under certain circumstances, be
transferred to a related person or it may be lost entirely.
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Redemption Premium. Under Section 305(c) of the Code and applicable Treasury
Regulations, if the redemption price of the Convertible Preferred Shares
exceeds its issue price by more than a de minimis amount then, in certain
circumstances, the amount of such excess may be deemed to be a constructive
distribution (treated as a dividend to the extent of the Company's current and
accumulated earnings and profits) which is taxable to the holder at a constant
yield (as if it was original issue discount on a debt instrument) over the
period the Convertible Preferred Shares cannot be redeemed.
A redemption premium is considered de minimis under the Treasury Regulation
if it is less than the product of .25% times the redemption price of the
Convertible Preferred Shares times the number of complete years the
Convertible Preferred Shares is outstanding. The Company does not expect that
the price paid for the redemption of the Convertible Preferred Shares would be
considered de minimis,
However, the constant yield method, described above, which must be used to
take into account the redemption premium on preferred stock only applies if
the subject preferred stock is (i) mandatorily redeemable, (ii) redeemable at
the holder's option, or (iii) redeemable at the issuer's option if at the time
of issue, based on all the facts and circumstances, it is more likely than not
that the issuer will exercise such option. With respect to situation (iii) in
the preceding sentence, the Treasury Regulations further provide that, even if
the redemption is more likely than not to occur, this constant yield method
will not apply if the redemption premium is solely in the nature of a penalty
for premature redemption. A redemption premium is considered to be a penalty
for premature redemption only if it is paid as a result of changes in economic
or market conditions over which the issuer of the stock or the holder does not
have legal or practical control.
The Convertible Preferred Shares are not mandatorily redeemable or
redeemable at the holder's option, and the Company does not believe that at
the time of issue it is more likely than not that the Convertible Preferred
Shares will be redeemed; thus, the Company does not expect that a holder of
such stock will be required to take the redemption premium into income as a
dividend distribution at a constant yield over the period the holder holds
such stock. However, no assurance can be given that the IRS will not take a
contrary position.
Conversion of Convertible Preferred Shares into Common Shares. In general,
no gain or loss will be recognized for federal income tax purposes upon the
conversion of the Convertible Preferred Shares solely into shares of Common
Shares. The basis that a holder will have for tax purposes in the shares of
the Common Shares received upon the conversion will be equal to the adjusted
basis the holder had in the shares of Convertible Preferred Shares so
converted, and, provided that the shares of Convertible Preferred Shares were
held as a capital asset, the holding period for the shares of Common Shares
received will include the holding period for the shares of Convertible
Preferred Shares converted. A holder, however, will generally recognize gain
or loss on the receipt of cash in lieu of fractional shares of Common Shares
in an amount equal to the difference between the amount of cash received and
the holder's adjusted basis in such fractional shares. Furthermore, under
certain circumstances, a holder of shares of Convertible Preferred Shares may
recognize gain or dividend income to the extent there are dividends in arrears
on the Convertible Preferred Shares at the time of conversion into Common
Shares.
Adjustments to Conversion Price. Adjustments in the conversion price (or the
failure to make such adjustment) pursuant to the anti-dilution provisions of
the Convertible Preferred Shares or otherwise may result in constructive
distributions to the holders of Convertible Preferred Shares that could, under
certain circumstances, be taxable to them as dividends pursuant to Section 305
of the Code. If such a constructive distribution were to occur, a holder of
Convertible Preferred Shares could be required to recognize ordinary income
for tax purposes without receiving a corresponding distribution of cash.
Additionally, such a constructive dividend may constitute a preferential
dividend by the Company.
OTHER TAX CONSIDERATIONS
Possible Legislative or Other Actions Affecting Tax Consequences
Prospective holders should recognize that the present federal income tax
treatment of the Company may be modified by future legislative, judicial or
administrative actions or decisions at any time, which may be retroactive in
effect, and, as a result, any such action or decision may affect investments
and commitments
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previously made. The rules dealing with federal income taxation are constantly
under review by persons involved in the legislative process and by the IRS and
the Treasury Department, resulting in statutory changes as well as
promulgation of new, or revisions to existing, regulations and revised
interpretations of established concepts. No prediction can be made as to the
likelihood of passage of any new tax legislation or other provisions either
directly or indirectly affecting the Company or its shareholders. Revisions in
federal income tax laws and interpretations thereof could adversely affect the
tax consequences of an investment in the Common Shares.
State and Local Taxes
The Company and its shareholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective holders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Common Shares.
Taxpayer Relief Act of 1997--Significant REIT Provisions
The 1997 Tax Act included various changes to the tax treatment of REITs
effective for taxable years beginning after August 5, 1997. In the case of the
Company, these provisions will be effective beginning January 1, 1998. Set
forth below is a summary of these changes.
Alternative Penalties for Failure to Ascertain Ownership. Under the 1997 Tax
Act, the rule that disqualifies a REIT for any year in which the REIT failed
to comply with regulations to ascertain its ownership has been replaced with
an intermediate penalty of $25,000 ($50,000 for intentional violations) for
any year in which the REIT did not comply with the ownership regulations. In
addition, a REIT that complied with the regulations for ascertaining its
ownership, and which did not know, or have reason to know, that it was so
closely held as to be classified as a personal holding company would not be
treated as a personal holding company.
De Minimis Rule for Tenant Service Income. Under the 1997 Tax Act, a REIT is
allowed to render a de minimis amount of impermissible services to tenants,
including managing or operating the property, and still treat amounts received
with respect to that property as rent, as long as the amount received with
respect to the impermissible services or management does not exceed one
percent of the REIT's gross income from the property. These services must not
be valued at less than 150 percent of the REIT's direct cost of the services.
Attribution Rules. Under the 1997 Tax Act, for purposes of determining (i)
whether a tenant is a "Related Party Tenant" and (ii) whether a party is an
independent contractor, a partner's ownership only is attributed to a
partnership if the partner owns a 25% or greater interest in the capital or
profits of that partnership.
Election to Retain and Pay Tax on Retained Capital Gains. The 1997 Tax Act
permits a REIT to elect to retain and pay income tax on net long-term capital
gains it received during the tax year. If a REIT makes this election, the REIT
shareholders include in their income as long-term capital gains their
proportionate share of the long-term capital gains as designated by the REIT.
Also, the shareholder will be deemed to have paid a proportionate share of the
tax, which could be credited or refunded to the shareholder. The shareholder's
basis in its shares is increased by the amount of the undistributed long-term
capital gains (less the proportionate amount of capital gains tax paid by the
REIT) included in the shareholder's long-term capital gains.
Repeal of 30-Percent Gross Income Requirement. The 1997 Tax Act repeals the
30 percent gross income test.
Non-REIT Earnings and Profits. The 1997 Tax Act changes the ordering rule
for purposes of the requirement that newly-electing REITs distribute earnings
and profits that were accumulated in non-REIT years such that distributions of
accumulated earnings and profits generally would be treated as made from the
entity's earliest accumulated earnings and profits.
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Treatment of Foreclosure Property. The 1997 Tax Act lengthens the grace
period for foreclosure property to three taxable years following the election
and allows for the possibility of an additional three year extension by filing
a request with the Service. Additionally, a REIT may revoke an election to
treat property as foreclosure property for any taxable year.
Payments Received under Hedging Instruments. The 1997 Tax Act treats income
and gain from all hedges that reduce the interest rate risk associated with
REIT liabilities as qualifying income under the 95% gross income test.
Excess Non-Cash Income. The 1997 Tax Act (i) expands the class of excess
noncash items that are not subject to the 95% distribution requirement to
include income from the cancellation of indebtedness, and (ii) extends the
treatment of original issue discount and coupon interest as excess noncash
items to REITs using the accrual method.
Prohibited Transaction Safe Harbor. The 1997 Tax Act excludes from the
prohibited sales rules any property that was involuntarily converted.
Shared Appreciation Mortgages. The 1997 Tax Act provides that interest
received on a shared appreciation mortgage is not subject to the tax on
prohibited transactions where the property subject to the mortgage is sold
within four years of the REIT's acquisition of the mortgage pursuant to a
bankruptcy plan of the mortgagor unless the REIT, when it acquired the
mortgage, knew or had reason to know that the property subject to the mortgage
would be sold in a bankruptcy proceeding.
Qualified REIT Subsidiaries. The 1997 Tax Act permits any corporation
wholly-owned by a REIT to be treated as a qualified REIT subsidiary,
regardless of whether the corporation has always been owned by the REIT.
However, if the REIT acquires an existing corporation, such corporation is
treated as if it had been liquidated at the time of acquisition by the REIT
and then reincorporated, so that any pre-REIT built-in gains will be taxed. In
addition, any pre-REIT earnings and profits of the subsidiary must be
distributed before the end of the REIT's taxable year.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA
and the prohibited transaction provisions of Section 4975 of the Code that may
be relevant to a prospective purchaser (including, with respect to the
discussion contained in "--Status of the Company, the Operating Partnership
and the Services Company under ERISA," to a prospective purchaser that is not
an employee benefit plan, another tax-qualified retirement plan or an
individual retirement account ("IRA")). This discussion does not propose to
deal with all aspects of ERISA or Section 4975 of the Code or, to the extent
not pre-empted, state law that may be relevant to particular employee benefit
plan shareholders (including plans subject to Title I of ERISA, other employee
benefit plans and IRAs subject to the prohibited transaction provisions of
Section 4975 of the Code, and governmental plans and church plans that are
exempt from ERISA and Section 4975 of the Code but that may be subject to
state law requirements) in light of their particular circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN CONVERTIBLE PREFERRED SHARES ON
BEHALF OF A PROSPECTIVE PURCHASER WHICH IS AN ERISA PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, AN IRA OR OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT
ITS OWN LEGAL ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER
ERISA, SECTION 4975 OF THE CODE, AND (TO THE EXTENT NOT PRE-EMPTED) STATE LAW
WITH RESPECT TO THE PURCHASE, OWNERSHIP OR SALE OF CONVERTIBLE PREFERRED
SHARES BY SUCH PLAN OR IRA. Plans should also consider the entire discussion
under the heading "Certain Federal Income Tax Considerations," as material
contained therein is relevant to any decision by an employee benefit plan,
tax-qualified retirement plan or IRA to purchase the Common Shares.
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EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of an employee benefit plan subject to Title I of ERISA (an
"ERISA Plan") should carefully consider whether an investment in Convertible
Preferred Shares is consistent with its fiduciary responsibilities under
ERISA. In particular, the fiduciary requirements of Part 4 of Title I of ERISA
require (i) an ERISA Plan's investments to be prudent and in the best
interests of the ERISA Plan, its participants and beneficiaries, (ii) an ERISA
Plan's investments to be diversified in order to reduce the risk of large
losses, unless it is clearly prudent not to do so, (iii) an ERISA Plan's
investments to be authorized under ERISA and the terms of the governing
documents of the ERISA Plan and (iv) that the fiduciary not cause the ERISA
Plan to enter into transactions prohibited under Section 406 of ERISA. In
determining whether an investment in Convertible Preferred Shares is prudent
for purposes of ERISA, the appropriate fiduciary of an ERISA Plan should
consider all of the facts and circumstances, including whether the investment
is reasonably designed, as a part of the ERISA Plan's portfolio for which the
fiduciary has investment responsibility, to meet the objectives of the ERISA
Plan, taking into consideration the risk of loss and opportunity for gain (or
other return) from the investment, the diversification, cash flow and funding
requirements of the ERISA Plan and the liquidity and current return of the
ERISA Plan's portfolio. A fiduciary should also take into account the nature
of the Company's business, the length of the Company's operating history and
other matters described under "Risk Factors."
The fiduciary of an IRA or of an employee benefit plan not subject to Title
I of ERISA because it is a governmental or church plan or because it does not
cover common law employee (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents, not prohibited under Section 4975 of the Code
and permitted under applicable state law.
STATUS OF THE COMPANY UNDER ERISA
A prohibited transaction may occur if the assets of the Company are deemed
to be assets of the investing Plans and "parties in interest" or "disqualified
persons" as defined in ERISA and Section 4975 of the Code, respectively deal
with such assets. In certain circumstances where a Plan holds an interest in
an entity, the assets of the entity are deemed to be Plan assets (the "look-
through rule"). Under such circumstances, any person that exercises authority
or control with respect to the management or disposition of such assets is a
Plan fiduciary. Plan assets are not defined in ERISA or the Code, but the
United States Department of Labor has issued regulations, effective March 13,
1987 (the "Regulations"), that outline the circumstances under which a Plan's
interest in an entity will be subject to the look-through rule.
The Regulations apply only to the purchase by a Plan of an "equity interest"
in an entity, such as common stock or common shares of beneficial interest of
a REIT. However, the Regulations provide an exception to the look-through rule
for equity interests that are "publicly-offered securities."
Under the Regulations, a "publicly-offered security" is a security that is
(i) freely transferable, (ii) part of a class of securities that is widely-
held and (iii) either (a) part of a class of securities that is registered
under section 12(b) or 12(g) of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"), or (b) sold to a Plan as part of an offering of
securities to the public pursuant to an effective registration statement under
the Securities Act and the class of securities of which such security is a
part is registered under the Exchange Act within 120 days (or such longer
period allowed by the Securities and Exchange Commission) after the end of the
fiscal year of the issuer during which the offering of such securities to the
public occurred. Whether a security is considered "freely transferable"
depends on the facts and circumstances of each case. Generally, if the
security is part of an offering in which the minimum investment is $10,000 or
less, any restriction on or prohibition against any transfer or assignment of
such security for the purposes of preventing a termination or reclassification
of the entity for federal or state tax purposes will not of itself prevent the
security from being considered freely transferable. A class of securities is
considered "widely-held" if it is a class of securities that is owned by 100
or more investors independent of the issuer and of one another.
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The Company anticipates that the Convertible Preferred Shares will meet the
criteria of the publicly-offered securities exception to the look-through
rule. First, the Company anticipates that the Convertible Preferred Shares
will be considered to be freely transferable, as the minimum investment will
be less than $10,000 and the only restrictions upon its transfer are those
required under federal tax laws to maintain the Company's status as a REIT.
Second, the Company believes that the Convertible Preferred Shares will be
held by 100 or more investors and that at least 100 or more of these investors
will be independent of the Company and of one another. Third, the Convertible
Preferred Shares will be part of an offering of securities to the public
pursuant to an effective registration statement under the Securities Act and
will be registered under the Exchange Act within 120 days after the end of the
fiscal year of the Company during which the offering of such securities to the
public occurs. Accordingly, the Company believes that if a Plan purchases
Convertible Preferred Shares, the Company's assets should not be deemed to be
Plan assets and, therefore, that any person who exercises authority or control
with respect to the Company's assets should not be treated as a Plan fiduciary
for purposes of the prohibited transaction rules of ERISA and Section 4975 of
the Code.
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PLAN OF DISTRIBUTION
Security Capital Preferred Growth is expected to agree to purchase from the
Company, and the Company expects to agree to sell to Security Capital
Preferred Growth, the Convertible Preferred Shares under the terms and subject
to the conditions contained in a Securities Purchase Agreement dated as of
November , 1997 (the "Security Purchase Agreement") between Security Capital
Preferred Growth and the Company.
The Securities Purchase Agreement will provide that Security Capital
Preferred Growth is obligated to purchase all of the Convertible Preferred
Shares offered hereby.
The Convertible Preferred Shares will constitute a new issue of securities
with no established trading market, and it is unlikely that an active trading
market will develop, because the Company does not intend to list or qualify
the Convertible Preferred Shares for trading on any exchange or the Nasdaq
National Market. There can be no assurance that even following any such
listing or qualification of the Convertible Preferred Shares, an active
trading market will exist for the Convertible Preferred Shares, or that any
trading market will be liquid.
Purchasers of Convertible Preferred Shares sold by Security Capital
Preferred Growth may be required to pay stamp taxes and other charges in
accordance with the laws and practices of the jurisdiction of purchase.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon
for the Company by Winston & Strawn, Chicago, Illinois. Legal matters relating
to Maryland law, including the validity of the issuance of the Shares offered
hereby, will be passed upon for the Company by Miles & Stockbridge, a
Professional Corporation, Baltimore, Maryland. In addition, the description of
federal income tax consequences contained in this Prospectus under "Certain
Federal Income Tax Considerations" is, to the extent that it constitutes
matters of law, summaries of legal matters or legal conclusions, the opinion
of Winston & Strawn, special tax counsel to the Company as to the material
federal income tax consequences of the Offering.
EXPERTS
The balance sheet of Prime Group Realty Trust as of July 21, 1997, the
combined financial statements of the Prime Properties (Predecessor Affiliates)
as of June 30, 1997 and December 31, 1996 and 1995, and for the six months
ended June 30, 1997 and for each of the three years in the period ended
December 31, 1996, the combined statements of revenue and certain expenses of
the Prime Industrial Contribution Properties for the period from January 1,
1997 to June 30, 1997 and for the period from March 1, 1996 to December 31,
1996, the combined statements of revenue and certain expenses of the IBD
Properties for the period from January 1, 1997 to June 30, 1997 and for the
year ended December 31, 1996, the combined statements of revenue and certain
expenses of the NAC Properties for the period from January 1, 1997 to June 30,
1997 and for the year ended December 31, 1996, the statements of revenue and
certain expenses of Citibank Office Plaza for the period from January 1, 1997
to June 30, 1997 and for the year ended December 31, 1996, the combined
statements of revenue and certain expenses of Salt Creek Office Center for the
period from January 1, 1997 to June 30, 1997 and for the year ended December
31, 1996, the statements of revenue and certain expenses of 280 Schuman
Boulevard for the period from January 1, 1997 to June 30, 1997 and for the
year ended December 31, 1996, and the statements of revenue and certain
expenses of 475 Superior Avenue for the period from January 1, 1997 to June
30, 1997 and for the year ended December 31, 1996, 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.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus:
"1997 Tax Act" means the Taxpayer Relief Act of 1997, as amended.
"Acquisition Properties" means the two Office Properties and related assets
that comprise 1990 Algonquin Road, 2000-2060 Algonquin Road (also known as the
Salt Creek Office Center), 280 Schuman Boulevard, 475 Superior Avenue and
2205-2245 Enterprise Drive (also known as the Enterprise Centre) that are
expected to be acquired by the Company concurrently with the completion of the
Offering.
"ADA" means the Americans with Disabilities Act of 1990, as amended, and the
regulations promulgated under the authority conferred thereby.
"AEA" means the American Electronics Association.
"AHEC" means the Industrial Property known as 425 East Algonquin Road.
"AIREB" means the Association of Industrial Real Estate Brokers.
"Amended and Restated Bylaws" means the Amended and Restated Bylaws of the
Company.
"Annualized Effective Net Rent" means the total net rent to be received over
the respective terms from all leases in effect at June 30, 1997 minus all
Tenant Expenditures for all such leases, divided by the terms in months for
such leases, multiplied by 12.
"Annualized Net Rent" means, with respect to a lease, the monthly net rent
due under the lease as determined in accordance with GAAP, annualized for all
leases in effect on June 30, 1997.
"Assessment" means the Natural Resources Damage Assessment of the Grand
Calumet River and the Indiana Harbor Canal System which IDEM has requested the
owner of the ECEC, along with numerous other property owners, to develop.
"Audit Committee" means the audit committee of the Board of Trustees of the
Company.
"Base Year" means, with respect to a lease, the tenant's proportionate share
of real estate taxes, insurance, utility and operating expense paid by the
tenant during the tenant's first year of occupancy under such lease.
"Beneficiary" means the qualified charitable organization selected by the
Company which would receive the automatic transfer of any Excess Shares.
"Board of Trustees" means the board of trustees of the Company.
"BOMA" means the Building Owners and Managers Association.
"Book-Tax Difference" means, with respect to appreciated or depreciated
property that is contributed to a partnership, the amount of unrealized gain
or unrealized loss associated with the property of the time of contribution,
which 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 the time of contribution.
"Business Combination" means a merger, consolidation or other combination
with or into another person or sale of all or substantially all of its assets,
or any reclassification, recapitalization or change of outstanding Common
Shares.
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"Chicago CBD" means the Chicago central business district.
"Chicago Metropolitan Area" means the area defined by the United States
Department of Commerce as the Chicago Metropolitan Statistical Area,
comprising Lake, Cook, DuPage, Kane, McHenry, Grundy, Kendall and Will
Counties in Illinois, Kenosha County in Wisconsin and Lake and Porter Counties
in Indiana.
"Class A" means, with regard to buildings, buildings that are centrally
located, professionally managed and maintained, attract high-quality tenants
and command upper-tier rental rates and are modern structures or have been
modernized to compete with newer buildings.
"Class B" means, with regard to buildings, buildings that have good
location, construction and tenancy and are sometimes considered to be
competitive with the lower spectrum of Class A buildings.
"Class C" means, with regard to buildings, buildings that are generally
older buildings with progressing functional and/or economic obsolescence.
"Code" means the Internal Revenue Code of 1986, as amended.
"Combined Financial Statements" means the combined financial statements of
the Prime Properties and various affiliated entities related to certain of the
Properties or other assets being contributed to the Company.
"Commission" means the United States Securities and Exchange Commission.
"Common Share Offering" means the concurrent offering by the Company of the
Common Shares.
"Common Shares" means common shares of beneficial interest, par value $.01
per share, of the Company.
"Common Units" means partnership interests representing the common equity in
the Operating Partnership.
"Company" means Prime Group Realty Trust, a Maryland real estate investment
trust, and its subsidiaries.
"Continental" means Continental Offices Ltd.
"Continental Management Business" means all of the operations and business
of Continental Offices, Ltd. and Continental Offices, Ltd. Realty, including a
construction business and the property management and/or leasing operations at
five of the Properties, excluding certain assets.
"Contributors" means, collectively, the IBD Contributors and the NAC
Contributors.
"Contribution Properties" means, collectively, the IBD Properties and the
NAC Properties.
"Control Shares" means voting shares of beneficial interest of a Maryland
real estate investment trust which, if aggregated with all other such shares
of beneficial interest previously acquired by the acquiror, or in respect of
which the acquiror is able to exercise or direct the exercise of voting power
(except solely by revocable proxy) would entitle the acquiror to exercise
voting power in electing trustees within one of the following ranges of voting
power: (i) one-fifth or more but less than one third; (ii) one-third or more
but less than a majority, or (iii) a majority of all voting power. Control
Shares do not include shares the acquiror is then entitled to vote as a result
of having previously obtained shareholder approval.
"Control Share Acquisition" means the acquisition of Control Shares, subject
to certain exceptions.
"Convertible Preferred Shares" means the % Series A Cumulative
Convertible Preferred Shares of the Company.
"Convertible Preferred Offering" means the Company's offering hereby of
2,000,000 Convertible Preferred Shares.
"CPI" means the Consumer Price Index, the economic index issued by the U.S.
Department of Labor indicating price increases or decreases for the U.S.
economy.
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"Declaration of Trust" means the Company's Declaration of Trust, as amended
by Articles of Amendment and Restatement.
"Dividend Reduction" means the dividend paid on a Common Share of the
Company for each of two consecutive fiscal quarters of the Company has been in
an amount less than eighty-five percent (85.0%) of the dividend paid on a
common share of the Company in the first full fiscal quarter of the Company
subsequent to the Offerings.
"Donnelley" means R.R. Donnelley and Sons Company.
"ECEC" means the East Chicago Enterprise Center.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended.
"ERISA Plan" means an employee benefit plan subject to Title I of ERISA.
"Everen" means Everen Securities, Inc.
"Excess Shares" means the 65.0 million authorized shares of excess shares of
beneficial interest, $.01 par value per share, of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Executive Committee" means the executive committee of the Board of Trustees
of the Company.
"Executive Compensation Committee" means the executive compensation
committee of the Board of Trustees of the Company.
"Expense Stop" means, with respect to a lease, a negotiated amount
approximating the tenant's pro rata share of real estate taxes, insurance, and
operating expense.
"FIRE" means, collectively, with respect to an economy, that sector of such
economy comprised of the businesses of finance, insurance, and real estate.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"five or fewer requirement" means the requirement under the Code that not
more than 50% in value of the Company's outstanding shares of beneficial
interest may be owned directly or indirectly by five or fewer individuals (as
defined in the Code) during the last half of the taxable year (other than the
first year).
"Formation Agreement" means the agreement between the Operating Partnership
and Prime regarding the interests the Operating Partnership will acquire in
the Properties or interests therein owned by Prime and the third-party office
and industrial development, leasing and property management business of Prime.
"Formation Transactions" means those transactions relating to the
organization of the Company and its subsidiaries, including the transfer of
the Properties and other assets to the Company, formation of the Operating
Partnership, consolidation of the ownership interests in certain of the
Properties, the Offering and qualification of the Company as a REIT for
federal income tax purposes for the taxable year beginning January 1, 1997,
all as described under "Structure and Formation of the Company--Formation
Transactions."
"Funds from Operations" means funds from operations computed in accordance
with the resolution adopted by the Board of Governors of NAREIT in its March
1995 White Paper (with the exception that the Company expects to report base
rents on a cash basis, rather than a straight-line GAAP basis, which the
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Company believes will result in a more accurate presentation of its actual
operating activities), as follows: net income (loss) (computed in accordance
with GAAP with the exception that base rents are reported on a cash basis as
described above), excluding gains (or losses) from debt restructuring and
sales of real property, plus real estate related depreciation and amortization
(excluding amortization of deferred financing costs), and after adjustments
for unconsolidated partnerships and joint ventures.
"GAAP" means generally accepted accounting principles in the United States.
"GMP" means gross metropolitan product.
"HEC" means the Hammond Enterprise Center.
"Huntley Business Park" means that certain industrial and office park
located in the Village of Huntley, Illinois.
"IBD" means Industrial Building and Development Company.
"IBD Contributors" means Edward S. Hadesman Trust dated May 22, 1992,
Grandville/Northwestern Management Corp., Carolyn B. Hadesman Trust dated May
21, 1992, Lisa Hadesman 1991 Trust, Cynthia Hadesman 1991 Trust, Tucker B.
Magid, Frances Shubert, Grandville Road Property, Inc., HR Trust, Edward E.
Johnson and Sky Harbor Associates.
"IBD Properties" means, collectively, the Office Property and related assets
that comprise 555 Huehl Road together with the six Industrial Properties and
related assets that comprise 1001 Technology Way, 3818 Grandville/1200
Northwestern, 306-310 Era Drive, 1301 Ridgeview Drive, 515 Huehl Road/500
Lindberg and 455 Academy Drive.
"IDEM" means the Indiana Department of Environmental Management.
"IEPA" means the Illinois Environmental Protection Agency.
"Indemnitors" means certain Limited Partners who have agreed to make certain
representations and warranties concerning the Properties and have also agreed
to indemnify the Company against breaches of such representations and
warranties.
"Indemnified Contributor" means those Contributors with whom the Company has
entered into a Tax Indemnification Agreement whereby the Company agrees to
indemnify such Contributors for, among other things, certain tax liabilities
based on income or gain which they might realize upon the sale by the Company
of the Properties Contributed by such Contributors.
"Industrial Properties" means the industrial properties the Company, through
its subsidiaries, will own upon completion of the Offering consisting of bulk
warehouse distribution facilities, light-assembly and manufacturing facilities
and heavy-industrial/overhead crane buildings.
"Interested Shareholder" means any person who beneficially owns 10% or more
of the voting power of a Maryland real estate investment trust's shares of
beneficial interest or an affiliate of the trust which, at any time within the
two-year period prior to the date in question, was the beneficial owner of 10%
or more of the voting power of the then outstanding voting shares of
beneficial interest of the trust.
"IRA" means an individual retirement account as defined by the Code and the
applicable Treasury Regulations.
"IRS" means the United States Internal Revenue Service.
"Jones Day" means the law firm of Jones, Day, Reavis & Pogue.
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"Keck" means the law firm of Keck, Mahin & Cate.
"Keck Space" means the approximately 113,000 net rentable square feet
formerly leased to Keck at the 77 West Wacker Drive Building. The Property
Partnership that holds such Property has reached a settlement pursuant to
which Keck has agreed to vacate its space by November 30, 1997.
"Libertyville Business Park" means that certain office and industrial park
located in the Village of Libertyville, Illinois.
"Limited Partner" initially means, any of Prime and the Contributors, each
of which are limited partners of the Operating Partnership.
"Management Contracts" means the contracts between the Operating Partnership
and the Services Company pursuant to which the Services Company will render
development, leasing and property management services for the Company.
"Maryland REIT Law" means Title 8 of the Corporations and Associations
Article of the Annotated Code of Maryland, as amended.
"MGCL" means the Maryland General Corporation Law, as amended.
"Mortgage Debt" means the loans secured by certain of the Contribution
Properties.
"Motorola" means Motorola, Inc.
"MSA" means consolidated metropolitan statistical area.
"NAC Contributors" means certain affiliates of the NAC General Partner,
including Narco River Business Center, Narco Tower Road Associates, Olympian
Office Center, Tri-State Industrial Park Joint Venture, Carol Stream
Industrial Park Joint Venture, Narco Enterprises, Inc., The Nardi Group Ltd.,
Narco Construction Inc., Nardi & Co., Nardi Asset Managment, Inc. and Nardi
Architectural, Inc.
"NAC General Partner" means a limited liability company controlled by
Stephen J. Nardi.
"NAC Properties" means, collectively, the six Office Properties and related
assets that comprise 941-961 Weigel Drive, 4100 Madison Street, 350 N.
Mannheim Road, 1600-1700 167th Street, 1301 Tower Road and 4343 Commerce
Court, the 14 Industrial Properties and related assets that comprise 1401 S.
Jefferson, 1051 N. Kirk Road, 4211 Madison Street, 200 E. Fullerton Avenue,
350 Randy Road, 4248, 4250 and 4300 Madison Street, 370 Carol Lane, 388 Carol
Lane, 342-48 Carol Lane, 343 Carol Lane, 4160-4190 Madison Street, 11039 Gage
Avenue, 11045 Gage Avenue, and 550 Kehoe Boulevard and one retail center that
comprise 371-385 N. Gary Avenue.
"NAREIT" means the National Association of Real Estate Investment Trusts,
Inc.
"National Service Industries" or "NSI, Inc." means National Service
Industries, Inc.
"Net rent" means, with respect to a lease, the amount due from the tenant
under the lease without including operating expenses, taxes and other similar
reimbursements due from the tenant.
"Non-Compete Agreement" means the agreement Prime and Michael W. Reschke
have entered with the Company which contains restrictions on their ability to
compete with the Company.
"Non-ERISA Plan" means an employee benefit plan which is not subject to
Title I of ERISA because it is a governmental or church plan or because it
does not cover common law employees.
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"Non-U.S. Shareholder" means a holder of Common Shares who is a nonresident
alien individual, foreign corporation, foreign partnership, foreign trust or
estate or other foreign shareholder.
"Note" means that certain promissory note to be issued by the Services
Company to the Operating Partnership with an initial principal amount of
approximately $4.2 million.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the offering of Common Shares and Convertible Preferred
Shares of the Company pursuant to and as described in this Prospectus.
"Office Properties" means the office properties in which the Company,
through its subsidiaries, will have an interest or will own upon completion of
the Offering.
"Operating Partnership" means Prime Group Realty, L.P., a Delaware limited
partnership having its principal offices at 77 West Wacker Drive, Suite 3900,
Chicago, Illinois 60601.
"Outparcels" means parcels of vacant land which are located adjacent to, or
near, particular Properties that are not necessarily required for use in
connection with the office building or industrial center located at a
particular property.
"Ownership Limit" means the prohibition in the Declaration of Trust on (i)
beneficial ownership of more than 9.9% of the Common Shares by one person and
(ii) ownership of more than 9.9% of the fully diluted Common Shares (assuming
no exchange of Common Units for Common Shares by one person).
"Partnership Agreement" means the Amended and Restated Limited Partnership
Agreement of the Operating Partnership.
"Plan" means an ERISA Plan or a non-ERISA Plan.
"preferential dividend" means a dividend which is not pro rata within a
class of shares of beneficial interest or stock entitled to a dividend or
which is not consistent with the rights to distribution between classes of
shares of beneficial interest or stock.
"Preferred Stock" means the non-voting participating preferred stock of the
Services Company.
"Preferred Units" means partnership interests representing the preferred
equity in the Operating Partnership.
"Prime" means The Prime Group, Inc., an Illinois corporation, and certain of
its affiliates.
"Prime Contribution Properties" means, collectively, the Office Property and
related assets that comprise 1699 East Woodfield Road (Citibank Office Plaza)
together with the six Industrial Properties and related assets that comprise
2160 McGaw Road, 4849 Groveport Road, 2400 McGaw Road, 5160 Blazer Memorial
Parkway, 4411 Marketing Place and 600 London Road.
"Prime Partnerships" means those corporations, general and limited
partnerships and trusts affiliated with the Prime Properties which are being
acquired by the Operating Partnership.
"Prime Properties" means, collectively, the five Office Properties and
related assets known as the 77 West Wacker Drive Building, 201 4th Avenue N.,
620 Market Street, 625 Gay Street, and 4823 Old Kingston Pike, together with
the 16 Industrial Properties and related assets that comprise 425 East
Algonquin Road, the Chicago Enterprise Center, the East Chicago Enterprise
Center, the Hammond Enterprise Center and a parking facility.
"Prohibited Owner" means any purported owner of Common Shares who would
otherwise violate the Ownership Limit or such other limit as provided in the
Declaration of Trust.
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"Prohibited Transferee" means any purported transferee of Common Shares who
would otherwise violate the Ownership Limit or such other limit as provided in
the Declaration of Trust.
"Properties" means the Office Properties and the Industrial Properties,
which collectively include the Prime Properties, the Prime Contribution
Properties, the Contribution Properties and the Acquisition Properties in
which the Company, through its subsidiaries, will have an interest or which
the Company will own upon the completion of the Offering.
"Property Partnerships" means those corporations, general and limited
partnerships and trusts that own the Properties.
"Prospectus" means the prospectus used in connection with the Offering.
"PPE" is the proposed trading symbol of the Company on the NYSE.
"Put Option Agreement" means that certain Put Option Agreement, by and among
the NAC General Partner, the Company and the Operating Partnership.
"Rank Video" means Rank Video Services America, Inc.
"RCG" means the Rosen Consulting Group.
"Recognition Period" means the ten-year period beginning on the date a
"built-in gain asset" is acquired by the Company.
"Registrable Shares" means any Common Shares acquired by the Limited
Partners upon the exchange by the Limited Partners of Common Units received by
them in connection with the Formation Transactions.
"Registration Rights" means those certain registration rights granted to the
Limited Partners in connection with the Formation Transactions.
"Registration Statement" means the registration statement on Form S-11 filed
with the Commission in connection with the Offering.
"Regulations" means the regulations issued by the United States Department
of Labor that outline the circumstances under which an ERISA Plan's interest
in an entity will be subject to the look through rule.
"REIT" means a self-managed real estate investment trust as defined by the
Code and the applicable Treasury Regulations.
"REIT Requirements" means the requirements for qualifying as a REIT.
"Related Party Tenant" means a tenant directly or constructively owned 10%
or more by the Company or by an owner of 10% or more of the Company.
"Rentable square feet" mean a building's usable area plus common areas and
penetrations, expressed collectively in square feet which are allocated pro
rata to tenants.
"Representatives" means Prudential Securities Incorporated, Friedman,
Billings, Ramsey & Co., Inc., Smith Barney Inc. and Morgan Keegan & Company,
Inc.
"RFA" means Regional Financial Associates.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Services Company" means Prime Group Realty Services, Inc., a Maryland
corporation having its principal offices at 77 West Wacker Drive, Suite 3900,
Chicago, Illinois 60601.
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"Share Incentive Plan" means the share incentive plan established by the
Company, as further described in this Prospectus under the caption entitled
"Management--Share Incentive Plan."
"Share Options" means share options which the Company is authorized to grant
pursuant to the Share Incentive Plan.
"Share Trust" means a trust which holds Common or Preferred Shares of
beneficial interest of the Company which have been designated as Shares-in-
Trust.
"Shares-in-Trust" means Common or Preferred Shares of beneficial interest of
the Company which are automatically converted into an equal number of Excess
Shares and transferred automatically to the Share Trust upon a purported
transfer of such Common or Preferred Shares which is violative of the
applicable restrictions on transfer.
"SIOR" means the Society of Industrial and Office Realtors.
"Suburban Chicago" means all areas of the Chicago Metropolitan Area, except
for the City of Chicago.
"Surviving Partnership" means a surviving entity in which substantially all
of the surviving partnership's assets are directly or indirectly owned by the
Operating Partnership or another limited partnership or limited liability
company which is the survivor of a merger, consolidation or combination of
assets with the Operating Partnership.
"Tax Counsel" means the law firm of Winston & Strawn, which has acted as a
special tax counsel to the Company in connection with the Offering and the
preparation of the Prospectus.
"Tax-Exempt Bonds" means the tax-exempt bond financing encumbering certain
of the Properties.
"Tenant Expenditures" means tenant improvements, leasing commissions and
other concessions.
"Termination Transaction" means any merger, consolidation or other
combination with or into another person, sale of all or substantially all of
the Company's assets or any reclassification, recapitalization or change of
its outstanding equity interest.
"Total market capitalization" means the sum of the aggregate market value of
the outstanding Common Shares and Convertible Preferred Shares, assuming the
full exchange of all Common Units for Common Shares, plus the Company's total
outstanding debt.
"Treasury Regulations" means the rules and regulations promulgated by the
United States Department of the Treasury under the Code, as such rules and
regulations are amended from time to time.
"Triple net basis lease" means a lease pursuant to which a tenant is
responsible for the base rent in addition to the costs and expenses in
connection with and related to property taxes, insurance and repairs and
maintenance applicable to the leased space.
"U.S. Shareholder" means a holder of Common Shares who (for United States
federal income tax purposes) (i) is a citizen or resident of the United
States, (ii) is a corporation, partnership, or other entity created or
organized in or under the laws of the United States or of any political
subdivision thereof, or (iii) is an estate or trust which is subject to
taxation in the United States regardless of the source of its income or which
is under the primary supervision or authority of a United States court or a
United States fiduciary.
"Underwriters" shall mean the underwriters in the Common Share Offering.
"United States" or "U.S." means the United States of America (including the
District of Columbia), its territories, possessions and other areas subject to
its jurisdiction.
G-8
<PAGE>
PRIME GROUP REALTY TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Prime Group Realty Trust:
Pro Forma (Unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1997... F-4
Notes to Pro Forma Condensed Consolidated Balance Sheet.............. F-5
Pro Forma Condensed Consolidated Statements of Operations for the six
months ended June 30, 1997 and the year ended December 31, 1996..... F-11-12
Notes to Pro Forma Condensed Consolidated Statements of Operations... F-13
Historical:
Report of Independent Auditors........................................ F-18
Balance Sheet as of July 21, 1997..................................... F-19
Notes to Balance Sheet................................................ F-20
Prime Properties:
Report of Independent Auditors........................................ F-21
Combined Balance Sheets as of June 30, 1997 and December 31, 1996 and
1995................................................................. F-22
Combined Statements of Operations for the six months ended June 30,
1997 and 1996 (unaudited) and the three years ended December 31,
1996, 1995, and 1994................................................. F-23
Combined Statements of Changes in Partners' Deficit for the six months
ended June 30, 1997 and for the three years ended December 31, 1996,
1995, and 1994....................................................... F-24
Combined Statements of Cash Flows for the six months ended June 30,
1997 and 1996 (unaudited) and the three years ended December 31,
1996, 1995, and 1994................................................. F-25
Notes to Combined Financial Statements................................ F-27
Prime Industrial Contribution Properties:
Report of Independent Auditors........................................ F-38
Combined Statements of Revenue and Certain Expenses for the period
from January 1, 1997 to
June 30, 1997 and for the period from March 1, 1996 to December 31,
1996................................................................. F-39
Notes to Combined Statements of Revenue and Certain Expenses.......... F-40
IBD Properties:
Report of Independent Auditors........................................ F-41
Combined Statements of Revenue and Certain Expenses for the period
from January 1, 1997 to
June 30, 1997 and for the year ended December 31, 1996............... F-42
Notes to Combined Statements of Revenue and Certain Expenses.......... F-43
NAC Properties:
Report of Independent Auditors........................................ F-44
Combined Statements of Revenue and Certain Expenses for the period
from January 1, 1997 to June 30, 1997 and for the year ended December
31, 1996............................................................. F-45
Notes to Combined Statements of Revenue and Certain Expenses.......... F-46
Citibank Office Plaza:
Report of Independent Auditors........................................ F-47
Statements of Revenue and Certain Expenses for the period from January
1, 1997 to June 30, 1997 and for the year ended December 31, 1996.... F-48
Notes to Statements of Revenue and Certain Expenses................... F-49
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Salt Creek Office Center:
Report of Independent Auditors........................................... F-50
Combined Statements of Revenue and Certain Expenses for the period from
January 1, 1997 to
June 30, 1997 and for the year ended December 31, 1996.................. F-51
Notes to Combined Statements of Revenue and Certain Expenses............. F-52
280 Schuman Boulevard:
Report of Independent Auditors........................................... F-53
Statements of Revenue and Certain Expenses for the period from January 1,
1997 to
June 30, 1997 and for the year ended December 31, 1996.................. F-54
Notes to Statements of Revenue and Certain Expenses...................... F-55
475 Superior Avenue:
Report of Independent Auditors........................................... F-56
Statements of Revenue and Certain Expenses for the period from January 1,
1997 to
June 30, 1997 and for the year ended December 31, 1996.................. F-57
Notes to Statements of Revenue and Certain Expenses...................... F-58
</TABLE>
F-2
<PAGE>
PRIME GROUP REALTY TRUST
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Consolidated Balance Sheet of the Company
is presented as if, at June 30, 1997, (i) the Company had sold 12.38 million
shares of its common shares of beneficial interest at a sales price of $20.00
per share, the midpoint of the price range, and contributed the net proceeds
to the Operating Partnership, (ii) the Company had sold 2.0 million shares of
its convertible preferred shares of beneficial interest at a sales price of
$20.00 per share, the midpoint of the price range, and contributed the net
proceeds to the Operating Partnership, (iii) The Prime Group, Inc. (Prime)
contributed the properties, business and operations of the Prime Properties
and the Prime Contribution Properties (Prime Industrial Contribution
Properties and Citibank Office Plaza--recently acquired by Prime from third
parties) to the Operating Partnership, (iv) the Operating Partnership had
issued 4.57 million units for $85.0 million to Primestone Joint Venture (a
joint venture in which Prime is a partner--See "Structure and Formation of the
Company"), (v) the IBD Contributors and the NAC Contributors had contributed
their respective properties and operations (IBD Properties and NAC Properties
respectively) to the Operating Partnership, (vi) the Operating Partnership
acquired the Acquisition Properties, (vii) the Operating Partnership acquired
Continental Office, Ltd. and Continental Offices, Ltd. Realty,
construction/property management companies, from a third party, and (viii) the
Operating Partnership repaid debt on certain of the Prime Properties and Prime
Contribution Properties described under "Use of Proceeds." The unaudited Pro
Forma Condensed Consolidated Statements of Operations for the six months ended
June 30, 1997 and for the year ended December 31, 1996 are presented as if the
above transactions occurred as of January 1, 1996. The unaudited Pro Forma
Condensed Consolidated financial statements should be read in conjunction with
all of the financial statements contained elsewhere in the Prospectus. In
management's opinion, all adjustments necessary to reflect the effects of the
Formation and Offering have been made.
The unaudited Pro Forma Condensed Consolidated Balance Sheet and Statements
of Operations of the Company are not necessarily indicative of what the actual
financial position or results operations would have been assuming the
Formation and Offering had occurred at the dates indicated above, nor do they
purport to represent the future financial position or results of operations of
the Company.
F-3
<PAGE>
PRIME GROUP REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRIME
CONTRIBUTION, PRE-
CONTRIBUTION OFFERING
PRIME AND ACQUISITION CONSOLIDATION PRIME GROUP OFFERING
GROUP PROPERTIES AND PRO FORMA REALTY PRO FORMA
REALTY PRIME INVESTMENT IN ADJUST- TRUST PRO ADJUST- PRO
TRUST PROPERTIES(A) SUBSIDIARY(B) MENTS(C) FORMA MENTS(D) FORMA
------ ------------- --------------- ------------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Real estate, net........ $ -- $ 245,457 $ 219,575 $ 1,220 (E) $466,252 $ 1,705 (E) $467,957
Cash.................... 1 4,458 (100,109) (110)(F) (95,760) 100,671 (F) 4,911
Tenant receivables...... -- 41,389 -- -- 41,389 -- 41,389
Investment in
subsidiary............. -- -- 5,890 87 (G) 5,977 -- 5,977
Deferred costs, net..... -- 26,191 -- (350)(H) 25,841 1,718 (H) 27,559
Other................... 2,340 783 1,500 (2,340)(I) 2,283 -- 2,283
------ --------- --------- --------- -------- --------- --------
Total assets............ $2,341 $ 318,278 $ 126,856 $ (1,493) $445,982 $ 104,094 $550,076
====== ========= ========= ========= ======== ========= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Mortgage notes payable.. $ -- $ 343,835 $ 89,925 $(100,808)(J) $332,952 $(243,027)(J) $ 89,925
Bonds payable........... -- 86,450 -- (12,000)(K) 74,450 -- 74,450
Accounts payable and
accrued expenses....... -- 15,822 -- (599)(L) 15,223 -- 15,223
Liabilities for leases
assumed................ -- 6,615(M) -- -- 6,615 -- 6,615
Other................... 2,340 5,835 -- (2,340)(I) 5,835 -- 5,835
------ --------- --------- --------- -------- --------- --------
Total liabilities.... 2,340 458,557 89,925 (115,747) 435,075 (243,027) 192,048
Partners' deficit....... -- (140,279) -- 140,279 (N) -- -- --
Minority interest....... -- -- 36,931 (26,025)(O) 10,906 148,995 (O) 159,901
Shareholders' equity:
Convertible preferred
shares................. -- -- -- -- -- 20 (P) 20
Common shares........... -- -- -- -- -- 124 (P) 124
Additional paid-in
capital................ 1 -- -- -- 1 197,982 (Q) 197,983
------ --------- --------- --------- -------- --------- --------
Total shareholders'
equity.............. 1 -- -- -- 1 198,126 198,127
------ --------- --------- --------- -------- --------- --------
Total liabilities and
shareholders' equity... $2,341 $ 318,278 $ 126,856 $ (1,493) $445,982 $ 104,094 $550,076
====== ========= ========= ========= ======== ========= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
BASIS OF PRESENTATION
The following pro forma adjustments reflect the Offering and Formation
Transactions, including the contribution of the net proceeds of the Offering
by the Company to the Operating Partnership, the contribution of the Prime
Properties and the Prime Contribution Properties (one office building
(Citibank Office Plaza) and six industrial properties (Prime Industrial
Contribution Properties) recently acquired from third parties) by Prime to the
Operating Partnership (Prime and management will receive 3.58 million common
units with an aggregate value of $71.5 million), the purchase of non-Prime
ownership interests in certain of the Prime Properties by the Operating
Partnership, the sale of 4.57 million Operating Partnership units (aggregate
value of $91.4 million) to the Primestone Joint Venture (Primestone, a joint
venture in which Prime is a partner--see "Structure and Formation of the
Company"; Prime will also contribute 3.38 million of its Common Units
described above to Primestone), the contribution of the IBD Properties and the
NAC Properties by their current owners (IBD Contributors and NAC Contributors,
collectively the Contributors) to the Operating Partnership (the IBD
Properties and the NAC Properties are collectively referred to as the
Contribution Properties--See Note B), the purchase of the Acquisition
Properties and Continental Offices Ltd. and Continental Offices, Ltd. Realty
(Continental) by the Operating Partnership (See Note B) and the repayment and
forgiveness of debt on certain of the Prime Properties and the Prime
Contribution Properties by the Operating Partnership. The Operating
Partnership will contribute Continental and other assets to a newly formed
service company (Services Company) in exchange for a non-voting, 95% economic
ownership interest. The Operating Partnership will reflect its investment in
Services Company using the equity method. Prime, Primestone and the
Contributors are collectively referred to as the minority interest unit
holders (Minority Interest) of the Operating Partnership.
The above contributions and purchases will be recorded by the Operating
Partnership as follows:
<TABLE>
<CAPTION>
PROPERTIES/ENTITIES INITIAL RECORDED VALUE
------------------- ----------------------
<S> <C>
Prime Properties:
Prime's ownership interests Prime's historical cost
Non-Prime ownership interests Purchase price of the interests
Prime Contribution Properties Prime's historical cost
IBD Properties Purchase Price
NAC Properties Purchase Price
Acquisition Properties Purchase price
Continental Purchase price
</TABLE>
The Prime Properties and the Prime Contribution Properties will be recorded
at Prime's historical cost (adjusted for the purchase of the non-Prime/non-
sponsor ownership interests in the Prime Properties) since Prime is the
sponsor of the Company's initial public offering. The IBD Properties and the
NAC Properties will be recorded at the value of the consideration (aggregate
value of Operating Partnership units, cash, debt assumed and debt repaid with
new mortgage notes) issued to the Contributors for their contribution since
they are not sponsors. The Acquisition Properties and Continental will be
recorded at their purchase prices since they are being acquired from third-
parties. The initial recorded values are further described in Notes A,B,E,F
and N.
F-5
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--(CONTINUED)
After giving effect to the Offering and Formation Transactions and the
contribution of Common Units by Prime to Primestone described above, the
following represents the common ownership interests in the Company/ Operating
Partnership:
<TABLE>
<CAPTION>
COMMON
SHARES/UNITS COMMON
(IN OWNERSHIP
MILLIONS) INTEREST
------------ ---------
<S> <C> <C>
Company............................................ 12.38 55.34%
Prime (*)(+)....................................... 0.20 0.89%
Primestone (+)..................................... 7.95 35.54%
IBD Contributors................................... 0.92 4.11%
NAC Contributors................................... 0.92 4.12%
----- ------
22.37 100.0%
===== ======
</TABLE>
- --------
(*) Includes 0.11 million units held by Mr. Patterson, an employee of Prime.
(+) Prime's and Primestone's ownership interest prior to Prime's contribution
of units to Primestone were 16.00% and 20.43%, respectively.
(A) Reflects the historical Prime Properties balance sheet as of June 30,
1997 (See Note 1 to the Prime Properties Notes to the Combined Financial
Statements for a listing of the entities included in the Prime Properties.)
which includes 77 West Wacker Limited Partnership (77 West Wacker) and 77
Fitness Center Ltd. (77 Fitness). The Operating Partnership will contribute 77
Fitness to the Services Company (See Notes E, F, G, L and N).
(B) Adjustments to reflect the contribution of the Prime Contribution
Properties and the Contribution Properties and the purchase of the Acquisition
Properties and Continental as of June 30, 1997:
<TABLE>
<CAPTION>
PROPERTY PROPERTY TYPE
-------- -----------------
<S> <C> <C>
Prime Contribution Properties (i)............. Office/Industrial $ 24,190
Contribution Properties (ii).................. Office/Industrial 155,528
Acquisition Properties (iii).................. Office/Industrial 41,357
--------
$221,075
========
Investment in Subsidiary (iv)................. $ 5,890
========
</TABLE>
- --------
(i) Prime recently acquired the Prime Contribution Properties from third
parties with proceeds of mortgage notes payable and cash. The Operating
Partnership will repay the mortgage notes payable of $23,501, reimburse
Prime $689 for certain acquisition costs.
(ii) The basis of the real estate of the Contribution Properties is the
summation of cash paid, assumed debt and obtain new mortgage notes
payable (New Notes), and the aggregate value of Operating Partnership
units (valued at $20.00 per unit) issued to the Contributors as follows:
<TABLE>
<CAPTION>
VALUE OF
OPERATING
MORTGAGE PARTNERSHIP TOTAL
PROPERTIES CASH NOTES UNITS BASIS
---------- ------- -------- ----------- --------
<S> <C> <C> <C> <C>
IBD Properties+..................... $ 5,151 $33,925 $18,389 $ 57,465
NAC Properties*..................... 23,521 56,000 18,542 98,063
------- ------- ------- --------
Total........................... $28,672 $89,925 $36,931 $155,528
======= ======= ======= ========
</TABLE>
--------
(+) Included in Mortgage Notes is an assumed existing mortgage note
payable of $6,425.
(*) Includes $1,500 of non-real estate assets.
F-6
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--(CONTINUED)
(iii) The basis of the real estate of the Acquisition Properties is equal to
the summation of the cash purchase prices as follows:
<TABLE>
<CAPTION>
PURCHASE
PROPERTY PRICE
-------- --------
<S> <C>
475 Superior Avenue.............................................. $13,450
Enterprise Centre................................................ 11,307
Salt Creek Office Center......................................... 10,400
280 Schuman Boulevard............................................ 6,200
-------
Total........................................................ $41,357
=======
</TABLE>
(iv) The basis of the investment in subsidiary is equal to the cash purchase
price as follows:
<TABLE>
<CAPTION>
PURCHASE
CONTRIBUTION TO SUBSIDIARY PRICE
-------------------------- --------
<S> <C>
Continental...................................................... $5,890
======
</TABLE>
(C) Consolidation Pro Forma Adjustments (Consolidation Adjustment):
To record the consolidation of the assumed contribution of the Prime
Properties and Prime Contribution Properties by Prime, contribution of the
Contribution Properties by the Contributors and the purchase of the
Acquisition Properties and Continental by the Operating Partnership (the
Consolidation). Prime (before Prime contributes 3.8 million units to
Primestone) and the Contributors will receive 5.42 million units representing
a 24.23% ownership interest in the Operating Partnership.
(D) Offering Pro Forma Adjustments (Offering Adjustment):
To record the Offering based upon the assumed issuance of 2.0 million
Convertible Preferred Shares at $20 per share and 12.38 million Common Shares,
at $20 per share and the contribution of the net proceeds by the Company to
the Operating Partnership in exchange for 2.0 million convertible preferred
units and 12.38 million common units representing a 55.34% ownership interest
in the Operating Partnership and the issuance of 4.57 million common units for
$85 million, representing a 20.43% ownership in the Operating Partnership.
(E) Real Estate, Net:
Consolidation Adjustment:
<TABLE>
<S> <C>
Increase in basis resulting from the purchase of the non-Prime
third party's partners' deficit in certain of the Prime Prop-
erties indicated below (See Note N)........................... $ 1,307
Elimination of 77 Fitness (See Notes A and G).................. (87)
--------
$ 1,220
========
Offering Adjustment:
Purchase of the non-Prime third party owners' interest in cer-
tain of the Prime Properties (See Note F)..................... $ 1,705
========
</TABLE>
F-7
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--(CONTINUED)
(F) Cash:
Consolidation Adjustment:
<TABLE>
<S> <C>
Elimination of 77 Fitness (See Notes A and G).................. $ (110)
========
Offering Adjustment:
Gross proceeds from the sale of 2.0 million convertible pre-
ferred shares of beneficial interest, at $20 per share........ $ 40,000
Gross proceeds from the sale of 12.38 million common shares of
beneficial interest, at $20 per share......................... 247,602
Less: underwriters discount ($17,732) and issuance costs
($4,500 incurred by Prime).................................... (22,232)
--------
Net proceeds (See Note Q)..................................... 265,370
Proceeds from the issuance of 4.57 million Operating Partner-
ship units to Primestone (See Note O)......................... 85,000
Repayment of current mortgage note payable on 77 West Wacker
(See
Note J)....................................................... (229,841)
Payment of transfer tax and legal costs related to the
contribution of properties by Prime ($1,900), the IBD
Contributors ($200) and the NAC Contributors ($400) (See Note
O)............................................................ (2,500)
Payment of swap breakage fee related to the repayment of cur-
rent mortgage note payable on 77 West Wacker (See Note O)..... (749)
Repayment of mortgage notes payable on certain of the Prime
Properties (See Note J)....................................... (13,186)
Payment of New Note fees and Credit Facility fees (See Note
H)............................................................ (1,718)
Purchase of the non-Prime third party owners' interest in cer-
tain of the Prime Properties (See Note E)..................... (1,705)
--------
$100,671
========
(G) Investment in Subsidiary:
Consolidation Adjustment:
Contribution of net assets of 77 Fitness to the Services Com-
pany (See
Note A)....................................................... $ 87
========
(H) Deferred Costs, net:
Consolidation Adjustment:
Elimination of net deferred financing fees on current mortgage
notes payable on 77 West Wacker and certain other Prime Prop-
erties being forgiven or repaid (See Note N).................. $ (350)
========
Offering Adjustment:
Payment of New Note fees of $368 (10 year term) and Credit Fa-
cility fees of $1,350 (3 year term) (See Note F).............. $ 1,718
========
</TABLE>
F-8
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--(CONTINUED)
(I) Other Assets/Other Liabilities:
Consolidation Adjustment:
<TABLE>
<S> <C>
Elimination of deferred offering costs, incurred by an
affiliate to be paid as part of the estimated issuance costs
(See Notes F and P)......................................... $ (2,340)
=========
(J) Mortgage Notes Payable:
Consolidation Adjustment:
Forgiveness of unpaid mortgage note payable to non-Prime af-
filiate on
77 West Wacker (See Note N)................................. $(100,808)
=========
Offering Adjustment:
Repayment of current mortgage note payable on 77 West Wacker
(See Note F)................................................ $(229,841)
Repayment of mortgage notes payable on certain of the Prime
Properties (See Note F)..................................... (13,186)
---------
$(243,027)
=========
(K) Bonds Payable:
Consolidation Adjustment:
Forgiveness of bonds payable to Prime affiliate (See Note
N).......................................................... $ (12,000)
=========
(L) Accounts Payable and Accrued Expenses:
Consolidation Adjustment:
Elimination of 77 Fitness (See Notes A and G)................ $ (599)
=========
</TABLE>
(M) Leases Assumed
In connection with obtaining certain tenant leases 77 West Wacker
assumed liability for the remaining terms of the tenants' existing
leases. 77 West Wacker has recorded a liability for the difference
between total remaining costs for leases assumed and the expected
benefits from subleases of the assumed lease properties. The related
incentive to lessee has been capitalized as a deferred charge and is
being amortized to rental revenue over the life of the respective
lease. The deferred charge and related liability are adjusted for
changes in the expected benefits from subleases. See footnotes 1 and 5
of the Notes to Combined Financial Statements of the Prime Properties
for additional information.
(N) Partner's Deficit:
Consolidation Adjustment:
<TABLE>
<S> <C> <C>
Forgiveness of mortgage note payable to non-Prime affili-
ate ($100,808) on 77 West Wacker and bonds payable to
Prime affiliate ($12,000) (See Notes J and K)............ $112,808
Elimination of net deferred financing fees on current
mortgage notes payable on 77 West Wacker and certain
other Prime Properties being forgiven or repaid (See Note
H)....................................................... (350)
Elimination of non-Prime third party's partners' deficit
in certain of the Prime Properties (See Note E).......... 1,307
Elimination of 77 Fitness (See Notes A and G)............. 489
Reclassification of the remaining historical Prime Proper-
ties partners'
deficit to minority interest (see Note O)................ 26,025
--------
$140,279
========
</TABLE>
F-9
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET--(CONTINUED)
(O) Minority Interest:
Consolidation Adjustment:
<TABLE>
<S> <C> <C>
Reclasification of the remaining historical Prime
Properties partners' deficit (See Note N)......... $(26,025)
========
Offering Adjustment:
Proceeds from the issuance of 4.57 million Operat-
ing Partnership units to Primestone (See Note F).. $ 85,000
Payment of transfer tax and legal costs related to
the contribution of properties by Prime and the
Contributors (See
Note F)........................................... (2,500)
Payment of swap breakage fee related to the
repayment on current mortgage note payable on 77
West Wacker (See
Note F)........................................... (749)
Adjustment to reflect estimated minority interest
of the Limited Partners in the Operating
Partnership computed as follows:.................. 67,244
--------
$148,995
========
Pro forma total assets............................. $ 550,076
Pro forma total liabilities........................ (192,048)
---------
Pro forma net book value of Operating
Partnership....................................... $ 358,028
=========
Minority interest of the Limited Partners in the
Operating Partnership 44.66....................... $ 159,901
Deduct: Pro forma minority interest before this
adjustment........................................ (92,657)
---------
$ 67,244
=========
(P) Preferred Shares/Common Shares of Beneficial Interest:
Offering Adjustment:
Issuance of 2.0 million convertible preferred
shares of beneficial interest with $0.01 par value
(see Note Q)...................................... $ 20
========
Issuance of 12.38 million common shares of benefi-
cial interest with $0.01 par value (See Note Q)... $ 124
========
(Q) Additional Paid-In Capital:
Offering Adjustment:
Net proceeds from the sale of 2.0 million shares of
beneficial interest at $20 per share and 12.38
million common shares of beneficial interest, at
$20 per share, less underwriters discount and is-
suances costs (See Note F)........................ $265,370
Less: par value of convertible preferred shares of
beneficial interest on 2.0 million shares at $0.01
per share (see Note P)............................ (20)
Less: par value of common shares of beneficial in-
terest on
12.38 million shares at $0.01 per share (See Note
P)................................................ (124)
Adjustment to reflect estimated minority interest
of Limited Partners in the Operating Partnership
(See Note O)...................................... (67,244)
--------
$197,982
========
</TABLE>
F-10
<PAGE>
PRIME GROUP REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRIME
CONTRIBUTION,
CONTRIBUTION CONSOLIDATION PRE OFFERING OFFERING
PRIME AND ACQUISITION PRO FORMA PRIME GROUP REALTY PRO FORMA
PROPERTIES (A) PROPERTIES (B) ADJUSTMENTS (C) TRUST PRO FORMA ADJUSTMENTS (D) PRO FORMA
-------------- --------------- --------------- ------------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Rental.................. $ 16,131 $11,895 $ -- $28,026 $ -- $28,026
Tenant reimbursements... 7,769 2,689 -- 10,458 -- 10,458
Other................... 689 -- (321)(E) 368 -- 368
-------- ------- ------ ------- ------- -------
Total revenue........... 24,589 14,584 (321) 38,852 -- 38,852
EXPENSES:
Property operations..... 4,318 1,844 (446)(F) 5,716 -- 5,716
Real estate taxes....... 5,590 2,209 -- 7,799 -- 7,799
Depreciation and
amortization........... 6,492 -- 2,079 (G) 8,571 244 (G) 8,815
Interest................ 19,236 -- (2,637)(H) 16,599 (11,890)(H) 4,709
Financing fees.......... 640 -- -- 640 -- 640
General and administra-
tive................... 2,687 -- (358)(I) 2,329 638 (I) 2,967
Provision for environ-
mental remediation
costs.................. 3,205 -- -- 3,205 -- 3,205
-------- ------- ------ ------- ------- -------
Total expenses.......... 42,168 4,053 (1,362) 44,859 (11,008) 33,851
-------- ------- ------ ------- ------- -------
Income (loss) from
operations before share
of income of investment
subsidiary, preferred
share dividend and
minority interest...... (17,579) 10,531 1,041 (6,007) 11,008 5,001
Share of income of
investment subsidiary.. -- -- 182 (J) 182 -- 182
-------- ------- ------ ------- ------- -------
Income (loss) before
preferred share
dividend and minority
interest............... (17,579) 10,531 1,223 (5,825) 11,008 5,183
Preferred share
dividend............... -- -- -- -- (1,400)(K) (1,400)
-------- ------- ------ ------- ------- -------
Income (loss) before
minority interest...... (17,579) 10,531 1,223 (5,825) 9,608 3,783
Minority interest....... -- -- -- -- (1,690)(L) (1,690)
-------- ------- ------ ------- ------- -------
Net income (loss)....... $(17,579) $10,531 $1,223 $(5,825) $ 7,918 $ 2,093
======== ======= ====== ======= ======= =======
Average number of
units/common shares of
beneficial interest
outstanding............ 5,422 12,380
======= =======
Net income (loss) per
unit/common share of
beneficial
interest (M)........... $ (1.07) $ 0.17
======= =======
</TABLE>
See accompanying notes.
F-11
<PAGE>
PRIME GROUP REALTY TRUST
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRIME
CONTRIBUTION,
CONTRIBUTION CONSOLIDATION PRE OFFERING OFFERING
PRIME AND ACQUISITION PRO FORMA PRIME GROUP REALTY PRO FORMA
PROPERTIES (A) PROPERTIES (B) ADJUSTMENTS (C) TRUST PRO FORMA ADJUSTMENTS (D) PRO FORMA
-------------- --------------- --------------- ------------------ --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUE:
Rental.................. $ 30,538 $22,463 $ -- $ 53,001 $ -- $53,001
Tenant reimbursements... 14,225 4,991 -- 19,216 -- 19,216
Other................... 3,397 -- (619)(E) 2,778 -- 2,778
-------- ------- ------- -------- -------- -------
Total revenue........... 48,160 27,454 (619) 74,995 -- 74,995
EXPENSES:
Property operations..... 9,767 3,799 (1,034)(F) 12,532 -- 12,532
Real estate taxes....... 9,383 4,057 -- 13,440 13,440
Depreciation and
amortization........... 12,409 -- 4,155 (G) 16,564 487 (G) 17,051
Interest................ 37,217 -- (4,116)(H) 33,101 (23,810)(H) 9,291
Financing fees.......... 1,232 -- -- 1,232 -- 1,232
General and
administrative......... 6,488 -- (714)(I) 5,774 1,387 (I) 7,161
Write-off of deferred
tenant costs........... 3,081 -- -- 3,081 -- 3,081
-------- ------- ------- -------- -------- -------
Total expenses.......... 79,577 7,856 (1,709) 85,724 (21,936) 63,788
-------- ------- ------- -------- -------- -------
Income (loss) from
operations before share
of income of investment
subsidiary, preferred
share dividend and
minority interest...... (31,417) 19,598 1,090 (10,729) 21,936 11,207
Share of income of
investment subsidiary.. -- -- 387 (J) 387 -- 387
-------- ------- ------- -------- -------- -------
Income (loss) before
preferred share
dividend and minority
interest............... (31,417) 19,598 1,477 (10,342) 21,936 11,594
Preferred share
dividend............... -- -- -- -- (2,800)(K) (2,800)
-------- ------- ------- -------- -------- -------
Income (loss) before
minority interest...... (31,417) 19,598 1,477 (10,342) 19,136 8,794
Minority interest....... -- -- -- -- (3,928)(L) (3,928)
-------- ------- ------- -------- -------- -------
Net income (loss)....... $(31,417) $19,598 $ 1,477 $(10,342) $ 15,208 $ 4,866
======== ======= ======= ======== ======== =======
Average number of
units/common shares of
beneficial interest
outstanding............ 5,422 12,380
======== =======
Net income (loss) per
unit/common share of
beneficial interest
(M).................... $ (1.91) $ 0.39
======== =======
</TABLE>
See accompanying notes.
F-12
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND FOR THE YEAR ENDED DECEMBER 31,
1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
BASIS OF PRESENTATION
The following pro forma adjustments reflect the Offering and Formation
transactions, including the contribution of the net proceeds of the Offering
by the Company to the Operating Partnership, the contribution of the Prime
Properties and the Prime Contribution Properties (one office building
(Citibank Office Plaza) and six industrial properties (Prime Industrial
Contribution Properties) recently acquired by Prime) to the Operating
Partnership, the purchase of non-Prime ownership interests in certain of the
Prime Properties by the Operating Partnership, proceeds from the issuance of
4.57 million Operating Partnership units to Primestone Joint Venture
(Primestone--a joint venture in which Prime is a partner--See "Structure and
Formation of the Company." Prime will contribute 3.38 million of its common
units, described above, to Primestone) the contribution of the IBD Properties
and the NAC Properties by their current owners (the Contributors) to the
Operating Partnership (the IBD Properties and the NAC Properties are
collectively referred to as the Contribution Properties), the purchase of the
Acquisition Properties and Continental Offices Ltd. and Continental Offices,
Ltd. Realty (Continental) by the Operating Partnership, the repayment and
forgiveness of debt on certain of the Prime Properties and the Prime
Contribution Properties by the Operating Partnership. The Operating
Partnership will contribute Continental and other assets to a newly formed
service company (Services Company) in exchange for a non-voting, 95% economic
ownership interest. The Operating Partnership will reflect its investment in
the Services Company using the equity method (See Notes J and N). Prime,
Primestone and the Contributors are collectively referred to as the minority
interest unit holders (Minority Interest) of the Operating Partnership.
(A) Reflects the historical operations of the Prime Properties, which
includes 77 West Wacker and 77 Fitness. The Operating Partnership will
contribute 77 Fitness to the Services Company (See Notes E, F and N).
(B) Reflects the historical operations of the Prime Contribution Properties,
the Contribution Properties and the Acquisition Properties being either
contributed to or acquired by the Operating Partnership.
(C) Consolidation Pro Forma Adjustments (Consolidated Adjustment):
To record the consolidation of the assumed contribution of the Prime
Properties and the Prime Contribution Properties by Prime, contribution of the
Contribution Properties by the Contributors, the purchase of the Acquisition
Properties and Continental by the Operating Partnership (the Consolidation).
Prime and the Contributors will receive 5.42 million units representing a
24.23% ownership interest in the Operating Partnership.
(D) Offering Pro Forma Adjustments (Offering Adjustment):
To record the Offering based upon the assumed issuance of 2.0 million
Convertible Preferred Shares at $20 per share and 12.38 million Common Shares,
at $20 per share and the contribution of the net proceeds by the Company to
the Operating Partnership in exchange for 12.38 million units representing a
55.34% ownership interest in the Operating Partnership and the issuance of
4.57 million common units for $85 million, representing a 20.43% ownership in
the Operating Partnership.
(E) Other Revenue:
Consolidation Adjustment:
<TABLE>
<S> <C> <C>
Elimination of 77 Fitness revenue (See Notes A and N).
</TABLE>
F-13
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(F) Property Operations Expense:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
Consolidation Adjustments:
Property Operations Expense:
<S> <C> <C>
Elimination of 77 Fitness property operation
expenses (See Notes A and N)............... $(283) $ (709)
Elimination of historical costs associated
with property management fees reimbursed by
tenants on certain of the Contribution
Properties................................. (163) (325)
----- -------
$(446) $(1,034)
===== =======
</TABLE>
(G) Depreciation and Amortization:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
Consolidation Adjustment:
<S> <C> <C>
Depreciation expense on the Prime
Contribution, Contribution and Acquisition
Properties.................................. $2,273 $4,541
Depreciation expense on the increase in basis
resulting from the elimination of Partners'
deficit and the purchase of the non-Prime
third party owners' interest in certain of
the Prime Properties........................ 55 110
Elimination of amortization expenses of
deferred financing costs related mortgage
loan payable on 77 West Wacker being repaid
or forgiven................................. (249) (496)
------ ------
$2,079 $4,155
====== ======
Offering Adjustment:
Amortization of New Note fees (10 year term)
and Credit Facility fees (3 year term)...... $ 244 $ 487
====== ======
</TABLE>
(H) Interest Expense:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
Consolidation Adjustment:
<S> <C> <C>
Elimination of interest expense on mortgage
notes payable to non-Prime affiliate on 77
West Wacker being forgiven................. $ (5,649) $(10,137)
Elimination of interest expense on bonds
payable to Prime affiliate being forgiven.. (328) (658)
Interest expense on new and assumed mortgage
notes payable on the Contribution
Properties................................. 3,340 6,679
-------- --------
$ (2,637) $ (4,116)
======== ========
Offering Adjustment:
Elimination of interest expense on current
mortgage notes payable on 77 West Wacker
and on certain other Prime Properties being
repaid..................................... $(11,890) $(23,810)
======== ========
</TABLE>
F-14
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(I) General and Administrative:
Historical general and administrative expenses (G&A) have consisted of
property level costs. Corporate level G&A was allocated to the
property level through property management and asset management fees,
administration fees and other reimbursables (Prime Fees: See Note 6 to
the Notes to the Combined Financial Statements of the Prime
Properties). Upon the completion of the Offering and Formation
transactions, certain employees previously employed by Prime (costs
associated with the Prime Fees) will become employees of the Company.
The following pro forma adjustments reflect management's estimate of
the additional corporate G&A the Company will incur as a public
company. In addition, G&A has been adjusted for non-recurring expenses
as a result of Offering and Formation transactions.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
Consolidation Adjustment:
<S> <C> <C>
Elimination of loan fees on 77 West Wacker
that will no longer be incurred by the
Company................................... $ (358) $ (714)
====== ======
Offering Adjustment:
Estimated incremental increases in G&A to
be incurred as a public company........... $ 638 $1,387
====== ======
</TABLE>
(J) Share of income of investment subsidiary:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
Consolidation Adjustment:
<S> <C> <C>
Share of income of Services Company (See
Note N)................................... $182 $387
==== ====
</TABLE>
(K) Convertible Preferred Share Dividend:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
Convertible preferred share dividend with a
7% yield.................................. $(1,400) $(2,800)
======= =======
</TABLE>
(L) Minority Interest:
Offering Adjustment:
Represents income allocated to the Limited Partners (44.66%)
(M) Net Income (Loss) per Unit/Common Share of Beneficial Interest:
Represents "Pre-Offering Prime Group Realty Trust Pro Forma" net loss
divided by 5.42 million units issued to Prime and the Contributors and "Pro
Forma" net income divided by 12.38 million common shares of beneficial
interest.
F-15
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(N) Services Company
The Services Company operations consist of employees previously employed by
Prime, Continental and 77 Fitness.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997 FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------------- -------------------------------------------------
77 PRO FORMA PRO 77 PRO FORMA PRO
CONTINENTAL (1) FITNESS (1) ADJUSTMENTS FORMA CONTINENTAL (1) FITNESS (1) ADJUSTMENTS FORMA
--------------- ----------- ----------- ------ --------------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE:
Construction and man-
agement fees.......... $8,124 $ -- $ -- $8,124 $14,134 $ -- $ -- $14,134
Other.................. -- 321 289 (2) 610 -- 619 898 (2) 1,517
------ ----- ----- ------ ------- ----- ------- -------
Total revenue.......... 8,124 321 289 8,734 14,134 619 898 15,651
EXPENSES:
Operating expenses..... 7,306 283 689 (3) 8,278 12,381 709 1,609 (3) 14,699
Interest expense....... -- -- 229 (4) 229 -- -- 459 (4) 459
Depreciation and
amortization.......... 29 -- 281 (5) 310 70 -- 550 (5) 620
------ ----- ----- ------ ------- ----- ------- -------
Total expenses......... 7,335 283 1,199 8,817 12,451 709 2,618 15,778
------ ----- ----- ------ ------- ----- ------- -------
Income (loss) before
income taxes.......... 789 38 (910) (83) 1,683 (90) (1,720) (127)
Income tax benefit .... -- -- 33(6) 33 -- -- 51 (6) 51
------ ----- ----- ------ ------- ----- ------- -------
Net income (loss)...... $ 789 $ 38 $(877) $ (50) $ 1,683 $ (90) $(1,669) $ (76)
====== ===== ===== ====== ======= ===== ======= =======
Company's share of net
income
(loss) (7)............ $ (47) $ (72)
Interest income recog-
nized by Company (8).. 229 459
------ -------
Company's share of the
net earnings of the
Services Company...... $ 182 $ 387
====== =======
</TABLE>
- -------
(1) Represents the historical operations of Continental and 77 Fitness.
(2) Revenue adjustments:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
Revenue derived by certain employees previ-
ously employed by Prime who will become em-
ployees of the Service Company............. $289 $898
==== ====
</TABLE>
(3) Operating expense adjustment:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
Expenses related to certain employees
previously employed by Prime who will become
employees of the Service Company............ $689 $ 1,609
==== =======
</TABLE>
(4) Represents interest expense on a $4,170 promissory note issued by the
Services Company to the Operating Partnership at an interest rate of 11%
per annum (See Note 8).
F-16
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(5) Adjustment to reflect estimated depreciation and amortization of the
Services Company:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
1997 1996
-------------- ------------
<S> <C> <C>
Depreciation expense on Continental and 77
Fitness fixed assets (5 years)............ $ 24 $ 48
Amortization of $5,720 of goodwill relating
to
the acquisition of Continental (10
years).................................... 286 572
Less: Historical depreciation.............. (29) (70)
---- ----
$281 $550
==== ====
</TABLE>
(6) Estimated income tax benefit (expense) of the Services Company at statutory
income tax rates (40%)
(7) The Operating Partnership will have a non-voting, 95% economic ownership
interest of the Services Company.
(8) The Operating Partnership will recognize interest income from the
promissory note issued by the Services Company (See Note 4) as part of its
share of income (loss) from the Services Company.
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying balance sheet of Prime Group Realty Trust,
a Maryland trust, as of July 21, 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 the significant
estimates made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet 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 Prime Group Realty Trust as of
July 21, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
July 21, 1997
F-18
<PAGE>
PRIME GROUP REALTY TRUST
BALANCE SHEET
JULY 21, 1997
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Cash................................................................... $ 1
Deferred offering costs................................................ 2,340
------
Total assets........................................................... $2,341
======
LIABILITIES AND SHAREHOLDER'S EQUITY
Due to affiliate....................................................... $2,340
------
Total liabilities...................................................... 2,340
Shareholder's equity:
Common shares of beneficial interest, $.01 par value per share, 100
shares authorized, issued and outstanding............................. --
Additional paid-in capital............................................. 1
------
Total shareholder's equity............................................. 1
------
Total liabilities and shareholder's equity............................. $2,341
======
</TABLE>
See notes to balance sheet.
F-19
<PAGE>
PRIME GROUP REALTY TRUST
NOTES TO BALANCE SHEET
JULY 21, 1997
1. FORMATION OF THE COMPANY
Prime Group Realty Trust (the Company), was incorporated in Maryland on July
21, 1997. The Company will file a Registration Statement on Form S-11 with the
Securities and Exchange Commission with respect to a proposed public offerings
(the Offering) of 2.0 million convertible preferred shares of beneficial
interest and 12.38 million common shares of beneficial interest. The Company
has been formed to succeed to the business of The Prime Group, Inc. (Prime)
consisting of a portfolio of eight office, fourteen industrial properties and
a parking garage facility (the Prime Properties) and the real estate
ownership, acquisition, development, leasing and management businesses
historically conducted by Prime. The Company's assets will be owned and
controlled by, and all of its operations will be conducted through Prime Group
Realty, L.P. (the Operating Partnership) and other subsidiaries.
2. INCOME TAXES
It is the intent of the Company to qualify as a real estate investment trust
(REIT) under the Internal Revenue Code of 1986, as amended. As a REIT, the
Company generally will not be subject to federal income tax to the extent that
it distributes at least 95% of its REIT taxable income to its Shareholders.
REITs are subject to 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 tax rates.
3. DEFERRED OFFERING COSTS
In connection with the Offering, affiliates have or will incur legal,
accounting and related costs which will be reimbursed by the Company upon the
consummation of the Offering. These costs will be deducted from the gross
proceeds of the Offering.
4. USE OF ESTIMATES
The preparation of the balance sheet in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts in the balance sheet and accompanying notes.
Actual results could differ from these estimates.
F-20
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees Prime Group Realty Trust
We have audited the accompanying combined balance sheets of the Prime
Properties as of June 30, 1997, and December 31, 1996, and 1995, and the
related combined statements of operations, changes in partners' deficit, and
cash flows for the six months ended June 30, 1997, and for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Prime Properties management. Our responsibility is
to express an opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the combined financial position of the Prime
Properties at June 30, 1997, and December 31, 1996 and 1995, and the combined
results of their operations and their cash flows for the six months ended June
30, 1997, and for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
August 20, 1997
F-21
<PAGE>
PRIME PROPERTIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
JUNE 30
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
ASSETS
Real estate at cost:
Land............................................. $ 23,530 $ 23,530 $ 23,505
Building and Improvements........................ 271,839 268,227 266,053
-------- --------- --------
295,369 291,757 289,558
Accumulated depreciation......................... (49,912) (44,411) (34,501)
-------- --------- --------
245,457 247,346 255,057
Cash............................................. 4,458 5,573 1,879
Tenant receivables............................... 41,389 41,384 43,669
Deferred costs--net.............................. 26,191 26,883 35,568
Due from affiliates.............................. 91 2,894 5,752
Other............................................ 692 1,150 1,716
-------- --------- --------
Total assets..................................... $318,278 $ 325,230 $343,641
======== ========= ========
LIABILITIES AND PARTNERS' DEFICIT
Mortgage notes payable........................... $236,304 $ 235,886 $234,730
Mortgage notes payable--affiliates............... 107,531 99,647 84,382
Bonds payable.................................... 74,450 74,450 54,600
Bonds payable--affiliates........................ 12,000 12,000 31,850
Accrued interest payable......................... 2,485 2,538 2,222
Accrued real estate taxes........................ 10,921 9,944 9,693
Accounts payable and accrued expenses............ 2,416 4,213 2,833
Liabilities for leases assumed................... 6,615 7,157 12,582
Due to affiliates................................ 734 708 934
Other............................................ 5,101 1,384 1,167
-------- --------- --------
Total liabilities................................ 458,557 447,927 434,993
Minority interest................................ (7,273) (6,905) (6,047)
Partners' deficit................................ (133,006) (115,792) (85,305)
-------- --------- --------
Total liabilities and partners' deficit.......... $318,278 $ 325,230 $343,641
======== ========= ========
</TABLE>
See accompanying notes.
F-22
<PAGE>
PRIME PROPERTIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
------------------ ----------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE
Rental...................... $ 16,131 $ 14,449 $ 30,538 $ 33,251 $ 30,352
Tenant reimbursements....... 7,769 6,962 14,225 14,382 12,451
Parking..................... 189 186 320 345 343
Gain on sale of assets...... -- 588 846 771 47
Insurance settlement........ -- -- -- 7,257 --
Other....................... 500 665 2,231 1,599 2,780
-------- -------- -------- -------- --------
Total revenue............... 24,589 22,850 48,160 57,605 45,973
EXPENSES
Property operations......... 4,318 4,304 9,767 9,479 8,852
Real estate taxes........... 5,590 5,154 9,383 9,445 9,057
Depreciation and amortiza-
tion....................... 6,492 6,146 12,409 12,646 11,624
Interest.................... 13,587 13,512 26,422 27,671 25,985
Interest--affiliates........ 5,649 4,852 10,795 8,563 7,402
Financing fees.............. 640 692 1,232 -- --
Property and asset manage-
ment fees--affiliates...... 801 766 1,561 1,496 1,388
General and administrative.. 1,886 1,575 4,927 4,508 3,727
Provision for environmental
remediation costs.......... 3,205 -- -- -- --
Write off deferred tenant
costs...................... -- -- 3,081 13,373 --
-------- -------- -------- -------- --------
Total expenses.............. 42,168 37,001 79,577 87,181 68,035
-------- -------- -------- -------- --------
Loss before minority inter-
est........................ (17,579) (14,151) (31,417) (29,576) (22,062)
Loss allocated to minority
interest................... 368 371 894 3,281 5,393
-------- -------- -------- -------- --------
Net loss.................... $(17,211) $(13,780) $(30,523) $(26,295) $(16,669)
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-23
<PAGE>
PRIME PROPERTIES
COMBINED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTALS
---------
<S> <C>
Partners' deficit at January 1, 1994................................ $ (28,854)
Contributions....................................................... 349
Distributions....................................................... (178)
Assignment of minority interest..................................... (20,580)
Net forgiveness of amounts due to affiliates........................ 210
Net loss............................................................ (16,669)
---------
Partners' deficit at December 31, 1994.............................. (65,722)
Contributions....................................................... 732
Distributions....................................................... (179)
Assignment of minority interest..................................... 3,243
Forgiveness of notes payable to minority interest................... 2,916
Net loss............................................................ (26,295)
---------
Partners' deficit at December 31, 1995.............................. (85,305)
Contributions....................................................... 40
Distributions....................................................... (4)
Net loss............................................................ (30,523)
---------
Partners' deficit at December 31, 1996.............................. (115,792)
Distributions....................................................... (3)
Net loss............................................................ (17,211)
---------
Partners' deficit at June 30, 1997.................................. $(133,006)
=========
</TABLE>
See accompanying notes.
F-24
<PAGE>
PRIME PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
--------------------- ----------------------------
1997 1996 1996 1995 1994
-------- ----------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................... $(17,211) $(13,780) $(30,523) $(26,295) $(16,669)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Amortization of costs for
leases assumed (included
in rental revenue)...... 622 744 1,244 1,539 1,008
Decrease (increase) in
tenant receivables from
straight-lining rent.... 149 (452) (645) (8,779) (13,537)
Gain on sale of real
estate.................. -- (588) (846) (771) (47)
Depreciation and
amortization............ 6,492 6,146 12,409 12,646 11,624
Interest added to
principal on mortgage
note payable affiliate.. 5,642 4,783 10,002 8,427 7,263
Standby loan fee-
affiliate added to
principal on mortgage
note payable affiliate.. 262 262 522 498 399
Write-off of deferred
tenant costs............ -- -- 3,081 13,373 --
Minority interest........ (368) (371) (894) (3,281) (5,393)
Changes in operating
assets and liabilities:
Decrease (increase) in
tenant receivables.... (154) 718 1,990 2,326 (2,864)
(Increase) decrease in
deferred costs........ (921) 365 (703) (907) 560
Decrease in other
assets................ 458 217 566 2,937 5,657
(Decrease) increase in
accrued interest
payable............... (53) 506 316 (1,221) 132
Increase in accrued
real estate taxes..... 977 1,180 251 5 547
(Decrease) increase in
accounts payable and
accrued expenses...... (1,797) (1,271) 1,380 (34) 484
Decrease in liabilities
for assumed leases.... (542) (1,142) (1,532) (1,985) (3,160)
Increase (decrease) in
other liabilities..... 3,717 (479) 217 263 121
-------- -------- -------- -------- --------
Net cash used in operating
activities................ (2,727) (3,162) (3,165) (1,259) (13,875)
</TABLE>
See accompanying notes.
F-25
<PAGE>
PRIME PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30 YEAR ENDED DECEMBER 31
-------------------- -------------------------
1997 1996 1996 1995 1994
------- ----------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INVESTING ACTIVITIES
Proceeds from sale of real es-
tate......................... $ -- $ 1,197 $ 2,110 $ 921 $ 61
Expenditures for real estate.. (3,612) (731) (3,842) (4,842) (6,191)
Decrease (increase) in due
from affiliates.............. 2,803 1,101 2,858 (5,255) (365)
------- ------- ------- ------- -------
Net cash (used in) provided by
investing activities......... (809) 1,567 1,126 (9,176) (6,495)
FINANCING ACTIVITIES
Additions to deferred financ-
ing costs.................... -- -- (10) (225) (112)
Proceeds from mortgage notes
payable...................... 480 1,535 1,239 9,815 14,859
Proceeds from mortgage notes
payable--affiliates.......... 1,980 2,435 5,891 2,693 1,378
Repayment of mortgage notes
payable...................... (62) (38) (83) (384) (73)
Repayment of mortgage notes
payable--affiliates.......... -- -- (1,150) (1,079) (64)
Increase (decrease) in due to
affiliates................... 26 (204) (226) (347) (882)
Contributions from partners... -- 35 80 872 671
Distributions to partners..... (3) -- (8) (357) (355)
Acquisition of partnership in-
terest....................... -- -- -- (115) --
------- ------- ------- ------- -------
Net cash provided by financing
activities................... 2,421 3,763 5,733 10,873 15,422
------- ------- ------- ------- -------
Net (decrease) increase in
cash......................... (1,115) 2,168 3,694 438 (4,948)
Cash at beginning of period... 5,573 1,879 1,879 1,441 6,389
------- ------- ------- ------- -------
Cash at end of period......... $ 4,458 $ 4,047 $ 5,573 $ 1,879 $ 1,441
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-26
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Prime Properties represent a combination of 23 partnerships described
below (Partnerships) that own, operate, and manage office and industrial
properties (Properties) in the greater Chicagoland area and Tennessee. The
Properties are under common management and ownership of The Prime Group, Inc.
and its affiliates (Prime) as either the managing general partner (responsible
for the operations of the Properties) or 100% owner. As of June 30, 1997, six
of the Partnerships have third party owners (Third Party), whose ownership
interests have been reflected as a minority interest in the combined financial
statements. Pursuant to the formation transactions more fully described
elsewhere in this Registration Statement and Prospectus, Prime Properties will
be owned and operated by a newly formed corporation, Prime Group Realty Trust
(the Company), whose shares are being registered pursuant to this Registration
Statement (the Offering).
The Partnerships and Properties owned and operated by the Prime Properties
at June 30, 1997, are as follows:
<TABLE>
<CAPTION>
OWNERSHIP INTEREST
-----------------------------------
PRIME 3RD PARTY
----------------- -----------------
GENERAL LIMITED GENERAL LIMITED
PARTNERSHIP PROPERTY PARTNERS PARTNERS PARTNERS PARTNERS
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OFFICE
77 West Wacker Limited
Partnership (77 West
Wacker)................ 77 West Wacker Building 5.00% 89.45% 5.00% 0.55%
Nashville Office
Building I, Ltd........ Nashville Office Building 24.50 51.00 24.50 --
Professional Plaza,
Ltd.................... Professional Plaza 24.50 51.00 24.50 --
Old Kingston Properties,
Ltd.................... Old Kingston 24.50 51.00 24.50 --
Two Centre Square,
Ltd.................... Two Centre Square 24.50 51.00 24.50 --
INDUSTRIAL
Hammond Enterprise
Center Limited
Partnership (HEC)...... Hammond Enterprise Center 22.50 77.50 -- --
East Chicago Enterprise
Center Limited
Partnership (ECEC)..... East Chicago Enterprise Center 22.50 77.50 -- --
Kemper/Prime Industrial
Partners (KP).......... Chicago Enterprise Center 100.00 -- -- --
Enterprise Center I,
L.P. (ECI)............. Enterprise Center I 50.00 50.00 -- --
Enterprise Center II,
L.P.................... Enterprise Center II 50.00 50.00 -- --
Enterprise Center III,
L.P.................... Enterprise Center III 50.00 50.00 -- --
Enterprise Center IV,
L.P.................... Enterprise Center IV 50.00 50.00 -- --
Enterprise Center V,
L.P.................... Enterprise Center V 50.00 50.00 -- --
Enterprise Center VI,
L.P.................... Enterprise Center VI 50.00 50.00 -- --
Enterprise Center VII,
L.P.................... Enterprise Center VII 50.00 50.00 -- --
Enterprise Center VIII,
L.P.................... Enterprise Center VIII 50.00 50.00 -- --
Enterprise Center IX,
L.P.................... Enterprise Center IX 50.00 50.00 -- --
Enterprise Center X,
L.P.................... Enterprise Center X 50.00 50.00 -- --
Arlington Heights I,
L.P.................... Arlington Heights I 50.00 50.00 -- --
Arlington Heights II,
L.P.................... Arlington Heights II 50.00 50.00 -- --
Arlington Heights III,
L.P.................... Arlington Heights III 50.00 50.00 -- --
OTHER
Triad Parking Company,
Ltd.................... Triad Parking Facility 0.50 49.50 0.50 49.50
77 Fitness Center,
Ltd.................... Executive Sports and Fitness Center 10.00 90.00 -- --
</TABLE>
F-27
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Certain Third Party owners assigned their limited partner interests in 77
West Wacker ($18,357 deficit in 1994), HEC ($439 deficit in 1995), ECEC ($751
capital in 1995) and KP ($2931 capital in 1995) to Prime. In addition, in
1994, HEC and ECEC acquired their Third Party ownership interest in exchange
for mortgage notes payable totaling $2,716 (collectively, HEC's and ECEC's
Third Party owners had a deficit balance of $2,223, including the notes
payable, at the acquisition date), which, along with accrued interest, were
forgiven in 1995 (see Note 4). During 1995, HEC acquired the remaining Third
Party ownership interest for cash of $115. All acquired Third Party ownership
interests were assigned to Prime.
All significant intercompany accounts and transactions have been eliminated
in combination.
The combined financial statements for the six months ended June 30, 1996 are
unaudited. In the opinion of management, such financial statements reflect all
adjustments necessary for a fair presentation. All such adjustments are of a
normal and reoccurring nature.
REAL ESTATE
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of, under which the Partnerships are required to recognize
impairment losses for the Properties when indicators of impairment are present
and the Properties' expected undiscounted cash flows are not sufficient to
recover the Properties' carrying value. The Partnerships adopted Statement No.
121 effective January 1, 1995. No impairment losses have been recognized in
the accompanying combined financial statements. Interest and other direct
costs incurred during construction periods are capitalized as a component of
the building costs. Expenditures for ordinary maintenance and repairs are
expensed to operations as incurred. Significant renovations and improvements
which improve and/or extend the useful life of the asset are capitalized and
depreciated over their estimated useful life. Depreciation is calculated on
the straight-line method over the estimated useful lives of assets, which are
as follows:
<TABLE>
<S> <C>
Building and improvements Primarily 50 years
Tenant improvements Term of related leases
</TABLE>
DEFERRED COSTS
Deferred financing costs are amortized on the straight-line method over the
terms of the loans. Deferred leasing costs are amortized on the straight-line
method over the terms of the related lease agreements.
LEASES ASSUMED
In connection with obtaining certain tenant leases 77 West Wacker assumed
liability for the remaining terms of the tenants' existing leases. 77 West
Wacker has recorded a liability for the difference between total remaining
costs for leases assumed and the expected benefits from subleases of the
assumed lease properties. The related incentive to lessee has been capitalized
as a deferred charge and is being amortized to rental revenue over the life of
the respective lease. The deferred charge and related liability are adjusted
for changes in the expected benefits from subleases. During 1996, 77 West
Wacker wrote off $3,893 of deferred charges and reduced the related liability
due to changes in the estimated benefits from subleases.
RENTAL REVENUE
Rental revenue is recorded on the straight-line method over the terms of the
related lease agreements. As a result, $149 of cash was received in excess of
recorded rental revenue during the six months ended June 30, 1997 and $452
(unaudited), $645, $8,779 and $13,537 of noncash rent was recorded as rental
revenue during
F-28
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the six months ended June 30, 1996 and the years ended December 31, 1996,
1995, and 1994, respectively, and are included in accounts receivable. As of
June 30, 1997, December 31, 1996 and 1995, the balance of the accounts
receivable relating to the straight-lining of rental revenue is $38,302,
$38,451 and $38,746 respectively.
INTEREST RATE SWAP AGREEMENT
77 West Wacker has entered into an interest rate swap agreement to
effectively convert its variable-rate borrowing into a fixed-rate obligation
(see Note 3). The interest rate differential paid or received is included as
an adjustment to interest expense in the accompanying combined financial
statements.
INCOME TAXES
The Partnerships pay no income taxes, and the income or loss from the
Partnerships is includable on the respective income tax returns of the
Partners.
USE OF ESTIMATES
The preparation of the combined financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect amounts reported in the combined financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. DEFERRED COSTS
Deferred costs consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
JUNE 30
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Financing costs................................ $ 6,757 $ 6,757 $ 6,879
Leasing costs.................................. 36,307 35,386 41,971
-------- -------- --------
43,064 42,143 48,850
Less: Accumulated amortization................. (16,873) (15,260) (13,282)
-------- -------- --------
$ 26,191 $ 26,883 $ 35,568
======== ======== ========
</TABLE>
3. MORTGAGE NOTES AND BONDS PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
JUNE 30
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Mortgage notes payable to various commercial
lenders (A).................................... $229,841 $229,361 $229,361
Mortgage notes payable to various financial in-
stitutions, interest at a variable rate of
prime plus 1/2% per annum and a fixed rate of
7.375% per annum with principal and interest
payable monthly through October 1998........... 6,463 6,525 5,369
-------- -------- --------
$236,304 $235,886 $234,730
======== ======== ========
Bonds Payable:
Variable rate taxable and tax-exempt bonds is-
sued by various state and local government au-
thorities (B), (C)............................. $ 74,450 $ 74,450 $ 54,600
======== ======== ========
</TABLE>
(A) 77 West Wacker has entered into a mortgage note agreement (Agreement)
with a consortium of commercial lenders providing a maximum loan of $230,000
(Loan). The Loan, which is collateralized by a first mortgage on the 77 West
Wacker Building, is due on March 14, 1998. Under the terms of the Agreement,
77 West Wacker is to make monthly interest-only payments. Interest is
calculated using certain variable rate indices,
F-29
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. MORTGAGE NOTES AND BONDS PAYABLE (CONTINUED)
as defined (6.48% at June 30, 1997). To reduce the impact of increases in
interest rates, 77 West Wacker also entered into an interest rate swap
agreement with affiliates of one of 77 West Wacker's Third Party owner
(Counterparties) for the outstanding principal balance on the Agreement up to
a maximum principal amount of $230,000. Under the terms of the interest rate
swap agreement, 77 West Wacker is to pay the Counterparties interest monthly
at a fixed rate of 10% per annum. 77 West Wacker is to receive monthly
interest payments from the Counterparties at the variable rate and is then
responsible for making the monthly interest payments required under the terms
of the Agreement. The interest rate swap agreement matures at the time the
related Agreement matures. 77 West Wacker is exposed to credit loss in the
event of nonperformance by the Counterparties to the interest rate swap
agreement. However, 77 West Wacker does not anticipate such nonperformance by
the Counterparties. The amount of the exposure is generally limited to the
amount of any payments due but not yet received from the Counterparties. In
addition, 77 West Wacker is subject to market risk as a result of potential
future decreases in the variable rate indices specified by the Agreement.
If the Loan is not repaid on or prior to March 14, 1998, 77 West Wacker will
be required to either extend the maturity date or refinance the loan. The
combined financial statements do not include any adjustments to reflect the
outcome of this matter.
(B) Permanent financing for the development of certain Industrial Properties
has been provided by $48,150 of tax exempt industrial development revenue
bonds (Bonds) (See Note 4--on December 13, 1995 and on May 20, 1996, the Bonds
were acquired by independent third party financial institutions from an
affiliate of Prime). The Bonds mature on June 1, 2022.
Under the terms of the Bond loan agreements, the borrowing Partnerships are
to make interest-only payments monthly, calculated using a floating rate
determined by the Remarketing Agent of the Bonds. The rates ranged from 3.30%
to 4.75% during the six months ended June 30, 1997 and 2.85% to 4.40% during
1996. The rate at June 30, 1997 was 4.40%, at December 31, 1996 was 4.40% and
at December 31, 1995, ranged from 5.25% to 5.51%.
The maximum annual interest rate on the Bonds is 13%. Under certain
conditions, the interest rate on the Bonds may be converted to a fixed rate at
the request of the borrowing Partnership.
Beginning in May of 1996, the Bonds were collateralized by letters of credit
totaling $48,918 from a financial institution that expire May 19, 1999. In
connection with the letters of credit, the borrowing Partnerships pay letter
of credit financing fees of 1.75% per annum of the face amount, payable
quarterly in advance. The letters of credit are collateralized by a first
mortgage on the related properties.
The bondholders may tender bonds on any business day during the variable
interest rate period discussed above and receive principal, plus accrued
interest through the tender date. Upon tender, the remarketing agent shall
immediately remarket the Bonds. In the event the remarketing agent fails to
remarket any Bonds, the borrowing Partnerships are obligated to purchase those
Bonds. The remarketing agent receives a fee of .11% per annum of the
outstanding Bonds balance, payable quarterly in advance.
(C) Permanent financing for the development of certain office Properties has
been provided by $26,300 of tax exempt industrial revenue bonds (IRBs). The
IRB's mature on December 1, 2014. Under the terms of the IRB agreements, the
borrowing Partnerships are to make interest-only payments monthly, calculated
using a floating rate determined by the remarketing agent of the IRBs. The
rates ranged from 3.35% to 3.85% during the six months ended June 30, 1997,
3.40% to 4.05% during 1996, 3.40% to 4.50% during 1995, and 2.20% to 3.65%
during 1994. The rates at June 30, 1997 were 3.85%, December 31, 1996 were
3.50% and December 31, 1995 were 4.05%.
F-30
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. MORTGAGE NOTES AND BONDS PAYABLE (CONTINUED)
Under certain conditions, the interest rates on the IRBs may be converted to
a fixed rate at the request of the borrowing Partnerships.
The IRBs are collateralized by letters of credit totaling $26,930 from a
financial institution which expires December 31, 1997 (unless extended as
provided for by the letter of credit agreement). Affiliates of the borrowing
Partnerships' Third Party owner have agreed to purchase from the financial
institutions any amounts drawn on the letters of credit. One of these
affiliates has also agreed to provide or arrange for credit enhancements
(including purchasing the IRBs) as may be required by the IRBs agreements
through March 22, 1999. The above affiliate agreements are collateralized by a
junior collateral interest in the borrowing Partnerships' properties.
Under the terms of the IRB agreements, the bondholders have the option to
require the borrowing Partnerships to purchase any of its IRBs on the 15th day
of any month while the IRBs are outstanding. Upon the exercise of the
bondholders' option to purchase the IRBs, the remarketing agent shall
immediately remarket the IRBs. In the event the remarketing agent fails to
remarket the IRBs, the borrowing Partnerships are obligated to purchase those
IRBs.
Total interest paid on the mortgage notes payable and bonds payable was
$13,319 and $12,102 (unaudited) for the six months ended June 30, 1997 and
1996, respectively, and $25,643, $25,490, and $22,599 for the years ended
December 31, 1996, 1995, and 1994, respectively.
4. MORTGAGE NOTES AND BONDS PAYABLE--AFFILIATES
<TABLE>
<CAPTION>
DECEMBER 31
JUNE 30 ---------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Mortgage notes payable--Affiliate (A).............. $107,241 $99,357 $82,942
Mortgage note payable--Affiliate; interest at 9.5%
per annum with interest payable quarterly and
principal and accrued interest due on maturity
date of March 7, 1998............................. 290 290 1,440
-------- ------- -------
$107,531 $99,647 $84,382
======== ======= =======
Bonds Payable--Affiliate:
Variable rate taxable and tax-exempt bonds issued
by state and local government authorities (B)..... $ 12,000 $12,000 $31,850
======== ======= =======
</TABLE>
(A) 77 West Wacker has entered into a subordinate loan agreement with
affiliates of its Third Party owner for a maximum disbursement amount of
$60,000. In addition, the affiliates of the Third Party owner have agreed to
fund 1997 operating deficits, as defined, up to a maximum of $4.2 million. As
of June 30, 1997, December 31, 1996 and 1995, $58,767, $56,787 and $50,896
respectively, has been funded under this agreement, and $46,515, $40,873 and
$30,871 respectively, of accrued interest and $1,959, $1,697 and $1,175
respectively, of standby loan fees, have been added to the principal balance
in accordance with the terms of the agreement. The loan bears interest at a
fixed rate of 11% through the maturity date of March 14, 1998. The Third Party
owner has provided a guarantee of 77 West Wacker's first mortgage note payable
and charges 77 West Wacker a standby loan fee, as defined. Standby loan fees
incurred were $262 and $262 (unaudited) for the six months ended June 30, 1997
and 1996, respectively, and $522, $498 and $399 for the years ended December
31, 1996, 1995, and 1994, respectively (included in general and administrative
expenses in the combined statements of operations). Under the terms of the
subordinate loan agreement, 77 West Wacker is not required to make any
periodic principal or interest payments prior to the date of stabilization, as
defined; unpaid interest is added to the principal balance monthly. Subsequent
to the date of stabilization, as defined, monthly payments of interest only
are payable to the extent of available cash flow, as defined, during the
operating period, with the entire outstanding balance due upon maturity. In
the opinion of management, no payments will be due under the subordinate loan
agreement during 1997. The subordinated loan is collateralized by a second
mortgage on the 77 West Wacker Building.
F-31
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
4. MORTGAGE NOTES AND BONDS PAYABLE--AFFILIATES (CONTINUED)
(B) Permanent financing for the development of certain industrial Properties
has been provided by $12,000 of tax exempt bonds which were converted to
taxable debt industrial development revenue bonds (IDBs). The Bonds mature on
June 1, 2022. On December 13, 1995, $60,150 of IDBs were acquired by an
affiliate of Prime from the Third Party. On December 13, 1995, $28,300 and on
May 20, 1996, $19,850 of the IDBs were sold to independent third party
financial institutions by the affiliate of Prime.
Under the terms of the IDB loan agreement, the borrowing Partnerships are to
make interest-only payments semi-annually, calculated using a floating rate
determined by the Remarketing Agent of the IDBs. The rates were 5.501% during
the six months ended June 30, 1997, 3.90% to 5.501% during 1996, 5.25% to
5.51% during 1995, and 5.00% to 5.50% during 1994. The rates at June 30, 1997
were 5.501%, at December 31, 1996 were 5.501% and December 31, 1995 ranged
from 5.25% to 5.501%.
The maximum annual interest rate on the IDBs is 13%. Under certain
conditions, the interest rate on the IDBs may be converted to a fixed rate at
the request of the respective borrowing Partnership.
The bondholders may tender bonds on any business day during the variable
interest rate period discussed above and receive principal, plus accrued
interest through the tender date. Upon tender, the remarketing agent shall
immediately remarket the IDBs. In the event the remarketing agent fails to
remarket any IDBs, the borrowing Partnership is obligated to purchase those
IDBs. The remarketing agent receives a fee of .11% per annum of the
outstanding IDB balance, payable quarterly in advance.
In 1995, mortgage notes payable to the Third Party totaling $2,716 and
accrued interest of $200 were forgiven by the Third Party. The notes bore
interest at 8.5%, payable quarterly from available cash flow.
Total interest paid on the mortgage notes payable and bonds payable to
affiliates was $328 and $973 (unaudited) for the six months ended June 30,
1997 and 1996, respectively, and $1,256, $3,538, and $3,393 for the years
ended December 31, 1996, 1995, and 1994, respectively.
5. FUTURE MINIMUM LEASE INCOME AND PAYMENTS
The Partnerships have entered into lease agreements with lease terms ranging
from one year to twenty years. The leases generally provide for tenants to
share in increases in operating expenses and real estate taxes in excess of
specified base amounts.
Approximately 53% and 63% (unaudited), 60%, 65%, and 72% of the rental
revenue for the six months ended June 30, 1997 and 1996 and for the years
ended December 31, 1996, 1995 and 1994, respectively, was received from four
tenants.
The total future minimum rentals to be received under such noncancelable
operating leases executed through June 30, 1997, exclusive of tenant
reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- --------
<S> <C>
1997............................................................ $ 16,346
1998............................................................ 31,413
1999............................................................ 30,319
2000............................................................ 29,404
2001............................................................ 28,534
Thereafter...................................................... 181,554
--------
$317,570
========
</TABLE>
Future minimum rentals include amounts to be received from Prime totaling
$2,819.
F-32
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. FUTURE MINIMUM LEASE INCOME AND PAYMENTS (CONTINUED)
In addition, as a part of lease agreements entered into with certain tenants
of 77 West Wacker Building,77 West Wacker assumed the tenants' leases at other
properties and subsequently executed subleases for certain of the assumed
lease space. Net future minimum rental payments due under leases assumed and
subleases executed through June 30, 1997, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
1997.............................................................. $ 627
1998.............................................................. 1,279
1999.............................................................. 1,306
2000.............................................................. 1,336
2001.............................................................. 1,367
Thereafter........................................................ 700
------
$6,615
======
</TABLE>
During 1995, a tenant of the 77 West Wacker Building experienced financial
difficulties and began negotiations with 77 West Wacker to reduce its leased
space, resulting in an amendment to the tenant's lease agreement. As a result
of the lease amendment, 77 West Wacker wrote-off $13,373 of deferred tenant
costs, representing $10,296 of tenant receivables related to straight-lining
of the tenant's rental revenue, $2,257 of deferred leasing costs, and $820 of
tenant improvements. The same tenant continued to experience financial
difficulty and in 1997 defaulted on certain 1997 rental payments. As a result
of the default, as of December 31, 1996, 77 West Wacker wrote-off $3,081 of
deferred tenant costs, representing $940 of tenant receivables related to
straight-lining of the tenant's rental revenue and $2,141 of deferred leasing
costs. During the six months ended June 30, 1997, 77 West Wacker recognized
revenue from this tenant only to the extent cash was received. Future minimal
rentals include $49,182 related to this tenant.
6. RELATED PARTY TRANSACTIONS
In connection with the leasing and management of the Properties, Prime is
entitled to payments and fees for services performed. Such amounts incurred
during the six months ended June 30, 1997, and 1996, and for the years ended
December 31, 1996, 1995, and 1994 are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30 YEAR ENDED DECEMBER 31
---------------- -----------------------
1997 1996 1996 1995 1994
---- ----------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Property management fee (a)........... $735 $700 $ 1,429 $ 1,364 $ 1,256
Administration fees (b)............... 223 223 468 730 779
Construction management (c)........... 89 14 102 115 102
Legal fees (d)........................ 134 104 127 77 92
Leasing fees (e)...................... -- -- 19 280 172
Reimbursables (f)..................... 138 26 184 352 569
Asset management fee (g).............. 66 66 132 132 132
</TABLE>
- --------
(a) Prime is entitled to a property management fee ranging from 2.5% to 4% of
gross receipts, payable monthly in arrears. Amounts are included in
property and asset management fees to affiliates.
(b) Prime is entitled to an annual administration fee as defined in the
Partnership agreement. Amounts are included in general and administrative
expenses.
(c) Prime is entitled to a construction management fee equal to 3% of
construction costs.
F-33
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
(d) Prime is reimbursed for reasonable legal and accounting expenses incurred
in connection with the operations of the Partnerships. Amounts are
included in general and administrative expenses.
(e) Prime is entitled to leasing commissions for all leases signed. The
commissions are equal to 1.5% to 3% of rent, exclusive of tenant
reimbursements, during the base term of the lease; commissions are payable
upon commencement of the respective leases.
(f) Prime is entitled to reimbursement for expenses paid for the benefit of
the Partnerships. Amounts are included in general and administrative
expenses.
(g) Prime is entitled to an annual fee from providing asset management
services to the Partnership which is payable from available cash flows.
Amounts are included in property and asset management fees to affiliates.
Amounts due to affiliates are for amounts due for advances made by
affiliates. Amounts due from affiliates are for advances made by the
Partnership to affiliates. Amounts due from and due to affiliates bear
interest at prime plus 2% and are payable upon demand.
Average balances of amounts due form and due to affiliates for the six
months ended June 30, 1997 and 1996 and for the years ended December 31 1996,
1995, and 1994 are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31
------------------ -----------------------
1997 1996 1996 1995 1994
------ ----------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Due from affiliates............... $1,492 $5,415 $ 4,323 $ 3,251 $ 565
Due to affiliates................. 721 831 821 1,107 1,722
</TABLE>
7. INSURANCE SETTLEMENT
On July 16, 1994, the Enterprise Center I property was destroyed by a fire.
During 1995, ECI received a final insurance settlement of $10,871 related to
the fire. The proceeds settled an insurance receivable of $1,755 recorded at
December 31, 1994, and additional costs of $1,859 incurred in 1995 related to
the cleanup of the property. ECI believes that all material costs of the fire
were incurred prior to December 31, 1995. The remaining proceeds of $7,257
have been recorded as revenue in the 1995 combined statements of operations.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (SFAS No. 107) and No. 119, Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments
requires disclosures of the fair value of certain on-and off-balance sheet
financial instruments for which it is practicable to estimate. Value is
defined by SFAS No. 107 as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
The following methods and assumptions were used by the Partnerships in
estimating its fair value disclosures for financial instruments:
Cash
The carrying amount of cash reported in the balance sheet approximates its
fair value.
F-34
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
Mortgage Notes and Bonds Payable
The carrying amount of the Partnerships' variable rate borrowing
approximates fair value based on the current borrowing rate for similar types
of borrowing arrangements.
The fair value for the Partnerships' fixed-rate borrowing is estimated using
discounted cash flow analysis based upon the incremental borrowing rate for
similar types of borrowing arrangements. The fair value of the Partnerships'
fixed-rate borrowing at June 30, 1997, is the amount recognized in the balance
sheet, as the Partnerships' current incremental borrowing rate approximates
the stated rate on its fixed-rate borrowings.
The carrying amount of accrued interest approximates fair value.
Off-Balance Sheet Financial Instrument
The fair value of 77 West Wacker's off-balance sheet instrument (interest
rate swap agreement) is a liability of approximately $10,300. Such amount is
based on discounted cash flow analyses using current assumptions and taking
into account the remaining term of the agreement.
9. COMMITMENTS AND CONTINGENCIES
The Partnerships are defendants in legal actions arising during the normal
course of business. Management believes that the ultimate outcome of those
actions will not materially affect the Partnerships' combined financial
position.
All of the Properties were subject to Phase I or similar environmental
assessments by independent environmental consultants which were intended to
discover information regarding, and to evaluate the environmental condition
of, the surveyed property and surrounding properties. Management is aware of
contamination at certain of the Industrial Properties, which are already in
remediation programs sponsored by the state in which they are located. The
Phase I assessments estimate that remedial action plans will have a probable
cost of approximately $3.2 million. Prime has recently initiated lawsuits
against a former environmental consultant and a former tenant of one of these
Properties for damages to cover the cost of the remedial action plans.
However, the outcome of the lawsuits cannot yet be determined and the actual
cost to be incurred by the Partnerships cannot yet be determined. Therefore,
as of June 30, 1997 the Industrial Partnerships have recorded a liability of
$3.2 million (included in other liabilities). Prime has contractually agreed
to indemnify the Partnerships from any environmental liabilities the
Partnerships may incur and has pledged $1 million and approximately 485,000
partnership units in an operating partnership that can be converted to common
shares of a publicly traded real estate investment trust to cover these costs.
F-35
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
10. REAL ESTATE AND ACCUMULATED DEPRECIATION
Real estate and accumulated depreciation, by property, consists of the
following:
<TABLE>
<CAPTION>
GROSS AMOUNT
COSTS CAPITALIZED CARRIED
INITIAL COST TO SUBSEQUENT TO AT DECEMBER 31,
DECEMBER 31, 1996 COMPANY ACQUISITION 1996
----------------- -------------------- --------------------- --------------------
BUILDING AND BUILDING AND BUILDING AND
DESCRIPTION LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS
- ----------- --------------------------- ----------------- ------- ------------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office:
77 West Wacker
Building....... Chicago, Illinois $328,718 $17,340 $ -- $ -- $189,042 $17,340 $189,042
Nashville Office
Building....... Nashville, Tennessee 10,175 1,530 -- -- 8,198 1,530 8,198
Professional
Plaza.......... Knoxville, Tennessee 9,000 -- -- -- 10,642 -- 10,642
Old Kingston.... Knoxville, Tennessee 3,500 378 -- -- 4,068 378 4,068
Two Centre
Square......... Knoxville, Tennessee 9,000 -- -- -- 10,542 -- 10,542
Triad Parking
Facility....... Knoxville, Tennessee 1,440 507 -- -- 1,324 507 1,324
Executive Sports
and Fitness
Center . Chicago, Illinois -- -- -- -- 75 -- 75
Hammond
Enterprise
Center(2)...... Hammond, Indiana -- 213 4,899 (188) (3,937) 25 962
Chicago
Enterprise
Center(2)...... Chicago, Illinois -- 2,069 8,795 (1,309) (7,271) 760 1,524
Industrial:
East Chicago
Enterprise
Center(2)...... East Chicago, Indiana -- 94 7,804 (67) (6,916) 27 888
Enterprise
Center I....... East Chicago, Indiana 2,900 18 1,368 -- (768) 18 600
Enterprise
Center II...... East Chicago, Indiana 5,000 18 2,099 -- 463 18 2,562
Enterprise
Center III..... East Chicago, Indiana 4,500 20 2,567 -- 2,798 20 5,365
Enterprise
Center IV...... East Chicago, Indiana 2,600 11 791 -- 232 11 1,023
Enterprise
Center V....... Hammond, Indiana 5,000 81 3,729 -- 755 81 4,484
Enterprise
Center VI...... Hammond, Indiana 4,900 101 3,151 -- 665 101 3,816
Enterprise
Center VII..... Chicago, Illinois 7,200 517 5,632 31 801 548 6,433
Enterprise
Center VIII.... Chicago, Illinois 7,000 124 3,687 -- 94 124 3,781
Enterprise
Center IX...... Chicago, Illinois 4,750 269 925 -- 504 269 1,429
Enterprise
Center X....... Chicago, Illinois 4,300 248 2,173 -- 1,142 248 3,315
Arlington
Heights I...... Arlington Heights, Illinois 4,000 626 2,401 (9) 1,034 617 3,435
Arlington
Heights II..... Arlington Heights, Illinois 4,000 460 1,768 (4) 647 456 2,415
Arlington
Heights III.... Arlington Heights, Illinois 4,000 452 1,738 -- 566 452 2,304
-------- ------- ------- ------- -------- ------- --------
Total........... $421,983 $25,076 $53,527 $(1,546) $214,700 $23,530 $268,227
======== ======= ======= ======= ======== ======= ========
<CAPTION>
DECEMBER 31, 1996
----------------- DATE OF
ACCUMULATED ACQUISITION (A)
DESCRIPTION TOTAL DEPRECIATION (1) CONSTRUCTION (C)
- ----------- -------- ----------------- ----------------
<S> <C> <C> <C>
Office:
77 West Wacker
Building....... $206,382 $26,851 1992(C)
Nashville Office
Building....... 9,728 808 1991(C)
Professional
Plaza.......... 10,642 3,195 1989(C)
Old Kingston.... 4,446 1,136 1989(C)
Two Centre
Square......... 10,542 2,791 1989(C)
Triad Parking
Facility....... 1,831 256 1987(A)
Executive Sports
and Fitness
Center . 75 3 1992(C)
Hammond
Enterprise
Center(2)...... 987 347 1989(A)
Chicago
Enterprise
Center(2)...... 2,284 598 1990(A)
Industrial:
East Chicago
Enterprise
Center(2)...... 915 332 1988(A)
Enterprise
Center I....... 618 44 1993(A)
Enterprise
Center II...... 2,580 617 1993(A)
Enterprise
Center III..... 5,385 651 1993(A)
Enterprise
Center IV...... 1,034 191 1993(A)
Enterprise
Center V....... 4,565 1,583 1993(A)
Enterprise
Center VI...... 3,917 718 1993(A)
Enterprise
Center VII..... 6,981 1,242 1993(A)
Enterprise
Center VIII.... 3,905 978 1993(A)
Enterprise
Center IX...... 1,698 238 1993(A)
Enterprise
Center X....... 3,563 639 1993(A)
Arlington
Heights I...... 4,052 623 1993(A)
Arlington
Heights II..... 2,871 277 1993(A)
Arlington
Heights III.... 2,756 293 1993(A)
-------- -----------------
Total........... $291,757 $44,411
======== =================
</TABLE>
(1) Depreciable lives range from 50 years for building and improvements, to
the term of related leases for tenant improvements.
(2) In 1993 a portion of these properties were sold to Enterprise Center I
through Enterprise Center X.
F-36
<PAGE>
PRIME PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
10. REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
The aggregate gross cost of the property included above, for federal income
tax purposes, approximated $328,220 as of December 31, 1996.
The following table reconciles the historical cost of the Prime Properties
from January 1, 1994 to December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year................... $289,558 $285,687 $281,316
Additions during year--Acquisition, im-
provements, etc........................... 3,842 4,842 6,191
Deductions during year--Write-off of tenant
improvements.............................. (1,643) (971) (1,820)
-------- -------- --------
Balance, close of year....................... $291,757 $289,558 $285,687
======== ======== ========
</TABLE>
The following table reconciles the accumulated depreciation from January 1,
1994 to December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year...................... $34,501 $24,499 $15,348
Additions during year--Depreciation and
amortization for the year.................... 10,288 10,005 9,562
Deductions during year--Accumulated
depreciation of written-off tenant
improvements................................. (378) (3) (411)
------- ------- -------
Balance, close of year.......................... $44,411 $34,501 $24,499
======= ======= =======
</TABLE>
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Combined Statements of Revenue and Certain
Expenses of Prime Industrial Contribution Properties (the Properties) for the
period from January 1, 1997 to June 30, 1997, and for the period from March 1,
1996 to December 31, 1996. The Combined Statements of Revenue and Certain
Expenses are the responsibility of the Properties' management. Our
responsibility is to express an opinion on the Combined Statements of Revenue
and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the Combined Statements of Revenue
and Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Combined Statements of Revenue and Certain Expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Combined Statements of Revenue and Certain Expenses. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust as described in Note 2 and are not
intended to be a complete presentation of the Properties' revenue and
expenses.
In our opinion, the Combined Statements of Revenue and Certain Expenses
referred to above present fairly, in all material respects, the combined
revenue and certain expenses described in Note 2 of the Properties for the
period from January 1, 1997 to June 30, 1997, and for the period from March 1,
1996 to December 31, 1996, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
August 20, 1997
F-38
<PAGE>
PRIME INDUSTRIAL CONTRIBUTION PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM MARCH
JANUARY 1, 1997 TO 1, 1996 TO
JUNE 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revenue
Rental.................................... $782 $1,608
Tenant reimbursements..................... 96 138
---- ------
Total revenue............................. 878 1,746
Expenses
Property operating........................ 90 158
Real estate taxes......................... 142 219
---- ------
Total expenses............................ 232 377
---- ------
Revenue in excess of certain expenses..... $646 $1,369
==== ======
</TABLE>
See accompanying notes.
F-39
<PAGE>
PRIME INDUSTRIAL CONTRIBUTION PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Combined Statements of Revenue and Certain Expenses relates
to the operations of six industrial buildings located in the Columbus, Ohio
metropolitan area referred to as the Prime Industrial Contribution Properties
(the Properties). As of June 30, 1997 the Properties had seven tenants, three
of which accounted for approximately 82% of rental revenue for the period from
January 1, 1997 to June 30, 1997. The same three tenants, along with a tenant
that terminated its lease during 1996, accounted for approximately 61% of
rental revenue for the period from March 1, 1996 to December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust. The combined statements are not
representative of the actual operations of the Properties for the periods
presented nor indicative of future operations as certain expenses, primarily
depreciation and amortization, which may not be comparable to the expenses
expected to be incurred by Prime Group Realty Trust in future operations of
the Properties, have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of revenue and certain expenses during the reporting period. Actual results
could differ from these estimates.
3. RENTALS
The Properties have lease agreements with lease terms ranging from three
years to fifteen years. The leases generally provide for tenants to share in
increases in operating expenses and real estate taxes in excess of specified
base amounts. The total future minimum rentals to be received under such
noncancelable operating leases executed through June 30, 1997, exclusive of
tenant reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
1997.............................................................. $ 843
1998.............................................................. 1,395
1999.............................................................. 1,203
2000.............................................................. 1,025
2001.............................................................. 844
Thereafter........................................................ 3,696
------
$9,006
======
</TABLE>
F-40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Combined Statements of Revenue and Certain
Expenses of IBD Properties (the Properties) for the period from January 1,
1997 to June 30, 1997, and for the year ended December 31, 1996. The Combined
Statements of Revenue and Certain Expenses are the responsibility of the
Properties' management. Our responsibility is to express an opinion on the
Combined Statements of Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the Combined Statements of Revenue
and Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Combined Statements of Revenue and Certain Expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Combined Statements of Revenue and Certain Expenses. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust as described in Note 2 and are not
intended to be a complete presentation of the Properties' revenue and
expenses.
In our opinion, the Combined Statements of Revenue and Certain Expenses
referred to above present fairly, in all material respects, the combined
revenue and certain expenses described in Note 2 of the Properties for the
period from January 1, 1997 to June 30, 1997, and for the year ended December
31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
August 20, 1997
F-41
<PAGE>
IBD PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Revenue
Rental................................... $2,654 $5,131
Tenant reimbursements.................... 206 227
------ ------
Total revenue............................ 2,860 5,358
Expenses
Property operating....................... 21 39
Real estate taxes........................ 299 461
------ ------
Total expenses........................... 320 500
------ ------
Revenue in excess of certain expenses.... $2,540 $4,858
====== ======
</TABLE>
See accompanying notes.
F-42
<PAGE>
IBD PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Combined Statements of Revenue and Certain Expenses relates
to the operations of seven industrial buildings located in the Chicago
metropolitan area referred to as the IBD Properties (the Properties). As of
June 30, 1997, the Properties had six tenants, two of which accounted for
approximately 78% of rental revenue for the period from January 1, 1997 to
June 30, 1997, and for the year ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust. The combined statements are not
representative of the actual operations of the Properties for the periods
presented nor indicative of future operations as certain expenses, primarily
depreciation and amortization, which may not be comparable to the expenses
expected to be incurred by Prime Group Realty Trust in future operations of
the Properties, have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of revenue and certain expenses during the reporting period. Actual results
could differ from these estimates.
3. RENTALS
The Properties have lease agreements with lease terms ranging from one year
to twenty years. The leases generally provide for tenants to share in
increases in operating expenses and real estate taxes in excess of specified
base amounts. The total future minimum rentals to be received under such
noncancelable operating leases executed through June 30, 1997, exclusive of
tenant reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- -------
<S> <C>
1997............................................................. $ 2,514
1998............................................................. 5,095
1999............................................................. 5,256
2000............................................................. 5,164
2001............................................................. 5,298
Thereafter....................................................... 16,304
-------
$39,631
=======
</TABLE>
F-43
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Combined Statements of Revenue and Certain
Expenses of NAC Properties (the Properties) for the period from January 1,
1997 to June 30, 1997, and for the year ended December 31, 1996. The Combined
Statements of Revenue and Certain Expenses are the responsibility of the
Properties' management. Our responsibility is to express an opinion on the
Combined Statements of Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the Combined Statements of Revenue
and Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Combined Statements of Revenue and Certain Expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Combined Statements of Revenue and Certain Expenses. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust as described in Note 2 and are not
intended to be a complete presentation of the Properties' revenue and
expenses.
In our opinion, the Combined Statements of Revenue and Certain Expenses
referred to above present fairly, in all material respects, the combined
revenue and certain expenses described in Note 2 of the Properties for the
period from January 1, 1997 to June 30, 1997, and for the year ended December
31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
October 10, 1997
F-44
<PAGE>
NAC PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Revenue
Rental................................... $5,161 $ 9,506
Tenant reimbursements.................... 1,164 2,185
------ -------
Total revenue............................ 6,325 11,691
Expenses
Property operating....................... 846 1,699
Real estate taxes........................ 757 1,483
------ -------
Total expenses........................... 1,603 3,182
------ -------
Revenue in excess of certain expenses.... $4,722 $ 8,509
====== =======
</TABLE>
See accompanying notes.
F-45
<PAGE>
NAC PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Combined Statements of Revenue and Certain Expenses relates
to the operations of 21 office buildings and industrial buildings located in
the Chicago metropolitan area referred to as the NAC Properties (the
Properties). As of June 30, 1997, the Properties had 77 tenants, one of which
accounted for approximately 16% of rental revenue for the period from January
1, 1997 to June 30, 1997, and for the year ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust. The combined statements are not
representative of the actual operations of the Properties for the periods
presented nor indicative of future operations as certain expenses, primarily
depreciation and amortization, which may not be comparable to the expenses
expected to be incurred by Prime Group Realty Trust in future operations of
the Properties, have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of revenue and certain expenses during the reporting period. Actual results
could differ from these estimates.
3. RENTALS
The Properties have lease agreements with lease terms ranging from one year
to twenty years. The leases generally provide for tenants to share in
increases in operating expenses and real estate taxes in excess of specified
base amounts. The total future minimum rentals to be received under such
noncancelable operating leases executed through June 30, 1997, exclusive of
tenant reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31 AMOUNT
------------------------ -------
<S> <C>
1997........................................................... $ 5,031
1998........................................................... 8,447
1999........................................................... 6,343
2000........................................................... 3,715
2001........................................................... 2,396
Thereafter..................................................... 4,446
-------
$30,378
=======
</TABLE>
F-46
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Statements of Revenue and Certain Expenses
of Citibank Office Plaza (the Property) for the period from January 1, 1997 to
June 30, 1997, and for the year ended December 31, 1996. The Statements of
Revenue and Certain Expenses are the responsibility of the Property's
management. Our responsibility is to express an opinion on the Statements of
Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statements of Revenue and
Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Statements of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the Statements
of Revenue and Certain Expenses. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Group Realty Trust as described in Note 2 and is not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, the Statements of Revenue and Certain Expenses referred to
above present fairly, in all material respects, the revenue and certain
expenses described in Note 2 of the Property for the period from January 1,
1997 to June 30, 1997, and for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
August 20, 1997
F-47
<PAGE>
CITIBANK OFFICE PLAZA
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revenue
Rental.................................... $ 845 $1,506
Tenant reimbursements..................... 168 479
------ ------
Total revenue............................. 1,013 1,985
------ ------
Expenses
Cleaning.................................. 55 111
Utilities................................. 109 211
Other property operating.................. 150 264
Real estate taxes......................... 226 456
------ ------
Total expenses............................ 540 1042
------ ------
Revenue in excess of certain expenses..... $ 473 $ 943
====== ======
</TABLE>
See accompanying notes.
F-48
<PAGE>
CITIBANK OFFICE PLAZA
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relates to the
operations of Citibank Office Plaza, an office building located in Schaumburg,
Illinois (the Property). As of June 30, 1997, the Property had twenty tenants,
two of which accounted for approximately 58% of rental revenue for the period
from January 1, 1997 to June 30, 1997, and for the year ended December 31,
1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Group Realty Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation and
amortization, which may not be comparable to the expenses expected to be
incurred by Prime Group Realty Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of revenue
and certain expenses during the reporting period. Actual results could differ
from these estimates.
3. RENTALS
The Property has lease agreements with lease terms ranging from one year to
twenty years. The leases generally provide for tenants to share in increases
in operating expenses and real estate taxes in excess of specified base
amounts. The total future minimum rentals to be received under such
noncancelable operating leases executed through June 30, 1997, exclusive of
tenant reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
1997.............................................................. $ 823
1998.............................................................. 1,660
1999.............................................................. 1,537
2000.............................................................. 1,096
2001.............................................................. 818
Thereafter........................................................ 726
------
$6,660
======
</TABLE>
F-49
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Combined Statements of Revenue and Certain
Expenses of Salt Creek Office Center (the Property) for the period from
January 1, 1997 to June 30, 1997, and for the year ended December 31, 1996.
The Combined Statements of Revenue and Certain Expenses are the responsibility
of the Property's management. Our responsibility is to express an opinion on
the Combined Statements of Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Combined Statements of Revenue
and Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Combined Statements of Revenue and Certain Expenses. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
Combined Statements of Revenue and Certain Expenses. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust as described in Note 2 and are not
intended to be a complete presentation of the Property's revenue and expenses.
In our opinion, the Combined Statements of Revenue and Certain Expenses
referred to above present fairly, in all material respects, the combined
revenue and certain expenses described in Note 2 of the Property for the
period from January 1, 1997 to June 30, 1997, and for the year ended December
31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
August 20, 1997
F-50
<PAGE>
SALT CREEK OFFICE CENTER
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revenue
Rental.................................... $ 610 $1,086
Tenant reimbursements..................... 410 721
------ ------
Total revenue............................. 1,020 1,807
------ ------
Expenses
Cleaning.................................. 5 9
Utilities................................. 16 36
Other property operating.................. 159 437
Real estate taxes......................... 249 475
------ ------
Total expenses............................ 429 957
------ ------
Revenue in excess of certain expenses..... $ 591 $ 850
====== ======
</TABLE>
See accompanying notes.
F-51
<PAGE>
SALT CREEK OFFICE CENTER
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Combined Statements of Revenue and Certain Expenses relate
to the operations of two office buildings, Salt Creek Office Complex, located
in Schaumburg, Illinois (collectively, the "Property"). As of June 30, 1997
the Property had thirty-nine tenants, one of which accounted for approximately
19% of rental revenue for the period from January 1, 1997 to June 30, 1997 and
22% of rental revenue for the year ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the registration statement
on Form S-11 of Prime Group Realty Trust. The combined statements are not
representative of the actual operations of the Property for the period
presented, nor indicative of future operations as certain expenses, primarily
depreciation and management fees, which may not be comparable to the expenses
expected to be incurred by Prime Group Realty Trust in future operations of
the Property, have been excluded.
Revenue and Expense Recognition
Rental income is recognized as income in the period earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Combined Statements of Revenue and Certain Expenses
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of revenues and certain expenses during the reporting period. Actual results
could differ from these estimates.
3. RENTALS
The Property has lease agreements with lease terms ranging from one to
fifteen years. The leases generally provide for tenants either to share in
increases in operating expenses in excess of specified base amounts or pay a
pro rata share of recoverable expenses as defined. The total future minimum
rentals to be received under such noncancelable operating leases executed
through June 30, 1997, exclusive of tenant reimbursements, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 AMOUNT
---------------------- ------
<S> <C>
1997.............................................................. $ 590
1998.............................................................. 1,104
1999.............................................................. 894
2000.............................................................. 614
2001.............................................................. 289
Thereafter........................................................ 109
------
$3,600
======
</TABLE>
F-52
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Statements of Revenue and Certain Expenses
of 280 Schuman Boulevard (the Property) for the period from January 1, 1997 to
June 30, 1997, and for the year ended December 31, 1996. The Statements of
Revenue and Certain Expenses are the responsibility of the Property's
management. Our responsibility is to express an opinion on the Statements of
Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statements of Revenue and
Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Statements of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the Statements
of Revenue and Certain Expenses. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Group Realty Trust as described in Note 2 and is not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, the Statements of Revenue and Certain Expenses referred to
above present fairly, in all material respects, the revenue and certain
expenses described in Note 2 of the Property for the period from January 1,
1997 to June 30, 1997, and for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
October 10, 1997
F-53
<PAGE>
280 SCHUMAN BOULEVARD
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revenue
Rental.................................... $561 $1,011
Tenant reimbursements..................... 33 20
---- ------
Total revenue............................. 594 1,031
---- ------
Expenses
Cleaning.................................. 26 47
Utilities................................. 28 64
Other property operating.................. 75 159
Real estate taxes......................... 49 97
---- ------
Total expenses............................ 178 367
---- ------
Revenue in excess of certain expenses..... $416 $ 664
==== ======
</TABLE>
See accompanying notes.
F-54
<PAGE>
280 SCHUMAN BOULEVARD
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relates to the
operations of 280 Schuman Boulevard, an office building located in Naperville,
Illinois (the Property). As of June 30, 1997, the Property had 13 tenants, 4
of which accounted for approximately 66% and 72% of rental revenue for the
period from January 1, 1997 to June 30, 1997, and for the year ended December
31, 1996, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Group Realty Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation and
amortization, which may not be comparable to the expenses expected to be
incurred by Prime Group Realty Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of revenue
and certain expenses during the reporting period. Actual results could differ
from these estimates.
3. RENTALS
The Property has lease agreements with lease terms ranging from one year to
ten years. The leases generally provide for tenants to share in increases in
operating expenses and real estate taxes in excess of specified base amounts.
The total future minimum rentals to be received under such noncancelable
operating leases executed through June 30, 1997, exclusive of tenant
reimbursements and contingent rentals, are as follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31 AMOUNT
------------------------ ------
<S> <C>
1997............................................................ $ 496
1998............................................................ 956
1999............................................................ 857
2000............................................................ 826
2001............................................................ 522
Thereafter...................................................... 995
------
$4,652
======
</TABLE>
F-55
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Trustees
Prime Group Realty Trust
We have audited the accompanying Statements of Revenue and Certain Expenses
of 475 Superior Avenue (the Property) for the period from January 1, 1997 to
June 30, 1997, and for the year ended December 31, 1996. The Statements of
Revenue and Certain Expenses are the responsibility of the Property's
management. Our responsibility is to express an opinion on the Statements of
Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the Statements of Revenue and
Certain Expenses are free from material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
made in the Statements of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the Statements
of Revenue and Certain Expenses. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Group Realty Trust as described in Note 2 and are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, the Statements of Revenue and Certain Expenses referred to
above present fairly, in all material respects, the revenue and certain
expenses described in Note 2 of the Property for the period from January 1,
1997 to June 30, 1997, and for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
October 10, 1997
F-56
<PAGE>
475 SUPERIOR AVENUE
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1997 TO YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
------------------ -----------------
<S> <C> <C>
Revenue
Rental.................................... $632 $1,250
Tenant reimbursements..................... 282 515
---- ------
Total revenue............................. 914 1,765
---- ------
Expenses
Property operating........................ 24 27
Real estate taxes......................... 265 472
---- ------
Total expenses............................ 289 499
---- ------
Revenue in excess of certain expenses..... $625 $1,266
==== ======
</TABLE>
See accompanying notes.
F-57
<PAGE>
475 SUPERIOR AVENUE
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
1. BUSINESS
The accompanying Statements of Revenue and Certain Expenses relates to the
operations of 475 Superior Avenue, an industrial building located in Munster,
Indiana (the Property). As of June 30, 1997, the Property had one tenant which
accounted for approximately 100% of rental revenue for the period from January
1, 1997 to June 30, 1997, and for the year ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statements of Revenue and Certain Expenses were prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form S-
11 of Prime Group Realty Trust. The statements are not representative of the
actual operations of the Property for the periods presented nor indicative of
future operations as certain expenses, primarily depreciation and
amortization, which may not be comparable to the expenses expected to be
incurred by Prime Group Realty Trust in future operations of the Property,
have been excluded.
Revenue and Expense Recognition
Revenue is recognized in the period in which it is earned. Expenses are
recognized in the period incurred.
Use of Estimates
The preparation of the Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of revenue
and certain expenses during the reporting period. Actual results could differ
from these estimates.
3. RENTALS
The Property has a lease agreement with a lease term of ten years. The lease
provides for the tenant to share in increases in operating expenses and real
estate taxes in excess of specified base amounts. The total future minimum
rentals to be received under such noncancelable operating lease as of June 30,
1997, exclusive of tenant reimbursements and contingent rentals, are as
follows:
<TABLE>
<CAPTION>
PERIOD ENDED DECEMBER 31 AMOUNT
------------------------ ------
<S> <C>
1997............................................................ $ 681
1998............................................................ 1,362
1999............................................................ 340
------
$2,383
======
</TABLE>
F-58
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY 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 THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE
CONVERTIBLE PREFERRED SHARES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE
CONVERTIBLE PREFERRED SHARES 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 SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT ANY INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Summary Financial Data.................................................... 28
Risk Factors.............................................................. 31
The Company............................................................... 46
Business Objective and Growth Strategies.................................. 50
Use of Proceeds........................................................... 54
Distribution Policy....................................................... 55
Capitalization............................................................ 62
Selected Financial Data................................................... 63
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................... 66
Business and Properties................................................... 72
Policies with Respect to Certain Activities............................... 137
Management................................................................ 140
Structure and Formation of the Company.................................... 148
Certain Relationships and Related
Transactions............................................................. 156
Partnership Agreement..................................................... 158
Principal Shareholders of the Company..................................... 162
Description of Shares of Beneficial Interest.............................. 163
Certain Provisions of Maryland Law and of the Company's Declaration of
Trust and
Bylaws................................................................... 177
Shares Eligible for Future Sale........................................... 181
Certain Federal Income Tax
Consequences............................................................. 184
ERISA Considerations...................................................... 201
Plan of Distribution......................................................
Legal Matters............................................................. 205
Experts................................................................... 206
Additional Information.................................................... 206
Glossary.................................................................. G-1
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 Convertible Preferred Shares
LOGO
LOGO
% Cumulative Convertible
Preferred Shares of
Beneficial Interest
--------------
PROSPECTUS
--------------
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC registration fee................................................ $ 103,996
NASD fee............................................................ 30,500
NYSE listing fee.................................................... *
Blue Sky fees and expenses.......................................... *
Printing and engraving expenses..................................... *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Miscellaneous....................................................... *
----------
Total............................................................. $4,500,000
==========
</TABLE>
- --------
* To be completed by amendment.
ITEM 31. SALES TO SPECIAL PARTIES
See response to Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
The following sets forth certain information as to all securities sold by
the Company within the last three years that were not registered under the
Securities Act of 1933, as amended (the "Securities Act"). As to all such
transactions, an exemption is claimed under Section 4(2) of the Securities
Act.
On July 21, 1997, the Company issued 100 Common Shares of beneficial
interest to Mr. Reschke for $10 per share, or an aggregate consideration of
$1,000. Such Common Shares were purchased solely for investment purposes to
facilitate the organization of the Company. Upon completion of the Offering,
all of the shares so acquired by Mr. Reschke will be redeemed by the Company
for an aggregate redemption price of $1,000.
Simultaneously with the completion of the Offering, the Company will cause
the Operating Partnership to issue 12,380,000 Common Units to the Limited
Partners in exchange for their respective interests in the Properties and the
office and industrial development, leasing and property management business to
be contributed to the Company. Simultaneously with the completion of the
Offering, the Company will grant options to purchase a total of 1,113,000
Common Shares under its Share Incentive Plan to key executives and the
Company's independent trustees.
ITEM 33. INDEMNIFICATION OF TRUSTEES AND OFFICERS
The Declaration of Trust and Bylaws authorize the Company to indemnify its
present and former trustees and officers and to reimburse expenses for such
individuals to the maximum extent permitted from time to time under Maryland
law. The MGCL, as applicable to Maryland REITs, currently provides that
indemnification of a person who is a party, or threatened to be made a party,
to legal proceedings by reason of the fact that such a person is or was a
trustee, officer, employee or agent of a corporation, or is or was serving as
a trustee, officer, employee or agent of a corporation or other firm at the
request of a corporation, against judgments, fines, penalties, amounts paid in
settlement and reasonable expenses, is mandatory in certain circumstances and
permissive in others, subject to authorization by the board of trustees, a
committee of the board of trustees consisting of two or more trustees not
parties to the proceeding (if there does not exist a majority vote quorum of
the board of trustees consisting of trustees not parties to the proceeding),
special legal counsel appointed by the board of trustees or such committee of
the board of trustees, or by the shareholders, so long as it is not
established that the act or omission of such person was material to the matter
giving rise to the proceedings and
II-1
<PAGE>
was committed in bad faith, was the result of active and deliberate
dishonesty, involved such person receiving an improper personal benefit in
money, property or services, or, in the case of criminal proceedings, such
person had reason to believe that his or her act or omission was unlawful.
The Company's officers and trustees are also indemnified pursuant to the
Partnership Agreement and their respective employment agreements, which
agreements are filed as exhibits hereto.
The Company intends to purchase an insurance policy which purports to insure
the officers and trustees of the Company against certain liabilities incurred
by them in the discharge of their functions as such officers and trustees,
except for liabilities resulting from their own malfeasance.
ITEM 34. TREATMENT OF PROCEEDS FROM SHARES BEING REGISTERED
Not Applicable
ITEM 35. FINANCIAL STATEMENT AND EXHIBITS.
(a) Financial Statements
Prime Group Realty Trust
Pro Forma Condensed Consolidated Financial Information (unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 1997
Pro Forma Condensed Consolidated Statements of Operations for the six
months ended June 30, 1997 and for the year ended December 31, 1996
Financial Statements:
Report of Independent Auditors
Balance Sheet as of July 21, 1997 and Notes to Balance Sheet
Prime Properties
<TABLE>
<S> <C>
Report of Independent Auditors
Combined Balance Sheets as of June 30, 1997 and December 31, 1996 and
1995
Combined Statements of Operations for the six months ended June 30, 1997
and 1996 (unaudited) and the three years ended December 31, 1996, 1995,
and 1994
Combined Statements of Changes in Partners' Deficit for the six months
ended June 30, 1997 and for the three years ended December 31, 1996,
1995, and 1994
Combined Statements of Cash Flows for the six months ended June 30, 1997
and 1996 (unaudited) and the three years ended December 31, 1996, 1995,
and 1994
Notes to Combined Financial Statements
</TABLE>
Prime Industrial Contribution Properties
<TABLE>
<S> <C>
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for the period from
January 1, 1997 to June 30, 1997 and for the period from March 1, 1996
to December 31, 1996
Notes to Combined Statements of Revenue and Certain Expenses
IBD Properties
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for the period from
January 1, 1997 to June 30, 1997 and for the year ended December 31,1996
Notes to Combined Statements of Revenue and Certain Expenses
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
NAC Properties
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for the period from
January 1, 1997 to
June 30, 1997 and for the year ended December 31, 1996
Notes to Combined Statements of Revenue and Certain Expenses
Citibank Office Plaza
Report of Independent Auditors
Statements of Revenue and Certain Expenses for the period from January 1,
1997 to June 30, 1997 and for the year ended December 31, 1996
Notes to Statements of Revenue and Certain Expenses
Salt Creek Office Center
Report of Independent Auditors
Combined Statements of Revenue and Certain Expenses for the period from
January 1, 1997 to June 30, 1997 and for the year ended December 31,
1996
Notes to Combined Statements of Revenue and Certain Expenses
280 Superior Boulevard
Report of Independent Auditors
Statements of Revenue and Certain Expenses for the period from January 1,
1997 to June 30, 1997 and for the year ended December 31, 1996
Notes to Statements of Revenue and Certain Expenses
475 Superior Avenue
Report of Independent Auditors
Statements of Revenue and Certain Expenses for the period from January 1,
1997 to June 30, 1997 and for the year ended December 31, 1996
Notes to Statements of Revenue and Certain Expenses
</TABLE>
All other schedules are omitted because the required information is not
applicable or the information required has been disclosed in the financial
statements and related notes included in the Prospectus.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1* Form of Articles of Amendment and Restatement of Declaration of
Trust of Prime Group Realty Trust
3.2* Form of Amended and Restated Bylaws of Prime Group Realty Trust
3.3 Original Declaration of Trust of Prime Group Realty Trust
3.4 Form of Original Bylaws of Prime Group Realty Trust
3.5 Original Certificate of Limited Partnership of Prime Group Realty,
L.P.
3.6* Form of Amended and Restated Agreement of Limited Partnership of
Prime Group Realty, L.P.
4.1* Form of Common Share certificate
4.2* Form of Convertible Preferred Share certificate
5.1 Form of Opinion of Miles & Stockbridge regarding the validity of the
Convertible Preferred Shares and the Common Shares being registered
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
8.1 Form of Opinion of Winston & Strawn regarding tax matters
10.1* Form of Agreement of Limited Partnership of Prime Group Realty, L.P.
10.2* Form of Right of First Offer Agreement
10.3 Form of Share Incentive Plan
10.4* Form of Employment Agreement by and between the Company and Michael
W. Reschke
10.5* Form of Employment Agreement by and between the Company and Richard
S. Curto
10.6* Form of Employment Agreement by and between the Company and W.
Michael Karnes
10.7* Form of Employment Agreement by and between the Company and Robert
J. Rudnik
10.8* Form of Employment Agreement by and between the Company and Jeffrey
A. Patterson
10.9* Form of Employment Agreement by and between the Company and Kevork
M. Derderian
10.10 Form of Employment Agreement by and between the Company and Edward
S. Hadesman
10.11* Contribution Agreement dated as of October 20, 1997 by and among the
Prime Group, Inc., Prime Group Realty, L.P., Prime Group Realty
Trust, Narco River Business Center, Narco Tower Road Associates,
Olympian Office Center, Tri-State Industrial Park Joint Venture,
Carol Stream Industrial Park Joint Venture, Narco Enterprises, Inc.,
The Nardi Group Ltd., Narco Construction Inc., Nardi & Co., Nardi
Asset Management, Inc. and Nardi Architectural, Inc.
10.12 Option to Purchase Partnership Interests dated as of June 17, 1994
by and between KILICO Realty Corporation, and The Prime Group, Inc.;
as amended by that certain First Amendment to Option Purchase
Partnership Interests dated as of January 21, 1997 by and between
KILICO Realty Corporation and The Prime Group, Inc.; as further
amended by that certain Second Amendment to Option to Purchase
Partnership Interests dated as of July 15, 1997 by and between
KILICO Realty Corporation and The Prime Group, Inc.
10.13* Form of Option Agreement Regarding 300 N. LaSalle
10.14* Form of Registration Rights Agreement
10.15 Contribution Agreement dated as of July 8, 1997 by and among LaSalle
National Trust, N.A., not personally, but solely as Trustee under
Trust Agreement dated June 15, 1982 and known as Trust No. 10-40113-
09, LaSalle National Trust, N.A., not personally, but solely as
Trustee under Trust Agreement dated September 7, 1994 and known as
Trust No. 11-9051, LaSalle National Trust, N.A., not personally, but
solely as Trustee under Trust Agreement dated March 30, 1984 and
known as Trust No. 11-107825, LaSalle National Trust, N.A., not
personally, but solely as Trustee under Trust Agreement dated August
1, 1986 and known as Trust No. 11-1358, LaSalle National Trust,
N.A., not personally, but solely as Trustee under Trust Agreement
dated August 1, 1986 and known as Trust No. 11-1357, LaSalle
National Trust N.A., not personally, but solely as Trustee under
Trust Agreement dated January 17, 1974 and known as Trust No. 286-
34, LaSalle National Trust, N.A., not personally, but solely
as Trustee under Trust Agreement dated October 15, 1995 and known as
Trust No. 11-9869, LaSalle National Trust, N.A., not personally, but
solely as Trustee under Trust Agreement dated December 1, 1987 and
known as Trust No. 11-2868, 310 ERA Limited Partnership, MacArthur
Drive Properties, CLE Limited Partnership, 500 Lindberg Limited
Partnership, 515 Huehl Limited Partnership, 555 Huehl Limited
Partnership, Sky Harbor Associates, 1001 Technology Way, LLC, The
Grandville Road Limited Partnership, Industrial Building and
Development Company and The Prime Group, Inc.; as amended by the
First Amendment to the Contribution Agreement dated as of August 12,
1997, by and between The Prime Group, Inc., an Illinois corporation,
and LaSalle National Trust, NA, t/u/t 10-40113-09 dated June 15,
1982; LaSalle National Trust, NA, t/u/t 11-9051 dated September 7,
1994; LaSalle National Trust, NA, t/u/t 11-107825 dated March 30,
1984; LaSalle National Trust, NA, t/u/t 11-1358 dated August 1,
1986; LaSalle National Trust, NA, t/u/t 11-1357 dated August 1,
1986; LaSalle National Trust, NA, t/u/t 286-34 dated January 17,
1974; LaSalle National Trust, NA, t/u/t 11-9869 dated October 15,
1995; and LaSalle National Trust, NA, t/u/t 11-2868 dated December
1, 1987
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.16* Form of Management Contract
10.17* Form of Formation Agreement
10.18* Form of Asset Purchase Agreement by and among Continental Offices,
Ltd., Continental Offices Ltd. Realty and Prime Group Realty, L.P.
10.19* Form of Non-Compete Agreement by and among Prime Group Realty
Trust, The Prime Group, Inc. and Michael W. Reschke
10.20 Option Agreement dated as of August 4, 1997 by and between
Lumbermens Mutual Casualty Company, and The Prime Group, Inc.
10.21 Amended and Restated Agreement dated as of July 15, 1997 by and
among Kemper Investors Life Insurance Company, Federal Kemper Life
Assurance Company, KILICO Realty Corporation, FKLA Realty
Corporation, KR 77 Fitness Center, Inc., 77 West Wacker Limited
Partnership, K/77 Investors Limited Partnership, The Prime Group,
Inc., Prime Group Limited Partnership, and Prime 77 Fitness Center,
Inc.
10.22 Agreement dated as of July 18, 1997 by and among The Prime Group,
Inc., KILICO Realty Corporation, KFC Portfolio Corp., and Kemper
Investors Life Insurance Company
10.23* Form of Series A Convertible Preferred Securities Agreement by and
between Security Capital Preferred Growth Incorporated and Prime
Group Realty Trust
10.24* Form of Tax Indemnification Agreement by and between Prime Group
Realty Trust and IBD Contributors
10.25* Form of Tax Indemnification Agreement by and between The Prime
Group, Inc. and Prime Group Realty Trust relating to the IBD
Properties
10.26* Form of Tax Indemnification Agreement by and between Prime Group
Realty Trust and the NAC General Partner
10.27* Form of Tax Indemnification Agreement by and between The Prime
Group, Inc. and Prime Group Realty Trust relating to the NAC
Properties
10.28 Agreement to Contribute dated as of August 12, 1997 by and between
Tucker B. Magid and The Prime Group, Inc.
10.29 Agreement to Contribute dated as of August 12, 1997 by and between
Frances S. Shubert and The Prime Group, Inc.
10.30* Subscription Agreement by and between Prime Group Realty, L.P. and
Primestone
10.31* Form of Credit Facility
10.32* Form of PCF Mortgage Notes
12.1 Statements re computation of ratios
15.1* Letter regarding unaudited interim financial information
23.1* Consent of Miles & Stockbridge (included in Exhibit 5.1)
23.2* Consent of Winston & Strawn (included in Exhibit 8.1)
23.3 Consent of Ernst & Young LLP
23.4 Consent of Rosen Consulting Group
23.5.1 Consent of James R. Thompson
23.5.2 Consent of Christopher J. Nassetta
23.5.3 Consent of Jacque M. Ducharme
23.5.4 Consent of Stephen J. Nardi
23.5.5 Consent of Thomas J. Saylak
24.1+ Powers of attorney (included on signature page in Part II of the
initial filing)
27.1+ Financial Data Schedule
99.1 Report of Rosen Consulting Group
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
II-5
<PAGE>
ITEM 36. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters,
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the provisions described under Item 33 above, 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 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 trustee, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, 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 and will be
governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-11 and has duly caused this
amendment no. 2 to registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois, on October 24, 1997.
Prime Group Realty Trust
/s/ Richard S. Curto
By: __________________________________
Richard S. Curto
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment no. 2 to registration statement has been signed below on October 24,
1997 by the following persons in the capacities indicated.
SIGNATURE TITLE
Michael W. Reschke* Chairman of the Board,
- ------------------------------------- Trustee
Michael W. Reschke
/s/ Richard S. Curto President and Chief Executive
- ------------------------------------- Officer (principal executive
Richard S. Curto officer), Trustee
W. Michael Karnes* Executive Vice President and
- ------------------------------------- Chief Financial Officer
W. Michael Karnes (principal financial and
accounting officer)
/s/ Richard S. Curto
*By: ________________________________
Richard S. Curto, Attorney-in-
Fact
II-7
<PAGE>
Exhibit 3.3
PRIME GROUP REALTY TRUST
Declaration of Trust
THIS DECLARATION OF TRUST (this "Declaration of Trust") is made as of July
18, 1997, by the undersigned Trustee.
WHEREAS, the Trustee desire to create a real estate investment trust under
the laws of the State of Maryland and the Trustee desire that this trust qualify
as a "real estate investment trust" under Title 8 of the Corporations and
Associations Article of the Annotated Code of Maryland, as the same may be
amended from time to time (the "Maryland REIT Law");
NOW, THEREFORE, the Trustee hereby declare that he will hold in trust all
property which he have or may hereafter acquire as such Trustee, together with
the proceeds thereof, and manage the Trust property for the benefit of the
Shareholders as provided by this Declaration of Trust.
1. Name. The name of the trust is Prime Group Realty Trust (the
"Trust").
2. Purposes and Powers. The Trust is organized as a real estate
investment trust under the Maryland REIT Law for the purpose of engaging in any
activity permitted to real estate investment trusts under the laws of the State
of Maryland. The Trust shall have all the powers granted to real estate
investment trusts generally by the Maryland REIT law and shall have further
powers consistent with its purposes.
3. Authorized Capital. The total number of shares which the Trust has
authority to issue is one million shares of a class denominated as Common
Shares, $0.01 par value per share. Common Shares may be issued from time to time
upon authorization by the Board of Trustees of the Trust for such consideration,
if any, as the Board of Trustees determines and all shares so issued will be
fully paid and non-assessable. Each holder of Common Shares shall be entitled to
one vote per share on all maters to be voted on by the Shareholders of the
Trust.
4. Annual Meeting. A meeting of Shareholders shall be held annually
after the delivery of the annual report to the Shareholders required by Section
8-401 of the Maryland REIT Law. The annual meeting shall be held at a convenient
location on proper notice as provided in the bylaws of the Trust. At each annual
meeting, the Shareholders shall elect the Board of Trustees to serve for a one
year term and until their successors are elected and qualify.
5. Trustees. (a) The Trust shall have a Board of Trustees consisting of
not less than one and not more than 15 members, as determined from time to time
by resolution of the Board of Trustees in accordance with the bylaws of the
Trust. The Board of Trustees shall initially consist of one Trustee: Richard S.
Curto who shall serve as Trustee until the first annual meeting of Shareholders
and until his successor is elected and qualifies. A Trustee need not be a
Shareholder. If a vacancy in the Board of Trustees shall occur or be created
(whether arising through death, retirement, resignation or removal or through an
increase in the number of Trustees), the vacancy shall be filled by the
affirmative vote of a majority of the remaining Trustees, even though less
than a quorum of the Board of Trustees may exist.
<PAGE>
(b) A Trustee shall perform his or her duties as a Trustee; (i) in
good faith, (ii) in a manner he or she reasonably believes to be in the best
interest of the Trust, and (iii) with the care that an ordinarily prudent person
in a like position would use under similar circumstances. In performing his or
her duties, a Trustee is entitled to rely on any information, opinion, report or
statement, including any financial statement or other financial data, prepared
or presented by, (i) an officer or employee of the Trust whom the Trustee
reasonably believes to be reliable and competent in the matters presented, (ii)
a lawyer, certified public accountant or other person, as to matters which the
Trustee reasonably believes to be within the person's professional competence,
or (iii) a committee of the Board of Trustees on which the Trustee does not
serve, as to matters within its designated authority, if the Trustee reasonably
believes the committee to merit confidence.
(c) To the maximum extent that Maryland law in effect from time to
time permits limitation of liability of trustees or officers of real estate
investment trusts, no Trustee or officer of the Trust shall be liable to the
Trust or its Shareholders for money damages. Neither the amendment nor repeal
of this provision, nor the adoption nor amendment of any other provision of this
Declaration of Trust or the bylaws of the Trust inconsistent with this
provision, shall apply to or affect in any respect the applicability of the
preceding sentence with respect to any act or failure to act which occurred
prior to such amendment, repeal or adoption.
6. Registered Agent. The name and address of the resident agent of
the Trust in the State of Maryland is The Corporation Trust, Incorporated, 32
South Street, 2nd Floor, Baltimore, Maryland 21202, which is a resident of the
State of Maryland. The address of the Trust's principal office is 77 West Wacker
Drive, Suite 3900, Chicago, Illinois 60601.
7. Indemnification. The Trust shall indemnify and advance expenses
to a Trustee, officer, employee or agent of the Trust in connection with the
proceedings to the fullest extent permitted by and in accordance with the laws
of the State of Maryland in effect from time to time.
IN WITNESS WHEREOF, this Declaration of Trust has been executed on the
date set forth above, by the undersigned Trustee, who acknowledges that this
document is the act of the Trust, that to the best of his knowledge, information
and belief, the matters and facts set forth herein are true in all material
respects and that this statement is made under the penalties of perjury.
/s/ Richard S. Curto
--------------------------------
Richard S. Curto
-2-
<PAGE>
PRIME GROUP REALTY CORP.
77 WEST WACKER DRIVE
SUITE 3900
CHICAGO, ILLINOIS 60601
CONSENT AND APPROVAL
--------------------
The undersigned, a duly authorized officer of Prime Group Realty Corp., as
a Maryland corporation, hereby gives its consent and approval for the use of the
name Prime Group Realty Trust.
Prime Group Realty Corp.
By: /s/ Richard S. Curto
------------------------
Name: Richard S. Curto
---------------------
Title: Vice President
---------------------
<PAGE>
Exhibit 3.4
FORM OF
BY-LAWS
OF
PRIME GROUP REALTY TRUST
a Maryland real estate investment trust
ARTICLE I
Offices
-------
Section 1.1 Registered Office. The Prime Group Realty Trust (the "Trust")
shall maintain a registered office in the State of Maryland as required by law.
Section 1.2 Executive Office. The Trust also has executive offices
located at 77 West Wacker Drive, Suite 3900, Chicago, Illinois 60601, telephone
number 312/917-1500.
Section 1.3 Other Offices. The Trust may also have offices other than
its executive offices at such other places both within and without the State of
Maryland as the Board of Trustees may from time to time determine or the
business of the Trust may require.
ARTICLE II
Stockholders
------------
Section 2.1 Annual Meetings. An annual meeting of stockholders shall be
held each year for the election of Trustees at such date, time and place either
within or without the State of Delaware as shall be designated by the Board of
Trustees. Any other proper business may be transacted at the annual meeting of
stockholders.
Section 2.2 Special Meetings. Special meetings of stockholders may be
called at any time by the Board of Trustees, the Chairman, if any, the Vice
Chairman, if any, or the President and shall be called by the Chairman or the
Secretary at the request, in writing, stating the purpose or purposes of the
meeting, of stockholders who hold a majority of the outstanding shares of each
class of capital stock entitled to vote at the meeting. Each special meeting
shall be held at such date, time and place either within or without the State of
Maryland as shall be designated by the person or persons calling such meeting at
least ten days prior to such meeting.
Section 2.3 Notice of Meeting. Unless otherwise provided by law,
whenever stockholders are required or permitted to take any action at a meeting,
a written notice of the meeting shall be given which shall state the date, time
and place of the meeting and, in
<PAGE>
the case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise provided by law, the written notice of any meeting
shall be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at the meeting. If mailed, notice
is given when deposited in the United States mail, postage prepaid, directed to
the stockholder at his address as it appears on the records of the Trust.
Section 2.4 Adjournments. Any meeting of stockholders, annual or
special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the Trust may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
Section 2.5 Quorum. Unless otherwise provided by law or the Declaration
of Trust, at each meeting of stockholders, the presence in person or
representation by proxy of the holders of a majority of the outstanding shares
of each class of capital stock entitled to vote at the meeting shall constitute
a quorum for the transaction of business. For purposes of the foregoing, two or
more classes or series of capital stock shall be considered a single class if
the holders thereof are entitled to vote together as a single class at the
meeting. In the absence of a quorum, the stockholders so present and
represented may, by vote of the holders of a majority of the shares of capital
stock of the Trust so present and represented, adjourn the meeting from time to
time until a quorum shall attend, and the provisions of Section 2.4 of these by-
laws shall apply to each such adjournment. Shares of its own capital stock
belonging on the record date for the meeting to the Trust or to another
corporation, if a majority of the shares entitled to vote in the election of
Trustees of such other corporation is held, directly or indirectly, by the
Trust, shall neither be entitled to vote nor be counted for quorum purposes;
provided, however, that the foregoing shall not limit the right of the Trust to
vote stock, including but not limited to its own stock, held by it in a
fiduciary capacity.
Section 2.6 Organization. Meetings of stockholders shall be presided
over by the Chairman, if any, or in his absence by the Vice Chairman, if any, or
in his absence by the President, or in the absence of the foregoing persons by a
chairman designated by the Board of Trustees, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
-2-
<PAGE>
Section 2.7 Voting; Proxies. Unless otherwise provided by the
Declaration of Trust, each stockholder entitled to vote at any meeting of
stockholders shall be entitled to one vote for each share of capital stock held
by him which has voting power on the subject matter submitted to a vote at the
meeting. Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by proxy, but no such proxy
shall be voted or acted upon after three years from its date, unless the proxy
provides for a longer period. A duly executed proxy shall be irrevocable if it
states that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A stockholder may
revoke any proxy which is not irrevocable by attending the meeting and voting in
person or by filing an instrument in writing revoking the proxy or another duly
executed proxy bearing a later date with the Secretary before the proxy is
voted. Unless otherwise required by law, voting of stockholders for the
election of Trustees need not be by written ballot. Voting of stockholders for
all other matters need not be by written ballot unless so determined at a
stockholders meeting by the vote of the holders of a majority of the outstanding
shares of each class of capital sock present in person or represented by proxy
at the meeting and entitled to vote on the subject matter submitted to a vote at
the meeting. Unless otherwise provided by law or the Declaration of Trust, the
vote of the holders of a majority of the shares of capital stock of the Trust
present in person or represented by proxy at a meeting at which a quorum is
present and entitled to vote on the subject matter submitted to a vote at the
meeting shall be the act of the stockholders.
Section 2.8 Fixing Date for Determination of Stockholders of Record. In
order that the Trust may determine the stockholders entitled to notice of or to
vote at any meeting of stockholders or any adjournment thereof or to express
consent to corporate action in writing without a meeting, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for the purpose of any other lawful action, the Board of Trustees
may fix, in advance, a record date, which shall not be more than sixty nor less
than ten days before the date of such meeting, more than ten days after the date
upon which the resolution fixing the record date with respect to the taking of
corporate action by written consent without a meeting is adopted by the Board of
Trustees, nor more than sixty days prior to any other action. If no record date
is fixed: (a) the record date for determining stockholders entitled to notice
of or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given or, if notice is waived,
at the close of business on the day next preceding the day on which the meeting
is held; (b) the record date for determining stockholders entitled to express
consent to
-3-
<PAGE>
corporate action in writing without a meeting, when no prior action by the Board
of Trustees is necessary, shall be the day on which the first written consent is
expressed; (c) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when prior action by
the Board of Trustees is required, shall be at the close of business on the day
on which the Board of Trustees adopts the resolution taking such prior action;
and (d) the record date for determining stockholders for any other purpose shall
be at the close of business on the day on which the Board of Trustees adopts the
resolution relating thereto. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Trustees may
fix a new record date for the adjourned meeting.
Section 2.9 List of Stockholders Entitled to Vote. The Secretary shall
make, at least ten days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof and may be
inspected by any stockholder who is present.
Section 2.10 Consent of Stockholders in Lieu of Meeting. Unless otherwise
provided by the Declaration of Trust, any action required by law to be taken at
any annual or special meeting of stockholders of the Trust, or any action which
may be taken at any annual or special meeting of such stockholders (including,
without limitation, the removal of any member of the board of Trustees), may be
taken without a meeting, without prior notice and without a vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
-4-
<PAGE>
ARTICLE III
Board of Trustees
-----------------
Section 3.1 Powers; Number; Qualifications. Unless otherwise provided by
law or the Declaration of Trust, the business and affairs of the Trust shall be
managed by or under the direction of the Board of Trustees. Unless otherwise
provided by the Declaration of Trust, the Board of Trustees shall consist of
such number of Trustees as the Board of Trustees shall from time to time
designate. Unless otherwise provided by the Declaration of Trust, Trustees need
not be stockholders.
Section 3.2 Election; Term of Office; Resignation; Removal; Vacancies.
Each Trustee shall hold office until his successor is elected and qualified or
until his earlier resignation or removal. Any Trustee may resign at any time
upon written notice to the Trust directed to the Board of Trustees or the
Secretary. Such resignation shall take effect at the time specified therein,
and unless otherwise specified therein no acceptance of such resignation shall
be necessary to make it effective. Any Trustee or the entire Board of Trustees
may be removed, with or without cause, by the vote of the holders of a majority
of shares of capital stock then entitled to vote at an election of Trustees.
Whenever the holders of shares of any class or series of capital stock are
entitled to elect one or more Trustees by the provisions of the Declaration of
Trust, the provisions of the preceding sentence shall apply, in respect to the
removal without cause of a Trustee or Trustees so elected, to the vote of the
holders of the outstanding shares of that class or series of capital stock and
not to the vote of the holders of the outstanding shares of capital stock as a
whole. Unless otherwise provided by the Declaration of Trust, vacancies and
newly created Trusteeships resulting from any increase in the authorized number
of Trustees elected by all of the stockholders having a right to vote as a
single class may be filled by the vote of a majority of the Trustees then in
office, although less than a quorum, or by the vote of the sole remaining
Trustee. Whenever the holders of shares of any class or classes of capital stock
or series thereof are entitled to elect one or more Trustees by the provisions
of the Declaration of Trust, vacancies and newly created Trusteeships of such
class or classes or series thereof may be filled by the vote of a majority of
the Trustees elected by such class or classes or series thereof then in office,
or by the vote of the sole remaining Trustee so elected.
Section 3.3 Regular Meetings. Regular meetings of the Board of Trustees
shall be held at such dates, times and places either within or without the State
of Maryland as the Board of Trustees shall from time to time determine.
Section 3.4 Special Meetings. Special meetings of the Board of Trustees
may be called at any time by the Chairman, if any, the
-5-
<PAGE>
Vice Chairman, if any, the President or by any two members of the Board of
Trustees. Each special meeting shall be held at such date, time and place
either within or without the State of Maryland as shall be fixed by the person
or persons calling the meeting.
Section 3.5 Notice of Meetings. Written notice of each meeting of the
Board of Trustees shall be given which shall state the date, time and place of
the meeting. The written notice of any meeting shall be given at least twenty-
four hours in advance of the meeting to each Trustee. Notice may be given by
letter, telegram, telex or facsimile and shall be deemed to have been given when
deposited in the United States mail, delivered to the telegraph company or
transmitted by telex or facsimile, as the case may be.
Section 3.6 Telephonic Meetings Permitted. Members of the Board of
Trustees or any committee designated by the Board of Trustees may participate in
a meeting of the Board of Trustees or of such committee by means of conference
telephone or similar communication equipment by means of which all persons
participating in the meeting can hear each other, and participation in the
meeting pursuant to this by-law shall constitute presence in person at such
meeting.
Section 3.7 Quorum; Vote Required for Action. Unless otherwise required
by law, at each meeting of the Board of Trustees, the presence of one-third of
the total number of Trustees shall constitute a quorum for the transaction of
business. The vote of a majority of the Trustees present at a meeting at which
a quorum is present shall be the act of the Board of Trustees, unless the vote
of a greater number is required by law or the Declaration of Trust. In case at
any meeting of the Board of Trustees a quorum shall not be present, the members
of the Board of Trustees present may by majority vote to adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall attend.
Section 3.8 Organization. Meetings of the Board of Trustees shall be
presided over by the Chairman, if any, or in his absence by the Vice Chairman,
if any, or in his absence by the President, or in their absence by a chairman
chosen at the meeting. The Secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.
Section 3.9 Action by Trustees Without a Meeting. Unless otherwise
provided by the Declaration of Trust, any action required or permitted to be
taken at any meeting of the Board of Trustees or any committee designated by the
Board of Trustees may be taken without a meeting if all members of the Board of
Trustees or of such committee consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Trustees or
such committee.
-6-
<PAGE>
Section 3.10 Compensation of Trustees. Unless otherwise provided by the
Declaration of Trust, the Board of Trustees shall have the authority to fix the
compensation of Trustees, which compensation may include the reimbursement of
expenses incurred in connection with meetings of the Board of Trustees or a
committee thereof.
ARTICLE IV
Committees
----------
Section 4.1 Committees. The Board of Trustees may, by resolution passed
by a majority of the whole Board of Trustees, designate one or more committees,
each committee to consist of one or more of the Trustees of the Trust. The
Board of Trustees may designate one or more Trustees as alternate members of any
committee, who may replace any absent or disqualified member of such committee
at any meeting thereof. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Trustees to act at the
meeting in place of any such absent or disqualified member.
Section 4.2 Power of Committees. Any committee designated by the Board
of Trustees, to the extent provided in a resolution of the Board of Trustees,
shall have and may exercise all the powers and authority of the Board of
Trustees in the management of the business and affairs of the Trust and may
authorize the seal of the Trust to be affixed to all papers which may require
it; but no such committee shall have the power or authority to take any action
which by law may only be taken by the Board of Trustees or to take any action
with reference to: amending the Declaration of Trust (except that a committee
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the Board of Trustees, fix the
designation and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the Trust or
the conversion into, or the exchange of such shares for, shares of any other
class or classes or any other series of the same or any other class or classes
of stock of the Trust or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the Trust's property and
assets, recommending to the stockholders a dissolution of the Trust or a
revocation of dissolution, removing or indemnifying Trustees or amending these
by-laws; and, unless a resolution of the Board of Trustees expressly so
provides, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger.
-7-
<PAGE>
Section 4.3 Committee Rules. Unless the Board of Trustees otherwise
provides, each committee designated by the Board of Trustees may adopt, amend
and repeal rules for the conduct of its business. In the absence of a
resolution by the Board of Trustees or a provision in the rules of such
committee to the contrary, the presence of a majority of the total number of
members of such committee shall constitute a quorum for the transaction of
business, and the vote of a majority of the members present at a meeting at
which a quorum is present shall be the act of such committee.
ARTICLE V
Officers
--------
Section 5.1 Officers; Elections. As soon as practicable after the annual
meeting of stockholders in each year, the Board of Trustees shall elect from its
membership or outside thereof a President and a Secretary. The Board of
Trustees may also elect from its membership a Chairman of the Board of Trustees
(herein called "Chairman") and a Vice Chairman of the Board of Trustees (herein
called "Vice Chairman"), and from its membership or outside thereof one or more
Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant
Secretaries, a Treasurer and one or more Assistant Treasurers and such other
officers or agents as it may determine. Unless otherwise provided by the
Declaration of Trust, any number of offices may be held by the same person.
Section 5.2 Term of Office; Resignation; Removal; Vacancies. Except as
otherwise provided by the Board of Trustees when electing any officer, each
officer shall hold office until the first meeting of the Board of Trustees after
the annual meeting of stockholders next succeeding his election, or until his
successor is elected and qualified or until his earlier resignation or removal.
Any officer may resign at any time upon written notice to the Trust directed to
the Board of Trustees and the Secretary. Such resignation shall take effect at
the time specified therein, and unless otherwise specified therein no acceptance
of such resignation shall be necessary to make it effective. The Board of
Trustees may remove any officer or agent with or without cause at any time. Any
such removal shall be without prejudice to the contractual rights of such
officer or agent, if any, with the Trust, but the election of an officer or
agent shall not of itself create any contractual rights. Any vacancy occurring
in any office of the Trust by death, resignation, removal or otherwise may be
filled for the unexpired portion of the term by the Board of Trustees.
Section 5.3 Powers and Duties. The officers of the Trust shall have such
powers and duties in the management of the Trust as shall be stated in these by-
laws or in a resolution of the Board of Trustees which is not inconsistent with
these by-laws and, to the extent not so stated, as generally pertain to their
respective
-8-
<PAGE>
offices, subject to the control of the Board of Trustees. The Secretary shall
have the duty to record in a book to be kept for that purpose the proceedings of
the meetings of the stockholders, the Board of Trustees and any committees
designated by the Board of Trustees.
Section 5.4 Other Officers; Security. The other officers, if any, of the
Trust shall have such duties and powers as generally pertain to their respective
offices and such other duties and powers as the Board of Trustees shall from
time to time delegate to each such officer. The Board of Trustees may require
any officer, agent or employee to give security, by bond or otherwise, for the
faithful performance of his duties.
Section 5.5 Compensation of Officers. The compensation of each officer
shall be fixed by the Board of Trustees and no officer shall be prevented from
receiving such compensation by virtue of his also being a Trustee.
ARTICLE VI
Stock
-----
Section 6.1 Certificates. Every holder of one or more shares of capital
stock of the Trust shall be entitled to have a certificate signed by or in the
name of the Trust by the Chairman or Vice Chairman, if any, or the President or
a Vice President, and by the Treasurer or an Assistant Treasurer, if any, or the
Secretary or an Assistant Secretary, certifying the number of shares owned by
him in the Trust. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Trust with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
Section 6.2 Lost, Stolen or Destroyed Stock Certificates; Issuance of New
Certificates. The Trust may issue a new certificate of stock in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Trust may require the owner of the lost, stolen or destroyed
certificate, or his legal representative, to give the Trust a bond sufficient to
indemnify it against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
ARTICLE VII
Indemnification of Trustees and Officers
----------------------------------------
-9-
<PAGE>
Section 7.1 Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is otherwise involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (hereinafter a "proceeding"), by
reason of the fact that he is or was a Trustee or officer of the Trust or is or
was serving at the request of the corporation as a Trustee, officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity as a Trustee, officer, employee or agent or in
any other capacity while serving as a Trustee, officer, employee or agent, shall
be indemnified and held harmless by the Trust to the fullest extent authorized
by Maryland REIT law, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Trust to provide broader indemnification rights than permitted prior
thereto), against all reasonable expense, liability and loss (including, without
limitation, reasonable attorneys' fees, judgments, fines and amounts paid in
settlement) incurred or suffered by such indemnitee in connection therewith and
such indemnification shall continue as to an indemnitee who has ceased to be a
Trustee, officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators; provided, however, that,
except as provided in Section 7.02 below with respect to proceedings to enforce
rights to indemnification, the Trust shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Trustees of
the Trust. The right to indemnification conferred in this ARTICLE VII shall be
a contract right and shall include the right to be paid by the Trust the
expenses incurred in defending any such proceeding in advance of its final
disposition (hereinafter an "advancement of expenses"); provided, however, that,
if the Maryland REIT law requires, an advancement of expenses incurred by an
indemnitee in his capacity as a Trustee or officer (and not in any other
capacity in which service was or is rendered by such indemnitee) shall be made
only upon delivery to the corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this ARTICLE VII or otherwise.
Section 7.2 Right of Indemnitee to Bring Suit. If a claim under Section
7.1 above is not paid in full by the Trust within sixty days after a written
claim has been received by the Trust, except in the case of a claim for an
advancement of expenses, in which case the applicable period shall be thirty
days, the indemnitee may at any time thereafter bring suit against the Trust
-10-
<PAGE>
to recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Trust to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(a) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that and (b) in any suit by the
Trust to recover an advancement of expenses pursuant to the terms of an
undertaking the Trust shall be entitled to recover such expenses upon a final
adjudication that, the indemnitee has not met the applicable standard of conduct
set forth in the General Trust Law of the State of Maryland. Neither the
failure of the Trust (including its Board of Trustees, independent legal counsel
or its stockholders) to have made a determination prior to the commencement of
such suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the Maryland General Trust Law, nor an actual determination by the Trust
(including its Board of Trustees, independent counsel or its stockholders) that
the indemnitee has not met such applicable standard of conduct, shall create a
presumption that the indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by the indemnitee, be a defense to such
suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the Trust to
recover an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be indemnified, or to
such advancement of expenses, under this ARTICLE VII or otherwise shall be on
the Trust.
Section 7.3 Non-Exclusivity of Rights under this ARTICLE. The rights to
indemnification and to the advancement of expenses conferred in this ARTICLE VII
shall not be exclusive of any other right which any person may have or hereafter
acquire under any statute, provision of the Declaration of Trust, by-law,
agreement, vote of stockholders or disinterested Trustees or otherwise.
Section 7.4 Insurance. The Trust may purchase and maintain insurance on
its own behalf or on behalf of any person who is or was a Trustee, officer,
employee or agent of the Trust, or is or was serving at the request of the Trust
as a Trustee, officer, employee or agent of another Trust, partnership, joint
venture, trust or other enterprise against any expense, liability or loss
asserted against him in any such capacity, or arising out of his status as such,
whether or not the Trust would have the power to indemnify such person against
such expense, liability or loss under the General Trust Law of the State of
Maryland.
Section 7.5 Indemnification of Employees and Agents. The Trust may, to
the extent authorized at any time from time to time
-11-
<PAGE>
by the Board of Trustees, grant rights to indemnification and the advancement of
expenses to any employee or agent of the Trust to the fullest extent of the
provisions of this ARTICLE VII with respect to the indemnification and
advancement of expenses of Trustees and officers of the Trust.
ARTICLE VIII
Miscellaneous
-------------
Section 8.1 Fiscal Year. The fiscal year of the Trust shall be
determined by the Board of Trustees.
Section 8.2 Seal. The Trust may have a seal which shall have the name of
the Trust inscribed thereon and shall be in such form as may be approved from
time to time by the Board of Trustees.
Section 8.3 Waiver of Notice of Meetings of Stockholders, Trustees and
Committees. Whenever notice is required to be given by law, the Declaration of
Trust or these by-laws, a written waiver thereof, signed by the person entitled
to notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Unless otherwise provided by the Declaration of Trust, neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders, Trustees or members of a committee of Trustees need be
specified in any written waiver of notice.
Section 8.4 Interested Trustees, Officers, Quorum. No contract or
transaction between the Trust and one or more of its Trustees or officers, or
between the Trust and any other Trust, partnership, association or other
organization in which one or more of its Trustees or officers are Trustees or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the Trustee or officer is present at or
participates in the meeting of the Board of Trustees or committee thereof which
authorizes the contract or transaction, or solely because his or their votes are
counted for such purpose, if: (a) the material facts as to his relationship or
interest and as to the contract or transaction are disclosed or are known to the
Board of Trustees or the committee, and the Board of Trustees or committee in
good faith authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested Trustees, even though the disinterested Trustees
be less than a quorum; or (b) the material facts as to his relationship or
interest and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the
-12-
<PAGE>
stockholders; or (c) the contract or transaction is fair as to the Trust as of
the time it is authorized, approved or ratified, by the Board of Trustees, a
committee thereof or the stockholders. Common or interested Trustees may be
counted in determining the presence of a quorum at a meeting of the Board of
Trustees or of a committee which authorizes the contract or transaction.
Section 8.5 Books and Records. The books and records of the Trust may be
kept within or without the State of Maryland at such place or places as may be
designated from time to time by the Board of Trustees. Any records maintained
by the Trust in the regular course of its business, including its stock ledger,
books of account and minute books, may be kept on, or be in the form of, punch
cards, magnetic tape, photographs, microphotographs or any other information
storage device provided that the records so kept can be converted into clearly
legible form within a reasonable time. The Trust shall so convert any records
so kept upon the request of any person entitled to inspect the same.
Section 8.6 Amendment of By-Laws. These By-laws may be amended or
repealed, and new by-laws adopted, by the Board of Trustees, but the
stockholders entitled to vote may adopt additional by-laws and may amend or
repeal any by-law whether or not adopted by them.
-13-
<PAGE>
Exhibit 3.5
CERTIFICATE OF LIMITED PARTNERSHIP
OF
PRIME GROUP REALTY, L.P.
The undersigned, desiring to form a limited partnership pursuant to the
Delaware revised Uniform Limited Partnership Act, 6 Delaware Code, Chapter 17,
do hereby certify as follows:
I. The name of the limited partnership is Prime Group Realty, L.P.
II. The address of the Partnership's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, County of
New Castle. The name of the Partnership's registered agent for service of
process in the State of Delaware at such address is The Corporation Trust
Company.
III. The name and mailing address of the sole general partner are as
follows;
Name Mailing Address
---- ---------------
Prime Group Realty Corp. c/o The Prime Group, Inc.
77 West Wacker Drive, Suite 3900
Chicago, Illinois 60601
IN WITNESS WHEREOF, the underdsigned have executed this Certificate of
Limited Partnership of Prime Group Realty, L.P. as of this 19th day of March,
1997.
Prime Group Realty Corp.,
a Maryland corporation
/s/ Robert J. Rudnik
----------------------------
Robert J. Rudnik
Vice President and Secretary
/s/ Richard S. Curto
----------------------------
Richard S. Curto
Vice President
<PAGE>
EXHIBIT 5.1
FORM OF MILES & STOCKBRIDGE VALIDITY OPINION
_____________, 1997
Prime Group Realty Trust
77 W. Wacker Drive, Suite 3900
Chicago, IL 60601
Ladies and Gentlemen:
In connection with the registration under the Securities Act of 1933, as
amended (the "Act") of ______________ common shares of beneficial interest, $.01
par value per share (the "Common Shares"), and of _____________ cumulative
convertible preferred shares of beneficial interest, $.01 par value per share
(the "Convertible Preferred Shares"), of Prime Group Realty Trust, a Maryland
real estate investment trust, on its Registration Statement on Form S-11 (File
No. 333-33547) (the "Registration Statement"), we have examined such trust
records, certificates and documents as we deemed necessary for the purpose of
this opinion. Based on that examination, we advise you that in our opinion the
Common Shares and the Convertible Preferred Shares have been duly and validly
authorized and, when issued upon the terms and in the manner set forth in the
Registration Statement, will be legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving our consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Act or the rules and regulations of the Securities and Exchange Commission
thereunder. Additionally, we understand that Winston & Strawn will rely on our
opinion in giving its opinion letter to you on the date hereof and we consent to
that reliance. The opinion expressed herein is limited to the matters set forth
in this letter and no other opinion should be inferred beyond the matters
expressly stated.
Very truly yours,
Miles & Stockbridge,
a Professional Corporation
By:
------------------------
Principal
<PAGE>
EXHIBIT 8.1
FORM OF WINSTON & STRAWN TAX MATTERS OPINION
October __, 1997
Prime Group Realty Trust
77 West Wacker Drive
Suite 3900
Chicago, Il 60601
Re: Qualification as REIT and Prospectus Federal Income Tax Disclosure
------------------------------------------------------------------
Ladies and Gentlemen:
We have acted as special tax counsel to Prime Group Realty Trust, a
Maryland real estate investment trust (the "Company"), in connection with the
offering of common shares, convertible preferred units and convertible preferred
shares of the Company's beneficial interests contemplated by the Company's
Registration Statement on Form S-11 (File No. 333-33547), which was initially
filed with the Securities and Exchange Commission ("SEC") on August 13, 1997
(the "Registration Statement") as amended by Amendment No. 1 thereto filed with
the SEC on September 12, 1997, Amendment No. 2 thereto filed with the SEC on
October __, 1997 and the Prospectus dated ________, 1997 constituting a part
thereof (the "Prospectus"). Capitalized terms used herein and not otherwise
defined shall have the meanings assigned to such terms in the Prospectus.
You have requested our opinion concerning (i) whether the Company is
organized in conformity with the requirements for qualification as a real estate
investment trust ("REIT") for federal income tax purposes, (ii) whether the
Company's method of operation has enabled it to meet the requirements for
qualification and taxation as a REIT under the provisions of the Internal
Revenue Code of 1986, as amended (the "Code") and (iii) whether the Company's
method of operation enables it to continue to meet the requirements for
qualification as a REIT. In rendering this opinion, we have examined and relied
upon the descriptions of the Company, the Operating Partnership and the Property
Partnerships and their respective investments, as well as proposed investments,
activities, operations, and governance, as set forth in the Prospectus. We have
reviewed originals or copies, certified or otherwise identified to our
satisfaction, of the Amended and Restated Declaration of Trust of the Company as
amended on , 1997 (the "Charter"), the Agreement of Limited Partnership
of
<PAGE>
the Operating Partnership, each of the Property Partnerships' agreements as
amended, the Registration Statement, the Prospectus and such other documents,
agreements, and information as we have deemed necessary for purposes of
rendering the opinions contained herein. For purposes of such examination, we
have assumed the genuineness of all signatures on originals or copies, the legal
capacity of natural persons, the authority of any individual or individuals who
executed any such documents on behalf of any other person, the authenticity of
all documents submitted to us as originals and the conformity to originals or
certified copies of all copies submitted to us as certified or reproduction
copies.
We have also reviewed and, with your permission, are relying upon the
Officer's Certificate dated on the date hereof and executed by a duly authorized
officer of the Company, setting forth certain representations relating to the
formation, ownership, operation, future method of operation, and compliance with
the REIT and partnership provisions of the Code of the Company, the Operating
Partnership, each of the Property Partnerships, and Prime Group Realty Services,
Inc. (the "Services Company"). We have further relied on and assumed the truth
and correctness of (i) the Company's representations in the Agreement of Limited
Partnership of the Operating Partnership and (ii) the certificates of public
officials with respect to the formation of certain limited partnerships.
Moreover, for the purpose of rendering our opinion, we have assumed that no
partner in the Operating Partnership or any of the Property Partnerships will
elect to be excluded from all or part of subchapter K of the Code.
For the purposes of rendering this opinion, we have not made an independent
investigation of the facts set forth in any of the aforementioned documents,
including without limitation the Prospectus and the Officer's Certificate. We
have consequently relied upon your representations that the information
presented in such documents or otherwise furnished to us accurately and
completely describes all material facts relevant to this opinion.
In rendering this opinion, we have assumed that the transactions
contemplated by the Prospectus will be consummated in accordance with the
operative documents, and such documents accurately reflect the material facts of
such transactions. In addition, the opinions set forth herein are based on the
correctness of the following specific assumptions: (i) the Company, the
Operating Partnership, the Property Partnerships, and the Services Company will
each be operated in the manner described in the relevant partnership agreement
or other organizational documents and in the Prospectus and in accordance with
applicable laws; and (ii) each partner in the Operating Partnership and in each
of the Property Partnerships has been motivated in acquiring its respective
partnership interest by such partner's anticipation of economic rewards apart
from tax considerations.
Our opinion is based upon the current provisions of the Code, Treasury
Regulations promulgated thereunder, current
<PAGE>
administrative rulings, judicial decisions, and other applicable authorities,
all as in effect on the date hereof. All of the foregoing authorities are
subject to change or new interpretation, both prospectively and retroactively,
and such changes or interpretation, as well as changes in the facts as they have
been represented to us or assumed by us, could affect our opinion. Our opinion
is rendered only as of the date hereof and we undertake no responsibility to
update this opinion after this date. Our opinion does not foreclose the
possibility of a contrary determination by the Internal Revenue Service (the
"IRS") or by a court of competent jurisdiction, or of a contrary position by the
IRS or Treasury Department in regulations or rulings issued in the future.
Based on the foregoing, and subject to the limitations, qualifications and
exceptions set forth herein, we are of the opinion that:
1. The Company is organized in conformity with the requirements for
qualification as a REIT, and the Company's method of operation has enabled it to
meet the requirements for qualification and taxation as a REIT under the Code,
and its method of operation enables it to continue to meet the requirements for
qualification as a REIT.
2. The discussion in the Prospectus under the heading "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS" fairly summarizes the federal income tax
considerations that are likely to be material to a holder of the Company's
common shares, convertible preferred units or convertible preferred shares.
The Company's qualification and taxation as a REIT depend upon the
Company's ability to meet on a continuing basis, through actual annual operating
and other results, the various requirements under the Code and described in the
Prospectus with regard to, among other things, the sources of gross income, the
composition of assets, the level of distributions to stockholders, and the
diversity of its stock ownership. Winston & Strawn undertakes no responsibility
to, and will not, review the Company's compliance with these requirements on a
continuing basis. Accordingly, no assurance can be given that the actual
results of the Company's operations, the nature of its assets, the amount and
types of its gross income, the level of its distributions to stockholders and
the diversity of its stock ownership for any given taxable year will satisfy the
requirements under the Code for qualification and taxation as a REIT. In
particular, we would note that, although the Company's Charter contains certain
provisions which restrict the ownership and transfer of the Company's capital
stock and which are intended to prevent concentration of stock ownership, such
provisions do not ensure that the Company will be able to satisfy the
requirement set forth in Code section 856(a)(6) that it not be "closely held"
within the meaning of Code section 856(h) for any given taxable year, primarily,
though not exclusively, as a result of fluctuations in value among the different
classes of the Company's capital stock.
<PAGE>
Other than as expressly stated above, we express no opinion on any issue
relating to the Company, the Operating Partnership, the Services Company, or any
of the Property Partnerships or to any investment therein.
This opinion is being delivered to you solely for use in connection with
the Prospectus as of the date hereof. This opinion is solely for the benefit of
the above-named addressee and may not be relied upon by any other person in any
manner whatsoever without our prior written permission. Notwithstanding the
foregoing, we hereby consent to the incorporation by reference of this opinion
to the Registration Statement and to the use of our name in the Prospectus under
the caption "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" and "LEGAL MATTERS." In
giving this consent, we do not admit that we are included in the category of
persons whose consent is required under section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the SEC.
Very truly yours,
Winston & Strawn
<PAGE>
EXHIBIT 10.3
FORM OF
PRIME GROUP REALTY TRUST
SHARE INCENTIVE PLAN
<PAGE>
PRIME GROUP REALTY TRUST
SHARE INCENTIVE PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Article 1. Establishment, Objectives and Duration.................... 1
Article 2. Definitions............................................... 2
Article 3. Administration............................................ 7
Article 4. Shares Subject to the Plan and Maximum Awards............. 7
Article 5. Eligibility and Participation............................. 9
Article 6. Stock Options............................................. 9
Article 7. Stock Appreciation Rights................................. 11
Article 8. Restricted Stock and Restricted Units..................... 13
Article 9. Performance Units......................................... 14
Article 10. Performance Measures...................................... 16
Article 11. Beneficiary Designation................................... 17
Article 12. Deferrals................................................. 17
Article 13. Rights of Employees....................................... 18
Article 14. Change in Control......................................... 18
Article 15. Amendment, Modification and Termination................... 19
Article 16. Withholding............................................... 20
Article 17. Indemnification........................................... 20
Article 18. Successors................................................ 21
Article 19. Legal Construction........................................ 21
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Article 20. Shareholder Approval..................................... 22
</TABLE>
ii
<PAGE>
PRIME GROUP REALTY TRUST
SHARE INCENTIVE PLAN
Article 1. Establishment, Objectives and Duration
1.1 Establishment of the Plan. Prime Group Realty Trust, a Maryland real
estate investment trust (hereinafter referred to as the "Company"), hereby
establishes a long-term incentive compensation plan to be known as the "Prime
Group Realty Trust Share Incentive Plan" (hereinafter referred to as the
"Plan"), as set forth in this document. The Plan permits the grant of
Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights,
Restricted Stock, Restricted Units and Performance Units.
Subject to the approval of the Company's shareholders, the Plan shall
become effective as of October __, 1997 (the "Effective Date") and shall remain
in effect as provided in Section 1.3 hereof.
1.2 Objectives of the Plan. The objectives of the Plan are to optimize
the profitability and growth of the Company through long-term incentives which
are consistent with the Company's objectives and which link the interests of
Participants to those of the Company's shareholders; to provide Participants
with an incentive for excellence in individual performance; and to promote
teamwork among Participants; and to give the Company a significant advantage in
attracting and retaining officers, key employees and trustees.
The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract and retain the services of Participants who make
significant contributions to the Company's success and to allow Participants to
share in the success of the Company.
1.3 Duration of the Plan. The Plan shall commence on the Effective Date,
as described in Section 1.1 hereof, and shall remain in effect, subject to the
right of the Board of Trustees to amend or terminate the Plan at any time
pursuant to Article 15 hereof, until all Shares subject to the Plan pursuant to
Article 4 shall have been purchased or acquired according to the provisions
hereof. In no event, however, may an Award be granted under the Plan on or after
September 30, 2007.
1
<PAGE>
Article 2. Definitions
Whenever used in the Plan, the following terms shall have the meanings set
forth below, and when the meaning is intended, the initial letter of the word
shall be capitalized:
2.1 "Award" means, individually or collectively, a grant under this Plan
of Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation
Rights, Restricted Stock, Restricted Units or Performance Units.
2.2 "Award Agreement" means an agreement entered into by the Company and a
Participant setting forth the terms and provisions applicable to an Award or
Awards granted under this Plan to such Participant.
2.3 "Board" or "Board of Trustees" means the Board of Trustees of the
Company.
2.4 "Cause" shall have the meaning set forth in any unexpired employment
or severance agreement between the Participant and the Company or another
Employer, in the absence of any such agreement, shall mean (i) the willful and
continued failure of the Participant to substantially perform his or her duties
with or for the Company or another Employer, (ii) the engaging by the
Participant in conduct which is significantly injurious to the Company or
another Employer, monetarily or otherwise, (iii) the Participant's conviction of
a felony, (iv) the Participant's abuse of illegal drugs or other controlled
substances or (v) the Participant's habitual intoxication. Unless otherwise
defined in the Participant's employment or severance agreement, an act or
omission is "willful" for this purpose if such act or omission was knowingly
done, or knowingly omitted to be done, by the Participant not in good faith and
without reasonable belief that such act or omission was in the best interest of
the Company or another Employer.
2.5 "Change in Control"shall be deemed to have occurred if
(a) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company, a corporation or
trust owned directly or indirectly by the shareholders of the Company in
substantially the same proportions as their ownership of the Shares,
Michael W. Reschke or The Prime Group, Inc. or any of their respective
affiliates, becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Company
representing 50% or more of the total voting
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power represented by the Company's then outstanding securities which vote
generally in the election of Trustees (referred to herein as "Voting
Securities");
(b) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board and any new Trustees whose
election by the Board or nomination for election by the Company's
shareholders was approved by a vote of at least two-thirds of the Trustees
then still in office who either were Trustees at the beginning of the
period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority of the Board;
(c) the shareholders of the Company approve a merger or consolidation
of the Company with any other trust or corporation, other than a merger or
consolidation which would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) more than 50% of the total voting power represented by
the Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; or
(d) the shareholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by
the Company (in one transaction or a series of transactions) of all or
substantially all of the Company's assets.
2.6 "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
2.7 "Committee" means, as specified in Article 3 herein, the Compensation
Committee of the Board or such other committee as may be appointed by the Board
to administer the Plan.
2.8 "Company" means Prime Group Realty Trust, a Maryland real estate
investment trust, and any successor thereto as provided in Article 18 herein.
2.9 "Disability" shall mean (a) long-term disability as defined under a
long-term disability plan maintained by an Employer and covering that
individual, or (b) if the individual is not covered by such a long-term
disability plan, disability as defined for purposes of eligibility for a
disability award under the Social Security Act.
2.10 "Effective Date" shall have the meaning ascribed to such term in
Section 1.1 hereof.
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2.11 "Eligible Employee" means any officer or other key employee of
the Company or of any other Employer. Trustees who are not employed by the
Company or another Employer shall not be considered Eligible Employees under
this Plan.
2.12 "Employer" means, individually, the Company, each Subsidiary, the
Operating Partnership, the Services Company and any other corporation, trust or
partnership in which the Company owns directly or indirectly at least 50% in
value of the outstanding capital or profits interest.
2.13 "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto.
2.14 "Exercise Price" means the price at which a Share may be purchased
pursuant to the exercise of an Option.
2.15 "Fair Market Value" means the per share value of the Shares as of a
given date, determined as follows:
(a) If the Shares are listed or admitted for trading on the New York
Stock Exchange (or if not, on another national securities exchange upon
which the Shares are listed), the Fair Market Value of a Share is the
closing quotation for such shares based on composite transactions for the
New York Stock Exchange (or if not listed on it, such other national
securities exchange) on the last trading day for the Shares prior to such
given date.
(b) If the Shares are not traded on any national securities exchange,
but are quoted on the National Association of Securities Dealers, Inc.
Automated Quotation System (NASDAQ System) or any similar system of
automated dissemination of quotations of prices in common use, the Fair
Market Value of a Share is the average of the last sales price (if the
Shares are then listed as a national market issue under the NASDAQ System)
or the mean between the closing representative bid and asked prices (in all
other cases) for the Shares on the last 5 trading days for the Shares
preceding such given date as reported by the NASDAQ System (or such similar
quotation system).
(c) If neither clause (a) nor clause (b) of this Section 2.15 is
applicable, the Fair Market Value of a Share is the fair market value per
share as of such valuation date, as determined by the Board in good faith
and in accordance with uniform principles consistently applied; provided,
however, that the Fair Market Value of a Share on the date
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of the completion of an initial public offering of the Shares shall be the
initial public offering price.
2.16 "Freestanding SAR" means an SAR that is granted independently of any
Option, as described in Article 7 herein.
2.17 "Incentive Stock Option" or "ISO" means an option to purchase Shares
granted under Article 6 herein which is designated as an Incentive Stock Option
and that is intended to meet the requirements of Code Section 422.
2.18 "Nonemployee Trustee" means an individual who is a member of the
Board of Trustees of the Company but who is not an employee of the Company or
any other Employer.
2.19 "Nonqualified Stock Option" or "NQSO" means an option to purchase
Shares granted under Article 6 herein that is not intended to meet the
requirements of Code Section 422.
2.20 "Operating Partnership" means Prime Group Realty, L.P., a Delaware
limited partnership.
2.21 "Option" means an Incentive Stock Option or a Nonqualified Stock
Option, as described in Article 6 herein.
2.22 "Participant" means an Eligible Employee who has been selected by the
Committee to participate in the Plan pursuant to Section 5.2 and who has
outstanding an Award granted under the Plan. The term "Participant" shall not
include Nonemployee Directors.
2.23 "Performance-Based Exception" means the performance-based exception
from the tax deductibility limitations of Code Section 162(m) and any
regulations promulgated thereunder.
2.24 "Performance Unit" means a Share equivalent Award granted to a
Participant, as described in Article 9 herein.
2.25 "Restriction Period" means the period during which the transfer of
Shares of Restricted Stock is limited in some way (based on the passage of time,
the achievement of performance objectives, or upon the occurrence of other
events as determined by the Committee, at its discretion), and/or the Restricted
Stock/Units are not vested.
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2.26 "Restricted Stock" means a contingent grant of Shares awarded to
a Participant pursuant to Article 8 herein.
2.27 "Restricted Unit" means a Share equivalent Award granted to a
Participant, as described in Article 8 herein.
2.28 "Retirement" shall mean termination of employment on or after (a)
attaining the age established as the normal retirement age in any unexpired
employment agreement between the Participant and the Company or another Employer
or, in the absence of such an agreement, the normal retirement age under the
tax-qualified defined benefit retirement plan or, if none, the tax-qualified
defined contribution retirement plan, sponsored by the Company or another
Employer in which the Participant participates, or (b) attaining age sixty-two
with ten years of continuous service with one or more Employers provided that
the retirement is approved by the Chief Executive Officer of the Company unless
the Participant is an officer subject to Section 16 of the Exchange Act in which
case the retirement must be approved by the Committee.
2.29 "Services Company" means Prime Group Realty Services, Inc., a
Maryland corporation.
2.30 "Shares" means the Company's common shares.
2.31 "Stock Appreciation Right" or "SAR" means an Award, granted alone or
in connection with a related Option, designated as an SAR, pursuant to the terms
of Article 7 herein.
2.32 "Subsidiary" means a subsidiary corporation of the Company within the
meaning of Code Section 424(f).
2.33 "Tandem SAR" means an SAR that is granted in connection with a
related Option pursuant to Article 7 herein, the exercise of which requires
forfeiture of the right to purchase a Share under the related Option (and when a
Share is purchased under the Option, the Tandem SAR shall similarly be
canceled).
2.34 "Trustee" means any individual who is a member of the Board of
Trustees.
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Article 3. Administration
3.1 The Committee. The Plan shall be administered by the Compensation
Committee of the Board, or by any other Committee appointed by the Board, which
Committee (unless otherwise determined by the Board) shall satisfy the
"nonemployee director" requirements of Rule 16b-3 under the Exchange Act and
the regulations thereunder and the "outside director" provisions of Code Section
162(m), or any successor regulations or provisions. The members of the Committee
shall be appointed from time to time by, and shall serve at the discretion of,
the Board. The Committee shall act by a majority of its members at the time in
office and eligible to vote on any particular matter, and such action may be
taken either by a vote at a meeting or in writing without a meeting.
3.2 Authority of the Committee. Except as limited by law and subject to
the provisions herein, the Committee shall have full power and discretion to:
select Eligible Employees who shall participate in the Plan; select Nonemployee
Trustees to receive Awards under Article 6; determine the sizes and types of
Awards; determine the terms and conditions of Awards in a manner consistent with
the Plan; construe and interpret the Plan and any agreement or instrument
entered into under the Plan; establish, amend or waive rules and regulations for
the Plan's administration; and, subject to the provisions of Article 15 herein,
amend the terms and conditions of any outstanding Award to the extent such terms
and conditions are within the discretion of the Committee as provided in the
Plan. Further, the Committee shall make all other determinations which may be
necessary or advisable for the administration of the Plan. As permitted by law
and consistent with Section 3.1, the Committee may delegate its authority as
identified herein.
3.3 Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan shall be final, conclusive and
binding on all persons, including the Company, its Board of Trustees, its
shareholders, all Employers, employees, Participants and their estates and
beneficiaries.
Article 4. Shares Subject to the Plan and Maximum Awards
4.1 Number of Shares Available for Grants. Subject to adjustment as
provided in Section 4.3 herein, the number of Shares that may be issued or
transferred to Participants under the Plan shall be [1,850,000] Shares.
The maximum number of Shares and Share equivalent units that may be granted
during any calendar year to any one Participant under Options, Freestanding
SARs, Restricted Stock, Restricted
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Units or Performance Units, shall be ________ (on an aggregate basis for all
such types of Awards), which limit shall apply regardless of whether such
compensation is paid in Shares or in cash.
4.2 Lapsed Awards. If any Award granted under this Plan is canceled,
terminates, expires or lapses for any reason, any Shares subject to such Award
again shall be available for the grant of an Award under the Plan, but shall
continue to count for the purpose of the annual individual award limit set forth
in Subsection 4.1 above.
4.3 Adjustments in Authorized Shares.
(a) In the event the Shares, as presently constituted, shall be changed
into or exchanged for a different number or kind of shares of
securities of the Company or of another corporation (whether by reason
of merger, consolidation, recapitalization, reclassification, split,
reverse split, combination of shares, or otherwise) or if the number
of such Shares shall be increased through the payment of a share
dividend, then there shall be substituted for or added to each Share
theretofore appropriated or thereafter subject or which may become
subject to an Award under this Plan, the number and kind of shares of
securities into which each outstanding Share shall be so changed, or
for which each such Share shall be exchanged, or to which each such
Share shall be entitled, as the case may be. Outstanding Awards shall
also be appropriately amended as to price and other terms as may be
necessary to reflect the foregoing events. In the event there shall be
any other change in the number or kind of the outstanding Shares, or
of any stock or other securities into which such Shares shall have
been changed, or for which it shall have been exchanged, then, if the
Committee shall, in its sole discretion, determine that such change
equitably requires an adjustment in any Award therefore granted or
which may be granted under the Plan, such adjustments shall be made in
accordance with such determination.
(b) Fractional Shares resulting from any adjustment in Awards pursuant to
this section may be settled in cash or otherwise as the Committee
shall determine. Notice of any adjustment shall be given by the
Company to each Participant who holds an Award which has been so
adjusted and such adjustment (whether or not such notice is given)
shall be effective and binding for all purposes of the Plan.
4.4 Employer Payment. In the case of Shares delivered pursuant to an
Award granted to an employee of an Employer other than the Company or a
Subsidiary, such Employer shall make a payment to the Company with respect to
such Shares in an amount equal to (i) the Fair Market
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Value of the Shares on the date as of which they are so delivered, less (ii) in
the case of an option, the aggregate exercise price for such Shares. For this
purpose, the obligation to deliver Shares shall first be satisfied from any
Shares transferred in payment of an exercise price.
Article 5. Eligibility and Participation
5.1 Eligibility. Individuals eligible to participate in this Plan consist
of all Eligible Employees, including Eligible Employees who are members of the
Board, and Nonemployee Trustees but only to the extent provided herein.
5.2 Actual Participation. Subject to the provisions of the Plan, the
Committee may, from time to time, select from all Eligible Employees, those to
whom Awards shall be granted and shall determine the nature and amount of each
Award.
Article 6. Stock Options
6.1 Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted to Eligible Employees in such number, and upon such
terms, and at any time and from time to time as shall be determined by the
Committee. Options granted to Eligible Employees who are employees of the
Company or a Subsidiary may be either ISOs or NQSOs. Options granted to other
Eligible Employees may only be NQSOs. In addition, NQSOs may be granted to
Nonemployee Directors in such number, and upon such terms, and at any time and
from time to time as shall be determined by the Committee.
6.2 Award Agreement. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Exercise Price, the duration of the Option, the
number of Shares to which the Option pertains, the manner, time and rate of
exercise or vesting of the Option, and such other provisions as the Committee
shall determine. The Award Agreement also shall specify whether the Option is
intended to be an ISO within the meaning of Code Section 422 or an NQSO which is
not intended to qualify under the provisions of Code Section 422.
6.3 Exercise Price. The Exercise Price for each Share subject to an
Option granted under this Plan shall be at least equal to one hundred percent of
the Fair Market Value of a Share on the date the Option is granted; provided,
however, that, in the case of an ISO, the price per share shall not be less than
110% of the Fair Market Value of such Share if on the date of grant the
Participant owns (within the meaning of Code Section 424(d)) more than 10% of
the total combined voting power of all classes of shares of beneficial interest
of the Company or any Subsidiary.
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6.4 Duration of Options. Each Option granted to an Eligible Employee or a
Nonemployee Trustee shall expire at such time as the Committee shall determine
at the time of grant; provided, however, that no Option shall be exercisable
later than the tenth anniversary of the date of its grant; provided, further,
that in the case of an ISO granted to a Participant owning (within the meaning
of Code Section 424(d)), on the date of grant, more than 110% of the total
combined voting power of all classes of shares of beneficial interest of the
Company or any Subsidiary, the Option shall not be exercisable later than the
fifth anniversary of the date of its grant.
6.5 Dividend Equivalents. The Committee may grant dividend equivalents in
connection with Options granted under this Plan. Such dividend equivalents may
be payable in cash or in Shares, upon such terms as the Committee, in its sole
discretion, deems appropriate.
6.6 Exercise of Options. Options granted under this Article 6 shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, which need not be the same for
each Award or for each Participant. To the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options (within the
meaning of Section 422 of the Code, but without regard to Section 422(d) of the
Code) are exercisable for the first time by the Participant during any calendar
year (under the Plan and all other incentive stock option plans of the Company)
exceeds $100,000, such Options shall be treated as Nonqualified Options. The
rule set forth in the preceding sentence shall be applied by taking Options into
account in the order in which they were granted, and the Fair Market Value of
the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
6.7 Payment. Options granted under this Article 6 shall be exercised by
the delivery of a written notice of exercise to the Company, setting forth the
number of Shares with respect to which the Option is to be exercised accompanied
by full payment for the Shares and any withholding tax relating to the exercise
of the Option.
The Exercise Price, and any related withholding taxes, upon exercise of any
Option shall be payable: (a) in cash, or its equivalent, in United States
dollars, or (b) if permitted in the governing Award Agreement, by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Exercise Price, or (c) if permitted in the governing
Award Agreement, by a combination of (a) and (b). The Committee also may allow
cashless exercise as permitted under Federal Reserve Board's Regulation T,
subject to applicable securities law restrictions, or by any other means which
the Committee determines to be consistent with the Plan's purpose and applicable
law.
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6.8 Termination of Employment. Each Option Award Agreement shall set
forth the extent to which the Participant shall have the right to exercise the
Option following termination of the Participant's employment with the Company
and all other Employers. Such provisions shall be determined by the Committee,
shall be included in the Award Agreement entered into with each Participant or
Nonemployee Trustee, need not be uniform among all Options issued pursuant to
this Article 6, and may reflect distinctions based on the reasons for
termination of employment.
6.9 Nontransferability of Options. No Option granted under the Plan may
be sold, transferred, pledged, assigned or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, all
Options granted to a Participant under the Plan shall be exercisable during the
Participant's lifetime only by such Participant or the Participant's guardian or
legal representative. The Committee may require a Participant's guardian or
legal representative to supply it with such evidence as the Committee deems
necessary to establish the authority of the guardian or legal representative to
act on behalf of the Participant.
Article 7. Stock Appreciation Rights
7.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs
may be granted to Participants at any time and from time to time as shall be
determined by the Committee. The Committee may grant Freestanding SARs, Tandem
SARs or any combination of these forms of SAR.
Subject to Article 4 hereof, the Committee shall determine the number of
SARs granted to each Participant and, consistent with the provisions of the
Plan, determine the terms and conditions pertaining to such SARs.
The grant price of a Freestanding SAR shall equal the Fair Market Value of
a Share on the date of grant of the SAR. The grant price of Tandem SARs shall
equal the Exercise Price of the related Option.
7.2 Exercise of Tandem SARs. Tandem SARs may be exercised for all or part
of the Shares subject to the related Option upon the surrender of the right to
exercise the equivalent portion of the related Option. A Tandem SAR may be
exercised only with respect to the Shares for which its related Option is then
exercisable.
7.3 Exercise of Freestanding SARs. Freestanding SARs may be exercised
upon whatever terms and conditions the Committee imposes upon them.
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7.4 Award Agreement. Each SAR grant shall be evidenced by an Award
Agreement that shall specify the grant price, the term of the SAR and such other
provisions as the Committee shall determine.
7.5 Duration of SARs. The term of an SAR granted under the Plan shall be
determined by the Committee; provided, however, that such term shall not exceed
ten years.
7.6 Payment of SAR Amount. Upon exercise of an SAR, a Participant shall be
entitled to receive payment from his or her Employer in an amount determined by
multiplying:
(a) the excess (or some portion of such excess as determined at the
time of the grant by the Committee) if any, of the Fair Market
Value of a Share on the date of exercise of the SAR over the
grant price specified in the Award Agreement; by
(b) the number of Shares with respect to which the SAR is exercised.
At the discretion of the Committee, the payment upon SAR exercise may be in
cash, in Shares of equivalent Fair Market Value or in some combination thereof.
7.7 Termination of Employment. Each SAR Award Agreement shall set forth
the extent to which the Participant shall have the right to exercise the SAR
following termination of the Participant's employment with the Company and all
other Employers. Such provisions shall be determined by the Committee, shall be
included in the Award Agreement entered into with Participants, need not be
uniform among all SARs issued pursuant to the Plan, and may reflect distinctions
based on the reasons for termination of employment.
7.8 Nontransferability of SARs. Except as otherwise provided in a
Participant's Award Agreement, no SAR granted under the Plan may be sold,
transferred, pledged, assigned or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution. Further, except as
otherwise provided in a Participant's Award Agreement, all SARs granted to a
Participant under the Plan shall be exercisable during the Participant's
lifetime only by such Participant or the Participant's guardian or legal
representative. The Committee may require a Participant's guardian or legal
representative to supply it with such evidence as the Committee deems necessary
to establish the authority of the guardian or legal representative to act on
behalf of the Participant.
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Article 8. Restricted Stock and Restricted Units
8.1 Grant of Restricted Stock/Units. Subject to the terms and provisions
of the Plan, the Committee may, at any time and from time to time, grant
Restricted Stock and/or Restricted Units to Participants in such amounts as the
Committee shall determine. Each grant of Restricted Stock shall be represented
by the number of Shares to which the Award relates. Each grant of Restricted
Units shall be represented by the number of Share equivalent units to which the
Award relates.
8.2 Award Agreement. Each Restricted Stock/Unit grant shall be evidenced
by an Award Agreement that shall specify the Restriction Periods, the number of
Shares or Share equivalent units granted, and such other provisions as the
Committee shall determine.
8.3 Nontransferability. Except as provided in this Article 8, the
Restricted Stock/Units granted herein may not be sold, transferred, pledged,
assigned or otherwise alienated or hypothecated until the end of the applicable
Restriction Period established by the Committee and as specified in the Award
Agreement, or upon earlier satisfaction of any other conditions, as specified by
the Committee and as set forth in the Award Agreement. All rights with respect
to Restricted Stock/Units granted to a Participant under the Plan shall be
available during the Participant's lifetime only to such Participant or the
Participant's guardian or legal representative. The Committee may require a
Participant's guardian or legal representative to supply it with such evidence
as the Committee deems necessary to establish the authority of the guardian or
legal representative to act on behalf of the Participant.
8.4 Other Restrictions. The Committee may impose such other conditions
and/or restrictions on any restricted Stock/Units granted pursuant to the Plan
as it deems advisable including, without limitation, restrictions based upon the
achievement of specific performance objectives (Company-wide, business unit,
and/or individual), time-based restrictions on vesting following the attainment
of the performance objectives, and/or restrictions under applicable federal or
state securities laws.
The Company shall retain the certificates representing Shares of restricted
Stock in the Company's possession until such time as all conditions and/or
restrictions applicable to such Shares have been satisfied.
8.5 Payment of Awards. Except as otherwise provided in this Article 8, (i)
Shares covered by each Restricted Stock grant made under the Plan shall become
freely transferable by the
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Participant after the last day of the applicable Restriction Period and (ii)
Share equivalent units covered by each Restricted Unit under Section 8.1 shall
be paid out in cash or Shares to the Participant following the last day of the
applicable Restriction Period or such later date as provided in the Award
Agreement.
8.6 Voting Rights. During the Restriction Period, Participants holding
Shares of Restricted Stock granted hereunder may exercise full voting rights
with respect to those Shares.
8.7 Dividends and Other Distributions. During the Restriction Period,
Participants holding Shares of Restricted Stock/Units hereunder shall be
credited with regular cash dividends or dividend equivalents paid with respect
to the underlying Shares or Share equivalent units while they are so held. Such
dividends may be paid currently, accrued as contingent cash obligations, or
converted into additional Shares or units of Restricted Stock/Units, upon such
terms as the Committee establishes.
The Committee may apply any restrictions to the crediting and payment of
dividends and other distributions that the Committee deems advisable. Without
limiting the generality of the preceding sentence, if the grant or vesting of
Restricted Stock/Units is designed to qualify for the Performance-Based
Exception, the Committee may apply any restrictions it deems appropriate to the
payment of dividends declared with respect to such Restricted Stock/Units, such
that the dividends and/or the Restricted Stock/Units maintain eligibility for
the Performance-Based Exception.
8.8 Termination of Employment. Each Award Agreement shall set forth the
extent to which the Participant shall have the right to retain unvested
Restricted Stock/Units following termination of the Participant's employment
with the Company and all other Employers. Such provisions shall be determined by
the Committee, shall be included in the Award Agreement entered into with each
Participant, need not be uniform among all Awards of Restricted Stock/Units
issued pursuant to the Plan, and may reflect distinctions based on the reasons
for termination of employment.
Article 9. Performance Units
9.1 Grant of Performance Units. Subject to the terms of the Plan,
Performance Units may be granted to Participants in such amounts and upon such
terms, and at any time and from time to time, as shall be determined by the
Committee.
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9.2 Value of Performance Units. Each grant of Performance Units shall be
represented by the number of Share equivalent units to which the Award relates.
The Committee shall set performance objectives in its discretion which,
depending on the extent to which they are met, will determine the number of
Performance Units that will be paid out to the Participant. For purposes of this
Article 9, the time period during which the performance objectives must be met
shall be called a "Performance Period" and shall be set by the Committee in its
discretion.
9.3 Earning of Performance Units. Subject to the terms of this Plan, after
the applicable Performance Period has ended, the holder of Performance Units
shall be entitled to receive payout on the number of Performance Units earned by
the Participant over the Performance Period, to be determined as a function of
the extent to which the corresponding performance objectives have been achieved.
9.4 Award Agreement. Each grant of Performance Units shall be evidenced by
an Award Agreement which shall specify the material terms and conditions of the
Award, and such other provisions as the Committee shall determine.
9.5 Form and Timing of Payment of Performance Units. Except as provided in
Article 12, payment of earned Performance Units shall be made within seventy-
five calendar days following the close of the applicable Performance Period in a
manner determined by the Committee. Payment of earned Performance Units may be
in the form of cash or in Shares (or in a combination thereof).
9.6 Termination of Employment Due to Death, Disability, or Retirement.
Unless determined otherwise by the Committee and set forth in the Participant's
Award Agreement, in the event the employment of a Participant is terminated by
reason of death, Disability or Retirement during a Performance Period, the
Participant shall receive a payout of the Performance Units which is prorated,
as specified by the Committee in the Award Agreement. Payment of earned
Performance Units shall be made at a time specified by the Committee and set
forth in the Participant's Award Agreement.
9.7 Termination of Employment for Other Reasons. In the event that a
Participant's employment terminates during a Performance Period for any reason
other than those reasons set forth in Section 9.6 herein, all Performance Units
shall be forfeited by the Participant, unless determined otherwise by the
Committee in the Participant's Award Agreement.
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9.8 Nontransferability. Except as otherwise provided in a Participant's
Award Agreement, Performance Units may not be sold, transferred, pledged,
assigned or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, except as otherwise provided in a
Participant's Award Agreement, a Participant's rights under the Plan shall be
exercisable during the Participant's lifetime only by such Participant or
Participant's guardian or legal representative. The Committee may require a
Participant's guardian or legal representative to supply it with such evidence
as the Committee deems necessary to establish the authority of the guardian or
legal representative to act on behalf of the Participant.
Article 10. Performance Measures
Unless and until the Committee proposes for shareholder approval and the
Company's shareholders approve a change in the general performance measures set
forth in this Article 10, the attainment of which may determine the degree of
payout and/or vesting with respect to Awards which are designed to qualify for
the Performance-Based Exception, the performance measure(s) to be used for
purposes of such awards shall be chosen from among the following alternatives:
(a) return to shareholders (absolute or peer-group comparative);
(b) stock price increase (absolute or peer-group comparative);
(c) cumulative net income (absolute or competitive growth rates
comparative);
(d) return on equity;
(e) return on capital;
(f) cash flow, including operating cash flow, free cash flow, discounted
cash flow return on investment, and cash flow in excess of cost of
capital;
(g) economic value added (income in excess of capital costs); or
(h) market share.
The Committee shall have the discretion to adjust the determinations of the
degree of attainment of the preestablished performance objectives; provided,
however, that Awards which are
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designed to qualify for the Performance-Based Exception may not be adjusted
except to the extent permitted under Code Section 162(m).
In the event that Code Section 162(m) or applicable tax and/or securities
laws change to permit Committee discretion to alter the governing performance
measures without obtaining shareholder approval of such changes, the Committee
shall have sole discretion to make such changes without obtaining shareholder
approval. In addition, in the event that the Committee determines that it is
advisable to grant Awards which shall not qualify for the Performance-Based
Exception, the Committee may make such grants without satisfying the
requirements of Code Section 162(m).
Article 11. Beneficiary Designation
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of the death of the
Participant before he or she receives any or all of such benefit. Each such
designation shall revoke all prior designations by the same Participant, shall
be in a form prescribed by the Committee during the Participant's lifetime. If
the Participant's designated beneficiary predeceases the Participant or no
beneficiary has been designated, benefits remaining unpaid at the Participant's
death shall be paid to the Participant's spouse or if none, the Participant's
estate.
Article 12. Deferrals
The Committee may permit or require a Participant to defer such
Participant's receipt of the payment of cash or the delivery of Shares that
would otherwise be due to such Participant by virtue of the exercise of an
Option or SAR, the lapse or waiver of restrictions with respect to Restricted
Stock/Units, or the satisfaction of any requirements or objectives with respect
to Performance Units. If any such deferral election is permitted or required,
the Committee shall, in its sole discretion, establish rules and procedures for
such deferrals. Notwithstanding the foregoing, the Committee in its sole
discretion may defer payment of cash or the delivery of Shares that would
otherwise be due to a Participant under the Plan if such payment or delivery
would result in compensation not deductible by the Company or any other Employer
by virtue of Code Section 162(m). Such a deferral may continue until the payment
or delivery would result in compensation deductible by the Company or such other
Employer under Code Section 162(m).
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Article 13. Rights of Employees
13.1 Employment. Nothing in the Plan shall interfere with or limit in any
way the right of the Company or any other Employer to terminate any
Participant's employment at any time, or confer upon any Participant any right
to continue in the employ of the Company or any other Employer.
13.2 Participation. No Eligible Employee shall have the right to be
selected to receive an Award under this Plan, or, having been so selected, to be
selected to receive a future Award.
Article 14. Change in Control
14.1 Treatment of Outstanding Awards. Upon the occurrence of a Change in
Control, unless otherwise specifically prohibited under applicable laws, or by
the rules and regulations of any governing governmental agencies or national
securities exchanges:
(a) Any and all outstanding Options and SARs granted hereunder shall
become immediately exercisable, and shall remain exercisable
throughout their entire term.
(b) Any Periods of Restriction and restrictions imposed on Restricted
Stock/Units shall lapse; provided, however, that the degree of vesting
associated with Restricted Stock/Units which has been conditioned upon
the achievement of performance conditions pursuant to Section 8.4
herein shall be determined in the manner set forth in Section 14.1(c)
herein.
(c) Except as otherwise provided in the Award Agreement, the vesting of
all Performance Units shall be accelerated as of the effective date of
the Change in Control, and there shall be paid out in cash to
Participants within thirty days following the effective date of the
Change in Control a pro rata amount based upon an assumed achievement
of all relevant performance objectives at target levels, and upon the
length of time within the Performance Period which has elapsed prior
to the effective date of the Change in Control; provided, however,
that in the event the Committee determines that actual performance to
the effective date of the Change in Control exceeds target levels, the
prorated payouts shall be made at levels commensurate with such actual
performance (determined by extrapolating such actual performance to
the end of the Performance Period), based upon the length of
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time within the Performance Period which has elapsed prior to the
effective date of the Change in Control.
14.2 Termination, Amendment, and Modifications of Change in Control
Provisions. Notwithstanding any other provision of this Plan or any Award
Agreement provision, the provisions of this Article 14 may not be terminated,
amended, or modified on or after the effective date of a Change in Control to
affect adversely any Award theretofore granted under the Plan without the prior
written consent of the Participant with respect to his or her outstanding
Awards.
Article 15. Amendment, Modification and Termination
15.1 Amendment, Modification and Termination. Subject to Section 14.2
herein, the Board may at any time and from time to time, alter, amend, modify or
terminate the Plan in whole or in part.
Subject to the terms and conditions of the Plan, the Committee may modify,
extend or renew outstanding Awards under the Plan, or accept the surrender of
outstanding Awards (to the extent not theretofore exercised) and grant new
Awards in substitution therefor (to the extent not theretofore exercised). The
Committee shall not, however, modify any outstanding Incentive Stock Option so
as to specify a lower Exercise Price. Notwithstanding the foregoing, no
modification of an Award shall, without the consent of the Participant, alter or
impair any rights or obligations under any Award theretofore granted under the
Plan.
15.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee may make adjustments in the terms and
conditions of, and the criteria included in, Awards in recognition of unusual or
nonrecurring events (including, without limitation, the events described in
Section 4.3 hereof) affecting the Company or the financial statements of the
Company or of changes in applicable laws, regulations, or accounting principles,
whenever the Committee determines that such adjustments are appropriate in order
to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan, subject to the requirements of
Code Section 162(m) for the Performance-Based Exception in the case of Awards
designed to qualify for the Performance-Based Exception.
15.3 Awards Previously Granted. No termination, amendment or modification
of the Plan shall adversely affect in any material way any Award previously
granted under the Plan, without the written consent of the Participant holding
such Award.
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15.4 Compliance with Code Section 162(m). Awards, when Code Section 162(m)
is applicable, shall comply with the requirements of Code Section 162(m);
provided, however, that in the event the Committee determines that such
compliance is not desired with respect to any Award or Awards available for
grant under the Plan, then compliance with Code Section 162(m) will not be
required. In addition, in the event that changes are made to Code Section 162(m)
to permit greater flexibility with respect to any Award or Awards available
under the Plan, the Committee may, subject to this Article 15, make any
adjustments it deems appropriate.
Article 16. Withholding
16.1 Tax Withholding. Each Employer shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Employer, an amount
(either in cash or Shares) sufficient to satisfy federal, state, and local
taxes, domestic or foreign, required by law or regulation to be withheld with
respect to any taxable event arising as a result of this Plan.
16.2 Share Withholding. With respect to withholding required upon the
exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock,
or upon any other taxable event arising as a result of Awards granted hereunder,
an Employer may satisfy the minimum withholding requirement for supplemental
wages, in whole or in part, by withholding from the Award Shares having a Fair
Market Value (determined on the date the Participant recognizes taxable income
on the Award) equal to the withholding tax required to be collected on the
transaction. The Participant may elect, subject to the approval of the
Committee, to deliver the necessary funds to satisfy the withholding obligation
to an Employer, in which case there will be no reduction in the Shares otherwise
distributable to the Participant.
Article 17. Indemnification
Each person who is or has been a member of the Committee, or of the Board,
shall be indemnified and held harmless by the Company against and from any loss,
cost, liability, or expense that may be imposed upon or reasonably incurred by
such person in connection with or resulting from any claim, action, suit, or
proceeding to which such person may be a party or in which such person may be
involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by such person in a settlement
approved by the Company, or paid by such person in satisfaction of any judgment
in any such action, suit, or proceeding against such person, provided such
person shall give the Company an opportunity, at its own expense, to handle and
defend the same before such person undertakes to handle and defend it. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons
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may be entitled under the Company's Articles of Incorporation or By-Laws, as a
matter of law, or otherwise, or any power that the Company may have to indemnify
them or hold them harmless.
Article 18. Successors
All obligations of an Employer under the Plan or any Award Agreement with
respect to Awards granted hereunder shall be binding on any successor to the
Employer, whether the existence of such successor is the result of a direct or
indirect purchase of all or substantially all of the business and/or assets of
the Employer, or a merger, consolidation, or otherwise.
Article 19. Legal Construction
19.1 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
19.2 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
19.3 Requirements of Law. The granting of Awards and the issuance of Share
and/or cash payouts under the Plan shall be subject to all applicable laws,
rules, and regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required. The Committee may impose such
restrictions on any Shares delivered pursuant to any Award granted under this
Plan as the Committee deems necessary or advisable, including, without
limitation, restrictions under applicable federal securities laws, under the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws applicable
to such Shares.
19.4 Securities Law Compliance. With respect to any individual who is, on
the relevant date, an officer, director or ten percent beneficial owner of any
class of the Company's equity securities that is registered pursuant to Section
12 of the Exchange Act, all as defined under Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 under the Exchange Act, or any successor rule. To the
extent any provision of the Plan or action by the Committee fails to so comply,
it shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee.
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19.5 Awards to Foreign Nationals and Employees Outside the United States.
To the extent the Committee deems it necessary, appropriate or desirable to
comply with foreign law of practice and to further the purposes of this Plan,
the Committee may, without amending the Plan, (i) establish rules applicable to
Awards granted to Participants who are foreign nationals, are employed outside
the United States, or both, including rules that differ from those set forth in
this Plan, and (ii) grant Awards to such Participants in accordance with those
rules.
19.6 Unfunded Status of the Plan. The Plan is intended to constitute an
"unfunded" plan for incentive and deferred compensation. With respect to any
payments or deliveries of Shares not yet made to a Participant by the Company or
any other Employer, nothing contained herein shall give any rights that are
greater than those of a general creditor. The Committee may authorize the
creation of trusts or other arrangements to meet the obligations created under
the Plan to deliver Shares or payments hereunder consistent with the foregoing.
19.7 Governing Law. To the extent not preempted by federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and governed
by the laws of the State of Maryland.
Article 20. Shareholder Approval
This Plan will be submitted for the approval of the Company's shareholders
within twelve months before or after the date of the Board's initial adoption of
the Plan. Awards may be granted prior to such shareholder approval; provided,
however, that such Awards shall not be exercisable or payable prior to the time
when the Plan is approved by the shareholders; provided, further, that if such
approval has not been obtained at the end of said twelve-month period, all
Awards previously granted under the Plan shall thereupon be cancelled and become
null and void.
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EXHIBIT 10.10
July 8, 1997
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into this
__________ day of ______________, 1997 by and between Prime Group Realty L.P., a
Delaware limited partnership [the operating partnership for Prime Group Realty
Corp., the REIT] ("Employer"), and Edward S. Hadesman, an individual domiciled
in the State of Illinois ("Executive").
WITNESSETH
----------
A. Employer is engaged primarily in the ownership, management, leasing,
marketing, acquisition, development and construction of office and industrial
real estate facilities throughout the United States.
B. Employer believes that it would benefit from the application of
Executive's particular and unique skill, experience, and background to the
development of industrial properties and the management thereof.
C. Executive wishes to commit himself to serve Employer in the position
set forth herein on the terms herein provided.
D. The parties wish by this Agreement to set forth the terms and
conditions of the employment relationship between Employer and Executive.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
herein set forth, and for other good and valuable consideration, Employer and
Executive hereby agree as follows:
1. Employment and Duties. During the Employment Term (as defined in
Section 2 hereof), Employer agrees to employ Executive, and Executive agrees to
be employed by Employer, as the President of Employer's Industrial Division on
the terms and conditions provided in this Agreement. Executive shall conduct,
operate, manage and promote the business and business concept of Employer, and
exercise such other powers and authority as are provided by the Partnership
Agreement of Employer ("Partnership Agreement"). The Chief Executive Officer or
the President of Employer may from time to time further define and clarify
Executive's duties and services hereunder or under the Partnership Agreement as
President of Employer's Industrial Division, which principal duties will include
the development, management, leasing, marketing and acquisition of industrial
properties Executive agrees to devote Executive's best efforts and substantially
all of Executive's business time, attention, energy and skill to perform
Executive's duties as President of Employer's Industrial Division. Employer
agrees to maintain the suburban office currently located at 3184 MacArthur
Boulevard, Northbrook, Illinois or such other suburban
<PAGE>
location as may be mutually agreeable to Employer and Executive. Employer
represents to Executive that it currently intends to engage in the acquisition
and development of industrial properties.
2. Term. The initial term of this Agreement (the "Initial Term") shall
commence on the date Employer's Registration Statement on Form S-11, as amended
(No. _________; the "Registration Statement") is declared effective (the
"Effective Date") and expire on _______, 2000 [three year term] (the "Scheduled
Termination Date"), provided, however, this Agreement shall automatically extend
for one year terms following the Initial Term (each a "Renewal Term", together
with the Initial Term, the "Employment Term"), unless prior to six (6) months,
in the case of a non-renewal by Employer, or prior to thirty (30) days, in the
case of a non-renewal by Executive, before the end of the Initial Term or any
Renewal Term, as applicable, either party shall give the other written notice of
its intention to terminate this Agreement.
3. Compensation and Related Matters. (a) Base Salary. As compensation
for performing the services required by this Agreement during the Employment
Term, Employer shall pay to Executive an annual salary of no less than Two
Hundred Thousand Dollars ($200,000) ("Base Compensation"), payable in accordance
with the general policies and procedures for payment of salaries to its
executive personnel maintained, from time to time, by Employer (but no less
frequently than monthly), subject to withholding for applicable federal, state,
and local taxes. Increases in Base Compensation, if any, shall be determined by
the Compensation Committee (the "Committee") of the Board of Directors of Prime
Group Realty Corp. ("PGRC"), the general partner of Employer (the "Board"),
based on periodic reviews of Executive's performance conducted on at least an
annual basis.
(b) Bonus. In addition to Base Compensation, the Board and the
Committee in its sole and absolute discretion may, but in no event shall be
obligated to, authorize the payment of a cash bonus (a "Performance Bonus
Distribution") to Executive based upon achievement of such partnership and
individual performance goals and objectives as may be established or determined
by the Board or the Committee from time to time which shall be determined in
part by (i) the profitability of industrial properties acquired or developed by
Employer for which Executive had primary responsibility and (ii) the
profitability or success of PGRC.
(c) Benefits. During the Employment Term and subject to the
limitations and alternative rights set forth in this Section 3(c), Executive and
Executive's eligible dependents shall have the right to participate in the
medical and dental benefit plan to be established by Employer (which may include
contributions by Executive) and in any other retirement, pension, insurance,
health or other benefit plan or program that has been or is hereafter adopted by
Employer (or in which Employer participates), as such plans and programs may be
amended or modified from time to time by Employer, according to the terms of
such plan or program with all the benefits, rights and privileges as are enjoyed
by any other executive officers of Employer. Employer expects to have in place a
life insurance program in which Executive will be entitled to participate. If
the participation of Executive would adversely affect the qualification of a
plan intended to be qualified under Section 401(a) of the Internal Revenue Code
as the same may be amended from time to time
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(the "Code"), Employer shall have the right to exclude Executive from that plan
in return for Executive's participation in (i) a nonqualified deferred
compensation plan or (ii) an arrangement providing substantially comparable
benefits under a plan that is either a qualified or nonqualified under the Code
at Employer's option. Employer agrees to provide Executive, at Employer's cost
and expense, a membership in the Executive Sports and Fitness Center located at
77 W. Wacker Drive, Chicago, Illinois.
(d) Expenses. Executive shall be reimbursed, subject to Employer's
receipt of invoices or similar records as Employer may reasonably request in
accordance with its policies and procedures, as such policies and procedures may
be amended or modified from time to time by Employer, for all reasonable and
necessary expenses incurred by Executive in the performance of Executive's
duties hereunder, including expenses for business entertainment and meals
(whether in or out of town) and gas for business travel, but excluding
automobile insurance.
(e) Vacations. During the Employment Term, Executive shall be
entitled to vacation in accordance with Employer's practices, as such practices
may be amended or modified from time to time by Employer, provided that
Executive shall be entitled to at least three (3) weeks paid vacation in each
full calendar year. Executive may accrue unused vacation time if not used in any
calendar year or years, however, the maximum cumulative amount of vacation time
that Executive may accrue and carry over to the next year is two (2) weeks.
Executive shall be entitled to a payment for any vacation time which has accrued
but has not been used as of the date of the termination of Executive's
employment with Employer, unless Executive's employment is terminated pursuant
to Section 5(a)(ii) hereof.
(f) Automobile. During the Employment Term, Employer shall pay
Executive an automobile allowance of $1350 per month.
4. Stock Options. The general partner of Employer, PGRC has established
a stock incentive plan (the "Stock Incentive Plan") that will become effective
prior to the completion of the initial public offering of shares of common stock
of PGRC (the "Common Stock") contemplated by the Registration Statement. The
Stock Incentive Plan initially provides, among other things, for the issuance
from time to time to certain officers, directors and other employees of PGRC and
Employer, including Executive, of stock options. On the Effective Date, pursuant
to the Stock Incentive Plan, PGRC shall grant to Executive 80,000 stock options
("Options") that will have such terms and conditions as are set forth in the
Stock Incentive Plan and the Stock Option Agreement to be entered into between
PGRC and Executive. Such Options granted to Executive shall vest immediately
upon the death or disability of Executive or upon termination of this Agreement
and Executive's employment for any reason other than a termination for cause by
Employer. In the case of a termination for cause, all unvested Options shall be
forfeited by Executive, but Executive shall have the right to exercise within
the time period provided for in the Stock Incentive Plan all Options vested
prior to such termination for cause.
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5. Termination and Termination Benefits. (a) Termination by Employer.
(i) Without Cause. Employer may terminate this Agreement and Executive's
employment at any time for any reason or for no reason at all upon thirty (30)
days' prior written notice to Executive following notice of termination. In
connection with the termination of Executive's employment pursuant to this
Section 5(a)(i), Executive shall (A) be paid Executive's Base Compensation in
accordance with Section 3(a) hereof up to the effective date of such
termination, (B) be paid a pro rata portion of any bonus otherwise payable to
Executive for or with respect to the calendar year in which such termination
occurs in accordance with Section 3(b) hereof to the effective date of such
termination and, to the extent not previously paid, Executive shall be entitled
to all bonuses payable to Executive in accordance with Section 3(b) hereof for
or with respect to any calendar years prior to the calendar year in which such
termination occurs, (C) be entitled to the benefits set forth in Sections
3(c),3(d),3(e) and 3(f) hereof up to the effective date of such termination and
(D) receive the Termination Compensation specified in Section 5(d) hereof. For
purposes of calculating Executive's pro rata portion of any bonus pursuant to
clause (B) in the previous sentence, if the termination takes place prior to
receipt by Executive of any Performance Bonus Distribution, the Performance
Bonus Distribution, a pro rata (based on the number of days in the year) portion
of which Executive shall be entitled to receive, shall be deemed to be 50% of
Executive's then current annual Base Compensation.
(ii) With Cause. Employer may terminate this Agreement with
cause immediately upon written notice to Executive. Employer may elect to
require Executive to continue to perform Executive's duties under this Agreement
for an additional thirty (30) days following notice of termination. In
connection with the termination of Executive's employment pursuant to this
Section 5(a)(ii), Executive shall (A) be paid Executive's Base Compensation in
accordance with Section 3(a) hereof up to the effective date of such
termination, and, to the extent not previously paid, Executive shall be entitled
to any bonuses payable to Executive in accordance with Section 3(b) hereof for
or with respect to any calendar years prior to the calendar year in which such
termination occurs and (B) be entitled to the benefits set forth in Sections
3(c), 3(d), 3(e) and 3(f) hereof up to the effective date of such termination.
For purposes of this Section 5(a)(ii), "cause" shall mean (A) a finding by the
Board that Executive has materially harmed Employer, its business, assets or
employees through an act of dishonesty, material conflict of interest, gross
misconduct or willful malfeasance, (B) Executive's conviction of (or pleading
nolo contendere to) a felony, (C) Executive's failure to perform (which shall
not include inability to perform due to disability) in any material respects
Executive's material duties under this Agreement after written notice specifying
the failure and a reasonable opportunity to cure (it being understood that if
Executive's failure to perform is not of a type requiring a single action to
fully cure, then Executive may commence the cure promptly after such written
notice and thereafter diligently prosecute such cure to completion), (D) the
breach by Executive of any of Executive's material obligations hereunder (other
than those covered by clause (C) above) and the failure of Executive to cure
such breach within thirty (30) days after receipt by Executive of a written
notice of Employer specifying in reasonable detail the nature of the breach, or
(E) Executive's sanction (including restrictions, prohibitions and limitations
agreed to under a consent decree or agreed order) under, or conviction for
violation of, any federal or state securities law, rule or regulation (provided
that in the case of a sanction, such sanction materially
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<PAGE>
impedes or impairs the ability of Executive to perform Executive's duties and
exercise Executive's responsibilities hereunder in a satisfactory manner).
(iii) Disability. If due to illness, physical or mental
disability, or other incapacity, Executive shall fail during any four (4)
consecutive months to perform the duties required by this Agreement, Employer
may, upon thirty (30) days' written notice to Executive, either terminate this
Agreement or suspend Executive's right to any Base Compensation or Performance
Bonus Distributions without terminating this Agreement. In any such event,
Executive shall (A) be paid Executive's Base Compensation in accordance with
Section 3(a) hereof up to the effective date of such termination, (B) be paid a
pro rata portion of any bonus otherwise payable to Executive for or with respect
to the calendar year in which such disability occurs in accordance with Section
3(b) hereof up to the first day of such four (4) month period and, to the extent
not previously paid, Executive shall be entitled to all bonuses payable to
Executive in accordance with Section 3(b) hereof for or with respect to any
calendar years prior to the calendar year in which such termination occurs and
(C) be entitled to the benefits set forth in Sections 3(c) hereof (or the after-
tax cash equivalent) up to the effective date of such termination, and be
entitled to the benefits set forth in Sections 3(d), 3(e), and 3(f) hereof up to
the date of such termination. For purposes of calculating Executive's pro rata
portion of any bonus pursuant to clause (B) in the previous sentence, if the
termination takes place prior to receipt by Executive of any Performance Bonus
Distribution, the Performance Bonus Distribution, a pro rata portion of which
Executive shall be entitled to receive, shall be deemed to be 50% of Executive's
then current annual Base Compensation. In the event Employer elects to suspend
Executive's right to Base Compensation and Performance Bonus Distributions, at
such time as Executive is able to resume the duties required under this
Agreement, Executive shall be entitled to receive Base Compensation and
Performance Bonus Distributions from the date Executive commences the
performance of such duties following the disability in accordance with the terms
and provisions of this Agreement. This Section 5(a)(iii) shall not limit the
entitlement of Executive, Executive's estate or beneficiaries to any disability
or other benefits available to Executive under any disability insurance or other
benefits plan or policy which is maintained by Employer for Executive's benefit.
For purposes of this Agreement, the "date of disability" shall mean the first
day of the consecutive period during which Executive fails to perform the duties
required by this Agreement due to illness, physical or mental disability or
other incapacity.
(b) Termination by Executive. (i) After Change of Control. Executive
may terminate this Agreement upon thirty (30) days' written notice to Employer
following any "change of control" of Employer and a resulting "diminution
event", each as defined below, but in no event later than two years after the
change of control event. Executive shall continue to perform, at the election of
Employer, Executive's duties under this Agreement for an additional thirty (30)
days following notice of termination. In such event, Executive shall (A) be paid
Executive's Base Compensation up to the effective date of such termination, (B)
be paid a pro rata portion of any bonus otherwise payable to Executive for or
with respect to the calendar year in which such termination occurs in accordance
with Section 3(b) hereof up to the effective date of such termination and, to
the extent not previously paid, Executive shall be entitled to all bonuses
payable to Executive in accordance with Section 3(b) hereof for or with respect
to any calendar years prior
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<PAGE>
benefits set forth in Sections 3(c), 3(d), 3(e) and 3(f) hereof up to the
effective date of such termination and (D) receive an amount equal to two times
the sum of (1) Executive's then current annual Base Compensation and (2)
Executive's last annualized Performance Bonus Distribution (if the termination
takes place prior to receipt by Executive of any Performance Bonus Distribution,
the Performance Bonus Distribution shall be deemed to be 50% of Executive's then
current Base Compensation). For purposes of calculating Executive's pro rata
portion of any bonus pursuant to clause (B) in the previous sentence, if the
termination takes place prior to receipt by Executive of any Performance Bonus
Distribution, the Performance Bonus Distribution, a pro rata portion of which
Executive shall be entitled to receive, shall be deemed to be 50% of Executive's
then current annual Base Compensation. For purposes of this Agreement, in the
event Employer defaults in its obligation under Section 9 hereof and, as a
consequence thereof, Executive's employment with Employer (or Employer's
successor or assign) terminates, such termination shall be deemed to be a
termination under this Section 5(b)(i).
For purposes of this Section 5(b)(i), (A) a "change of control" of Employer
shall be deemed to have occurred if: (l) any person (as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), including a "group" as defined in Section 13(d)(3) of the
Exchange Act (but excluding The Prime Group, Inc. or any of its affiliates or
any group in which The Prime Group, Inc. or any of its affiliates has a
significant interest and excluding a trustee or other fiduciary holding
securities under an employee benefit plan of Employer), becomes the beneficial
owner of shares of common stock of Employer having at least fifty percent (50%)
of the total number of votes that may be cast for the election of directors of
Employer; (2) the merger or other business combination of Employer, sale of all
or substantially all of Employer's assets or combination of the foregoing
transactions (a "Transaction"), other than a Transaction immediately following
which the shareholders of Employer immediately prior to the Transaction continue
to have a majority of the voting power in the resulting entity (excluding for
this purpose any shareholder, other than The Prime Group, Inc. and its
affiliates, owning directly or indirectly more than ten percent (10%) of the
shares of the other company involved in the Transaction); or (3) within any
twenty-four (24) month period beginning on or after the date hereof, the persons
who were directors of Employer immediately before the beginning of such period
(the "Incumbent Directors") shall cease to constitute at least a majority of the
Board or a majority of the board of directors of any successor to Employer,
provided that, any director who was not a director as of the date hereof shall
be deemed to be an Incumbent Director if such director was elected to the Board
by, or on the recommendation of or with the approval of, at least two-thirds of
the directors who then qualified as Incumbent Directors either actually or by
prior operation of this provision, unless such election, recommendation or
approval was the result of an actual or threatened election contest of the type
contemplated by Regulation 14a-11 promulgated under the Exchange Act or any
successor provision; and (B) a "diminution event" shall mean any material
diminution in (1) the duties and responsibilities of Executive (other than a
mere title change, unless the new title is not President) or (2) the
compensation package for Executive.
(ii) Without Good Reason. Executive may terminate this Agreement and
Executive's employment at any time for any reason or for no reason at all upon
thirty (30) days' written notice to Employer, during which period Executive
shall continue to perform Executive's
6
<PAGE>
termination of Executive's employment pursuant to this Section 5(b)(ii),
Executive shall (A) be paid Executive's Base Compensation in accordance with
Section 3(a) hereof up to the effective date of such termination, and, to the
extent not previously paid, Executive shall be entitled to all bonuses payable
to Executive in accordance with Section 3(b) hereof for or with respect to any
calendar years prior to the calendar year in which such termination occurs and
(B) be entitled to the benefits set forth in Sections 3(c), 3(d), 3(e) and 3(f)
hereof up to the effective date of such termination.
(c) Death. Notwithstanding any other provision of this Agreement,
this Agreement shall terminate on the date of Executive's death. In such event,
Executive shall (A) be paid Executive's Base Compensation in accordance with
Section 3(a) hereof up to the date of such death, (B) be paid a pro rata portion
of any bonus otherwise payable to Executive for or with respect to the calendar
year in which such death occurs in accordance with Section 3(b) hereof up to the
effective date of such death and, to the extent not previously paid, Executive
shall be entitled to all bonuses payable to Executive in accordance with Section
3(b) hereof for or with respect to any calendar years prior to the calendar year
in which such death occurs and (C) be entitled to the benefits set forth in
Sections 3(c) (or the after-tax cash equivalent), 3(d), 3(e) and 3(f) hereof up
to the date of such death. This Section 5(c) shall not limit the entitlement of
Executive, Executive's estate or beneficiaries under any insurance or other
benefits plan or policy which is maintained by Employer for Executive's benefit.
For purposes of calculating Executive's pro rata portion of any bonus pursuant
to clause (B) in the previous sentence, if the termination takes place prior to
receipt by Executive of any Performance Bonus Distribution, the Performance
Bonus Distribution, a pro rata portion of which Executive shall be entitled to
receive, shall be deemed to be 50% of Executive's then current annual Base
Compensation.
(d) Termination Compensation. In the event of a termination of this
Agreement pursuant to Section 5(a)(i) hereof, Employer shall pay to Executive,
within thirty (30) days of termination, an amount in one lump sum ("Termination
Compensation") equal to the product of (i) the sum of (a) Executive's then
current annual Base Compensation and (b) Executive's last annualized Performance
Bonus Distribution times (ii) a fraction, the numerator of which is the number
of days between such date of termination and expiration of the Employment Term,
and the denominator of which is 365. For purposes of calculating Executive's
Termination Compensation, if the termination takes place prior to receipt by
Executive of any Performance Bonus Distribution, the Performance Bonus
Distribution component of the Termination Compensation calculation shall be
deemed to be 50% of Executive's then current annual Base Compensation.
6. Covenants of Executive.
(a) No Conflicts. Executive represents and warrants that Executive is
not personally subject to any agreement, order or decree which restricts
Executive's acceptance of this Agreement and the performance of Executive's
duties with Employer hereunder.
(b) Non-Competition. In return for the performance of the management
duties described in Section 1 hereof, during the Employment Term, Executive
shall not, directly or
7
<PAGE>
behalf of any other person or entity with whom Executive may be employed or
associated, own any interest in, participate or engage in the day-to-day
supervision, management, development, marketing or operation of any office or
industrial real estate facilities or such other business as Employer may be
engaged in during the Employment Term (the "Business"). Furthermore, for a
period of one year after any applicable Section 5 termination event, Executive
shall not, directly or indirectly, solicit, attempt to hire or hire any employee
or client of Employer or solicit or attempt to lease space to or lease space to
any tenant of Employer. Notwithstanding the foregoing, nothing herein shall
prohibit Executive from (i) owning 5% or less of any securities of a competitor
engaged in the same Business if such securities are listed on a nationally
recognized securities exchange or traded over-the-counter on the National
Association of Securities Dealers Automated Quotation System or otherwise, (ii)
owning that certain 69-acre semi-improved industrial park located in
Libertyville, Illinois, the office/industrial buildings located at 801 and 901
Technology Way, Libertyville Business Park, Libertyville, Illinois, and any
other real property not purchased by Employer under the terms of the
Contribution Agreement between Executive, certain limited partnership controlled
by Executive and Employer, (iii) soliciting, attempting to hire or hiring Tucker
Magid and (iv) responding to contacts initiated by those tenants identified in
Exhibit A attached hereto which occupy facilities owned and/or operated by
Edward Hadesman and Executive (the "Tenants") and entering into leasing
transactions with such Tenants provided that such transactions do not result in
such Tenants relocating from a facility owned and/or operated by Employer, PGRC,
or any of their respective subsidiaries. Executive shall be entitled to manage
the buildings located at 801 and 901 Technology Way, Libertyville Business Park,
Libertyville, Illinois prior to their acquisition by PGRC, on the business time
of Employer and Employer or PGRC or any of their respective subsidiaries will
not receive any fees with respect to such property.
(c) Non-Disclosure. During the Employment Term and for a period of
two years after the expiration or termination of this Agreement for any reason,
Executive shall not disclose or use, except in the pursuit of the Business for
or on behalf of Employer, any Trade Secret (as hereinafter defined) of Employer,
whether such Trade Secret is in Executive's memory or embodied in writing or
other physical form. For purposes of this Section 6(c), "Trade Secret" means any
information which derives independent economic value, actual or potential, with
respect to Employer from not being generally known to, and not being readily
ascertainable by proper means by, other persons who can obtain economic value
from its disclosure or use and is the subject of efforts to maintain its secrecy
that are reasonable under the circumstances, including, but not limited to,
trade secrets, customer lists, sales records and other proprietary commercial
information. Said term, however, shall not include general "know-how"
information acquired by Executive prior to or during the course of Executive's
service which could have been obtained by him from public sources without the
expenditure of significant time, effort and expense which does not relate to
Employer.
(d) Business Opportunities. During the Employment Term, Executive
agrees to bring to Employer any and all business opportunities which come to
Executive's attention for the acquisition, development, management, leasing or
marketing of real estate for industrial or office use. In the event that
Employer elects not to participate or take advantage of any such business
8
<PAGE>
opportunity, upon termination of Executive's employment with Employer for any
reason, Executive shall be free to pursue such business opportunity, provided
that such business opportunity does not cause any tenant to relocate from a
facility owned and/or operated by Employer, PGRC or any of their respective
subsidiaries.
(e) Return of Documents. Upon termination of Executive's services with
Employer, Executive shall return all originals and copies of books, records,
documents, customer lists, sales materials, tapes, keys, credit cards and other
tangible property of Employer within Executive's possession or under Executive's
control.
(f) Equitable Relief. In the event of any breach by Executive of any
of the covenants contained in this Section 6, it is specifically understood and
agreed that Employer shall be entitled, in addition to any other remedy which it
may have, to equitable relief by way of injunction, an accounting or otherwise
and to notify any employer or prospective employer of Executive as to the terms
and conditions hereof.
(g) Acknowledgment. Executive acknowledges that Executive will be
directly and materially involved as a senior executive in all important policy
and operational decisions of Employer. Executive further acknowledges that the
scope of the foregoing restrictions has been specifically bargained between
Employer and Executive, each being fully informed of all relevant facts.
Accordingly, Executive acknowledges that the foregoing restrictions of Section 6
are fair and reasonable, are minimally necessary to protect Employer, its other
partners and the public from the unfair competition of Executive who, as a
result of Executive's performance of services on behalf of Employer, will have
had unlimited access to the most confidential and important information of
Employer, its business and future plans. Executive furthermore acknowledges that
no unreasonable harm or injury will be suffered by him from enforcement of the
covenants contained herein and that Executive will be able to earn a reasonable
livelihood following termination of Executive's services notwithstanding
enforcement of the covenants contained herein.
7. Prior Agreements. This Agreement, together with the Stock Incentive
Plan, supersedes and is in lieu of any and all other employment arrangements
between Executive and Employer or its predecessor or any subsidiary and any and
all such employment agreements and arrangements are hereby terminated and deemed
of no further force or effect.
8. Assignment. Neither this Agreement nor any rights or duties of
Executive hereunder shall be assignable by Executive and any such purported
assignment by him shall be void. Employer may assign all or any of its rights
hereunder provided that substantially all of the assets of Employer are also
transferred to the same party.
9. Successor to Employer. Employer will require any successor or assign
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all the business and/or assets of Employer, as the case may
be, by agreement in form and substance reasonably satisfactory to Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that Employer would be
9
<PAGE>
required to perform it if no such succession or assignment had taken place. Any
failure of Employer to obtain such agreement prior to the effectiveness of any
such succession or assignment shall be a material breach of this Agreement
giving Executive the right to terminate this Agreement, in which case Executive
shall be entitled to receive the compensation specified in Section 5(a)(i)
hereof. This Agreement shall inure to the benefit of and be enforceable by
Executive's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Executive should die
while any amounts are still payable to Executive hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to Executive's devisee, legatee or other designee or, if there be
no such designee, to Executive's estate.
10. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and if personally delivered, sent by
courier or by certified mail, postage or delivery charges prepaid, to the
following addresses:
(a) if to Executive, to:
Edward S. Hadesman
3184 MacArthur Blvd.
Northbrook, IL 60062
With a copy to:
--------------
Shefsky & Froelich Ltd.
444 N. Michigan Avenue
Suite 2500
Chicago, IL 60611
Attn: James M. Teper
(b) if to Employer, to:
Prime Group Realty Corp.
Suite 3900
77 West Wacker Drive
Chicago, IL 60601
Attn: Chief Executive Officer
With a copy to:
--------------
Prime Group Realty Corp.
Suite 3900
77 West Wacker Drive
Chicago, IL 60601
Attn: General Counsel
10
<PAGE>
and to:
-------
Winston & Strawn
35 West Wacker Drive
Chicago, IL 60601
Attn: Wayne D. Boberg
Any notice, claim, demand, request or other communication given as provided in
this Section 10, if delivered personally, shall be effective upon delivery; and
if given by courier, shall be effective one (1) business day after deposit with
the courier if next day delivery is guaranteed; and if given by certified mail,
shall be effective three (3) business days after deposit in the mail. Either
party may change the address at which it is to be given notice by giving written
notice to the other party as provided in this Section 10.
11. Amendment. This Agreement may not be changed, modified or amended
except in writing signed by both parties hereto.
12. Waiver of Breach. The waiver by either party of the breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach by either party.
13. Severability. Employer and Executive each expressly agree and contract
that it is not the intention of either party to violate any public policy,
statutory or common law, and that if any covenant, sentence, paragraph, clause
or combination of the same of this Agreement (a "Contractual Provision") is in
violation of the law of any state where applicable, such Contractual Provision
shall be void in the jurisdictions where it is unlawful, and the remainder of
such Contractual Provision, if any, and the remainder of this Agreement shall
remain binding on the parties such that such Contractual Provision shall be
binding only to the extent that such Contractual Provision is lawful or may be
lawfully performed under then applicable laws. In the event that any part of any
Contractual Provision of this Agreement is determined by a court of competent
jurisdiction to be overly broad thereby making the Contractual Provision
unenforceable, the parties hereto agree, and it is their desire, that such court
shall substitute a judicially enforceable limitation in its place, and that the
Contractual Provision, as so modified, shall be binding upon the parties as if
originally set forth herein.
14. Indemnification by Executive. Executive shall indemnify Employer for
any and all damages, costs and expenses resulting from any material harm to
Employer, its business, assets or employees through an act of dishonesty,
material conflict of interest, gross misconduct or willful malfeasance by
Executive. Executive also shall indemnify Employer for any and all damages,
costs and expenses resulting from Executive's acts of omission constituting
reckless disregard of Executive's duties to Employer following notice thereof by
Employer after it becomes aware of such conduct and Executive's failure to so
cure within thirty (30) days.
15. Indemnification by Employer and Insurance. The Partnership Agreement
will contain normal and customary indemnification provisions whereby Employer
agrees to indemnify the
11
<PAGE>
partners and officers of Employer, including Executive. In addition, during the
Employment Term, Employer shall maintain appropriate D&O insurance coverage in
such amount as may be determined by Employer in Employer's reasonable business
judgment for the benefit of Employer's partners and officers, including
Executive.
16. Governing Law. This Agreement shall be governed by, and construed,
interpreted and enforced in accordance with the laws of the State of Illinois,
exclusive of the conflict of laws provisions of the State of Illinois.
[signature page follows]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
EMPLOYER:
PRIME GROUP REALTY L.P.
By: Prime Group Realty Corp.,
its General Partner
By:____________________________
Title:_________________________
EXECUTIVE:
____________________________________
Edward S. Hadesman
13
<PAGE>
EXHIBIT A
TENANTS
-------
1. Rank Video Services America, Inc.
2. Motorola, Inc.
3. Major Reflector/National Service Industries
4. Arlington Industries
5. Laboratory Corporation of America
6. Northern Illinois Clinical Laboratories
7. Lionstone International
8. Sun Space Designs
9. Production Associates
<PAGE>
EXHIBIT 10.12
OPTION TO PURCHASE PARTNERSHIP INTERESTS
THIS OPTION TO PURCHASE PARTNERSHIP INTERESTS (this "Option
Agreement") is made and entered into as of the 17th day of June, 1994, but made
effective as of March 22, 1994, by KILICO Realty Corporation, an Illinois
corporation ("KRC" or "Optionor"), in favor of The Prime Group, Inc., an
Illinois corporation (herein sometimes referred to as "Prime" or the
"Optionee").
R E C I T A L S :
A. KRC is a general partner of 77 West Wacker Limited Partnership,
an Illinois limited partnership (the "Partnership"), under a certain Third
Amended and Restated Agreement of Limited Partnership of 77 West Wacker Limited
Partnership dated March 14, 1991 (the "Third Amended and Restated Agreement").
The Third Amended and Restated Agreement, as amended, is referred to herein as
the "Partnership Agreement."
B. KRC is the general partner of K/77 Investors Limited Partnership,
an Illinois limited partnership ("K/77"), under a certain Agreement of Limited
Partnership dated June 16, 1994 but made effective as of March 22, 1994 (the
"Original K/77 Agreement"). The Original K/77 Agreement, as amended, is referred
to herein as the "K/77 Partnership Agreement."
C. Optionor has agreed to enter into this Option Agreement under and
pursuant to a certain Amended and Restated Purchase and Sale Agreement (the
"Purchase and Sale Agreement") dated as of June 17, 1994, but effective as of
March 22, 1994 (subject to Section 3.3 thereof), by and among Prime, KRC, Kemper
Investors Life Insurance Company ("KILICO"), Federal Kemper Life Assurance
Company ("FKLA"), FKLA Realty Corporation ("FKLA Realty"), and KR 77 Fitness
Center, Inc. KILICO and FKLA are sometimes referred to herein collectively as
"KILICO/FKLA".
D. In connection with the consummation of the transactions set forth
in the Purchase and Sale Agreement, Prime, KRC, KILICO and FKLA, have entered
into or will enter into a certain Indemnity Agreement (the "Indemnity
Agreement") pertaining to the Partnership Agreement, and certain other
guaranties and indemnities among the parties as more fully described therein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Optionor agrees as follows:
1. Grant of Option
(a) Optionor hereby grants to Optionee the right and option (the
"Option") to purchase the following interests (collectively referred to herein
as the "Option Interests"), as owned by Optionor:
(i) 100% of the interest in the Partnership, as a general
partner, owned by KRC, representing a 5% interest in the
Partnership ("KRC General Partner Interest"); and
<PAGE>
(ii) 100% of the interest in K/77, as a general partner, owned by
KRC, representing a 1% interest in K/77 (the "KRC-K/77 General
Partner Interest").
(b) The Option shall be subject to the following terms and conditions:
(i) The Option shall expire if not exercised on or before the
maturity date of the loan made by the Co-Agents under the BLA
(as such terms are defined in the Purchase and Sale Agreement).
(ii) The purchase price to be paid for the Option Interests (the
"Option Price") upon exercise of the Option shall be Ten
Dollars ($10.00) to be paid to Optionor.
(iii) The Option may be exercised only as to the entire Option
Interests collectively by the giving of written notice by
Optionee to Optionor stating that Optionee elects to exercise
the Option and designating a date and place for closing which
date shall be within thirty (30) days after the date of
exercise.
(iv) At the closing so designated by Optionee, Optionor shall
execute and deliver such documents and instruments as may be
necessary to vest the Option Interests in Optionee free and
clear of all claims, liens, charges, security interests and
encumbrances, except as to the Restrictions (as defined below),
against payment of the Option Price, and Optionee shall execute
and deliver, or cause to be executed and delivered, the other
documents and instruments contemplated by Paragraph 3 below.
The parties agree to cause to be executed and delivered
appropriate amendments to the Partnership Agreement and the
K/77 Partnership Agreement reflecting the withdrawal of
Optionor and the acquisition of the Option Interests by
Optionee.
(v) At the time of the exercise of the Option, and at the time of
the closing pursuant thereto, there shall not then be existing
any default (after expiration of applicable notice and cure
periods) under or pursuant to the Acquisition Note (as defined
in the Purchase and Sale Agreement), the Guaranty (as defined
in the Purchase and Sale Agreement), the Indemnity Agreement,
or the Security Agreement (Partner Interests), except to the
extent any such default results from KILICO/FKLA's failure to
perform the Continuing KILICO/FKLA Obligations (as defined in
the Purchase and Sale Agreement), provided that in each case
all conditions to such performance have been satisfied.
(vi) Notwithstanding anything to the contrary in this Option
Agreement, and subject to the provisions of clause (i)
regarding the expiration of the Option, Optionor shall be
obligated to exercise the Option within thirty (30) days after
the "Bank" (as defined in the Purchase and Sale Agreement)
approves the purchase by Optionee of the Option Interests
pursuant hereto.
2
<PAGE>
(c) At the closing, the Option Interests acquired by the Optionee
hereunder shall entitle Optionee to all the rights, powers and privileges of
Optionor, subject to the Restrictions, and all of the terms, provisions and
restrictions set forth in the Partnership Agreement as to the KRC General
Partner Interest, and the K/77 Partnership Agreement as to the KRC-K/77 General
Partner Interest.
(d) This Option Agreement, the Option Interests, and the exercise of
the Option, are subject to the following agreements and options, and applicable
consent rights set forth therein, as more fully stated therein, which may affect
the Option Interests and/or other interests in the Partnership or K/77:
(i) A certain Option and Agreement for Purchase and Sale of
Partnership Interests dated as of November 13, 1991, by and
among Prime, KILICO, FKLA and R.R. Donnelley & Sons
Company, a Delaware Corporation (the "Donnelley Option");
and
(ii) The BLA and related documents (the "BLA Documents").
(collectively the Donnelley Option and the BLA Documents are referred to as
"Restrictions").
2. Indemnity Agreement. It shall be a condition precedent to the sale of
-------------------
the Option Interests to Prime that, concurrently with the execution and delivery
of this Option Agreement, Prime (the "Indemnitor") shall have executed and
delivered the Indemnity Agreement to KRC, KILICO and FKLA. The Indemnity
Agreement shall be, from and after its execution and delivery by Indemnitor,
binding and enforceable against Indemnitor, and nothing contained herein, nor in
the consummation of the sale and purchase of the Option Interests, shall in any
manner terminate, nullify, waive, alter, amend or modify in any way the
obligations and liabilities therein set forth on the part of Indemnitor.
3. Other Agreements. It shall be a condition precedent to the closing of
----------------
the sale of the Option Interests to Prime that Prime shall have executed, or
caused to be executed, and delivered to KRC, KILICO, FKLA, FKLA Realty and KR 77
Fitness Center, the following documents and instruments, in substantially the
same form as the "Guaranty", the "Security Agreement (Partner Interests)", and
the "Subordination Agreement" (as such terms are defined in the Purchase and
Sale Agreement), as applicable:
(a) a Limited Recourse Guaranty, under which Prime shall guaranty
repayment of the Acquisition Note (as defined in the Purchase and Sale
Agreement), limited in recourse to the collateral and proceeds of the
collateral pledged under the Security Agreement (General Partner
Interests) described in subparagraph (b) below;
(b) a Security Agreement (General Partner Interests), under which Prime
shall pledge the Option Interests to secure its obligations under the
Limited Recourse Guaranty described in subparagraph (a) above and the
Indemnity Agreement;
(c) a Subordination Agreement - 77 West Wacker Limited Partnership, under
which Prime and K/77 subordinate their rights as partners in 77 West
Wacker Limited Partnership to repayment of capital contributions,
loans, and interest thereon, to the repayment of the Acquisition Note,
the other secured obligations under the
3
<PAGE>
Security Agreement (Partner Interests) and the Security Agreement
(General Partner Interests) described in subparagraph (b) above, and
the repayment of the SMFA Debt;
(d) a Subordination Agreement - K/77 Investors Limited Partnership, under
which Prime and PGLP subordinate their rights in K/77 Investors
Limited Partnership to repayment of capital contributions, loans, and
interest thereon, to the repayment of the Acquisition Note and, the
other secured obligations under the Security Agreement (Partner
Interests) and the Security Agreement (General Partner Interests)
described in subparagraph (b) above, and the repayment of the SMFA
Debt; and
(e) such other documents and instruments as KRC, KILICO, FKLA, FKLA Realty
and KR 77 Fitness Center may reasonably request to effectuate the
transactions contemplated in the foregoing documents and instruments,
or to perfect any rights or security interests granted thereunder.
4. Representations and Warranties. Optionor hereby represents and
------------------------------
warrants to Optionee that it is the record and beneficial owner of the Option
Interest owned by it free and clear of all claims, liens, charges, security
interests and encumbrances, except for the Restrictions; that the Partnership
Agreement and the K/77 Partnership Agreement, respectively, are currently in
full force and effect and have not been modified or amended, except as disclosed
to Optionee; and that it has full power and authority to execute and deliver
this Option and perform its obligations hereunder.
5. Assignment; Binding Effect. The Option and all or any portion of the
---------------------------
rights and privileges conferred hereby hall not be assigned, transferred,
pledged or hypothecated in any way, except that Optionee may assign the Option
and its rights hereunder to any one or more person or entity controlling,
controlled by or under common control with Optionee. Subject to the foregoing
provisions, this Option shall inure to the benefit of and be binding upon
Optionor and Optionee and their respective successors and permitted assigns. Any
such permitted assignee(s) of Optionee shall execute and deliver the documents
and instruments described in Paragraph 3 above to the extent applicable.
6. Governing Law. In all respects, this Option shall be governed by and
-------------
construed in accordance with the laws of the State of Illinois.
7. Notices. Any notice required or permitted hereunder shall be in
-------
writing and shall be given by personal delivery, telegraph, telex or U.S. mail,
certified or registered with return receipt requested, postage prepaid and shall
be deemed to be effective three business days after the mailing, twenty four
(24) hours after transmission of a telegram or telex, or on the date of delivery
if delivered personally, at the following addresses or such other addresses as
one party may from time to time give another in writing:
If to Optionor, to:
The Prime Group, Inc.
77 West Wacker Drive, Suite 3900
Chicago, Illinois 60601
Attention: Michael W. Reschke
4
<PAGE>
with copy to:
The Prime Group, Inc.
77 West Wacker Drive, Suite 3900
Chicago, Illinois 60601
Attention: Robert J. Rudnik
If to Optionee, to:
Kemper Financial Services, Inc.
120 South LaSalle Street, 13th Floor
Chicago, Illinois 60603
Attention: Real Estate Investment Group
with copy to:
KFC Portfolio Corp.
c/o Kemper Financial Services, Inc.
120 South LaSalle Street, 22nd Floor
Chicago, Illinois 60603
Attention: Legal Department
Real Estate Counsel
and to:
Keck, Mahin & Cate
77 West Wacker Drive
49th Floor
Chicago, Illinois 60601
Attention: Laurance P. Nathan
Any party may change its address for purposes hereof by notice to the other
parties.
8. Severability. In case any one or more of the provisions contained in
------------
this Option should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
[Signature Page Follows]
5
<PAGE>
IN WITNESS WHEREOF, Optionor has caused this Option Agreement to be
executed on the date hereinabove written.
OPTIONOR:
KILICO REALTY CORPORATION, an Illinois
corporation
By: /s/ John Theal
------------------------------
Its: Pres
------------------------------
By: /s/ H.E. Guenther
------------------------------
Its: Auth Sig
-----------------------------
6
<PAGE>
ACCEPTANCE OF OPTION
TO PURCHASE PARTNERSHIP INTERESTS
---------------------------------
The undersigned herein accepts and agrees to the terms, conditions and
limitations set forth in the Option to Purchase Partnership Interests dated as
of June 17, 1994, but made effective as of March 22, 1994, from KILICO Realty
Corporation and KR 77 Fitness Center, Inc. in favor of the undersigned.
Dated: June 17, 1994, but made effective as of March 22, 1994.
THE PRIME GROUP, INC.
By: /s/
--------------------------
Its: Executive Vice President
--------------------------
7
<PAGE>
ACKNOWLEDGEMENT AND CONSENT
---------------------------
The undersigned, as lenders under the "Standby First Mortgage Funding
Agreement" and the "Subordinate Mortgage Funding Agreement" (as such terms are
defined in the Purchase and Sale Agreement), hereby acknowledge and consent to
the granting of the Option and the purchase of the Option Interests pursuant
thereto, subject to and in accordance with the provisions of the foregoing
Option Agreement.
Dated: June 17, 1994, but made effective as of March 22, 1994.
KEMPER INVESTORS LIFE INSURANCE
COMPANY, an Illinois insurance corporation
By: /s/
--------------------------------
Its:
--------------------------------
By: /s/
--------------------------------
Its:
--------------------------------
FEDERAL KEMPER LIFE ASSURANCE
COMPANY, an Illinois insurance corporation
By: /s/
--------------------------------
Its:
--------------------------------
By: /s/
--------------------------------
Its:
--------------------------------
8
<PAGE>
FIRST AMENDMENT TO
OPTION TO PURCHASE PARTNERSHIP INTERESTS
THIS FIRST AMENDMENT TO OPTION TO PURCHASE PARTNERSHIP INTERESTS
("Amendment") is made as of this 21st day of January, 1997 by KILICO Realty
Corporation, an Illinois corporation ("KRC" or "Optionor") and The Prime Group,
Inc., an Illinois corporation ("TPG" or "Optionee").
RECITALS
A. KRC and TPG have entered into that Option To Purchase Partnership
Interests entered into as of June 17, 1994 but made effective as of March 22,
1994 (the "Option Agreement").
B. KRC and TPG have also entered into that Agreement of even date
herewith made by Kemper Investors Life Insurance Company, an Illinois insurance
corporation; Federal Kemper Life Assurance Company, an Illinois insurance
corporation; KRC; FKLA Realty Corporation, an Illinois corporation; KR 77
Fitness Center, Inc., a Delaware corporation; 77 West Wacker Limited
Partnership, an Illinois limited partnership; TPG; Prime group Limited
Partnership, an Illinois limited partnership; and Prime 77 Fitness Center, Inc.,
an Illinois corporation (the "Agreement"). Terms defined in the Agreement are
used with the same meanings in this Amendment.
C. As required by the Agreement, KRC and TPG have agreed to enter into
this Amendment to amend certain provisions of the Option Agreement.
NOW THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Amendment agree as follows:
Section 1. Amendments. The Option Agreement is herby amended as follows:
----------------------
a. Section 1(b)(i) of the Option Agreement is hereby deleted in its
entirety and the following material substituted in lieu thereof:
(i) The Option shall expire if not exercised on or before September
23, 1997, and the Optionee shall designate the closing to occur
no later than September 30, 1997.
b. Section 1(b)(iii) of the Option Agreement is herby amended by deleting
the phrase "within thirty (30) days after the date of exercise" and inserting in
lieu thereof "within five (5) business days after the date of exercise".
<PAGE>
c. Section 1(b)(v) of the Option Agreement is hereby deleted in its
entirety.
d. Sections 2 and 3 of the Option Agreement are hereby deleted in their
entirety.
e. Section 7 of the Option Agreement is hereby amended by substituting
the following addresses for Optionee:
If to Optionee:
c/o ZKS Real Estate Partners LLC
225 W. Washington
Suite 1450
Chicago, Illinois 60606
Attention: Gregory A. Lisauskas
with a copy to:
Zurich Kemper Life Companies
c/o ZKS Real Estate Partners LLC
225 W. Washington
Suite 1450
Chicago, Illinois 60606
Attention: Timothy R. Verrilli, Esq.
with a copy to:
Rudnick & Wolfe
203 N. LaSalle Street
Chicago, Illinois 60601-1293
Attention: Kenneth Hartmann
Section 2. Miscellaneous.
--------------------------
a. All agreements, covenants, representations, warranties and other
provisions of this Amendment shall survive the Closing.
b. This Amendment shall be governed by the laws of the State of Illinois,
without reference to its conflicts of law or choice of law rules.
c. The terms and provisions of this Amendment shall be binding on the
successors and assigns of the parties hereto.
2
<PAGE>
d. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. It shall not be necessary that any single
counterpart of this Amendment be executed by all of the parties hereto, so long
as each of such parties shall have executed the same or any other separate
counterpart hereof.
e. As used herein, the terms (i) "person" shall mean an individual, a
corporation, a partnership, a joint venture, a limited liability company, an
unincorporated organization, or a governmental body; (ii) "including" shall mean
including, without limiting the generality of the foregoing; and (iii) the
singular shall include the plural, and vice versa.
f. If any provision of this Amendment should be found to be invalid,
void, or unenforceable, then it is the intent of the parties hereto that the
remainder of this Amendment be enforced to the fullest extent possible in
accordance with the intentions of the parties.
g. The parties to this Amendment will execute and deliver such other
documents and instruments as may be reasonably requested by any other party to
cause, effect, accomplish, or evidence any of the transactions required by this
Amendment.
In Witness Whereof, the parties hereto have caused this Amendment to be
executed and delivered the day and year first above written.
KILICO REALTY CORPORATION, an Illinois
corporation
By: /s/ Beth A. Schlief
-------------------------------
Name: Beth A. Schlief
-----------------------------
Title: Authorized Signatory
----------------------------
THE PRIME GROUP, INC., an Illinois corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
3
<PAGE>
d. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. It shall not be necessary that any single
counterpart of this Amendment be executed by all of the parties hereto, so long
as each of such parties shall have executed the same or any other separate
counterpart hereof.
e. As used herein, the terms (i) "person" shall mean an individual, a
corporation, a partnership, a joint venture, a limited liability company, an
unincorporated organization, or a governmental body; (ii) "including" shall mean
including, without limiting the generality of the foregoing; and (iii) the
singular shall include the plural, and vice versa.
f. If any provision of this Amendment should be found to be invalid,
void, or unenforceable, then it is the intent of the parties hereto that the
remainder of this Amendment be enforced to the fullest extent possible in
accordance with the intentions of the parties.
g. The parties to this Amendment will execute and deliver such other
documents and instruments as may be reasonably requested by any other party to
cause, effect, accomplish, or evidence any of the transactions required by this
Amendment.
In Witness Whereof, the parties hereto have caused this Amendment to be
executed and delivered the day and year first above written.
KILICO REALTY CORPORATION, an Illinois
corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
THE PRIME GROUP, INC., an Illinois corporation
By: /s/ Michael W. Reschke
------------------------------
Name: Michael W. Reschke
----------------------------
Title: President
---------------------------
3
<PAGE>
SECOND AMENDMENT TO
OPTION TO PURCHASE PARTNERSHIP INTERESTS
THIS SECOND AMENDMENT TO OPTION TO PURCHASE PARTNERSHIP INTERESTS ("Second
Amendment") is made as of this 1st day of July, 1997 by KILICO Realty
Corporation, an Illinois corporation ("KRC" or "Optionor") and The Prime Group,
Inc., an Illinois corporation ("TPG" or "Optionee").
RECITALS
A. KRC and TPG have entered into that Option To Purchase Partnership
Interests entered into as of June 17, 1994 but made effective as of March 22,
1994 (the "Original Option").
B. KRC and TPG have also entered into that First Amendment to Option to
Purchase Partnership Interests entered into as of January 21, 1997 (the "First
Amendment") amending the Original Option (the Original Option and the First
Amendment shall be collectively referred to herein as the "Option Agreement").
C. KRC and TPG have also entered into that Agreement dated as of January
21, 1997 made by Kemper Investors Life Insurance Company, an Illinois insurance
corporation ("KILICO"); Federal Kemper Life Assurance Company, an Illinois
insurance corporation ("FKLA"); KRC; FKLA Realty Corporation, an Illinois
corporation ("FRC"); KR 77 Fitness Center, Inc., a Delaware corporation ("KR
Fitness"); 77 West Wacker Limited Partnership, an Illinois limited partnership
("77 West"); TPG; Prime Group Limited Partnership, an Illinois limited
partnership ("PGLP"); and Prime 77 Fitness Center, Inc., an Illinois corporation
("Prime Fitness") (KILICO, FKLA, KRC, FRC, KR Fitness, 77 West, TPG, PGLP and
Prime Fitness shall be collectively referred to herein as the "Parties") (the
"Original Agreement").
D. KRC and TPG have also entered into that Amended and Restated Agreement
dated as of July 15, 1997 made by the Parties and K/77 Investors Limited
Partnership, and Illinois limited partnership (the "Amended Agreement"),
amending the Original Agreement. Terms defined in the Amended Agreement are
used with the same meanings in this Second Amendment.
E. As required by the Amended Agreement, KRC and TPG have agreed to enter
into this Second Amendment to amend certain provisions of the Option Agreement.
NOW THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Second Amendment agree as follows:
Section 1. Amendments. The Option Agreement is hereby amended as follows:
-----------------------
<PAGE>
a. Section 1(b)(i) of the Option Agreement is hereby deleted in its
entirety and the following material substituted in lieu thereof:
(i) The Option shall expire if not exercised on or before five (5)
business days prior to the Outside Date (as defined in the
Amended Agreement), and the Optionee shall designate the closing
to occur no later than the Outside Date.
Section 2. Miscellaneous.
------------------------
a. Except as otherwise specifically modified herein, the Option Agreement
shall remain unchanged and in full force and effect and is hereby ratified in
all respects.
b. This Amendment shall be governed by the laws of the State of Illinois,
without reference to its conflicts of law or choice of law rules.
c. The terms and provisions of this Amendment shall be binding on the
successors and assigns of the parties hereto.
d. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. It shall not be necessary that any single
counterpart of this Amendment be executed by all of the parties hereto, so long
as each of such parties shall have executed the same or any other separate
counterpart hereof.
e. As used herein, the terms (i) "person" shall mean an individual, a
corporation, a partnership, a joint venture, a limited liability company, an
unincorporated organization, or a governmental body; (ii) "including" shall mean
including, without limiting the generality of the foregoing; and (iii) the
singular shall include the plural, and vice versa.
f. If any provision of this Amendment should be found to be invalid,
void, or unenforceable, then it is the intent of the parties hereto that the
remainder of this Amendment be enforced to the fullest extent possible in
accordance with the intentions of the parties.
g. The parties to this Amendment will execute and deliver such other
documents and instruments as may be reasonably requested by any other party to
cause, effect, accomplish, or evidence any of the transactions required by this
Amendment.
2
<PAGE>
In Witness Whereof, the parties hereto have caused this Amendment to be
executed and delivered the day and year first above written.
KILICO REALTY CORPORATION, an Illinois
corporation
By: /s/ Frederick Stephens
--------------------------------------
Name: Frederick Stephens
-------------------------------------
Title: President
------------------------------------
THE PRIME GROUP, INC., an Illinois corporation
By:
--------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
3
<PAGE>
In Witness Whereof, the parties hereto have caused this Amendment to be
executed and delivered the day and year first above written.
KILICO REALTY CORPORATION, an Illinois
corporation
By:
--------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
THE PRIME GROUP, INC., an Illinois corporation
By: /s/ Richard S. Curto
--------------------------------------
Name: Richard S. Curto
-------------------------------------
Title: Executive Vice President
------------------------------------
4
<PAGE>
Exhibit 10.15
CONTRIBUTION AGREEMENT
----------------------
THIS CONTRIBUTION AGREEMENT ("Agreement") is made this 8th day of July,
1997, in Chicago, Illinois, by and between the parties set forth on Schedule 1
attached hereto and made a part hereof (collectively, "Contributor"), and THE
PRIME GROUP, INC., an Illinois corporation ("Company").
R E C I T A L S:
A. The Land Trust (as hereinafter defined) is the fee owner of the Real
Property (as hereinafter defined) described on Schedule 1 attached hereto and
made a part hereof, and the Beneficiary (as hereinafter defined) is the owner of
the Personal Property, Contracts and Licenses (as such terms are hereinafter
defined and, together with the Business Assets (as hereinafter defined) and the
Real Property, collectively referred to herein as the "Property").
B. Prior to the Closing Date (as hereinafter defined), Company will
assign all of its right, title and interest in and to this Agreement to the
Partnership (as hereinafter defined).
C. Contributor desires to contribute the Property to the Partnership, and
the Company desires to cause Partnership to accept the contribution of the
Property from the Contributor upon and subject to the terms and conditions
hereinafter set forth.
A G R E E M E N T S
NOW, THEREFORE, in consideration of the foregoing premises and the
respective representations, warranties, agreements, covenants and conditions
herein contained, and other good and valuable consideration, Contributor and
Company agree as follows:
ARTICLE 1
DEFINITIONS
1.01 Definitions. When used herein, the following terms shall have the
respective meanings set forth opposite each such term:
<PAGE>
Agreement: This Agreement including the Exhibits and Schedules attached
hereto which are incorporated herein and made a part hereof.
Assignments of Partnership Interests: The assignments of one hundred
percent (100%) of the partnership interests in the Beneficiary described on
Schedule 1, which assignments shall be in the form of Schedule 4 attached hereto
and shall be executed and delivered by all of the partners of such Beneficiary.
Beneficiary: Each of the entities described as "Beneficiary" on Schedule 1
attached hereto.
Business Assets: The assets of IBD, including, but not limited to, items
described on Schedule 2 attached hereto and made a part hereof.
Closing Date: The date which is three (3) business days following Company's
written notice to Contributor that it has priced the IPO, provided, however,
that if Closing has not occurred by July 31, 1997, Company may extend the
Closing Date to the last day of August upon payment to Escrowee with such notice
on or before July 31, 1997 of an additional $100,000.00 to be held as an
additional Deposit, (iv) Company may extend the Closing Date to the last day of
September with notice to Contributor and upon payment of an additional
$100,000.00 to Escrowee on or before August 31, 1997, to be held as an
additional Deposit, (v) Company may extend the Closing Date to the last day of
October with notice of Contributor and upon payment to Escrowee of an additional
$300,000.00 to be held as an additional Deposit on or before September 30, 1997,
(v) Company may extend the Closing Date to the last day of November with notice
to Contributor and upon payment to Escrowee of an additional $300,000.00 to be
held as an additional Deposit on or before October 31, 1997, and (vi) Company
may extend the Closing Date to the last day of December with notice to
Contributor and upon payment to Escrowee of an additional $300,000.00 to be
held as an additional Deposit on or before November 30, 1997, or such earlier
date as Company may designate by at least ten (10) days' prior notice to
Contributor
Contracts: All written or oral: (i) insurance, service, maintenance,
operating, repair and other contracts and commitments (excluding the recorded
documents evidencing the Permitted Title Exceptions) in any way relating to the
Property or any part thereof which shall survive the closing hereunder; (ii)
equipment leases located on the Property; and (iii) guaranties and warranties in
effect with respect to the Property or any portion thereof, which shall survive
the closing hereunder. A true, correct and complete list of the foregoing are
attached as Exhibit D hereto.
-2-
<PAGE>
Contribution Price: $53,500,000.00, being the consideration payable by
the Partnership to Contributor for the contribution of the Property to the
Partnership and all other covenants and warranties contained herein, as further
described in Article 3.
Deed: Those certain Trustee's Deeds (in recordable form) delivered by the
fee simple owners of any of the other Real Property to the Partnership, subject
only to the permitted exceptions applicable to such Real Property.
Deposit: The sum of $137,500.00, which shall be delivered by the Company
to the Contributor within two (2) business days after this Agreement has been
executed by all parties as non-refundable (except as otherwise provided in this
Agreement) earnest money subject to the terms of this Agreement. The Deposit
shall also include additional deposits made to the Escrowee to extend the
Closing Date as provided in this Agreement.
Employee Benefit Plan: All written or oral employee benefit plans or
programs, welfare benefits plans, retirement plans, excess benefit plans, plans
maintained to provide workers' compensation or unemployment benefits and pay
practices which Contributor has funded or been obligated to fund for its past or
present employees, independent contractors or either of their beneficiaries or
dependents.
Environmental Laws: As defined in Section 12.01(u).
Environmental Study: As defined in Section 11.01(f).
Escrowee: Chicago Title & Trust Company.
Governmental Approvals: Certificates of occupancy, licenses, permits,
authorizations and approvals required by law or by any Governmental Authority
having jurisdiction thereover in respect of the Property, or any portion
thereof, occupancy thereof, or any present use thereof.
Government Authority: Any federal, state or local governmental body or
agency having jurisdiction in respect of the Property, or any portion thereof,
occupancy thereof, or any present use thereof.
Hazardous Materials: As defined in Section 12.01(u).
IBD: Industrial Building and Development Company, an Illinois
corporation.
Intangible Personal Property: All logos, designs, tradenames, trademarks,
service marks, copyrights and other intellectual property used by Contributor
(excluding the name of "Industrial Building and Development Company" and its
logo) in connection with the
-3-
<PAGE>
ownership and operation of the Property or any part thereof, together with the
goodwill of the business appurtenant thereto.
IPO: The initial public offering of the stock of Prime Group Realty Corp.
as contemplated by Form S-11 Registration Statement, a draft copy of which has
been delivered to Contributor, as same may be amended from time to time.
Land Trust: Each of the entities described as "Land Trust" on Schedule 1
attached hereto.
Leases: All leases and tenancies in the Real Property identified and
described in Exhibit F.
Legal Requirements: All laws, statutes, codes, acts, ordinances, orders,
judgments, decrees, injunctions, rules, regulations, permits, licenses,
authorizations, directions and requirements of all governments and governmental
authorities having jurisdiction of the Property (including, for purposes hereof,
any local Board of Fire Underwriters), and the operation thereof.
Libertyville Vacant Property: The real property legally described on
Exhibit A-1 attached hereto.
Licenses: All licenses, franchises, certifications, authorizations,
approvals and permits issued or approved by any governmental authority and
relating to the operation, ownership and maintenance of the Property or any part
thereof, including elevator permits, machinery permits, business licenses,
ingress and egress permits and the like, as identified and described in Exhibit
E.
Mortgages: Unless specifically set forth otherwise, collectively, the
mortgages encumbering the Real Property described on Schedule 3 attached hereto,
which are to be assumed by the Partnership and the mortgages described on
Schedule 3-A which are to be repaid by the Partnership.
Option Property: The real property legally describe on Exhibit A-2
attached hereto.
Partnership: Prime Group Realty, L. P., a Delaware limited partnership.
Permitted Title Exceptions: All of the items as listed and described on
Exhibit C (including the Leases and the Mortgages described on Schedule 3); acts
of Company; rights of persons claiming by, through or under Company; and any
other matters which Company shall approve in writing.
-4-
<PAGE>
Personal Property: Any and all machinery, equipment, fixtures, furnishings,
and other tangible personal property owned by Contributor situated in or upon or
used in connection with the operation or maintenance of the Real Property or any
part thereof and all replacements, additions or accessories thereto between the
date hereof and the Closing Date, including the items identified and described
on Exhibit B.
Property: Collectively, the Real Property, the Personal Property, the
Intangible Personal Property, the Business Assets, the Contracts, the Leases and
the Licenses.
Real Property: The Real Property legally described on Exhibit A, Exhibit A-
1 and Exhibit A-2 together with all buildings and improvements thereon or
therein (including all replacements or additions thereto between the date hereof
and the Closing Date); to the extent owned by Contributor (and not a tenant
under a Lease) all systems, facilities, fixtures, machinery, equipment and
conduits to provide fire protection, security, heat, exhaust, ventilation, air
conditioning, electrical power, light, plumbing, refrigeration, gas, sewer and
water thereto (including all replacements or additions thereto between the date
hereof and the Closing Date); all privileges, rights, easements, hereditaments,
and appurtenances thereto belonging to Contributor; and all right, title and
interest of Contributor in and to all streets, alleys, passages and other
rights-of-way included therein or adjacent thereto (before or after the vacation
thereof).
Survey: Current as-built survey for the Real Property prepared by a
surveyor licensed by the State of Illinois and certified to the Company, the
Contributor, the Title Insurer and such other parties as Company shall designate
to be prepared in accordance with the standards for Land Title Surveys of the
American Land Title Association and the American Congress on Surveying and
Mapping Class A survey, setting forth the legal description and street address
of the Real Property and showing thereon all buildings and other improvements
(including fences), the number of stories in such buildings, easements (visible
or recorded), building lines, curb cuts, party walls (if any), the number and
location of parking spaces, sewage, water, electricity, gas and other utility
facilities (together with recording information concerning the documents
creating any such easements and building lines to the extent recorded), roads
and other rights-of-way and means of physical and record ingress and egress to
and from the Real Property by public roads (including the dimensions of abutting
streets) and the net (after deduction of land dedicated or used or subject to
public easements for roads and highways) and gross area of the land included in
the Real Property, and spotting improvements on adjoining property which are
within five (5) feet of the property lines of the Real Property, and certifying
whether any portion of the Real Property lies within a flood plain or wetlands
area.
Tangible Personal Property: All machinery, equipment, fixtures,
furnishings, and other tangible personal property situated in or upon or used in
connection with the operation or maintenance of the Real Property or any part
thereof, and all replacements,
-5-
<PAGE>
additions or accessories thereto between the date hereof and the Closing Date,
including the items identified and described on Exhibit B, but excluding
personal property owned by IBD which are not Business Assets, if any, described
on Schedule 2A or by tenants under the Leases and personal property demised by
any equipment leases (if any) described on Exhibit F.
Title Commitment: A separate commitment for an ALTA Form B Owner's Title
Insurance Policy for each real property comprising the Real Property issued by
the Title Insurer in the amount of the allocation of the Contribution Price as
provided in Schedule 10 attached hereto, covering title to the Real Property on
or after the date hereof, showing the respective owner of the Real Property in
fee simple, subject only to the Permitted Title Exceptions, and other exceptions
pertaining to liens or encumbrances of a definite or ascertainable amount (which
in the aggregate do not exceed that portion of the Contribution Price payable to
Contributor on the Closing Date) which may be removed by the payment of money at
closing and which Contributor shall so remove, and providing for full extended
coverage over all general title exceptions contained in such policies and the
following special endorsements at the Company's sole cost and expense: Zoning
Endorsement 3.1 (with parking); a contiguity endorsement; and such other
endorsements as may be requested by the Company. Contributor shall cause Title
Insurer to furnish a non-imputation endorsement and creditor's rights
endorsement at Contributor's sole cost and expense.
Title Insurer: Chicago Title Insurance Company.
ARTICLE 2
CONTRIBUTION AND RECEIPT
2.01 Contribution. Subject to the conditions and on the terms contained in
this Agreement:
(a) (i) Contributor agrees to execute and deliver the Assignments of
Partnership Interests, and the Partnership agrees to accept the Assignments of
Partnership Interests in the partnerships described on Schedule 1, or (ii)
Contributor agrees to execute and deliver Trustee's Deeds (in recordable form)
and otherwise in the form required pursuant to this Agreement to the Partnership
for the Real Property legally described on Exhibit A and as further described on
Schedule 1.
(b) Partnership agrees to acquire from Contributor, and Contributor
agrees to contribute to Partnership all of Contributor's right, title and
interest in the Contracts (all of which Contracts shall be with third parties
which are not affiliated with any
-6-
<PAGE>
party comprising Contributor and shall be at market rates or better), the
Leases, Intangible Personal Property and Licenses relating to the Real Property
described on Exhibit A.
(c) Partnership agrees to acquire from Contributor, and Contributor
agrees to contribute to Partnership the Personal Property relating to the Real
Property described on Exhibit A by good and sufficient bill of sale containing
full warranties of title free and clear of liens, claims, encumbrances and
restrictions of every kind and description except the Permitted Title Exceptions
to the extent applicable thereto.
ARTICLE 3
CONTRIBUTION PRICE
3.01 Contribution Price. The total gross fair market value attributable to
the Property (excluding the Real Property described on Exhibit A-1 and Exhibit
A-2 which are covered by the agreements attached hereto as Exhibit K and Exhibit
L) contributed by Contributor to the Partnership for such Property shall be
Fifty-Three Million Five Hundred Thousand and No/100 Dollars ($53,500,000.00).
3.02 Consideration Received by Contributor. Provided that all conditions
precedent to the Partnership's and Contributor's obligations to close as set
forth in this Agreement have been satisfied and fulfilled or waived in writing
by the parties hereto, the Partnership shall at Closing: (i) accept a
contribution of the Property subject to the Mortgages encumbering the Real
Property described on Schedule 3 attached hereto, which are to be assumed by the
Partnership and the Mortgages described on Schedule 3-A which are to be repaid
by the Partnership within one (1) business day of the IPO (as herein defined);
(ii) pay the sum of up to Five Hundred Thousand and No/100 Dollars ($500,000.00)
to IBD as a broker's commission and such other amounts required by Contributor
to pay the Closing expenses of Contributor in cash and to pay any amount
required to buy out limited partners in Sky Harbor Associates, and to pay an
amount not to exceed $300,000.00 to buy out HR Trust and Edward E. Johnson,
limited partners in The Grandvillle Road Property Limited Partnership (as
designated in writing by Contributor within a reasonable time prior to Closing);
plus (ii) admit the Contributor or the partners of the Contributor (as the case
may be) as a partner in the Partnership as evidenced by limited partnership
interests in the Partnership (the "OP Units") which shall have a net fair market
value equal to the balance of the Contribution Price (after deducting items (i)
and (ii) above, and after deducting that portion, if any, of the initial Deposit
of $137,500.00 which exceeds the prepayment fee payable to General American
Insurance pursuant to the payoff letter described in Section 15.02(xv), plus or
minus prorations and other adjustments required under this Agreement) shall be
paid in OP Units (the "OP Portion").
-7-
<PAGE>
For purposes of determining the number of OP Units to be delivered in
satisfaction of the OP Portion of the Contribution Price, the OP Units shall be
valued at the IPO price.
3.03 Delivery of Units. The Partnership's sole general partner will be
Prime Group Realty Corp., a Delaware corporation (the "REIT"). Currently, the
REIT is a private corporation that shall become a public entity through an
initial public offering of securities (the "IPO") which IPO the Partnership
expects shall occur on or before December 31, 1997. Provided that the REIT
does, in fact, consummate the IPO, the following shall be applicable: (i) the
Partnership shall provide Contributor with reasonable advance written notice
(the "Registration Notice") of the REIT's intent to file its initial S-11
Registration Statement (the "Initial S-11 Statement") with the Securities and
Exchange Commission (the "SEC"). Promptly upon filing, the Initial S-11
Statement with the SEC, the Partnership shall furnish a copy of the Initial S-11
Statement to Contributor. In the event that the REIT fails to file its initial
S-11 Statement with the SEC on or before the ninetieth (90th) day following the
date this Agreement is executed by all parties ("Initial Filing Date"),
Contributor may terminate this Agreement by written notice to the Partnership
delivered within three (3) business days after the Initial Filing Date
("Contributor's Termination Notice"). Upon delivery of the Contributor's
Termination Notice this Agreement shall automatically terminate, and neither the
Partnership nor the Contributor shall have any further liability to one another
with respect to this Agreement and the Property, except as otherwise
specifically provided in this Agreement; (ii) the Partnership shall satisfy this
OP Portion of the Contribution Price by delivery to Contributor at Closing of
the "OP Units," which OP Units shall be convertible or exchangeable into shares
of common stock of the REIT, which shares shall be registered and freely
tradeable on the New York Stock Exchange on a one-for-one basis. The
Contributor or the partners of the Contributor shall have voting and all other
rights as all other limited partners in the Partnership and shall entitle the
Contributor or the partners of the Contributor to its share of all distributions
in the Partnership which shall be based upon the ratio of OP Units held by the
Contributor or the partners of Contributor to all OP Units held by all partners
of the Partnership; and (iii) the Contributor or its assigns shall not be
restricted from selling its OP Units or shares in the REIT for a period in
excess of one (1) year following the Closing Date.
Notwithstanding any of the terms hereof (or the interpretation of any terms
hereof), no Contributor or partners of the Contributor shall receive any cash
payments in connection with its contribution to the Partnership, and any
provisions which in any way describe a payment of cash or consideration other
than OP Units shall be interpreted as reducing the number of OP Units the
Contributor or partners of the Contributor thereof are to receive. Any cash
actually paid by the Partnership to the Contributors shall be paid directly to
IBD or its designee; provided, however, any Deposit in excess of the initial
Deposit of $137,500.00 shall be proportioned among the Contributors based on the
ratio set forth in Schedule 10 hereof.
-8-
<PAGE>
3.04 The Exchange. The parties acknowledge that Contributor intends
that the delivery of the OP Units to Contributor will constitute a transfer of
an interest in the Property in exchange (the "Exchange") for OP Units in the
Partnership that will qualify as a contribution pursuant to Section 721 of the
Internal Revenue Code of 1986, as amended. Subject to applicable laws and
regulations, the Partnership shall cooperate in all reasonable respects with
Contributor to effectuate such exchange; provided, however, that: (i) the
Closing shall not be extended or delayed by reason of such Exchange unless the
Partnership has breached its obligations to Contributor under this Agreement; or
(ii) from and after the Closing Date, the Partnership agrees that neither the
Partnership or the REIT will take any tax return or financial statement
reporting position that is contrary to this Article 3.
3.05 Partnership Representations and Warranties. The Partnership hereby
represents and warrants to Contributor and will represent and warrant to the
Contributor on the date of the IPO and the truth of each said representation and
warranty shall be a condition precedent of Contributor's obligations hereunder
as follows:
(a) The Partnership will elect the "traditional method" set forth in
Treasury Regulation Section 1.704-3(b) (absent a Final Determination to the
contrary) to allocate tax attributes related to the Property as "Section 704(c)
Property" (as such term is defined in Treasury Regulation Section 1.704-3(a)(3))
or which are in any other way governed by the provisions of Section 704(c) of
the Internal Revenue Code of 1986, as amended ("Section 704(c) allocations") or
any successor section thereto.
(b) Contributor and its successors and assigns shall be able to
freely encumber, assign or pledge its OP Units or shares of stock in the REIT
immediately upon the IPO.
(c) The shares of the REIT shall be traded on the New York Stock
Exchange.
(d) Contributors will be allocated at the time of Closing, no less
than $20.6 million of non-recourse indebtedness for purposes of Section 752,
with such figure evidenced by a schedule prepared using the same methodology as
Exhibit M, with the amount apportioned under Treasury Regulation Section 1.752-
3(a)(3) determined using the "Indemnity Debt Allocation Method," as such term is
defined in the Tax Indemnification Agreement attached hereto as Exhibit I.
(e) The partnership agreement of the Partnership will provide that
commencing on or after the date that is one (1) year after the IPO, that upon
the request of a limited or general partner of Sky Harbor Associates, that
Partnership will admit said partner as a partner in the Partnership in order to
allow said partner to convert their newly
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received OP Units to registered and freely tradeable shares in the REIT (which
shares shall be tradeable on the New York Stock Exchange, as will all other
shares convertible into shares of the REIT).
(f) Edward E. Johnson and Richard S. Homer, as the trustee of the HR
Trust, at their election, within 10 days before pricing of the IPO, may exchange
their interests in The Grandville Road Property Limited Partnership for limited
partnership interests in the Partnership.
(g) The Employment Agreements between the Partnership and Richard
Curto and the other officers of the Partnership shall contain the same
indemnification provisions contained in Sections 14 and 15 of the employment
agreements between (a) Edward S. Hadesman and the Partnership and (b) Tucker B.
Magid and the Partnership.
ARTICLE 4
SURVEY
4.01 Survey. Promptly after execution of this Agreement, Company shall
order the Survey and deliver a copy to Contributor. Company shall obtain the
Survey, and Contributor shall reimburse Company for the cost of the Survey at
Closing. The Survey shall show no encroachments onto the Real Property from any
adjacent property, no encroachments by or from the Real Property onto any
adjacent property and no violation of or encroachments upon any recorded
building lines, restrictions or easements affecting the Real Property. If the
Survey is dated more than ninety (90) days prior to the Closing Date,
Contributor shall furnish at closing a certificate of the surveyor to Company,
the Title Insurer and such other parties as Company shall designate dated within
ninety (90) days prior to closing certifying that there have been no changes or
additions to the Property since the date of the Survey.
ARTICLE 5
TITLE AND SEARCHES
5.01 Title. Promptly after execution of this Agreement, Company shall
order and deliver a copy to Contributor the Title Commitment. Company shall
obtain the Title Commitment, and Contributor shall reimburse Company for the
cost of the Title Policy at Closing. On the Closing Date, Contributor shall
cause the Title Insurer to issue an owner's title insurance policy or prepaid
"marked up" commitment therefor pursuant to and in accordance with the Title
Commitment insuring fee simple title to the Real Property in the
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Company as of the Closing Date, subject only to the Permitted Title Exceptions
and such other exceptions as Company may approve.
5.02 Searches. Promptly after execution of this Agreement, Company shall
order (and deliver a copy of same to Contributor) searches of the records of the
Recorder of Deeds of the County in which the real property comprising the Real
Property is located; the Secretary of State of Illinois and the U. S. District
Court for the Northern District of Illinois confirming the absence of security
interests, judgments, tax liens and bankruptcy proceedings which affect or could
affect Contributor or the Property or any interest therein to be transferred to
Company pursuant to this Agreement (other than Permitted Title Exceptions
[collectively, the "Initial UCC Searches"]). Contributor shall reimburse
Company for the cost of one set of initial searches at Closing. Said searches
shall be updated at Company's sole cost and expense as of the Closing Date
confirming the absence of such security interests, judgments, tax liens or
bankruptcy proceedings.
5.03 Defects and Cures. The items described in Sections 4.01, 5.01 and
5.02 are collectively referred to as the "Title Evidence." If the Title
Evidence discloses unpermitted claims, liens, exceptions, conditions or other
items unacceptable to the Company (the "Defects"), the Company shall so notify
Contributor in writing within the later to occur of: (I) the date which is the
last day of the due diligence period, and (ii) August 14, 1997 (failure to do so
shall be deemed approval of the Title Evidence by the Company), and said Defects
shall, as a condition precedent to Closing, be cured and removed by Contributor
from the Title Evidence prior to Closing, or within thirty (30) days after
delivery by the Company to Contributor of notice that a Defect exists, whichever
date is earlier. If Contributor fails to so cure all Defects, or if Contributor
fails to cause all Defects to be insured over by the Title Insurer in a manner
satisfactory to the Company, then the Company may: (1) terminate this Agreement
by written notice to the Contributor given within ten (10) days after expiration
of the cure period, in which event the Deposit shall be returned to Company and
neither party shall have any further liability to the other hereunder except as
otherwise provided herein; or (2) proceed to close by deducting from the OP
Units otherwise due at Closing or escrowing with the Title Insurer the amount
necessary (but only to the extent that such Defects are liens or encumbrances of
an ascertainable money amount which can be endorsed over by the Title Insurer by
the escrowing of an ascertainable amount) to cause the Title Insurer to insure
and/or endorse over such Defects in a manner satisfactory to Company.
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ARTICLE 6
POSSESSION, PRORATIONS AND CLOSING COSTS
6.01 Possession. Sole and exclusive possession of the Property, subject to
the rights of tenants in possession (as tenants only) pursuant to the Leases
shall be delivered to Company on the Closing Date.
6.02 Prorations. Current rents based upon scheduled rents per the Leases,
security deposits, if any (and any interest thereon, if any) and advance rentals
under the Leases; unused decorating allowances under the Leases; expenditures
required (under the Leases) to complete any tenant improvement work required of
the landlord under the Leases and incomplete on the Closing Date; Interest on
the Mortgages to be assumed by Company described on Schedule 3 and real estate
tax and insurance impounds (if any) held by the holder of the Mortgages to be
assumed by Company described on Schedule 3 will be assigned to Company and
Contributor will receive a credit at Closing for same; special and general real
estate taxes and other ad valorem taxes and assessments for the Property will
not be prorated, however, at Closing, Contributor shall assign to Purchaser any
and all monies being held for such real estate taxes and assessments with
respect to any tenants under the Leases which are paying monthly escrows to the
Contributor, state or city taxes, fees, charges and assessments affecting the
Property; utility charges and deposits; fuels; and all other items of accrued or
prepaid income and expenses customarily prorated on the transfer of industrial
properties in the Chicago, Illinois area shall be prorated on an accrual basis
as of the Closing Date on the basis of the most recent ascertainable amounts of
or other reliable information in respect to each such item of income and
expense, and the net credit to Company or Contributor shall increase or decrease
(as the case may be) the Contribution Price payable on the Closing Date. Real
estate taxes for the properties described on Schedule 5 attached hereto and made
a part hereof shall not be prorated since the tenants in occupancy are paying
such real estate taxes. Following closing, Company shall pay to Contributor all
rents which Company shall collect which are specifically allocated to periods
preceding the Closing Date, except that all such rents collected by Company
shall first be applied to satisfy all current rents due Company, and Contributor
shall pay to Company all rents received by Contributor from any tenant of the
Property before or after the Closing Date which are attributable to periods
succeeding the Closing Date. As of the Closing Date, the parties hereto agree
that there will be no proration with respect to any delinquent rents. In
addition and in lieu of a proration credit, on the Closing Date, Contributor
shall assign to Company any and all monies being held for real estate taxes with
respect to any tenants under the Leases which are paying monthly escrows to the
Contributor. Contributor agrees to cooperate at no cost to Contributor with
Company in the preparation of the financial statements and other financial data
respecting the ownership and operation of the Property for calendar year 1996
(if such statements have not been completed by the Closing Date) and subsequent
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periods for which such statements and data must be prepared in order to compute,
charge and prorate any tenant items. As soon as reasonably possible after the
preparation of the aforesaid financial statements and data, Company will render
statements for the tenant items to the tenants of the Real Property under their
respective Leases. From time to time as Company receives payment of the tenant
items from the tenants, Company will promptly remit to Contributor that portion
of the tenant items allocable to the Property prior to the Closing Date.
6.03 Closing Costs. At Closing, Contributor shall pay all charges
customarily attributable to sellers of Real Property, including, without
limitation, all title charges and premiums for the base title policy, extended
coverage and comprehensive endorsement no. 1, creditors rights endorsement and
non-imputation endorsement, survey charges and fees for the Initial UCC Searches
required by Section 5.02, and all state and county transfer taxes. Company
shall pay charges customarily attributable to purchasers, including, without
limitation, all recordation, title insurance and money lender's escrow charges
and other costs incurred in connection with any mortgage loans obtained by
Company. Company shall also pay an amount not to exceed one percent (1%) of the
outstanding balance of the Mortgages described on Schedule 3 imposed by the
holders of the Mortgages described on Schedule 3 in connection with the
assumption of such Mortgages, the charges for title endorsements requested by
Company other than those described above which Contributor has agreed to pay and
the cost of final UCC Searches required by the Company under Section 5.02. Any
municipal transfer tax shall be paid by the party on whom the ordinance imposes
responsibility for payment unless the ordinance does not specify the party
responsible for payment, in which case such tax shall be paid by Contributor.
The parties shall each be solely responsible for the fees and disbursements of
their respective counsel and other professional advisers. Contributor and
Company agree to split equally the cost of any escrows required under this
Agreement.
ARTICLE 7
ESCROW
7.01 Escrow. Within five (5) days following the date on which the
conditions precedent set forth in Article XIV have been satisfied or waived, the
parties, through their respective attorneys, shall establish an escrow with the
Escrowee through which the transaction contemplated hereby shall be closed.
Upon opening of said escrow, Company shall cause the Deposits (other than the
initial Deposit of $137,500.00) to be deposited in said escrow. The escrow
instructions shall be in the form customarily used by the Escrowee with such
special provisions added thereto as may be required to conform to the provisions
of this Agreement, including provisions with respect to a related money lender's
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escrow from which all or any part of the Contribution Price may be paid. Said
escrow shall be auxiliary to this Agreement, and this Agreement shall not be
merged into nor in any manner superseded by said escrow. The escrow costs and
fees shall be equally divided between Company and Contributor. If required by
applicable law, the Escrowee shall file with the Internal Revenue Service the
information return (Form 1099B) required by Section 6045(e) of the Internal
Revenue Code and any regulations issued pursuant thereto. Contributor shall be
responsible to give to the Escrowee such information of the Contributor that the
Escrowee needs in order to complete such form.
ARTICLE 8
BROKERAGE
8.01 Brokerage. Contributor and Company hereby represent and warrant
to the other that it has not dealt with any broker or finder in respect to the
transaction contemplated hereby except for Samuel Sax, whose commission shall be
paid if Closing occurs: fifty percent (50%) by Contributor from the Contribution
Price (not to exceed $100,000.00) and fifty percent (50%) by Company (not to
exceed $100,000.00) at Closing; and Contributor hereby agrees to indemnify
Company for any claim for brokerage commission or finder's fee asserted by a
person, firm or corporation other than Samuel Sax claiming to have been engaged
by Contributor. Company hereby agrees to indemnify Contributor for any claim
for brokerage commission or finder's fee asserted by a person, firm or
corporation other than Samuel Sax claiming to have been engaged by Company.
ARTICLE 9
DESTRUCTION OR DAMAGE
9.01 Destruction or Damage. If, subsequent to the date hereof and prior to
the Closing Date, all or any portion which will cost less than $500,000.00 to
repair or restore (in the reasonable judgment of Company or its lenders, if any)
the Property, and provided no leases are terminated by tenants as a result of
such event, the Company shall close and take the Property as diminished by such
events, and Contributor shall assign and/or to pay the Company at Closing all
insurance proceeds collected or claimed with respect to said loss or damage,
plus any deductible or self-insured amount. If, subsequent to the date hereof
and prior to the Closing Date, all or any portion which will cost more than
$500,000.00 to repair or restore (in the reasonable judgment of Company and
Contributor) the Property or in the event any of the Leases may be terminated as
a result of such event, or if any one or more improved parcels of the Property
shall be entirely destroyed or damaged by one or more incidents of vandalism,
fire and/or other casualty, whether or not
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covered by insurance, Contributor shall immediately give Company notice of such
occurrence, and Company may, within fifteen (15) days after receipt of such
notice, elect to (a) terminate this Agreement as to all properties comprising
the Property if the cost to repair the damage or destruction exceeds
$20,000,000.00; otherwise, to terminate this Agreement only as to such
properties which have been damaged or destroyed, in which event, in the case of
such termination as to all Properties, the Deposit (less $137,500.00, which sum
shall be retained by Contributor), and any earnings thereon, shall be returned
forthwith to Company, all obligations of the parties hereunder shall cease and
this Agreement shall have no further force and effect, and in the case of
termination as to such Property which has been damaged or destroyed, the
Purchase Price shall be reduced by the amount allocated to such property on
Schedule 10 and the parties shall make any other adjustments as agreed upon, or
(b) close the transaction contemplated hereby as scheduled (except that if the
Closing Date is less than fifteen (15) days following Company's receipt of such
notice, closing shall be delayed until Company makes such election), in which
event Company shall have the right to participate in the adjustment and
settlement of any insurance claim relating to said damage, and Contributor shall
assign and/or pay to Company at closing all insurance proceeds collected or
claimed with respect to said loss or damage plus any deductible or self-insured
amount.
ARTICLE 10
CONDEMNATION
10.01 Condemnation. If, subsequent to the date hereof and prior to the
Closing Date, any proceeding, judicial, administrative or otherwise, which shall
relate to the proposed taking of all or any substantial portion of the Real
Property by condemnation or eminent domain or any action in the nature of
eminent domain, or the taking or closing of any right of access to the Real
Property, is instituted or commenced, Company shall have the right and option to
terminate this Agreement as to all properties comprising the Property if the
cost to restore the Property exceeds $20,000,000.00; otherwise, to terminate
this Agreement only as to such properties which have been taken or condemned by
giving Contributor written notice to such effect within ten (10) days after
actual receipt of written notification of any such occurrence or occurrences.
Failure to give such notice within such time shall be conclusive evidence that
Company has waived the option to terminate by reason of the occurrence or
occurrences of which it has received notice, and Company shall be credited with
or be assigned all Contributor's right to any proceeds therefrom. Contributor
hereby agrees to furnish Company written notification in respect to any such
proceedings within five (5) days of Contributor's receipt of any such written
notification or commencement of the institution of such proceedings. Should
Company be entitled to elect to so terminate this Agreement and does, in fact,
so terminate this Agreement, in the case of such termination as to all
Properties the Deposit (less
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$137,500.00, which sum shall be retained by Contributor), and any earnings
thereon, shall be returned forthwith to Company, and the parties hereto shall be
released from any and all further obligations hereunder, and in the case of
termination as to such Property which has been taken or condemned, the Purchase
Price shall be reduced by the amount allocated to such property on Schedule 10,
and the parties shall make any other adjustments as agreed upon. If the Closing
Date is less than ten (10) days following the last day on which Company is
entitled to elect to terminate this Agreement, then the closing shall be delayed
until Company makes such election. Notwithstanding the foregoing, if such
proceeding by way of condemnation or eminent domain shall be "insubstantial"
Company shall not have the right to terminate this Agreement but shall be
credited with or be assigned all Contributor's right to any proceeds therefrom.
An "insubstantial" proceeding shall be one which (i) does not relate to the
taking or closing of any right of access to the Real Property, (ii) affects only
the perimeter of the Real Property and does not involve more than the equivalent
of $500,000.00 in value, (iii) does not give rise to the right to cause an
acceleration of the loan secured by the Mortgages, (iv) does not involve any
relocation of utility facilities serving the Real Property (providing this
latter condition shall be deemed deleted if Contributor shall agree to pay any
cost of relocation of any of the same and may use such part of the proceeds of
the award allocable thereto for such purpose), and (v) does not give rise to a
right to terminate any of the Leases by tenant.
ARTICLE 11
AFFIRMATIVE COVENANTS OF CONTRIBUTOR
11.01 Affirmative Covenants of Contributor.
(a) Contributor, at Contributor's sole cost and expense, shall
maintain or cause to be maintained the Property as required by the terms of the
Leases, and shall keep and perform or cause to be performed all obligations of
the Property owner or its agents under the Contracts and Licenses and under the
Legal Requirements, and all obligations of the holder of the Mortgages described
on Schedule 3 to and including the Closing Date or termination of this
Agreement. Subject to closing and Sections 9.01 and 10.01 hereof, on the Closing
Date, Contributor shall tender possession of the Property to Company in the same
condition the Property was in on the date hereof, except for ordinary wear and
tear, casualty loss and condemnation (provided Company shall not have elected to
terminate this Agreement pursuant to Sections 9.01 or 10.01 as a result of such
casualty loss or condemnation). Notwithstanding anything contained herein to the
contrary, in the event that Contributor receives written notice from any
Governmental Authority after the date hereof, but prior to the Closing that the
Property is not in compliance (the "Violation") with applicable municipal and
other governmental laws, ordinances, regulations, codes,
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licenses, permits and authorizations, Contributor shall provide written notice
to the Company of such event. In addition, Contributor shall have the
affirmative obligation to cure said Violation(s) prior to the Closing, provided,
that the cost to cure such Violation(s) do not exceed Seventy-Five Thousand and
No/100 Dollars ($75,000.00) (the "Cure Limitation"). If the cost to cure the
Violation(s) shall exceed the Cure Limitation and Contributor provides written
notice to the Company that it does not intend to pay amounts in excess of the
Cure Limitation, then in such event, the Company may elect (i) to terminate this
Agreement whereupon the entire Deposit shall be returned to Company and this
Agreement shall be null and void and except as otherwise expressly provided in
this Agreement, neither party shall have any further liability to the other
under this Agreement; or (ii) to take title to the Property subject to the
Violation(s), in which event Contributor will provide Company with a credit
against the Contribution Price due at the Closing in the amount of the Cure
Limitation.
(b) From the date of Contributor's acceptance hereof to the Closing
Date, Contributor shall maintain or cause to be maintained in full force and
effect liability, casualty and other insurance upon and with respect to the
Property against such hazards and in such amounts as shall be required by the
Mortgages.
(c) From the date of Contributor's acceptance hereof to the Closing
Date or earlier termination of this Agreement, Contributor shall operate and
maintain the Property in the same manner as it has been operated and maintained
heretofore, provided that during said period, without the prior written consent
of Company, Contributor shall not do, suffer or permit, or agree to do, any of
the following:
(i) Enter into any other transaction with respect to or
affecting the Property which would survive the Closing, except for seasonal or
other arms length contracts with third parties in the ordinary course of
Contributor's business;
(ii) Except as otherwise provided in the Libertyville Business
Park Agreement (and subject to the conditions set forth therein), sell (other
than transfers of partnership interests in entities comprising Contributor to or
among Edward Hadesman and his wife and children or trusts of any of said
individuals or Tucker Magid), encumber or grant any interest in the Property or
any part thereof in any form or manner whatsoever or allow any general partner
of Beneficiary to pledge his equity interests in any Beneficiary, or otherwise
perform or permit any act which will diminish or otherwise affect Company's
interest under this Agreement or in or to the Property or which will prevent
Contributor's full performance of its obligations hereunder;
(iii) Enter into, amend, waive any rights under, terminate or
extend any Contract (other than seasonal contracts or other arms length
contracts with third
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parties in the ordinary course of Contributor's business) which may be
terminated on no more than thirty (30) days' notice or any of the Leases.
(iv) Amend or waive any rights, or suffer or permit a default to
occur, under the Mortgages except for defaults attributable to the borrower's
failure to pay the loan by a maturity date which occurs prior to Closing (and in
connection with any such loan having a maturity date prior to Closing Seller
shall utilize its best efforts to extend the maturity date of such loan to
12/31/97), except in connection with obtaining an agreement relating to
prepayment of the Mortgages described on Schedule 3A; or
(v) Remove from the Property any of the fixtures thereon or any
of the Personal Property, unless such fixtures and Personal Property are
replaced with like-kind fixtures and personal property.
(d) From the date of Contributor's acceptance hereof to the Closing
Date, Contributor shall permit representatives, agents, employees, lenders,
contractors, appraisers, architects and engineers designated by Company access
to and entry upon the Real Property and the improvements thereon to examine,
inspect, measure and test the Property; provided, however, such entry shall be
upon written notice and during business hours and shall be subject to the rights
of the tenants under the Leases. Company shall furnish to Contributor
certificates of insurance naming Contributor as an additional insured and
otherwise reasonably satisfactory to Contributor from Company's environmental
consultants and engineer, and Company shall indemnify and hold Contributor
harmless from and against any and all cost, liability or expenses incurred by
Contributor as a result of injury or damage to the Property caused by such
access and entry and testing.
(e) Contributor shall deliver to Company (or make available to the
Company at the offices of IBD as provided below) not later than five (5) days
following Contributor's acceptance of this Agreement true, correct and complete
copies of the following:
(i) All Licenses, Contracts and Leases in Contributor's
possession or control, and all documents evidencing and securing the
indebtedness described in the Mortgages described on Schedule 3 and 3A;
(ii) Copies of all existing title policies or reports, surveys,
environmental reports, appraisals and physical inspection or engineering reports
in Contributor's possession or control;
(iii) The most recent real estate tax bills pertaining to the
Real Property;
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(iv) Make available to Company to the extent in Contributor's
possession or control, as-built plans and specifications for the improvements on
the Property including the plans and specifications for and a description of all
existing renovations to the Property;
(v) Make available to Company to the extent in Contributor's
possession or control, as-built drawings of underground utilities (including
gas, sewer, water, telephone and electrical service cables) located under the
Property, if available;
(vi) Make available to Company to the extent in Contributor's
possession or control, all essential data, correspondence, documents,
agreements, waivers, notices, applications and other records with respect to the
Property (including, without limitation, any records relating to transactions
with taxing authorities, governmental agencies, utilities, mortgagees, and
others with whom Company may be dealing subsequent to closing); and
(vii) All Exhibits not attached hereto but delivered in
accordance with Section 18.08 below; and
(viii) All items described on Schedule 6 attached hereto and made
a part hereof.
(f) Company may order an environmental report to be conducted by an
environmental engineering firm selected by Company (the "Environmental Study")
at any time from the date of Contributor's acceptance hereof to the Closing
Date. Company shall pay all costs of the Environmental Study, if any, and
Contributor agrees to cooperate with Company, or its agents, in arranging for
and conducting the Environmental Study and the Company shall provide copies of
such Environmental Study to Contributor. Notwithstanding the foregoing,
Contributor agrees to pay up to $5,000.00 of the cost of further investigation
costs associated with the property located at 1200 Northwestern/3818 Grandville,
Gurnee, Illinois ("Grandville property") within five (5) days after receipt of
an invoice for same.
(g) Contributor shall notify Company promptly if Contributor becomes
aware of any transaction or occurrence prior to the Closing Date which would
make any of the representations and warranties of Contributor contained in
Section 12.01 not true in any material respect.
(h) Contributor agrees to notify Company if any of the employees
listed on Exhibit H leave prior to the Closing Date, and if any of such
employees leave, Contributor may replace such employees; provided the salary and
other benefits for such new employees do not exceed the salary and other
benefits for the employees who
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terminated their employment. Contributor agrees to provide written notice to
the Company of any hiring of replacement employees.
ARTICLE 12
REPRESENTATIONS AND WARRANTIES OF Contributor
12.01 Representations and Warranties of Contributor. To induce
Company to execute, deliver and perform this Agreement, Contributor hereby
represents and warrants to Company on and as of the date hereof and on and as of
the Closing Date to the extent same are true, and to the extent not true, then
describing the circumstances or manner in which such representations and
warranties are not true. (Contributor hereby agrees to give Company written
notice of any information which makes any representation or warranty untrue
within three (3) business days of obtaining such information as follows with
respect to the respective portions of the Property owned by it (and disclosure
of such information shall not be deemed a breach of a representation or warranty
by Contributor or default by Contributor under this Agreement in the absence of
willful or intentional acts or omissions or gross negligence by Contributor):
(a) To the best of such Contributor's knowledge, all representations
and warranties of Contributor appearing in other Sections of this Agreement are
true and correct in all material respects.
(b) Each Beneficiary and IBD is duly organized and in good standing
under the laws of the State of Illinois, and is duly qualified to do business in
the State of Illinois.
(c) Subject to obtaining consent of the holders of the Mortgages
described in Schedule 3 to the assumption and the consent of the holders of the
Mortgages described in Schedule 3A, each Beneficiary of Contributor and IBD has
full capacity, right, power and authority to execute, deliver and perform this
Agreement and all documents to be executed by such party pursuant hereto, and
all required action and approvals therefor have been duly taken and obtained.
The individuals signing this Agreement and all other documents executed or to be
executed pursuant hereto on behalf of such party are and shall be duly
authorized to sign the same on such party's behalf and to bind such party
thereto. This Agreement and all documents to be executed pursuant hereto by
such party are and shall be binding upon and enforceable against such party in
accordance with their respective terms, and the transaction contemplated hereby
will not result in a breach of or constitute a default or permit acceleration of
maturity under any mortgage, deed of trust, loan agreement or other agreement
(other than the Mortgages) to which Contributor or the Property is subject or by
which Contributor or the Property is bound.
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(d) To the best of such Contributor's knowledge, the information
included in the Exhibits hereto and the documents to be delivered to Company
pursuant to Section 11.01(e) is true, correct and complete in all material
respects, and the same shall not omit any material information.
(e) To the best of such Contributor's knowledge, Exhibit D includes a
true, correct and complete listing of all Contracts and amendments and
modifications thereof. To the best of such Contributor's knowledge, there are no
defaults under any of the Contracts, and the Contracts are in full force and
effect.
(f) To the best of such Contributor's knowledge, Exhibit E is an
accurate description of each of the Licenses, as amended and in effect. Each of
the Licenses is in full force and effect, and neither such Contributor nor any
agent or employee of Contributor has received written notice of any intention on
the part of the issuing authority to cancel, suspend or modify any of the
Licenses or to take any action or institute any proceedings to effect such a
cancellation, suspension or modification.
(g) Exhibit F is a true, correct and complete listing of all of the
Leases. Except as provided in the Leases, none of the Leases contain any option
or right of first refusal to purchase any property demised thereby, to extend
the Lease term, to lease additional space, to cancel or terminate the Lease
prior to the end of its term, or any other extraordinary provisions. To the
best of such Contributor's knowledge, (1) all tenants have accepted and are
occupying the respective leased premises described in such Leases; (2) all
Leases are in full force and effect, and no rights or interests of the landlord
thereunder have been waived or released; (3) all of landlord's obligations under
the Leases including the obligation to finish or refinish space to the
specifications provided in the Leases, have been satisfied; (4) neither the
landlord nor any tenant is in default under any Lease; and (5) such Contributor
has not received written notice of any circumstances affecting the financial
condition of any tenant of the Property, or otherwise, which would prevent such
tenant from fulfilling and complying with the obligations under its Lease.
(h) To the best of such Contributor's knowledge, the information to
be furnished by Contributor on which the computation of prorations is based
shall be true, correct and complete in all material respects.
(i) Each Land Trust owner of a portion of the Property owns fee
simple title to its respective portion of the Real Property described on
Schedule 1 free and clear of liens, encumbrances, options and restrictions of
every kind and description, except the Permitted Title Exceptions.
(j) Each Beneficiary has good and marketable title to the respective
portion of the Personal Property owned by it and each item thereof free and
clear of liens,
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security interests, encumbrances, leases and restrictions of every kind and
description, except the Permitted Title Exceptions.
(k) The interest of Contributor in the Contracts, the Leases and
Licenses is free and clear of all encumbrances and has not been assigned to any
other person, except as reflected in the Permitted Title Exceptions.
(l) Except for Contributor and tenants in possession under the Leases
(and subleases with respect to 306-310 Era Drive), there are no persons in
possession or occupancy of the Real Property or any part thereof, nor are there
any persons who have possessory rights in respect to the Real Property or any
part thereof.
(m) To the best of such Contributor's knowledge, the improvements on
the Real Property have been constructed and are presently used and operated in
compliance with all Licenses and all Legal Requirements, and with all covenants,
easements and restrictions affecting the Property, and all obligations of such
Contributor or the Property with regard to the Legal Requirements, covenants,
easements and restrictions have been and are being performed in a proper and
timely manner.
(n) To the best of such Contributor's knowledge, such Contributor has
not received any written notice from any tenant or Governmental Authority that
any of the improvements on the Real Property are not structurally sound and
weather-tight, nor that any of said improvements, the fixtures therein or
thereon and the Personal Property are not in good condition and working order.
(o) To the best of such Contributor's knowledge, there are no claims,
causes of action or other litigation or proceedings pending and no written
notice of any threatened proceeding with respect to the ownership or operation
of the Property or any part thereof (including disputes with the holder of the
Mortgages described on Schedule 3 or any other mortgagees, Governmental
Authority, utilities, contractors or adjoining land owners) except possible
claims for workers' compensation, personal injury or property damage which are
fully insured and as to which the insurer has accepted defense.
(p) Such Contributor has not received any written notice of any
violations of any Legal Requirements with respect to the Property which have not
been corrected.
(q) To the best of such Contributor's knowledge, such Contributor has
not received any written notice that there is any existing, pending,
contemplated, threatened or anticipated (i) condemnation of any part of the Real
Property, (ii) widening, change of grade (except for possible change in grade in
vacant property adjacent to 306-310 Era Drive, Northbrook) or limitation on use
of streets abutting the Real Property, (iii) special
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tax or assessment to be levied against the Real Property, or (iv) change in the
zoning classification of the Real Property.
(r) To the best of such Contributor's knowledge, such Contributor has
not received any written notice from any insurance carrier that there are
defects or inadequacies in the Property which would adversely affect the
insurability of the same or cause the imposition of extraordinary premiums
therefor or create or be likely to create a hazard, excessive maintenance cost
or material operating deficiencies.
(s) Such Contributor has not received any written notice from any
tenant or Governmental Authority that all water, sewer, gas, electric, telephone
and drainage facilities and all other utilities and public or quasi-public
improvements upon or adjacent to the Real Property required by law or for the
normal operation of the Property are not installed, are not connected under
valid permits, are not in good working order, are not adequate to service the
Property and are not fully paid for.
(t) To the best of such Contributor's knowledge, such Contributor has
obtained all licenses, permits, easements and rights-of-way, including proof of
dedication, required from a Governmental Authority having jurisdiction over the
Property or from private parties to make use of utilities serving the Property
and to insure ingress and egress to and from the Property.
(u) To the best of such Contributor's knowledge, and other than as
disclosed in the Phase I Environmental Reports for 455 Academy and for
Grandville property prepared by Carlson Engineering, during Contributor's
ownership of the Property, (i) no Hazardous Materials (as defined below) have
been located on the Property or have been released into the environment, or
discharged, placed or disposed of at, on or under the Property; (ii) no
underground storage tanks have been located on the Property; (iii) the Property
has not been used as a dump for waste material during its ownership; and (iv)
such Contributor has not received any written notice from any Governmental
Authority or Tenant that the Property and its prior uses does not comply with
and at all times have complied with, any applicable governmental law, regulation
or requirement relating to environmental and occupational health and safety
matters and Hazardous Materials.
The term "Hazardous Materials" shall mean any substance, material,
waste, gas or particulate matter which is regulated by any local governmental
authority, the State of Illinois, or the United States Government, including,
but not limited to, any material or substance which is (i) defined as a
"hazardous waste," "hazardous material," "hazardous substance," "extremely
hazardous waste," or "restricted hazardous waste" under any provision of
Illinois law, (ii) petroleum, (iii) asbestos, (iv) polychlorinated biphenyl, (v)
radioactive material, (vi) designated as a "hazardous substance" pursuant to
Section 311 of the Clean Water Act, 33 U.S.C. (S) 1251 et seq. (33 U.S.C. (S)
1317), (vii) defined as a
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"hazardous waste" pursuant to Section 1004 of the Resource Conservation and
Recovery Act, 42 U.S.C. (S) 6901 et seq. (42 U.S.C. (S) 6903), or (viii) defined
as a "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation, and Liability Act, 42 U.S.C. (S) 9601 et
seq. (42 U.S.C. (S) 9601). The term "Environmental Laws" shall mean all statutes
specifically described in the foregoing sentence and all federal, state and
local environmental health and safety statutes, ordinances, codes, rules,
regulations, orders and decrees regulating, relating to or imposing liability or
standards concerning or in connection with Hazardous Materials in effect as of
the date of this Agreement.
Additionally (except in connection with items disclosed in the Phase I
Environmental Report for the 455 Academy property), but not in lieu of
Contributor's affirmative undertakings set forth herein, Contributor agrees to
indemnify, defend and hold harmless Company and its grantees from and against
any and all debts, liens, claims, causes of action, administrative orders and
notices, costs (including, without limitation, response and/or remedial costs),
personal injuries, losses, damages, liabilities, demands, interest, fines,
penalties and expenses, including reasonable attorneys' fees and expenses,
consultants' fees and expenses, court costs and all other out-of-pocket
expenses, suffered or incurred by Company and its grantees as a result of (i)
any such representation which is in any manner inaccurate or any such warranty
which is in any manner breached, or (ii) any matter, condition or state of act
involving Environmental Laws or Hazardous Materials which existed on or arose
prior to the Closing Date and which failed to comply with the Environmental Laws
in effect as of the Closing Date or any existing common law theory based on
nuisance or strict liability in existence as of the Closing Date, whether or not
Contributor had knowledge of same as of the Closing Date. Notwithstanding the
foregoing exclusion, Company shall be entitled to seek contributions from
Contributor for Hazardous Materials at the 455 Academy property or at any other
portion of the Property pursuant to common law or under state or federal
contribution or strict liability statutes.
(v) To the best of such Contributor's knowledge, Schedule 3 includes a
true, correct and complete list of all documents evidencing and securing the
Mortgages to be assumed and all amendments and modifications thereto. To the
best of such Contributor's knowledge, there are no defaults by the mortgagor or
events which with notice, passage of time or both may become defaults under the
Mortgages described on Schedule 3 or any documents or instruments evidencing or
securing the loan secured thereby, and such Contributor has not received any
written notice of default with respect to or relating to such Mortgages, and
each such Contributor agrees to deliver to Company copies of any such notices of
default within five (5) business days of receipt of same. Such Contributor has
not waived any of its rights or interests under any of said documents, and such
Contributor has received no written notice of default or acceleration in respect
to the Mortgages described on Schedule 3. The Mortgages described on Schedule 3
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secure no debt other than that which is explicitly set forth in such exhibit.
The amount of principal and accrued interest under the Mortgages described on
Schedule 3 as of the Closing Date shall not exceed the amount set forth in
Schedule 3 of this Agreement.
(w) To the best of such Contributor's knowledge and belief, such
Contributor is not in default with respect to any of its obligations under any
plan, agreement or trust, and such Contributor has filed or caused to be filed
all reports with respect to the foregoing required by, and is otherwise in
compliance with, the Employees Retirement Income Security Act of 1974, as
amended, and all rules and regulations thereunder with respect thereto.
(x) Schedule 2 is a true, correct and complete list of the Business
Assets of IBD, and such assets are owned by IBD free and clear of all liens and
encumbrances.
Notwithstanding anything contained herein to the contrary, in the
event that the Company gains knowledge prior to the Closing that any
representation or warranty contained in this Agreement is untrue or inaccurate,
Company shall, within five (5) business days of gaining such knowledge but in no
event subsequent to the Closing Date, provide Contributor with written notice of
such and in the event that the Company closes on the acquisition of the
Property, then the Company irrevocably waives any right to claim any damages
against Contributor for the breach of such representation or warranty and
Contributor shall have no liability to the Company resulting therefrom.
EXCEPT AS OTHERWISE SPECIFICALLY AND EXPLICITLY SET FORTH IN THIS
AGREEMENT OR IN ANY DOCUMENT WHICH MAY BE EXECUTED BY CONTRIBUTOR AND DELIVERED
TO THE COMPANY AT CLOSING: (1) THE CONTRIBUTION OF THE PROPERTY AS PROVIDED FOR
HEREIN IS MADE TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW ON AN "AS IS-
WHERE IS" CONDITION AND BASIS WITH ALL FAULTS, (2) THE COMPANY ACKNOWLEDGES THAT
CONTRIBUTOR HAS NOT MADE ANY REPRESENTATIONS TO THE COMPANY WITH RESPECT TO THE
PROPERTY WITH REGARD TO THE HABITABILITY, MERCHANTABILITY, PROFITABILITY OR
FITNESS FOR A PARTICULAR PURPOSE.
ARTICLE 13
REPRESENTATIONS AND WARRANTIES OF COMPANY
13.01 Representations and Warranties of Company. To induce
Contributor to execute, deliver and perform this Agreement, Company hereby
represents and warrants to Contributor on and as of the date hereof and on and
as of the Closing Date as follows:
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(a) All representations and warranties of Company appearing in other
Sections of this Agreement are true and correct.
(b) Company is a corporation duly organized and in good standing
under the laws of the State of Illinois, and is duly qualified to do business in
and is in good standing under the laws of the State of Illinois.
(c) Company has full capacity, right, power and authority to execute,
deliver and perform this Agreement and all documents to be executed by Company
pursuant hereto, and all required action and approvals therefor have been duly
taken and claimed. The individuals signing this Agreement and all other
documents its executed or to be executed pursuant hereto on behalf of Company
are and shall be duly authorized to sign the same on Company's behalf and to
bind Company thereto. This Agreement and all documents to be executed pursuant
hereto by Company are and shall be binding upon and enforceable against Company
in accordance with their respective terms.
ARTICLE 14
CONDITIONS PRECEDENT AND TERMINATION
14.01 Consent Regarding Mortgage Documents. The consent of the
holder of the Mortgages described on Schedule 3 attached hereto to the
transaction contemplated hereby is required. The obligation of Company and
Contributor to close the transaction contemplated hereby is subject to
Contributor's and the Company's receipt of: (i) the consent to the sale to
Partnership contemplated by this Agreement, subject to the assumption of,
without payment of a service charge, premium or like fee or modification of the
Mortgages, other than an assumption fee to be paid by the Partnership in an
amount not to exceed one percent (1%) of the balance (as of the Closing Date) of
the Mortgages described on Schedule 3, and (ii) an estoppel letter addressed to
Partnership dated no more than ten (10) days prior to the Closing Date from the
holder of the Mortgages setting forth and confirming the following: (aa) the
outstanding indebtedness under the Note, the portions thereof allocable to
principal and interest, and the date through which debt service payments have
been made; (bb) the amounts of all reserves for payment of taxes, insurance
premiums and interest; (cc) that there are no defaults under said loan or any
document evidencing or securing same; (dd) that true, correct and complete
copies of all of Mortgages is attached to said letter; (ee) the consents of the
holder of the Mortgages to the transaction contemplated hereby; and (ff) such
other matters as shall be reasonably requested by Company or by its lenders or
otherwise in form acceptable to Company. If the conditions precedent set forth
above in this Section 14.01 have not been satisfied on or before the thirtieth
(30th) day following the date hereof, then at any time prior to the expiration
of such thirty (30) day period, Company may elect to terminate this Agreement
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by notice to the Contributor, in which event this Agreement shall become null
and void, and the Deposit and any earnings thereon shall forthwith be returned
to Company. The assumption of the Mortgages described on Schedule 3 attached
hereto by the Partnership is a condition precedent to Contributor's obligations
to close under this Agreement.
14.02 General Feasibility and Review. (a) The obligation of Company to
close the transaction contemplated hereby is, at Company's option, subject to
Company's review and approval of the physical condition of the Property,
including, without limitation, all electrical, mechanical, plumbing and other
systems which are a part of the Property, the Contracts, Leases, the
Environmental Study, all Exhibits and all documents and items to be delivered to
or made available to Company pursuant to Section 11.01(e). If, for any reason
whatsoever, Company, in its sole discretion, is not satisfied with the foregoing
on or before August 4, 1997, then at any time on or prior to August 4, 1997,
Company may, at its option, elect to terminate this Agreement by notice to
Contributor, in which event this Agreement shall become null and void, and the
Deposit (except the initial Deposit of $137,500.00 shall be retained by
Contributor unless Contributor fails to obtain the payoff letter described in
Section 15.02(xv), in which event the entire Deposit shall be returned to the
Company) and any earnings thereon shall forthwith be returned to Company.
Company may elect to have any or all of the Contracts which are not third party
arms length contracts terminated by Contributor at Closing, and the termination
of such Contracts at Contributor's expense and payment by Contributor of all
amounts due thereunder shall be a condition to the obligation of Company to
close the transaction contemplated hereby.
(b) The obligation of Contributor to close the transaction
contemplated hereby is, at Contributor's option, subject to Contributor's review
of information relating to the properties to be included in the IPO by 5:00 p.m.
on August 4, 1997. For any reason whatsoever, Contributor, in its sole
discretion by written notice delivered to Company prior to 5:00 p.m. on August
4, 1997, may terminate this Agreement, in which event this Agreement shall be
null and void and the Deposit and any earnings thereon shall be forthwith
returned to Company.
(c) On or before the thirtieth (30th) day following the date this
Agreement is fully executed, Contributor shall obtain an Environmental Indemnity
from the tenant at 455 Academy in the form of Schedule 9 attached hereto, and
Seller shall: (x) obtain either the consents of the limited partners of Sky
Harbor Associates to the transactions contemplated by this Agreement or
acceptable buyout agreements from such limited partners, and (y) remediate
conditions at the Grandville property in accordance with the recommendations of
Carlson Engineering (provided that Contributor is only obligated to pay up to
$50,000 to remediate such conditions) ("Additional Closing Conditions"). In the
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event the cost to remediate conditions at the Grandville property is expected to
exceed $50,000 and Contributor does not agree to pay such excess, and/or in the
event Contributor fails to commence remediation of the Grandville property as
described above within said thirty (30) day period, Company, at any time
thereafter, may terminate the Agreement as to the Grandville property, in which
event the Contribution Price shall be reduced (at Closing) by the amount
allocated to such property on Schedule 10 and such other adjustments shall be
made at Closing as agreed upon by the parties. In the event Contributor is
unable to satisfy the Additional Closing Conditions within such thirty (30) day
period, Closing of the 455 Academy property and/or the Grandville property, as
the case may be, shall be postponed until such time as and when Contributor
satisfies the Additional Closing Conditions (but in no event shall the
Partnership be obligated to close if the Additional Closing Conditions have not
been satisfied by the date which is one hundred eighty (180) days following the
Closing), and the Contribution Price (at Closing) shall be reduced by the amount
allocated to the 455 Academy property on Schedule 10 and such other adjustments
shall be made at Closing as agreed upon the parties. At such time that
Contributor satisfies the Additional Closing Conditions in accordance with this
Section (or if the Additional Closing Conditions are satisfied, except that the
Agreement relating to the [Grandville] property is terminated pursuant to this
Section), Contributor shall notify Partnership and deliver to Partnership
evidence reasonably satisfactory to Partnership that the Additional Closing
Conditions have been satisfied. Closing shall occur in accordance with and in
the manner specified in this Agreement, and Contributor shall receive OP Units
(calculated utilizing as the value of the 455 Academy property and/or the
Grandville property the amount set forth on Schedule 10 attached hereto, and the
stock price averaged over the three (3) trading days prior to such Closing).
14.03 Truth of Contributor's Representations and Warranties and
Performance of Contributor's Obligations. The obligation of Company to close the
transaction contemplated hereby is, at Company's option, and except as otherwise
provided herein, subject to all representations and warranties of Contributor
contained in this Agreement being true and correct in all material respects at
and as of the Closing Date and all obligations of Contributor to have been
performed on or before the Closing Date having been timely and duly performed
(or to the extent not true, same shall be disclosed to Company). Upon failure of
any condition precedent as set forth in this Section 14.03 Company may, by
written notice to Contributor and failure by Contributor to cure same within 10
days after such notice, elect at any time thereafter to terminate this Agreement
by written notice to Contributor in which event: (i) the Deposit and any
additional Deposit shall be returned to the Company, and (ii) this Agreement
shall be null and void, and except as otherwise provided in this Agreement, the
parties shall have no further obligations to the other hereunder.
14.04 Estoppel Letters. The obligation of Company to close the transaction
contemplated by this Agreement is subject to Company's receipt of: an estoppel
letter
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addressed to Company within thirty (30) days after Company's written request to
Contributor [and which request shall be made by Company at such time that
Company anticipates Closing to occur approximately thirty (30) days after such
request], which estoppel letters shall be in the form of Schedule 7 attached
hereto or other form satisfactory to Company for Motorola and tenants (including
Motorola) occupying eighty percent (80%) of the aggregate building square
footage contained in the Property. Contributor's failure to obtain such estoppel
letters shall not be a default of Contributor under this Agreement. In the event
Company does not receive estoppel certificates from tenants occupying one or
more properties comprising the Property, Company may terminate this Agreement.
14.05 Performance of Company's Obligations. The obligation of Contributor
to close the transaction contemplated hereby is, at Contributor's option,
subject to all obligations of Company which were to have been performed on or
before the Closing Date having been timely and duly performed. If any condition
precedent to closing of Contributor as set forth in this Agreement has not been
fulfilled and satisfied on or before the Closing Date, Contributor may, by
notice to Company, elect at any time thereafter to terminate this Agreement,
provided that Contributor is not itself in default under this Agreement, and (i)
if such termination is due to Company's fault and the IPO does not close on or
before December 31, 1997, Contributor shall be entitled to retain the Deposit
and any additional Deposit as full and complete liquidated damages (and not as a
penalty or forfeiture), and (ii) if such termination is due to the Company's
fault and the IPO closed on or before December 31, 1997, Contributor shall be
entitled to retain the Deposit and any additional Deposit and the Company shall
pay Contributor the sum of $700,000.00 as full and complete liquidated damages
(and not as a penalty or forfeiture), in either case in lieu of any and all
other legal and equitable rights which Contributor may have hereunder, and all
other funds and documents theretofore delivered hereunder or deposited in escrow
by either party shall be forthwith returned to such party. In addition, Company
shall deliver to Contributor upon request copies of any environmental reports
and physical inspection reports relating to the Property.
14.06 Performance of Contributor's Obligations. The obligation of the
Company to close the transaction contemplated hereby is, at the Company's
option, subject to all obligations of Contributor which were to have been
performed on or before the Closing Date having been timely and duly performed.
If any condition precedent to Closing of the Company set forth in this Agreement
has not been fulfilled and satisfied on or before the Closing Date, the Company
may, by notice to Contributor, elect either to: (i) terminate this Agreement,
provided that the Company is not itself in default under this Agreement, and if
such termination is due to Contributor's willful or intentional default
(including, but not limited to, Contributor's decision (or change of mind) such
that Contributor decides not to contribute and/or to be an officer of the
Partnership (or general partner of the Partnership) and not attributable to an
innocent misstatement, misrepresentation or breach of warranty
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or covenant, the Deposit and any additional Deposit shall be returned to Company
and Contributor shall pay the Company the sum of $1,000,000.00 as full and
complete liquidated damages (and not as a penalty or a forfeiture); and (ii)
except as otherwise provided in this Agreement, Company may file an action for
specific performance of this Agreement and compel Contributor to comply with
Contributor's obligations under this Agreement.
ARTICLE 15
CLOSING
15.01 Time and Place. The transaction contemplated hereby shall close at
9:00 A. M. on the Closing Date at the offices of the Escrowee, or on such other
date, time and place as the parties may mutually agree.
15.02 Contributor's Deliveries. On the Closing Date, Contributor shall
deposit in the escrow for each of the properties comprising the Real Estate the
following:
(i) The Deeds and/or Assignments of Partnership Interests;
(ii) Contributor's assignment of any and all impounds and reserves
held by the holder of the Mortgages, and Contributor's assignment of the
Contracts, Leases, Intangible Personal Property and Licenses, as provided in
Section 2.01(b);
(iii) Contributor's bill of sale as provided in Section 2.01(c);
(iv) [OMITTED.]
(v) Original executed counterparts of all Contracts, Leases and
Licenses assigned to Company pursuant to Section 15.02(ii) above (or, in
Company's sole discretion where originals are unavailable, copies duly certified
by Contributor as being true, correct and complete copies of the originals),
together with an Assignment of same;
(vi) [OMITTED.]
(vii) Contributor's certificate dated as of the Closing Date
confirming that the representations and warranties of Contributor are true and
correct as of the Closing Date, except as modified by prior written notice to
Company;
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(viii) An opinion of Contributor's counsel regarding authority and
enforceability of this Agreement and all Closing documents reasonably acceptable
to Company;
(ix) An ALTA Statement, GAP Undertaking, Broker's Affidavit and
Manager's Affidavit in the form required by the Title Insurer;
(x) Assignment of all Contracts and other agreements which Company
has elected to terminate by notice to Contributor as provided in Section 14.02;
(xi) Certificate(s) of occupancy issued by the appropriate
governmental authorities authorizing use of each property comprising the Real
Property as the same is presently used to the extent same are in such
Contributor's possession;
(xii) An executed Affidavit in the form attached hereto as Exhibit G
or a qualifying statement from the U.S. Treasury Department that the transaction
is exempt from the withholding tax requirement imposed by Section 1445A of the
Internal Revenue Code and the rules and regulations promulgated thereunder
("Section 1445A"). In the event that Contributor fails to deliver either the
Affidavit or the qualifying statement as aforesaid, Contributor agrees that
Company may, at closing, deduct and withhold from the proceeds that are due to
Contributor the amount necessary to comply with the withholding tax requirement
imposed by Section 1445A. Company shall deposit the amount so withheld in escrow
with the Escrowee pursuant to terms and conditions acceptable to Contributor,
Company and the Escrowee, but in any event, complying with Section 1445A;
(xiii) Certificates of the good standing of the Beneficiaries and IBD
issued by the Secretary of State of Illinois;
(xiv) Letters to tenants of the Property in the form of Schedule 8
attached hereto;
(xv) A payoff letter from General American Insurance confirming its
agreement to accept prepayment of loans at any time prior to the Closing Date
for a prepayment fee not to exceed one percent (1%) of the outstanding balance
of such loans as of the Closing Date, and if the prepayment fee shall exceed one
percent (1%) of the outstanding balance of such Loan, Contributor shall pay such
amount which exceeds $137,500.00, and if the prepayment fee shall be less than
$137,500.00, Company shall receive a credit against the Contribution Price at
Closing in an amount equal to the difference between $137,500.00 and the
prepayment fee and Company shall not be responsible to pay any default interest
or costs..
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(xvi) Such other documents, instruments, certifications and
confirmations as may be reasonably required and designated by Company to fully
effect and consummate the transactions contemplated hereby.
15.03 Company's Deliveries. On the Closing Date, Company shall deliver
the following to Contributor:
(i) An ALTA Statement, GAP Undertaking and Broker's Affidavit in
form required by the Title Insurer;
(ii) The Contribution Price as provided in Article 3 hereof;
(iii) Tax Indemnification Agreement in the form of Exhibit I
attached hereto and made a part hereof;
(iv) Assumption Agreement relating to Leases and Contracts;
(v) Opinion of Counsel regarding authority and enforceability of the
Tax Indemnification Agreement and the other Closing Documents in form reasonably
satisfactory to Contributor;
(vi) Such other documents, instruments, certifications and
confirmations as may be reasonably required and designated by Contributor to
fully effect and consummate the transaction contemplated hereby.
15.04 Concurrent Deliveries. Contributor and Company shall jointly deposit
in the escrow or deliver to each other at closing: (i) an agreed proration
statement, (ii) certificates complying with the provisions of state, county and
local law applicable to the determination of transfer taxes; and (iii)
employment agreements in the form of Exhibit J attached hereto and made a part
hereof.
15.05 Closing Documents; Form, Execution and Substance. All closing
documents to be furnished by Contributor pursuant hereto shall be in form,
execution and substance reasonably satisfactory to the parties and their
respective counsel.
15.06 New York Style Closing. At the request of either party, the
transaction shall be closed by means of a so-called New York Style Closing, with
the concurrent delivery of the documents of title, transfer of interests,
delivery of the title policy described in Section 5.01 and the payment of the
Contribution Price. The Contributor shall provide and pay for any undertaking
(the "Gap Undertaking") to the Title Company necessary for the New York Style
Closing to occur. Contributor and Company shall each pay fifty percent (50%) of
the charges of the Title Company for such New York Style Closing.
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15.07 Concurrent Transactions. All documents or other deliveries required
to be made by Company or Contributor at Closing, and all transactions required
to be consummated concurrently with Closing, shall be deemed to have been
delivered and to have been consummated simultaneously with all other
transactions and all other deliveries, and no delivery shall be deemed to have
been made, and no transaction shall be deemed to have been consummated, until
all deliveries required by Company, and Contributor shall have been made, and
all concurrent or other transactions shall have been consummated.
15.08 Leasing Commissions, Management Fees and Employees. On the Closing
Date, Contributor shall deliver evidence satisfactory to Company that the
current manager of the Property has been terminated and paid all commissions or
fees due him for all services rendered by him, and Contributor shall also
terminate and satisfy all obligations to all employees employed by Contributor
in the operation of the Property and provide Company with evidence thereof
satisfactory to Company on the Closing Date. Partnership agrees that it will
hire the employees identified on Exhibit H commencing as of the day following
the Closing at the salaries provided on Exhibit H attached hereto; Contributor
agrees that all obligations with respect to the termination of all such
employees of Contributor and IBD, including termination benefits, earned prior
to the Closing Date, and unfunded contributions or termination obligations with
respect to the plans, agreements and trusts described in this Agreement shall be
the sole responsibility and expense of Contributor, provided that Contributor
shall not be responsible for any such obligations attributable to the employment
of such employees by Company or its agents subsequent to the Closing Date.
Contributor represents and warrants that no unpaid leasing fee or commission is
due any party in connection with any Lease or for extension or renewal of such
Lease for any payment for services, commissions or fees in connection with the
Property performed or incurred prior to the Closing Date (other than commissions
or fees due brokers for extensions or modifications of the Motorola Lease or
commission in connection with Motorola's exercise of its purchase option), which
shall be paid by Company if and when same is required to be paid pursuant to the
Motorola Lease as detailed on Schedule 11 attached hereto). Contributor shall
deliver a waiver of lien executed by Manager waiving all rights for additional
fees with regard to the Property.
15.09 Other Agreements. At Closing, Contributor and Partnership shall
execute the 801/901 Technology Drive Option Agreement in the form of Exhibit K
attached hereto and the Libertyville Business Park Agreement in the form of
Exhibit L attached hereto.
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ARTICLE XVI
INDEMNIFICATION
16.01 Contributor's Indemnity. Contributor hereby agrees to indemnify,
defend and hold harmless Company and its officers, shareholders, directors,
employees and agents against any and all losses, liabilities, fines and
penalties and damages (including, without limitation, any damages or injury to
persons, property or the environment as provided hereunder), or actions or
claims in respect thereof, except for liabilities specifically assumed by the
Company pursuant to the terms of this Agreement (including, without limitation,
amounts paid in settlement and reasonable cost of investigation, reasonable
attorneys' fees and other legal expenses) resulting from claims (whether or not
ultimately successful) to which the Company or any of its officers,
shareholders, directors, employees and agents may become subject or which the
Company or any of its officers, shareholders, directors, employees and agents
may suffer or incur either directly or indirectly, insofar as such losses,
liabilities or damages (or actions or claims in respect thereto) arising out of,
are with respect to, or are based upon:
(i) the inaccuracy in any material respect of any representation or
warranty, or a breach of any covenant of the Contributor contained herein;
(ii) any obligations, liabilities or charges of the Contributor not
expressly assumed by the Partnership except to the extent that Partnership
receives a credit therefor on the closing statement;
(iii) any misrepresentation in, or omission of a material fact from,
any certificate or instrument of transfer or conveyance to be furnished to the
Company by or on behalf of the Contributor under this Agreement;
(iv) the ownership or operation of the Property on or prior to the
Closing Date;
(v) any claim by any person for any leasing fee or commission in
connection with any Lease (except for extensions or modifications of the
Motorola Lease or commission in connection with Motorola's exercise of its
purchase option);
(vi) any claim by said current manager of the Property for any
payment of commissions or fees for services rendered in connection with the
Property prior to the Closing Date; or
-34-
<PAGE>
(vii) any claim by any employee employed by Contributor in the
operation of the Property whose employment was terminated at closing at
Company's request, or whose claim arose prior to the Closing Date.
16.02 Company's Indemnity. Company hereby agrees to indemnify, defend and
hold harmless Contributor and its officers, shareholders, directors, employees
and agents against any and all losses, liabilities, fines and penalties and
damages (including, without limitation, any damages or injury to persons,
property or the environment as provided hereunder), or actions or claims with
respect thereto, except for liabilities specifically assumed by the Contributor
pursuant to the terms of this Agreement (including, without limitation, amounts
paid in settlement and reasonable cost of investigation, reasonable attorneys'
fees and other legal expenses) resulting from claims (whether or not ultimately
successful) to which the Contributor or any of its officers, shareholders,
directors, employees and agents may become subject or which the Contributor or
any of its officers, directors, employees and agents may suffer or incur either
directly or indirectly, insofar as such losses, liabilities or damages (or
actions or claims in respect thereto) arising out of, are with respect to, or
are based upon:
(i) the inaccuracy in any material respect of any representation or
warranty, or a breach of any covenant of Company contained herein;
(ii) any obligations, liabilities or charges of Contributor that are
expressly assumed by Company or which Company receives a credit therefor on the
Closing Statement;
(iii) any misrepresentation in, or omission of a material fact from,
any certificate or instrument of transfer or conveyance to be furnished to
Contributor by or on behalf of Company under this Agreement;
(iv) the ownership or operation of the Property by Company after the
Closing Date; or
(v) any damage done to the Property, any property of the tenants
under the Leases or personal injury arising out of the Company's investigation
of the Property.
(vi) any damages or liability incurred by Contributor and/or its
partners as a result of the Partnership's failure to pay off the Mortgages
described on Schedule 3A so long as: (i) no default by Contributor has occurred
and remains uncured under any of such Mortgages, and (ii) the lender which holds
such Mortgages has issued pay off letters for such Mortgages and has agreed to
accept pay off of such Mortgages pursuant to such payoff letters.
-35-
<PAGE>
ARTICLE XVII
NOTICES
17.01 Notices. Any notice, request, demand, instruction or other document
to be given or served hereunder or under any document or instrument executed
pursuant hereto shall be in writing and shall be delivered personally or sent by
United States registered or certified mail, return receipt requested, postage
prepaid or by overnight express courier, postage prepaid and addressed to the
parties at their respective addresses set forth below, and the same shall be
effective upon receipt if delivered personally, on the next business day if
delivered by overnight courier, or two business days after deposit in the mails
if mailed by certified or registered mail. A party may change its address for
receipt of notices by service of a notice of such change in accordance herewith.
If to Company, to: c/o The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Attn: Jeffrey A. Patterson
With a copy to: c/o The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Attn: Robert J. Rudnik, Esq.
With a copy to: Winston & Strawn
35 West Wacker Drive
Suite 4200
Chicago, IL 60601
Attn: Wayne D. Boberg, Esq.
and William J. Ralph, Esq.
If to Contributor, to: c/o Industrial Building and Development Company
3184 MacArthur Boulevard
Northbrook, IL 60062
Attn: Edward S. Hadesman
-36-
<PAGE>
With a copy to: Shefsky & Froelich Ltd.
444 North Michigan Avenue
Suite 2500
Chicago, Illinois 60611
Attn: James M. Teper, Esq.
ARTICLE XVIII
MISCELLANEOUS
18.01 Entire Agreement, Amendments and Waivers. This Agreement and the
Exhibits and Schedules attached hereto contain the entire agreement and
understanding of the parties in respect to the subject matter hereof, and the
same may not be amended, modified or discharged nor may any of its terms be
waived except by an instrument in writing signed by the party to be bound
thereby.
18.02 Further Assurances. The parties each agree to do, execute,
acknowledge and deliver all such further acts, instruments and assurances and to
take all such further action before or after the closing at no cost to
Contributor as shall be necessary or desirable to fully carry out this Agreement
and to fully consummate and effect the transactions contemplated hereby.
18.03 Survival and Benefit. Except as otherwise provided herein, all
representations, warranties, agreements, obligations and indemnities of the
parties (including, but not limited to, Sections 3, 11, 12, 13, 14 and 16 of
this Agreement) shall, notwithstanding any investigation made by any party
hereto, survive Closing for a period of twelve (12) months and all agreements,
obligations and indemnities of the parties shall, notwithstanding any
investigation made by any party hereto, survive Closing for a period of twelve
(12) months and the same shall inure to the benefit of and be binding upon the
respective successors and assigns of the parties.
18.04 No Third Party Benefits. This Agreement is for the sole and
exclusive benefit of the parties hereto and their respective successors and
assigns, and no third party is intended to or shall have any rights hereunder.
18.05 Income Tax Withholding. At least thirty-five (35) days prior to
closing Contributor shall deliver to Company evidence reasonably satisfactory to
Company that the sale of the Property to Company hereunder is not subject to,
and does not subject Company to liability under, Section 902(d) ("Section
902(d)") of the Illinois Income Tax Act (the "Act"). If said evidence is not so
delivered to Company, as aforesaid, then Contributor shall, or Company may,
notify the Illinois Department of Revenue ("Department") of the
-37-
<PAGE>
intended sale and request the Department to make a determination as to whether
the Contributor has an assessed, but unpaid, amount of tax, penalties, or
interest under the Act. Contributor agrees that Company may, at closing, deduct
and withhold from the proceeds that are due Contributor the amount necessary to
comply with the withholding requirements imposed by Section 902(d). Company
shall deposit the amount so withheld in escrow with the Escrowee pursuant to
terms and conditions acceptable to Contributor and Company, but in any event,
complying with Section 902(d).
18.06 Interpretation.
(a) The headings and captions herein are inserted for convenient
reference only and the same shall not limit or construe the paragraphs or
sections to which they apply or otherwise affect the interpretation hereof.
(b) Words importing persons shall include firms, associations,
partnerships (including limited partnerships), trusts, corporations and other
legal entities, including public bodies, as well as natural persons.
(c) The terms "include," "including" and similar terms shall be
construed as if followed by the phrase "without being limited to."
(d) This Agreement and any document or instrument executed pursuant
hereto may be executed in any number of counterparts each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
(e) Whenever under the terms of this Agreement the time for
performance of a covenant or condition falls upon a Saturday, Sunday or holiday,
such time for performance shall be extended to the next business day. Otherwise
all references herein to "days" shall mean calendar days.
(f) This Agreement shall be governed by and construed in accordance
with the laws of the State of Illinois.
(g) Time is of the essence of this Agreement.
18.07. [OMITTED.]
18.08 [OMITTED.]
18.09 Company's Investigation and Inspections. Except as otherwise
provided herein, any investigation or inspection conducted by Company, or any
agent or representative of Company, pursuant to this Agreement, in order to
verify independently
-38-
<PAGE>
Contributor's satisfaction of any conditions precedent to Company's obligations
hereunder or to determine whether Contributor's warranties are true and
accurate, shall not affect or constitute a waiver by Company on any of
Contributor's obligations hereunder or Company's reliance thereon. Company
agrees that to the extent it discovers, prior to Closing, information which
renders any of Contributor's representations or warranties untrue, Company will
notify Contributor of such information in writing within five (5) business days
of gaining knowledge and in all events prior to the Closing Date.
18.10 Assignment. Prior to the Closing Date, the Company shall assign all
of its right, title and interest in and to this Agreement to the Partnership.
Other than the foregoing assignments to the Partnership, the Company may not
assign this Agreement and its right, title and interest thereunder. Upon the
assignment of this Agreement to Partnership, the Company will not be released
from its obligations hereunder to the Contributor, which obligations,
indemnities, representations and warranties shall remain in favor of
Contributor. Notwithstanding anything contained herein to the contrary, any and
all references in this Agreement to the Property being contributed and/or
conveyed to the Company shall mean the Contributor contributing and/or conveying
to the Partnership simultaneously with the IPO on the Closing Date. In addition,
Contributor shall have no obligation to contribute and/or convey the Property to
the Company, all of Contributor's obligations hereunder being to contribute
and/or convey the Property to the Partnership.
18.11 Limitation on Liability. Notwithstanding anything to the contrary
set forth in this Agreement, the Company and/or the Partnership shall look
solely to the greater of: (i) the assets of the Beneficiary, the trust estates
of the title holding land trusts and the equity interests of the general
partners in the Beneficiaries, and (ii) the assets of Edward S. Hadesman up to
$1,000,000 (excluding his personal residence) for satisfaction of any monetary
claims against Contributor.
[SIGNATURE PAGE FOLLOWS ON NEXT PAGE]
-39-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
Contributor and Company on the respective dates set forth beneath each of their
signatures and is intended to be effective as of the latest such date.
CONTRIBUTOR:
LASALLE NATIONAL TRUST, N.A., not personally, but
solely as Trustee under Trust Agreement dated
June 15, 1982 and known as Trust No. 10-40113-09
By:
-----------------------------------------------
Its:
----------------------------------------
Dated:
--------------------------------------------, 1997
LASALLE NATIONAL TRUST, N.A., not personally, but
solely as Trustee under Trust Agreement dated
September 7, 1994 and known as Trust No. 11-9051
By:
-----------------------------------------------
Its:
----------------------------------------
Dated:
--------------------------------------------, 1997
-40-
<PAGE>
LASALLE NATIONAL TRUST, N.A., not personally, but
solely as Trustee under Trust Agreement dated
March 30, 1984 and known as Trust No. 11-107825
By:
-----------------------------------------------
Its:
---------------------------------------
Dated:
--------------------------------------------, 1997
LASALLE NATIONAL TRUST, N.A., not personally, but
solely as Trustee under Trust Agreement dated
August 1, 1986 and known as Trust No. 11-1358
By:
-----------------------------------------------
Its:
---------------------------------------
Dated:
--------------------------------------------, 1997
-41-
<PAGE>
LASALLE NATIONAL TRUST, N.A., not personally,
but solely as Trustee under Trust Agreement
dated August 1, 1986 and known as Trust No.
11-1357
By:
------------------------------------------
Its:
-----------------------------------
Dated:
_______________________________________, 1997
LASALLE NATIONAL TRUST, N.A., not personally,
but solely as Trustee under Trust Agreement
dated January 17, 1974 and known as Trust No.
286-34
By:
------------------------------------------
Its:
-----------------------------------
Dated:
_______________________________________, 1997
-42-
<PAGE>
LASALLE NATIONAL TRUST, N.A., not personally,
but solely as Trustee under Trust Agreement
dated October 15, 1995 and known as Trust No.
11-9869
By:
------------------------------------------
Its:
-----------------------------------
Dated:
_______________________________________, 1997
LASALLE NATIONAL TRUST, N.A., not personally,
but solely as Trustee under Trust Agreement
dated December 1, 1987 and known as Trust No.
11-2868
By:
------------------------------------------
Its:
-----------------------------------
Dated:
_______________________________________, 1997
310 ERA LIMITED PARTNERSHIP, an Illinois
limited partnership
/s/ Edward S. Hadesman
---------------------------------------------
By: Edward S. Hadesman
Its: General Partner
-43-
<PAGE>
MACARTHUR DRIVE PROPERTIES, an Illinois
limited partnership
/s/ Edward S. Hadesman
-----------------------------------------
By: Edward S. Hadesman
Its: General Partner
CLE LIMITED PARTNERSHIP, an Illinois limited
partnership
/s/ Edward S. Hadesman
-----------------------------------------
By: Edward S. Hadesman
Its: General Partner
500 LINDBERG LIMITED PARTNERSHIP, an
Illinois limited partnership
/s/ Edward S. Hadesman
-----------------------------------------
By: Edward S. Hadesman
Its: General Partner
515 HUEHL LIMITED PARTNERSHIP, an
Illinois limited partnership
/s/ Edward S. Hadesman
-----------------------------------------
By: Edward S. Hadesman
Its: General Partner
-44-
<PAGE>
555 HUEHL LIMITED PARTNERSHIP, an
Illinois limited partnership
/s/ Edward S. Hadesman
---------------------------------------
By: Edward S. Hadesman
Its: General Partner
SKY HARBOR ASSOCIATES, an Illinois limited
partnership
/s/ Edward S. Hadesman
---------------------------------------
By: Edward S. Hadesman
Its: Managing General Partner
1001 TECHNOLOGY WAY, LLC, an Illinois
limited liability company
/s/ Edward S. Hadesman
---------------------------------------
By: Edward S. Hadesman
Its: Managing Member
-45-
<PAGE>
THE GRANDVILLE ROAD LIMITED PARTNERSHIP, an
Illinois limited partnership
By: GRANDVILLE/NORTHWESTERN MANAGEMENT
CORPORATION, an Illinois corporation, its
General Partner
/s/ Edward S. Hadesman
----------------------------------------------
By: Edward S. Hadesman
Its: President
IBD:
INDUSTRIAL BUILDING AND DEVELOPMENT COMPANY
/s/ Edward S. Hadesman
By: Edward S. Hadesman
Its: President
Dated:
---------------------------------------, 1997
-46-
<PAGE>
COMPANY:
THE PRIME GROUP, INC., an Illinois corporation
By: /s/ Richard S. Curto
-------------------------------------------
Its: EVP
------------------------------------
Dated:
July 8
---------------------------------------, 1997
-47-
<PAGE>
LIST OF EXHIBITS & SCHEDULES
----------------------------
<TABLE>
<CAPTION>
<S> <C>
EXHIBIT A - LEGAL DESCRIPTION - REAL PROPERTY
EXHIBIT A-1 - LEGAL DESCRIPTION - LIBERTYVILLE VACANT REAL PROPERTY
EXHIBIT A-2 - LEGAL DESCRIPTION - OPTION PROPERTY
EXHIBIT B - PERSONAL PROPERTY
EXHIBIT C - PERMITTED TITLE EXCEPTIONS
EXHIBIT D - LISTING OF CONTRACTS
EXHIBIT E - SCHEDULE OF LICENSES
EXHIBIT F - SCHEDULE OF LEASES
EXHIBIT G - NON-FOREIGN AFFIDAVIT
EXHIBIT H - LIST OF EMPLOYEES (AND BENEFITS) TO BE HIRED BY
COMPANY
EXHIBIT I - TAX INDEMNIFICATION AGREEMENT
EXHIBIT J - EMPLOYMENT AGREEMENT
EXHIBIT K - 801/901 OPTION AGREEMENT
EXHIBIT L - LIBERTYVILLE BUSINESS PARK AGREEMENT
EXHIBIT M - NON RECOURSE DEBT METHODOLOGY
SCHEDULE 1 - LIST OF CONTRIBUTORS (INCLUDING PARTIES REQUIRED BY SEC) AND
PROPERTY LOCATIONS
SCHEDULE 2 - SCHEDULE OF BUSINESS ASSETS
SCHEDULE 2A - PERSONAL PROPERTY OWNED BY IBD WHICH ARE NOT BUSINESS ASSETS
SCHEDULE 3 - DESCRIPTION OF MORTGAGES TO BE ASSUMED
SCHEDULE 3A - DESCRIPTION OF MORTGAGE LOANS TO BE REPAID
</TABLE>
-48-
<PAGE>
SCHEDULE 4 - FORM OF PARTNERSHIP ASSIGNMENT
SCHEDULE 5 - REAL ESTATE PROPERTIES WITH NO TAX PRORATION
SCHEDULE 6 - DUE DILIGENCE ITEMS
SCHEDULE 7 - FORM OF TENANT ESTOPPELS
SCHEDULE 8 - FORM OF LETTERS TO TENANTS
SCHEDULE 9 - TENANT ENVIRONMENTAL INDEMNITY (455 ACADEMY)
SCHEDULE 10 - ALLOCATION OF CONTRIBUTION PRICE
SCHEDULE 11 - MOTOROLA LEASE COMMISSION
-49-
<PAGE>
FIRST AMENDMENT TO CONTRIBUTION AGREEMENT
------------------------------------------
THIS FIRST AMENDMENT TO CONTRIBUTION AGREEMENT (this "First Amendment") is
made as of this 12th day of August, 1997, in Chicago, Illinois, by and between
the parties set forth in Schedule 1 attached hereto and made a part hereof
(collectively "Contributor"), and The Prime Group, Inc., an Illinois corporation
("Company").
R E C I T A L S :
A. Contributor and Company entered into a certain Contribution Agreement
("Contribution Agreement") dated as of the 8th day of July, 1997.
B. Contributor's counsel terminated the Contribution Agreement on behalf
of Contributor by a letter to the Company dated August 4, 1997.
C. Contributor and Company desire to reinstate the Contribution Agreement
and make certain modifications to the Contribution Agreement as further provided
in this First Amendment.
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing premises and the
respective representations, warranties, agreements, covenants and conditions
herein contained, and other good and valuable consideration, Contributor and
Company agree as follows:
1. The foregoing Recitals are hereby incorporated as if fully re-written.
2. All terms capitalized herein and not otherwise defined herein shall
have the meaning ascribed to such terms in the Contribution Agreement.
3. Contributor and Company hereby agree to reinstate the Contribution
Agreement effective as of the date of this First Amendment.
4. Exhibit C, Exhibit E and Exhibit F of the Contribution Agreement are
hereby deleted and replaced with substitute Exhibit C, Exhibit E and Exhibit F
attached hereto and made a part hereof.
5. Notwithstanding anything contained in Section 14.01 of the Contribution
Agreement to the contrary, in the event of the assumption by the Partnership of
the Mortgages described on Schedule 3 of the Contribution Agreement such
assumption shall include a full release of the Contributors and any guarantors
of the Mortgages or the other loan documents evidencing the loans described on
Schedule 3 of the Contribution Agreement. At Company's written election to
Contributor delivered no later than September 1, 1997, one or more of the loans
evidenced by the Mortgages described on Schedule 3 of the Contribution Agreement
may
<PAGE>
be repaid by the Partnership immediately following the Closing provided that (i)
replacement debt is simultaneously put of record, which replacement debt is to
be secured by new mortgages encumbering the Properties described on Schedule 3
being repaid, and (ii) the original principal amount of replacement debt shall
not be less than the outstanding principal balances of the Mortgages described
on Schedule 3 being repaid.
6. "On or before the thirtieth (30th) day following the date this
Agreement is fully executed" shall be deleted from the first two (2) lines of
Section 14.02(c) of the Contribution Agreement and is hereby replaced with "on
or before the date which is twenty-five (25) days following the date upon which
the Company files the Initial S-11 Statement with the Securities and Exchange
Commission".
7. "Within said thirty (30) day period" shall be deleted from the fourth
(4th) line of Page 28 of the Contribution Agreement and is hereby replaced with
"on or before the date which is twenty-five (25) days following the date upon
which the Company files the Initial S-11 Statement with the Securities and
Exchange Commission".
8. "Within such thirty (30) day period" shall be deleted from the eighth
(8th) and ninth (9th) lines of Page 28 of the Contribution Agreement and is
hereby replaced with "on or before the date which is twenty-five (25) days
following the date upon which the Company files the Initial S-11 Statement with
the Securities and Exchange Commission".
9. The following Section 3.06 is hereby added to the Contribution
Agreement as Section 3.06:
Section 3.06
(a) Any time on or before the date which is two (2) business days prior
to the printing of the "Red Herring" for the REIT ("Printing Date"), Contributor
may elect, upon written notice to the Company, that any or all of its OP Units
which Contributor will receive at the Closing pursuant to this Contribution
Agreement, be subject to the provisions of this Section 3.06. The Company shall
provide Contributor with not less than the seven (7) days' written notice prior
to the Printing Date of its intention to print the Red Herring for the REIT. If
the Company has not printed the Red Herring for the REIT within five (5) days of
the designated Printing Date in Company's written notice, then Contributor's
election is withdrawn and Contributor must comply with the terms of this Section
as though no notice had previously been provided by Company. The written notice
from the Contributor to the Company of its election to have any or all of its OP
Units to be subject to the provisions of this Section 3.06 shall state the
percentage of the OP Units which Contributor elects to be subject to this
Section 3.06. The OP Units elected by Contributor to be subject to this Section
3.06 shall hereinafter be referred to as the "Subject OP Units."
(b) With regard to the Subject OP Units, Contributor and the Company
shall enter into an agreement at Closing which shall provide for the
reapportionment of OP Units between the
2
<PAGE>
Company and the Contributor on the earlier to occur of: (i) the conversion by
Contributor of all of the Subject OP Units to Shares in the REIT and the sale of
such Shares (but in no event earlier than the second anniversary of the
Closing); or (ii) the third anniversary of the Closing (the earlier of such
dates shall hereinafter be referred to as the "Reapportionment Date"). Such
reapportionment of OP Units shall occur as follows: (i) the Company shall
reapportion OP Units to the Contributor on the Reapportionment Date in an
amount, if any, equal to the positive difference between (A) the pre-tax annual
compounded return of 16.8% on the Subject OP Units from the Closing to the
Reapportionment Date and (B) the actual return on the Subject OP Units for such
time period; and (ii) the OP Units shall be reapportioned from the Contributor
to the Company on the Reapportionment Date in an amount, if any, equal to the
positive difference between (A) the actual return on the Subject OP Units from
the Closing to the Reapportionment Date and (B) the pre-tax annual compounded
return of 19.8% on the Subject OP Units for such time period. The return
realized by the Contributor on the Subject OP Units shall be determined by
taking into account cash distributions received on the Subject OP Units and any
appreciation in the value of the Subject OP Units from the date of Closing until
the Reapportionment Date. In addition, at the election of the party obligated to
make the reapportionment, such party may make the reapportionment in cash in
lieu of OP Units under this Section 3.06(b).
(c) For purposes of making determinations under Section 3.06(b) hereof (i)
the value of the Subject OP Units at Closing will be based on the price set
forth in the REIT's final prospectus for its common stock; and (ii) the value of
the Subject OP Units on the Reapportionment Date will be based on the average
closing price for the REIT's common stock during the last ten (10) trading days
prior to the Reapportionment Date.
(d) Contributor and Company agree to use reasonable efforts to structure
the reapportionment of the OP Units as provided in this Section 3.06 so as to
minimize or eliminate adverse income tax consequences to the Contributor and the
Company.
(e) In the event Contributor elects to exchange for Shares in the REIT or
dispose of any OP Units on or before the third anniversary of the Closing, then,
in such event, Contributor shall provide Company with written notice in
accordance with the terms of the partnership agreement of the Partnership and
shall also at such time provide written notice to the Company whether any of
said OP Units being exchanged for Shares in the REIT or OP Units being disposed
of shall constitute Subject OP Units.
10. Notwithstanding anything contained in the Contribution Agreement to
the contrary and for purposes of further clarification of the Contribution
Agreement, the parties acknowledge and agree that, at the Closing, the partners
of the Contributors (with respect to other than the Property commonly known as
455 Academy Drive, Northbrook, Illinois) shall contribute their partnership
interests in the Beneficiaries to the Partnership pursuant to Assignments of
Partnership Interests executed by each of the partners of the Contributor with
respect to the applicable Property. Contributor and Company agree that the
Contributors will have no obligation to deliver Deeds to any Properties other
than the Property commonly known as 455 Academy Drive, Northbrook, Illinois.
The Beneficiaries shall be terminated at Closing and the Contributors, at
3
<PAGE>
Contributors' sole cost and expense, shall be responsible for the preparation
and filing of the final tax returns for the Beneficiaries. In addition, the
Contributors indemnify and hold harmless the Partnership from liabilities of the
Beneficiaries (other than the Mortgages) accruing prior to the Closing.
11. In the twelfth (12th) line of Section 3.02 of the Contribution
Agreement, "$300,000.00" is hereby deleted and replaced with "$350,000.00."
12. Except as modified by this First Amendment, the Contribution Agreement
remains in full force and effect.
IN WITNESS WHEREOF, this First Amendment has been executed and delivered by
Contributor and Company on the respective date set forth beneath each of their
signatures and is intended to be effective as of the date first above written.
CONTRIBUTOR:
LASALLE NATIONAL TRUST, N.A., not personally,
but solely as Trustee under Trust Agreement
dated June 15, 1982 and known as Trust No.
10-40113-09
By:
------------------------------------------
Its:
----------------------------------
Dated:
-----------------------------------------, 1997
LASALLE NATIONAL TRUST, N.A., not personally,
but solely as Trustee under Trust Agreement
dated September 7, 1994 and known as Trust No.
11-9051
By:
------------------------------------------
Its:
----------------------------------
Dated:
-----------------------------------------, 1997
4
<PAGE>
LASALLE NATIONAL TRUST, N.A., not personally,
but solely as Trustee under Trust Agreement
dated March 30, 1984 and known as Trust
No. 11-107825
By:
------------------------------------------
Its:
----------------------------------
Dated:
------------------------------, 1997
LASALLE NATIONAL TRUST, N.A., not personally,
but solely as Trustee under Trust Agreement
dated August 1, 1986 and known as Trust No.
11-1358
By:
------------------------------------------
Its:
----------------------------------
Dated:
------------------------------, 1997
LASALLE NATIONAL TRUST, N.A., not personally,
but solely as Trustee under Trust Agreement
dated August 1, 1986 and known as Trust No.
11-1357
By:
------------------------------------------
Its:
----------------------------------
Dated:
------------------------------, 1997
5
<PAGE>
LASALLE NATIONAL TRUST, N.A., not personally,
but solely as Trustee under Trust Agreement
dated January 17, 1974 and known as Trust No.
286-34
By:
------------------------------------------
Its:
----------------------------------
Dated:
------------------------------, 1997
LASALLE NATIONAL TRUST, N.A., not personally,
but solely as Trustee under Trust Agreement
dated October 15, 1995 and known as Trust No.
11-9869
By:
------------------------------------------
Its:
----------------------------------
Dated:
------------------------------, 1997
LASALLE NATIONAL TRUST, N.A., not personally,
but solely as Trustee under Trust Agreement
dated December 1, 1987 and known as Trust No.
11-2868
By:
------------------------------------------
Its:
----------------------------------
Dated:
------------------------------, 1997
6
<PAGE>
310 ERA LIMITED PARTNERSHIP, an Illinois
limited partnership
/s/ Edward S. Hadesman
-----------------------------------
By: Edward S. Hadesman
Its: General Partner
MACARTHUR DRIVE PROPERTIES, an Illinois
limited partnership
/s/ Edward S. Hadesman
-----------------------------------
By: Edward S. Hadesman
Its: General Partner
CLE LIMITED PARTNERSHIP, an Illinois
limited partnership
/s/ Edward S. Hadesman
-----------------------------------
By: Edward S. Hadesman
Its: General Partner
500 LINDBERG LIMITED PARTNERSHIP, an
Illinois limited partnership
/s/ Edward S. Hadesman
-----------------------------------
By: Edward S. Hadesman
Its: General Partner
515 HUEHL LIMITED PARTNERSHIP, an
Illinois limited partnership
/s/ Edward S. Hadesman
-----------------------------------
By: Edward S. Hadesman
Its: General Partner
7
<PAGE>
555 HUEHL LIMITED PARTNERSHIP, an
Illinois limited partnership
/s/ Edward S. Hadesman
-----------------------------------
By: Edward S. Hadesman
Its: General Partner
SKY HARBOR ASSOCIATES, an Illinois limited
partnership
/s/ Edward S. Hadesman
-----------------------------------
By: Edward S. Hadesman
Its: Managing General Partner
1001 TECHNOLOGY WAY, LLC, an Illinois
limited liability company
/s/ Edward S. Hadesman
-----------------------------------
By: Edward S. Hadesman
Its: Managing Member
8
<PAGE>
THE GRANDVILLE ROAD LIMITED
PARTNERSHIP, an Illinois limited partnership
By: GRANDVILLE/NORTHWESTERN
MANAGEMENT CORPORATION,
an Illinois corporation, its General Partner
/s/ Edward S. Hadesman
-----------------------------------
By: Edward S. Hadesman
Its: President
IBD:
INDUSTRIAL BUILDING AND
DEVELOPMENT COMPANY
/s/ Edward S. Hadesman
-----------------------------------
By: Edward S. Hadesman
Its: President
Dated:
August 12, 1997
------------------------------------
COMPANY:
THE PRIME GROUP, INC., an Illinois
corporation
By: /s/ Richard S. Curto
---------------------------------
Its: Executive Vice President
------------------------
Dated:
August 12, 1997
------------------------------------
9
<PAGE>
EXHIBIT C
---------
PERMITTED TITLE EXCEPTIONS
--------------------------
[TO BE AGREED UPON BY CONTRIBUTOR AND COMPANY ON OR BEFORE 5:00 P.M. ON FRIDAY,
AUGUST 15, 1997]
C-1
<PAGE>
EXHIBIT D
DESCRIPTION OF CONTRACTS
1. Package Insurance Policy - all locations
2. Tax Attorney
Cook County Triennial Reassessment (306-310 Era, 455 Academy Drive) Lake
County (1001 Technology)
3. Landscaping
Libertyville Business Park - Brickman Nurseries (1997 Season)
1001 Technology Way - Brickman Nurseries (1997 Season)
801 & 901 Technology Way - Brickman Nurseries (1997 Season)
306-310 Era Drive - Berrelles Landscaping (1997 Season)
4. Fire Alarm Monitoring
1001 Technology Way - Libertyville Fire Dept.
Ameritech Dedicated Phone Line
801 & 901 Technology Way - Libertyville Fire Dept.
Ameritech Dedicated Phone Line
306-310 Era Drive - Ameritech/Security Link $54/Qtr.
Ameritech Dedicated Phone Line
5. Roof-top Maintenance
306-310 Era Drive - Northern Illinois Roofing $ 100/mo.
6. Industrial Building and Development Company
Culligan Water Service
Phone System
Cleaning Service
Security Alarm and Monitoring
Cellular Phone Contracts
Copier Maintenance
Rubbish Removal
<PAGE>
EXHIBIT E
---------
SCHEDULE OF LICENSES
--------------------
Being those certain Licenses of which copies have previously been delivered to
Company.
E-1
<PAGE>
EXHIBIT F
---------
SCHEDULE OF LEASES
------------------
F-1
<PAGE>
EXHIBIT K
---------
PURCHASE OPTION AGREEMENT
-------------------------
THIS PURCHASE OPTION AGREEMENT (the "Option Agreement") is made as of the
______ day of July, 1997, by and among LASALLE NATIONAL TRUST, N.A., not
personally but solely as Trustee under Trust Agreement dated 7/1/96 and known as
Trust No. 120321 ("Trustee") and ESH LANDWEHR ROAD LIMITED PARTNERSHIP, an
Illinois limited partnership and ERA DRIVE LIMITED PARTNERSHIP, an Illinois
limited partnership which are the beneficiaries of the aforesaid land trust
(collectively, "Beneficiary"; Trustee and Beneficiary, collectively, are
hereinafter referred to as "Seller"), and PRIME GROUP REALTY, L.P., a Delaware
limited partnership ("Purchaser").
WITNESSETH:
----------
WHEREAS, Trustee is the fee owner of two (2) certain parcels of improved
real estate in the Village of Libertyville, County of Lake, and State of
Illinois, which parcels are legally described on Exhibit A attached hereto and
made a part hereof (the "Land"); and
WHEREAS, Beneficiary has developed each parcel as an office/industrial
building with related improvements (the Land, building and improvements which
are located on a parcel are hereinafter collectively referred to as the
"Property") and thereafter lease the Property to tenants; and
WHEREAS, Seller desires to grant, and Purchaser desires to acquire, an
option to purchase each Property upon and subject to the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of Purchaser's acquisition of the Property
from Seller, the mutual covenants and agreements contained in this Option
Agreement, and for Ten Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Seller and Purchaser agree as follows:
1. Grant of Option. Seller hereby grants to Purchaser the exclusive
option (the "Option") to purchase each Property upon the terms and conditions
set forth herein, for a purchase price of calculated in accordance with the
following formula (the "Purchase Price"). "The Purchase Price" shall be an
amount equal to the Proforma Net Operating Income (defined hereinafter) for the
applicable Property multiplied by ten (10), except that in no event shall the
Purchase Price be: (i) less than the total verified direct out-of-pocket cost to
develop and construct the applicable Property; or (ii) more than one hundred
twenty percent (120%) of the Seller's total verified direct and out-of-pocket
cost (as defined hereinafter) to develop and construct the applicable Property.
Any and an prepayment fees or expenses charged by any lender to release its
security interests in the Property or any
<PAGE>
part thereof as a result of Purchaser's purchase of the Property shall be paid
by Seller. For purposes of this Agreement, the following definitions shall
apply:
a. "Proforma Net Operating Income" shall mean the net operating income
projected to be generated from Qualified Lease(s) at the applicable Property
during the next twelve month period (determined by utilizing generally accepted
accounting principles consistently applied (unless the Qualified Lease is with
Bohdan Automation, in which event the calculation of net operating income shall
be made utilizing an assumed rent of $5.80 per square foot), after deducting all
real estate taxes and all projected operating expenses (unless the tenant is
obligated to pay same, in which event no deduction shall be made for such items)
and "Qualified Lease" shall mean a lease in which (i) the space in question is
occupied by a third party tenant who is not related to any Contributor (as
defined in the separate Contribution Agreement dated July 8, 1997 by and among
entities affiliated with Seller and Purchaser), directly or indirectly, or under
common control with any Contributor pursuant to arms length written leases and
under a valid certificate of occupancy; (ii) the tenant is open for business and
paying rent, and additional rent attributable to common area charges, taxes and
insurance in accordance with the lease (if the lease requires payment of such
items by such tenants); and (iii) the tenant shall have delivered an unqualified
tenant estoppel letter in the form of Exhibit D attached or other form
reasonably acceptable to Purchaser.
b. "Cost" shall mean the cost of the land of the applicable property
(calculated at $3.50 per net useable square foot as defined in that certain Real
Estate Sale Contract dated of even date herewith by and between Purchaser and
Seller), plus the direct, verified out-of-pocket hard and soft construction
costs; provided, however, soft costs shall include (i) actual interest carry
attributable to the Property which is covered by the Qualified Lease; (ii) a
development fee to Seller or its designee in an amount equal to four percent
(4%) of the hard construction costs, but shall not include any other fees,
commissions or payments to Seller, Edward Hadesman, Tucker Magid or their
families and/or entities owned or controlled by any of the foregoing.
The Purchase Price shall be paid in cash at Closing; provided,
however, Seller may, upon written notice to Purchaser given within 10 days after
Seller receives written notice of Purchaser's exercise of the option, elect to
contribute the Property to the Partnership and accept limited partnership
interests in Purchaser, which shall have a net fair market value equal to the
Purchase Price calculated utilizing the value of the limited partnership units
as of the Closing Date.
2. Exercise of the Option; Right of First Refusal. (a) Subject to the
provisions of this Agreement, hereof, Purchaser may exercise the Option, by the
delivery of written notice (the "Exercise Notice") to Seller of Purchaser's
intent so to exercise the Option, at any time after the date hereof and prior to
the "Expiration Date", being defined as the earlier of (i) the date which is the
third (3rd) anniversary of the date hereof, or (ii) the date sixteen (16) days
after the date that Seller delivers to Purchaser written notice that Seller has
obtained one or more Qualified Lease(s) for substantially all of the space
2
<PAGE>
within a building located on the Property to one or more third parties in arms
length transactions ("Seller's Delivery Notice"). In the event that the Option
is not exercised by Purchaser in the manner provided herein on or before the
Expiration Date, then this Option Agreement and the Option shall, without
further action of any party, automatically terminate as to such Property, and be
null, void and of no further force or effect, and neither party shall have any
further rights or obligations hereunder or with respect to the Option as to such
Property. The Closing shall occur on a date no less than thirty (30) days and no
more than forty-five (45) days following the date of Purchaser's exercise of its
option, except as provided hereinafter. Seller may give Seller's Delivery Notice
at the time it enters into a Lease which Seller believes will become a Qualified
Lease with the passage of time, in which event Seller shall specify the date
which Seller believes the Lease will become a Qualified Lease in Seller's
Delivery Notice, and Seller shall further immediately notify Purchaser of any
change in the date that the Lease is expected to become a Qualified Lease. In
the event Seller gives a Seller's Delivery Notice which states that a Lease will
become a Qualified Lease in the future, the Closing Date shall be the sixteenth
(16th) day following the date that the Lease becomes a Qualified Lease.
(b) In the event Seller desires to sell any portion of the Property
described on Exhibit A on or before the fifth (5th) anniversary of the execution
of this Agreement, Purchaser shall have a right of first refusal regarding each
and any sale of any portion of the Property by Seller. In the event Seller has
received a bona fide third party offer or term sheet acceptable to Seller,
Seller shall deliver to Purchaser a copy of such offer or term sheet and
Purchaser shall have the right for a period of fifteen (15) days after its
receipt of such offer or term sheet to notify Seller that it will purchase such
portion of the Property on the same terms and conditions set forth in such offer
or term sheet. In the event that Purchaser does not notify Seller of its
intention to purchase such Property on such terms within such fifteen (15) day
period, Seller may sell such Property on the same terms (but not different
terms) as were presented to Purchaser. Purchaser shall again have the right of
first refusal on any subsequent offer (or such changed terms) in the manner set
forth in this Section.
3. Entry onto the Property. Purchaser and/or Purchaser's agents shall have
the right during the term of this Option Agreement, at reasonable times and on
reasonable advance notice to Seller, to enter onto each Property for purposes of
surveying the Land, inspecting the improvements and undertaking soil boring and
other tests; provided, however, that neither Purchaser nor Purchaser's agents
shall disturb any tenants or occupants of such Property or their respective
licenses and/or invitees or be entitled to access to any portions of the
Property which are subject to tenant leases (except to the extent such access is
permitted by such tenant leases). Purchaser shall deliver to Seller prior to
entry on the Property, evidence of insurance naming Seller as an insured party
and protecting Seller against any liability or claim arising in connection with
Purchaser's investigation or the presence of Purchaser's representatives on the
Property (including Purchaser's agents and consultants for environmental and
soil testing). All surveying, inspections and soil boring and other tests shall
be performed at Purchaser's sole cost and expense and Purchaser shall deliver
copies of all such surveys and the results of all such
3
<PAGE>
tests to Seller at no cost or expense to Seller. Seller shall also provide
Purchaser and/or Purchaser's agents reasonable access to Seller's books and
records relating to such Property, and to copies of the leases, licenses,
contracts and all other documents and data relating to the Property, to examine
and copy the same.
Purchaser hereby indemnifies, protects and holds Seller harmless and
agrees to defend Seller from and against any and all claims, demands, loss,
cost, damage, expense and liability (including, without limitation, personal
injury and property damage claims and mechanics' or other liens), including
reasonable attorneys' fees and litigation costs, caused by or occurring in
connection with the presence of Purchaser or Purchaser's agents on such Property
or the exercise by Purchaser of any of its surveying, inspection and testing
rights under this Section. In addition, Purchaser shall keep such Property free
from any liens which could arise as a result of the exercise by Purchaser of any
of its surveying, inspection and testing rights under this Section. Purchaser,
at its sole cost and expense, shall restore such Property to the same condition
as existed prior to its entry onto the Property and shall be liable for any and
all damage in connection therewith. Notwithstanding anything to the contrary
contained herein, the provisions of this Section shall survive the term of this
Option Agreement (regardless of whether or not the Option is exercised), as well
as any closing of the sale of the Property pursuant hereto.
4. Closing. On the date of closing of the transfer of title, Seller shall
issue, or cause the issuance of, a recordable Trustee's Deed conveying
merchantable title, which Trustee's Deed shall convey the Property to Purchaser,
subject only to the matters set forth on Exhibit B attached hereto and made a
part hereof, and/or matters arising through, out of, or in connection with
Purchaser or any party claiming through Purchaser, or in the alternative,
contribute the Property to the Partnership and execute assignments of
Partnership Interests. Seller and Purchaser shall also execute and deliver such
other documents as are usual and customary in connection with the sale and
purchase of an office/industrial building, including without limitation, Bill of
Sale, ALTA Statements, Assignment of Leases, third party arm's length contracts
(but not management or leasing contracts), IRPTA Transfer Tax Declarations and
Closing Statements. At the request of Purchaser, Closing shall take place
through a standard form of deed and money escrow with such provisions as are
necessary to comply with the terms hereof, to be established by Seller and
Purchaser, and/or their respective attorneys. The parties shall split the cost
of the escrow.
5. Title and Survey. At least fifteen (15) days prior to the Closing
Date, Seller will deliver to Purchaser a then current commitment for a title
guaranty policy to be issued by Chicago Title Insurance Company, or other
national title company reasonably satisfactory to Purchaser, in the amount of
the Purchase Price showing title vested in Seller, and containing extended
coverage over any general exceptions, subject to: the matters set out on Exhibit
B attached hereto, general real estate taxes and matters arising through, out of
or in connection with Purchaser. Seller shall also deliver an updated As-Built
ALTA Plat of Survey of the Property or Affidavit of No Change, if no changes to
the Property have occurred since the date of the existing Plat of Survey. If any
defects in
4
<PAGE>
title and/or survey appear, Seller shall have thirty (30) days to cure same,
although matters which may be removed by payment of cash at Closing shall be so
removed and paid by Seller. If such defects are not or cannot be so cured within
such thirty (30) days, within ten (10) days of being notified thereof, Purchaser
may:
a. accept title as it then is and deduct liens or encumbrances of a
definite or ascertainable amount from the Purchase Price; or
b. withdraw and cancel the exercise of the Purchase Option as to
such Property.
On the Closing Date, Seller will cause the issuance of the title policy
described above. Seller shall pay the cost of the above described policy.
Purchaser shall pay for title endorsements requested by Purchaser.
6. Prorations. There shall be no proration for real estate taxes,
operating expenses, assessments, service contracts, utilities or other
customarily proratable items so long as same are being paid by tenants pursuant
to Qualified Leases of the Property. If any or all of such items are not paid by
tenants pursuant to Qualified Leases, the parties shall prorate such items based
upon the most recent information available and otherwise in the manner
previously utilized by Purchaser and entities owned or controlled by Edward
Hadesman. Rent will be prorated as of the Closing Date, and Seller will deliver
to Purchaser all Security Deposits (and interest, if any) held by Seller. There
shall be no other prorations unless specifically set out in this Agreement. All
Leasing commissions due and payable in connection with the initial execution of
Qualified Leases shall be paid by Seller. Leasing commissions to third parties
(unrelated to Edward S. Hadesman, Tucker Magid and/or entities owned and
controlled by either of said individuals or their families) due and payable in
connection with any extension of the term of Qualified Leases, if any, shall be
paid by Purchaser when due. Purchaser shall not be required to pay any leasing
commissions except as provided in this paragraph.
7. Transfer Tax and Brokers Commissions. Seller shall pay the amount of
any stamp tax imposed by state and/or county law on the transfer of the title
and shall furnish a completed real estate transfer declaration signed by the
Seller or Seller's agent in the form required pursuant to the Real Estate
Transfer Act of the State of Illinois if then in effect. Any local transfer tax
obligation shall be paid by the party responsible therefore pursuant to the
terms of the local ordinance; provided, however, if such local ordinance does
not specify a responsible party, the local transfer tax shall be paid by
Purchaser. No brokers commissions are payable in connection with the sale of the
Property at Closing, except for commissions to Industrial Building and
Development Company which commissions shall be paid by Seller.
8. Restrictions on Assignment. Neither party shall assign this Agreement
without the other party's prior written consent. This Agreement shall be binding
upon and
5
<PAGE>
shall inure to the benefit of the parties hereto and their respective successors
and/or assigns.
9. Zoning. During the term of this Option Agreement, Seller shall not
seek, permit, approve or consent to any zoning change, annexation or subdivision
with respect to the Property, which consent shall not be unreasonably withheld
or delayed by Purchaser.
10. Time of the Essence. Purchaser and Seller hereby acknowledge and agree
that time is and shall be of the essence hereof. Notwithstanding anything to the
contrary contained herein, in the event the due date for performance of any
obligation hereunder falls on a day other than a business day, the date for
performance of such obligation shall be extended to the next following business
day.
11. Seller's Covenants; Existing Mortgage. Seller hereby covenants and
agrees that during the term of this Option Agreement, Seller shall not commit,
approve, consent to or permit any Unpermitted Transfer (hereinafter defined)
without the prior written consent of Purchaser. Any Unpermitted Transfer which
is effected without the prior written consent of Purchaser shall be void,
invalid and ineffective and of no force or effect against Purchaser or
Purchaser's rights hereunder and in the Property. As used herein, an
"Unpermitted Transfer" shall mean any of the following:
(i) any grant, sale, transfer or other conveyance of all or any
portion of or interest in the Property; or
(ii) any mortgage, lien or other encumbrance of all or any portion of
the Property unless such mortgage, lien or encumbrance is able to be
released at the Closing using a portion of the Purchase Price in the event
that Purchaser exercises the Option, and unless the mortgagee under any
such mortgage acknowledges in writing Purchaser's rights under this Option
Agreement are superior to the mortgage.
12. Covenants Running with the Land; Specific Performance. The covenants
and agreements of Seller under this Option Agreement are intended to be and
shall be covenants running with the land with respect to the Property and shall
be binding upon the parties and their respective representatives, and permitted
successors and assigns. In the event Seller defaults, Purchaser may file an
action for specific performance to compel Seller to comply with its obligations
under this Option Agreement. In the event of a default by Purchaser, Purchaser
shall pay Seller the sum equal to ten percent (10%) of the Purchase Price as
full and complete liquidated damages (and not as a penalty or forfeiture) in
lieu of all other legal and equitable rights and remedies which Seller may have
on account of such default.
13. Notices. Any notice, request, demand, instruction or other document to
be given or served hereunder or under any document or instrument executed
pursuant hereto
6
<PAGE>
shall be in writing and shall be delivered personally or sent by United States
registered or certified mail, return receipt requested, or by overnight express
courier, postage prepaid and addressed to the parties at their respective
addresses set forth below, and the same shall be effective upon receipt if
delivered personally or two (2) business days after deposit in the mails or
deposit with an overnight express courier. A party may change its address for
receipt of notices by service of a notice of such change in accordance herewith.
If to Purchaser: Prime Group Realty, L.P.
c/o The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, IL 60601
Attn: Richard Curto
With a copy to: Winston & Strawn
35 West Wacker Drive
Suite 3500
Chicago, IL 60601
Attn: Wayne D. Boberg, Esq.
If to Seller: c/o Industrial Building and Development Company
3184 MacArthur Boulevard
Northbrook, IL 60062
With a copy to: Shefsky & Froelich Ltd.
444 North Michigan Avenue
Chicago, IL 60611
Attn: James M. Teper, Esq.
14. Memorandum. The parties hereby agree that a fully executed and
acknowledged memorandum of this Option Agreement, in the form attached hereto
and made a part hereof as Exhibit C (the "Memorandum"), has been executed by
Purchaser and Seller and shall be recorded by Purchaser at Purchaser's sole
expense. In the event that this Option Agreement shall expire or terminate and
Purchaser shall not have exercised the Option pursuant hereto, then this Option
Agreement and the Option shall, without further action of any party,
automatically terminate and be null, void and of no further force or effect, and
neither party shall have any further rights or obligations hereunder or with
respect to the Option; in addition, however, in such event, Purchaser shall
execute, acknowledge and deliver to Seller a recordable quitclaim deed to the
Property or any other instrument reasonably requested by Seller for the release
of the Memorandum and otherwise indicating the termination of Purchaser's
rights hereunder and with respect to the Property.
7
<PAGE>
15. Successors and Assigns: No Merger. All of the terms and conditions
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns.
16. Severability. In the event that any term or provision of this Option
Agreement, or the application thereof to any particular party or circumstance,
is found by a court of competent jurisdiction to be invalid or unenforceable (in
whole or in its application to a particular party or circumstance), the
remaining terms and provisions of this Option Agreement or the application
thereof to different parties or circumstances, as the case may be, shall not be
affected thereby and this Option Agreement shall remain in full force and effect
in all other respects.
17. Governing Law: Counterparts. This Option Agreement shall be governed
by and construed in accordance with the laws of the State of Illinois. This
Option Agreement and any document or instrument executed pursuant hereto may be
executed in any number of counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same instrument.
18. Due Authorization: Binding Agreement. Trustee hereby represents, and
Beneficiary and Purchaser each hereby represents and warrants, to the other
respective parties hereto that the execution, delivery and performance of this
Option Agreement has been duly and validly authorized by all necessary action of
such party, and constitutes a legal, valid and binding obligation of such party,
enforceable against such party in accordance with the terms hereof. Purchaser
represents and warrants to Seller that the execution, delivery, and performance
of this Option Agreement has been duly and validly authorized by all necessary
action of such party, and constitutes a legal, valid and binding obligation of
Purchaser, enforceable against Purchaser in accordance with its terms.
19. Consents and Approvals. Trustee hereby represents, and Beneficiary and
Purchaser each hereby represents and warrants, to the other respective parties
hereto that no consent, waiver, approval or authorization of, or notice to, any
other person is required to be obtained or given by such party in connection
with the execution, delivery and performance of this Option Agreement, except
for such consents, approvals or authorizations which have been obtained.
20. Trustee's Exculpation. This Option Agreement is executed by Trustee,
not personally but solely as Trustee aforesaid, in the exercise of the power and
authority conferred upon and vested in it, as Trustee aforesaid (and Trustee
hereby represents that it possesses full power and authority to execute this
Option Agreement). It is expressly understood and agreed by every person, firm
or corporation hereafter claiming an interest pursuant to this Option Agreement
that Trustee has executed this Option Agreement solely for the purpose of
subjecting the title holding interest and the trust estate under the aforesaid
Trust to the terms of this Option Agreement; that no personal liability or
personal responsibility is assumed by nor shall, at any time, be asserted or
enforceable against Trustee personally, on account of this Option Agreement or
on account of any
8
<PAGE>
representation, obligation, duty, covenant or agreement contained herein, either
express or implied, all such personal liability, if any, being expressly waived
and released; and further, that no duty shall rest upon Trustee either
personally or as Trustee, to sequester trust assets, rentals, avails or proceeds
of any kind, or otherwise to see to the fulfillment or discharge of any
obligation, express or implied, arising pursuant to the terms of this Option
Agreement. In the event of any conflict between the terms of this paragraph and
the remainder of this Option Agreement, or in the event of any question of
apparent liability or obligation resting upon Trustee, the exculpatory
provisions hereof shall be controlling.
21. Seller's Election of Tax-Deferred Exchange. Seller may elect a tax
deferred exchange under Section 1031 of the Internal Revenue Code of 1986, as
amended, by designating other real property (the "Exchange Property") to be
acquired by an intermediary selected by the Seller (the "Intermediary") in
exchange for the Property to be sold by Seller. In such event, Seller shall
enter into an exchange agreement with Intermediary prior to the Closing pursuant
to which the Intermediary shall receive the sale proceeds of the Property being
sold by Seller, and Seller may transfer Seller's right to receive proceeds under
this Agreement to the Intermediary for such purpose, but all transfer documents
shall be executed by Seller, and Seller shall remain responsible for its
obligations under this Agreement. Notwithstanding Seller's election to effect a
tax-deferred exchange, such an exchange by Seller shall not interfere with or
excuse Seller's obligations under this Agreement, and Seller shall be required
to sell the Property directly to Purchaser, and Purchaser shall be required to
purchase the Property directly from Seller for the price and on the terms set
forth in this Agreement. In no event shall Purchaser be required (a) to take
title to any property other than the Property, or (b) to pay funds or incur
expenses (including attorney's fees) in addition to those called for elsewhere
in this Agreement. Purchaser shall not be required to be involved in such
exchange other than as specified herein. Further, in no event shall Seller's
election to effect a tax-deferred exchange delay the Closing.
22. Limitation on Liability. Notwithstanding anything to the contrary set
forth in this Agreement, the Purchaser shall look solely to the assets of the
Beneficiary, the trust estates of the title holding land trusts and the equity
interests of the general partners in the Property (and not the personal
residence or personal assets of any partner in the Beneficiary) for satisfaction
of any monetary claim against Seller.
[SIGNATURE PAGE FOLLOWS ON NEXT PAGE]
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement
as of the day and year first above written.
PURCHASER:
PRIME GROUP REALTY, L.P., a Delaware
limited partnership
By: Prime Group Realty Corp., a Delaware
corporation, its sole General Partner
By: _________________________________
Name: _______________________________
Title: ______________________________
SELLER:
ESH LANDWEHR ROAD LIMITED
PARTNERSHIP, an Illinois limited
partnership
By: _____________________________________
Name: Edward S. Hadesman
Title: General Partner
ERA DRIVE LIMITED PARTNERSHIP, an Illinois
limited partnership
By: _____________________________________
Name: Edward S. Hadesman
Title: General Partner
10
<PAGE>
and
LASALLE NATIONAL TRUST, N.A., as Trustee
aforesaid
By: ________________________
Name: ________________________
Title: ________________________
11
<PAGE>
EXHIBIT A
LEGAL DESCRIPTIONS
801 TECHNOLOGY WAY
LOT D, BEING A CONSOLIDATION OF LOTS 58 THRU 62 (INCLUSIVE), IN LIBERTYVILLE
BUSINESS PARK, BEING A SUBDIVISION OF PART OF THE NORTHWEST 1/4 OF SECTION 18,
TOWNSHIP 44 NORTH, RANGE 11, EAST OF THE THIRD PRINCIPAL MERIDIAN, ACCORDING TO
THE PLAT THEREOF RECORDED MARCH 21, 1995 AS DOCUMENT 3655524, IN LAKE COUNTY,
ILLINOIS.
901 TECHNOLOGY WAY
LOT C, BEING A CONSOLIDATION OF LOTS 63 THRU 68 (INCLUSIVE), IN LIBERTYVILLE
BUSINESS PARK, BEING A SUBDIVISION OF PART OF THE NORTHWEST 1/4 OF SECTION 18,
TOWNSHIP 44 NORTH, RANGE 11, EAST OF THE THIRD PRINCIPAL MERIDIAN, ACCORDING TO
THE PLAT THEREOF RECORDED MARCH 21, 1995 AS DOCUMENT 3655524, IN LAKE COUNTY,
ILLINOIS.
<PAGE>
EXHIBIT B
PERMITTED EXCEPTIONS
[To be agreed upon by Seller and Purchaser on or before August 4, 1997]
<PAGE>
EXHIBIT C
---------
MEMORANDUM OF PURCHASE OPTION AGREEMENT
---------------------------------------
THIS MEMORANDUM OF PURCHASE OPTION AGREEMENT (the "Memorandum") is made as
of the _____ day of _________________, 1997, by and among _____________________
______, as Trustee under Trust Agreement dated _________________ and known as
Trust No. _________ ("Trustee") and _____________________, a __________________,
that is the sole beneficiary of the aforesaid land trust ("Beneficiary"; Trustee
and Beneficiary, collectively, "Seller"), and PRIME GROUP REALTY, L.P., a
Delaware limited partnership ("Purchaser").
WITNESSETH:
----------
WHEREAS, pursuant to that certain Purchase Option Agreement of even date
herewith by and between Seller and Purchaser (the "Option Agreement"), Seller
has granted to Purchaser, and Purchaser has acquired from Seller, an exclusive
option (the "Option") to acquire the real estate described on Schedule 1
attached hereto and made a part hereof (collectively, the "Property"), upon the
terms and subject to the conditions set forth in the Option Agreement; and
WHEREAS, the covenants and agreements of Seller under the Option Agreement
are covenants running with the land and shall be binding upon Seller and
Seller's heirs, representatives, successors and assigns; and
WHEREAS, this Memorandum is executed and recorded in accordance with the
terms of the Option Agreement solely for the purpose of giving notice of the
existence thereof and shall not supersede or in any way modify the terms or
conditions of the Option Agreement.
NOW, THEREFORE, for Ten Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Seller has granted, and does hereby grant, to Purchaser the Option to purchase
the Property, upon and subject to all the terms and conditions of the Option
Agreement, which is incorporated herein as fully as if set out herein in full,
and the parties further state as follows:
1. Termination of Option. Pursuant to and upon the terms and conditions
set forth in the Option Agreement, if not earlier terminated in accordance with
the terms of the Option Agreement, the Option shall, without further action of
any party, automatically expire and terminate on the earlier of (i) [third
anniversary of the date hereof], or (ii) the date sixteen (16) days after the
date, if any, that Seller delivers to Purchaser written notice
-C1-
<PAGE>
that Seller has leased all or substantially all of the space within a building
on a Property (as defined in the Option Agreement) to one or more third parties
in arms-length transactions.
2. Trustee's Exculpation. This Memorandum is executed by Trustee, not
personally but solely as Trustee aforesaid, in the exercise of the power and
authority conferred upon and vested in it, as Trustee aforesaid (and Trustee
hereby represents that it possesses full power and authority to execute this
Memorandum). It is expressly understood and agreed by every person, firm or
corporation hereafter claiming an interest pursuant to this Memorandum that
Trustee has executed this Memorandum solely for the purpose of subjecting the
title holding interest and the trust estate under the aforesaid Trust to the
terms of this Memorandum; that no personal liability or personal responsibility
is assumed by nor shall, at any time, be asserted or enforceable against Trustee
personally, on account of this Memorandum or on account of any representation,
obligation, duty, covenant or agreement contained herein, either express or
implied, all such personal liability, if any, being expressly waived and
released; and further, that no duty shall rest upon Trustee either personally or
as Trustee, to sequester trust assets, rentals, avails or proceeds of any kind,
or otherwise to see to the fulfillment or discharge of any obligation, express
or implied, arising pursuant to the terms of this Memorandum. In the event of
any conflict between the terms of this paragraph and the remainder of this
Memorandum, or in the event of any question of apparent liability or obligation
resting upon Trustee, the exculpatory provisions hereof shall be controlling.
[SIGNATURE PAGE FOLLOWS ON NEXT PAGE]
-C2-
<PAGE>
IN WITNESS WHEREOF, Seller and Purchaser have caused this Memorandum to be
executed as of the date first above written.
PURCHASER:
PRIME GROUP REALTY, L.P., a Delaware limited
partnership
By: Prime Group Realty Corp., a Delaware
corporation, its sole General Partner
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
SELLER:
------------------------------------------
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
------------------------------------------
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
THIS DOCUMENT WAS PREPARED BY,
AND AFTER RECORDING SHOULD BE
RETURNED TO:
Winston & Strawn
35 West Wacker Drive
Chicago, Illinois 60601
Attention: William J. Ralph, Esq.
- C3 -
<PAGE>
STATE OF ILLINOIS )
)SS.
COUNTY OF COOK )
I HEREBY CERTIFY that on this ______ day of _______________, 1997,
before me personally appeared _______________, the __________ of PRIME REALTY
CORP., a Delaware corporation, as General Partner of PRIME GROUP REALTY, L.P., a
Delaware limited partnership, to me known to be the same person who signed the
foregoing instrument as his free act and deed for the use and purpose therein
mentioned, and that the said instrument is the act and deed of said corporation
as aforesaid and the act and deed of said corporation as aforesaid.
WITNESS my signature and official seal the day and year last
aforesaid.
(NOTARY SEAL)
__________________________________
Notary Public
Commission Expires:_______________
- C4 -
<PAGE>
STATE OF ILLINOIS )
)SS.
COUNTY OF COOK )
I HEREBY CERTIFY that on this ______ day of _______________, 1997,
before me personally appeared _______________, the _______________________ of
_______________________, a ________________________, to me known to be the same
person who signed the foregoing instrument as his free act and deed for the use
and purpose therein mentioned, and that the said instrument is the act and deed
of said corporation as aforesaid and the act and deed of said corporation as
aforesaid.
WITNESS my signature and official seal the day and year last
aforesaid.
(NOTARY SEAL)
__________________________________
Notary Public
Commission Expires:_______________
- C5 -
<PAGE>
STATE OF ILLINOIS )
)SS.
COUNTY OF COOK )
I HEREBY CERTIFY that on this ______ day of _______________, 1997,
before me personally appeared _______________________, the ______________ of
_______________________, a ________________________, to me known to be the same
person who signed the foregoing instrument as his free act and deed for the use
and purpose therein mentioned, and that the said instrument is the act and deed
of said corporation as aforesaid and the act and deed of said corporation as
aforesaid.
WITNESS my signature and official seal the day and year last
aforesaid.
(NOTARY SEAL)
__________________________________
Notary Public
Commission Expires:_______________
<PAGE>
EXHIBIT D
---------
TENANT ESTOPPEL CERTIFICATE
_______________, 1997
Prime Group Realty, L.P.
c/o The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn:__________________
Re: Lease Dated: _______________________
Landlord: _______________________
Tenant: _______________________, a(n) _______________________
Premises: ____ square feet in the building located at
_______________________, _______, Illinois
Gentlemen:
The undersigned, __________, a(n) ____________ ("Tenant"), the tenant under
the above-described lease, a copy of which is attached hereto as Exhibit A,
("Lease") provides this Tenant Estoppel Certificate to you as conclusive
evidence of the matters set forth herein concerning the above-referenced Lease
and the Premises.
As of the date hereof, the undersigned hereby certifies the following:
1. That the Lease supersedes, in all respects, all prior written or oral
agreements between Landlord and Tenant with respect to the Premises
and there are no agreements, understandings, warranties, or
representations between Landlord and Tenant with respect to the Lease
or the Premises except as expressly set forth in the copy of the Lease
(including all amendments thereto, if any) attached hereto as Exhibit
A.
2. That, as of the date hereof, the Lease has not been changed, amended,
modified, supplemented or superseded except as set forth in the copy
of the Lease (including all amendments thereto, if any) attached
hereto as Exhibit A.
<PAGE>
3. That the Lease remains in full force and effect and there are no known
existing defaults by Tenant under the Lease.
4. That the improvements and space required by the Lease to be delivered
to Tenant have been satisfactorily completed and delivered by Landlord,
and have been accepted by the Tenant.
5. That the Premises are currently occupied and open for the use by
Tenant, its customers, employees and invitees.
6. That Tenant's interest in the Lease and the Premises demised therein,
or any part thereof, has not been sublet, transferred or assigned.
7. That all duties of an inducement nature required of the Landlord under
the Lease, as of the date of this certificate, have been fulfilled by
Landlord and Tenant is fully obligated to pay rent and all other
charges coming due under the Lease.
8. That the Commencement Date of the Lease was _________,19__ and the
Expiration Date of the Lease is __________, _____.
9. That the monthly base rent under the Lease of $ _________commenced on
________, 19__ and the last monthly payment of rent in the amount of
$_____________ was made by Tenant on _________, 1997. No monthly rental
has been prepaid nor has Tenant been given any free rent, partial rent,
rebates, rent rebates or concessions except as provided in Lease.
Tenant has no claims, defenses or offsets against any rents payable
under the Lease.
10. That a security deposit in the amount of $ _______ has been deposited
with Landlord. Tenant agrees to look solely to the Landlord for return
of the security deposit unless the Landlord has deposited the security
deposit with you.
11. That Landlord, to the best of our knowledge, has fully performed all of
its obligations under the Lease, as of the date of this certificate,
and there are no known circumstances existing under which Landlord may
be deemed in default merely upon the service of notice or passage of
time, or both.
12. That Landlord has not given its consent to Tenant (for example, to
sublease or to alter the Premises) to take any action which, pursuant
to the Lease, requires Landlord's consent, except _________________.
<PAGE>
13. That Tenant has not received any notice of a prior sale, transfer,
assignment, pledge or other hypothecation of the Premises or the Lease
or of the rents provided for therein.
14. That Tenant has not filed, and is not currently the subject of any
filing, voluntary or involuntary, for bankruptcy or reorganization
under any applicable bankruptcy or creditors rights laws.
15. That Tenant is a ___________ [corporation] organized, validly existing
and in good standing under the law of __________.
In issuing this Estoppel Certificate, Tenant understands that you will rely
thereon in your acquiring that certain real estate which includes the Premises.
_________________________, a(n)
_______________________________
By: __________________________
Name:_____________________
Title:____________________
<PAGE>
SCHEDULE 1
----------
[Legal Description]
<PAGE>
EXHIBIT L
---------
CHICAGO TITLE INSURANCE COMPANY - ILLINOIS FORM B*
Real Estate Sales Contract
1. PRIME GROUP REALTY, L.P., a Delaware limited partnership (Purchaser) agrees
to purchase at a price of $ See Rider Attached Hereto on the terms set forth
herein, the following described real estate in Lake County, Illinois:
SEE EXHIBIT "A" ATTACHED HERETO
commonly known as SEE EXHIBIT "A" ATTACHED HERETO, and with approximate lot
dimensions of ________ x ________, together with the following property
presently located thereon:
__________________________________________________________________(Beneficiary),
2. LASALLE NATIONAL TRUST, N. A., not personally, but solely as Trustee under
Trust Agreement dated November 15, 1994 and known as Trust No. 119196
(collectively "Seller") agrees to sell the real estate at the price and terms
set forth herein, and to convey or cause to be conveyed to Purchaser or nominee
title thereto by a recordable Trustee's deed, with release of homestead rights,
if any, subject only to: the Permitted Exceptions (hereinafter defined).
3. Purchaser will pay $10.00 and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, has paid $________, as
earnest money to be applied on the purchase price, and agrees to pay or satisfy
the balance of the purchase price, plus or minus prorations, at the time of
closing by cashier's check or wire transfer of funds.
5. The time of closing shall be on as set forth in/the Rider, unless
subsequently mutually agreed otherwise, at the/office of Chicago Title and Trust
Company provided title is shown to be good or is accepted by Purchaser.
8. Seller warrants that Seller, its beneficiaries or agents of Seller or of its
beneficiaries have received no notices from any city, village or other
governmental authority of zoning, building, fire or health code violations in
respect to the real estate that have not been heretofore corrected.
9. A duplicate original of this contract, duly executed by the Seller and his
spouse, if any, shall be delivered to the Purchaser within ____ days from the
date hereof, otherwise, at the Purchaser's option, this contract shall become
null and void and the earnest money shall be refunded to the Purchaser.
This contract is subject to the Conditions and Stipulations set forth on the
back page hereof, which Conditions and Stipulations are made a part of this
contract. SEE RIDER ATTACHED HERETO AND MADE A PART HEREOF.
Dated
---------------------
Purchaser SEE ATTACHED SIGNATURE PAGE (Address) SEE ATTACHED SIGNATURE PAGE
----------------------------- -----------------------------
Purchaser (Address)
----------------------------- -----------------------------
Seller SEE ATTACHED SIGNATURE PAGE (Address) SEE ATTACHED SIGNATURE PAGE
----------------------------- -----------------------------
Seller (Address)
----------------------------- -----------------------------
*Form normally used for sale of property improved with multi-family structures
of five or more units or of commercial or industrial properties.
<PAGE>
CONDITIONS AND STIPULATIONS
3. Water and other utility charges, fuels, general taxes, if any, and other
similar items shall be adjusted ratably as of the time of closing. The amount
of the current general taxes not then ascertainable shall be adjusted on the
basis of (a), (b).
(a) 100% of the most recent ascertainable taxes: Real Estate Taxes shall
be reprorated upon issuance of the final tax bills for the applicable year of
Closing.
Seller shall pay the amount of any stamp tax imposed by State and County law on
the transfer of the title, and shall furnish a completed Real Estate Transfer
Declaration signed by the Seller or the Seller's agent in the form required
pursuant to the Real Estate Transfer Tax Act of the State of Illinois and shall
furnish any declaration signed by the Seller or the Seller's agent or meet other
requirements as established by any local ordinance with regard to a transfer or
transaction tax: such tax required by local ordinance shall be paid by the party
upon whom such ordinance places responsibility therefor. If such ordinance does
not so place responsibility, the tax shall be paid by the (Seller). (Strike
one.)
4. The provisions of the Uniform Vendor and Purchaser Risk Act of the State of
Illinois shall be applicable to this contract.
5. If this contract is terminated without Purchaser's fault, the earnest money
shall be returned to the Purchaser, but if the termination is caused by the
Purchaser's fault, and upon notice to the Purchaser as Seller's sole and
exclusive remedy, Seller shall receive, and Purchaser shall pay liquidated
damages in an amount equal to 15% of the Purchase Price.
6. This sale shall be closed through an escrow with Chicago Title and Trust
Company, in accordance with the general provisions of the usual form of Deed and
Money Escrow Agreement then in use by Chicago Title and Trust Company, with such
special provisions inserted in the escrow agreement as may be required to
conform with this contract. Upon the creation of such an escrow, anything herein
to the contrary notwithstanding, payment of purchase price and delivery of deed
shall be made through the escrow and this contract and the earnest money shall
be deposited in the escrow. The cost of the escrow shall be divided equally
between Seller and Purchaser. (Strike paragraph if inapplicable.)
7. Time is of the essence of this contract.
8. All notices herein required shall be in writing and shall be served on the
parties at the addresses following their signatures. The personal delivery, or
mailing of a notice by registered or certified mail, return receipt requested,
shall be sufficient service, and a notice shall be deemed given when the same
has been delivered or if mailed as aforesaid, deposited with the U.S. Postal
Service.
10. (B) Seller agrees to execute and deliver to Purchaser and each mortgage
lender of Purchaser such disclosure documents as may be required by the Illinois
Responsible Property Transfer Act.
<PAGE>
SCHEDULE 1
LIST OF CONTRIBUTORS AND PROPERTY LOCATIONS
-------------------------------------------
<TABLE>
<CAPTION>
Property Fee Ownership Beneficiary(ies)
-------- ------------- ----------------
<S> <C> <C>
1. 306-310 Era Drive LaSalle National Trust, NA, 310 Era Limited
t/u/t 10-40113-09 dated June Partnership
15, 1982
2. 1301 Ridgeview LaSalle National Trust, NA, MacArthur Drive
t/u/t 11-9051 dated September Properties,
7, 1994 CLE Limited Partnership
3. 500 Lindberg Lane LaSalle National Trust, NA, 500 Lindberg Limited
t/u/t 11-107825 dated March Partnership
30, 1984
4. 515 Huehl Road LaSalle National Trust, NA, 515 Huehl Limited
t/u/t 11-1358 dated August 1, Partnership
1986
5. 555 Huehl Road LaSalle National Trust, NA, 555 Huehl Limited
t/u/t 11-1357 dated August 1, Partnership
1986
6. 455 Academy Drive LaSalle National Trust, NA, Sky Harbor Associates
t/u/t 286-34 dated January 17,
1974
7. 1001 Technology Way LaSalle National Trust, NA, 1001 Technology Way,
t/u/t 11-9869 dated October 15, LLC
1995
8. 3818 Grandville Road/ LaSalle National Trust, NA, The Grandville Road
1200 Northwestern Ave t/u/t ll-2868 dated December Limited Partnership Properties
1, 1987
</TABLE>
<PAGE>
SCHEDULE 2
SCHEDULE OF BUSINESS ASSETS
---------------------------
1. Micron computer Pentium 200 MHZ and Monitor
2. LaPine computer 486 50 MHZ and Monitor
3. IBM notebook computer and Monitor
4. Ditto Tape Back-up
5. HP LaserJet 4 printer
6. HP DeskJet 870cse color printer
7. HP ScanJet 4P color flatbed scanner
8. HP plain paper fax machine
9. Laminated Wood Desk
10. Secretarial Desk
11. Steelcase Desk
12. Plan Table
13. Office Cabinetry
14. Five (5) 4 drawer file cabinets
15. Ten (10) 2 drawer file cabinets
16. One (1) 2 drawer vertical file cabinet
17. Three (3) overhead wall cabinets
18. Two (2) work tables
19. Conference table and six (6) black conference chairs
20. Six (6) gray swivel chairs
21. Binding Machine and supplies
22. Refrigerator
23. Microwave Oven
24. Miscellaneous office equipment
25. Miscellaneous office supplies
26. Glass meeting table
27. Rolling computer cart
28. One (1) desk chair
29. Two (2) file cabinet tops
30. Phone System Lease/Purchase Agreement
<PAGE>
SCHEDULE 2A
PERSONAL PROPERTY OWNED BY IBD
------------------------------
WHICH ARE NOT BUSINESS ASSETS
-----------------------------
1. Industrial Building and Development Company Logo
2. Wooden Desk with Metal Legs (currently in Tucker's Office)
3. Personal Item in attic
4. Oriental Rugs
5. Photographs by Edward S. Hadesman
6. Leather Sofa
7. Paintings and Artwork
8. Miscellaneous Nautical Equipment
9. "Drexal" armoire and headboard
10. Gray reclining lounge chair
<PAGE>
SCHEDULE 3
DESCRIPTION OF MORTGAGES TO BE ASSUMED
--------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
1. 1001 Technology Way
-------------------
Lender: State Farm Life Insurance Company
Loan Number: 13108
Start Date: 11/01/96
Term: 15 years
Original Loan Amount: $6,500,000
Interest Rate: 8.30%
Monthly Payment: $51,467.00
Loan Balance 5/30/97: $6,425,877
Maturity Date: 10/01/2011
2. 3818 Grandville/1200 Northwestern Avenue
----------------------------------------
Lender: Nationwide Life Insurance Company/West Coast Life
Loan Number(s): 03-0302904/76-0000493
Start Date: 12/01/91
Term: 10 Year
Original Loan Amount: $7,750,000
Interest Rate: 9.875%
Monthly Payment: $79,141.83
Loan Balance 9/30/97: $6,303,277
Maturity Date: 11/01/2001
</TABLE>
<PAGE>
SCHEDULE 3A
DESCRIPTION OF MORTGAGES TO BE REPAID
1. 1301 Ridgview Drive
Lender: McHenry State Bank
Loan Number: 345936
Original Loan Amount: $7,900,000
Interest Rate: 8.58%
Loan Balance 9/30/97: $7,694,011
Maturity Date: 09/01/2002
2. 306-310 Era Drive
Lender: General American
Loan Number: 8120
Original Loan Amount: $1,900,000
Interest Rate: 10.25%
Loan Balance 9/30/97: $1,745,207
Maturity Date: 02/01/98
3. 500 Lindberg Lane/515 Huehl Road
Lender: General American
Loan Number: 8031
Original Loan Amount: $5,925,000
Interest Rate: 9.875%
Loan Balance 9/30/97: $5,391,737
Maturity Date: 11/01/97
4. 555 Huehl Road
Lender: General American
Loan Number: 8163
Original Loan Amount: $4,360,000
Interest Rate: 9.875%
Loan Balance 9/30/97: $3,982,968
Maturity Date: 02/01/98
5. 455 Academy Drive
Lender: General American
Loan Number: 7961
Original Loan Amount: $2,700,000
Interest Rate: 10.25%
Loan Balance 9/30/97: $2,467,832
Maturity Date: 09/01/97
<PAGE>
SCHEDULE 4
----------
ASSIGNMENT AND ASSUMPTION
-------------------------
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are
hereby acknowledged, ________________________, a _________________ ("Assignor"),
does hereby assign, transfer and convey to _______________________________, a
____________ ("Assignee"), the partnership interest represented by _____________
held by Assignee as a ______________ partner in _______________________________,
a _________________________ (the "Units"), standing in the name of Assignee on
the books and records of ________________________________ (the "Partnership"),
together with any and all right, title and interest in any property, both real
and personal, to which the Units relate, and any other rights, privileges and
benefits appertaining thereto.
This Assignment is made subject to all of the terms and conditions of
the partnership agreement of the Partnership, as amended (the "Agreement").
Assignor hereby certifies that it has full power to make this
Assignment under the Agreement, that this Assignment is being made in compliance
with said Agreement, that it has good and valid title to the Units, free and
clear of all liens, and that the Units have not otherwise been conveyed, sold,
transferred, encumbered, pledged, hypothecated or assigned. Except as expressly
set forth herein, this Assignment is made without representation or warranty.
IN WITNESS WHEREOF, Assignors and Assignee have executed this
Assignment as of the _____ day of _________________, 1997.
ASSIGNOR: ASSIGNEE:
_______________________________ __________________________________
By:____________________________ By:_______________________________
Name:__________________________ Name:_____________________________
Title:_________________________ Title:____________________________
<PAGE>
SCHEDULE 11
-----------
[LOGO OF IBD]
July 20, 1995
Mr. Edward E. Johnson, SIOR
Mr. John F. Cash, SIOR
301 Oakdale
Lake Forest, IL 60045
Re: Motorola Build to Suit for Lease in the McHenry Corporate Center
Dear Ed and John:
The objective of this letter is to document our commission agreement pertaining
to the above referenced transaction. Edward Johnson and John Cash are to receive
a lease commission from ownership equivalent to 3.5% of the total rental amount
in the initial lease term payable to the brokerage company that they are
employed with at the time the commission becomes due and payable.
In addition, lease renewals under the Lease shall cause ownership to pay a
commission equivalent to 2.25% of the total rental amount. This commission shall
be due 1/2 upon renewal and 1/2 upon the commencement date.
In addition, a lease expansion under the Lease shall cause ownership to pay a
commission equivalent to 3.5% of the total rental amount and shall be treated as
a soft cost in the rental calculation. This commission shall be due 1/2 upon
execution of the expansion document and 1/2 upon the commencement date.
Finally, the brokers are to receive a 3% sale commission paid by ownership in
the event that ownership sells the property to Motorola. This fee shall be due
upon the closing of the sale.
Please confirm your acceptance of these terms in the appropriate area provided
below and return a copy to us.
Sincerely Yours,
Industrial Building and Development Company
/s/ Edward S. Hadesman /s/ Tucker B. Magid
Edward S. Hadesman Tucker B. Magid
President Vice President
/s/ Edward E. Johnson
- ----------------------------------
/s/ John F. Cash 8-5-95
- ---------------------------------- ------
Edward E. Johnson and John F. Cash Date
<PAGE>
Exhibit 10.20
OPTION AGREEMENT
----------------
THIS OPTION AGREEMENT (this "Agreement") is made as of the 4th day of
August, 1997, between Lumbermens Mutual Casualty Company, an Illinois insurance
corporation ("LMCC"), and The Prime Group, Inc., an Illinois corporation
("PGI").
RECITALS
--------
A. Kemper Investors Life Insurance Company, an Illinois insurance
corporation ("KILICO"), and Federal Kemper Life Assurance Company, an Illinois
insurance corporation ("FKLA; KILICO and FKLA are sometimes referred to herein
together as "KILICO/FKLA"), and 77 West Wacker Limited Partnership, an Illinois
limited partnership ("Borrower"), entered into that certain Subordinate Mortgage
Funding Agreement, dated as of March 14, 1991, as amended by that First
Amendment to Subordinate Mortgage Funding Agreement, dated as of November 13,
1991, among Borrower and KILICO/FKLA (as amended, the "Subordinate Funding
Agreement"), which requires KILICO/FKLA to advance certain amounts to Borrower
(the "Subordinate Loan"). Pursuant to the Subordinate Funding Agreement,
Borrower has executed and delivered that certain Note dated as of March 14, 1991
in the face amount of Sixty Million Dollars ($60,000,000.00) payable to the
order of KILICO/FKLA (the "Subordinate Note"), which Subordinate Note is secured
by that certain Subordinate Mortgage, Security Agreement, Assignment of Leases,
Rents and Profits, Financing Statement and Fixture Filing, dated as of March 14,
1991, made by Borrower to KILICO/FKLA (the "KILICO/FKLA Subordinate Mortgage").
B. Pursuant to that certain Participation Agreement, dated as of April 1,
1991, as superseded by that certain Participation Agreement, dated as of
November 30, 1994, but effective as of March 14, 1991, between KILICO/FKLA and
LMCC (the "Participation Agreement"), LMCC acquired from KILICO/FKLA the
"Participating Interest" (as such term is defined in the Participation
Agreement) in the Subordinate Loan. The Subordinate Note, the KILICO/FKLA
Subordinate Mortgage, and the other documents identified in the Participation
Agreement as the "Loan Documents" are defined herein collectively as the
"Subordinate Loan Documents".
C. Subject to the terms and conditions set forth in this Agreement, LMCC
has agreed to grant to PGI an option to purchase from LMCC the Participating
Interest and all other rights, title and interests which LMCC may have in the
Subordinate Loan Documents and/or the Subordinate Loan, and any and all claims
that LMCC may have under or with respect to the Subordinate Loan Documents
and/or the Subordinate Loan (but excluding any and all claims that LMCC may have
in connection with interest rate protection provided to
<PAGE>
Borrower by KILICO/FKLA for the first mortgage loan made to Borrower by Bank of
Montreal and other lenders and excluding any and all rights and remedies to the
extent necessary to enforce or otherwise pursue such claims (such claims, rights
and remedies are referred to herein as the "Retained Swap Rights")) (the
Participating Interest and such other rights, title, interests and claims to be
transferred pursuant hereto are referred to herein collectively as the "LMCC 77
Subordinate Loan Interests").
NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. Grant of Option.
(a) LMCC hereby grants to PGI (without recourse, representations or
warranties of any kind except as provided in Section 4 hereof) an option
(the "Option") to acquire or to have a Prime Affiliate (as defined below)
acquire the LMCC 77 Subordinate Loan Interests for the sum of (i) Three
Million Two Hundred Fifty Thousand and no/100 Dollars ($3,250,000.00) plus
(ii) any and all amounts paid by LMCC pursuant to Section 8 of the
Participation Agreement from and after the date hereof through the date of
the Closing (the "Purchase Price"), which amount, as reduced by the amount
of the Option Payments (defined below) made prior to the date of the
Closing (defined below), shall be payable on the date of the Closing by
cashier's or certified check or, at LMCC's election, by wire transfer of
immediately available funds, upon and subject to the terms and conditions
stated herein.
(b) If PGI desires to exercise the Option, PGI must exercise the
Option by delivery of written notice (the "Option Notice") to LMCC,
delivered in accordance with the notice provisions of this Agreement,
stating that PGI is exercising the Option. The Option Notice must state the
business day on which PGI has elected to close the acquisition of the LMCC
77 Subordinate Loan Interests (the "Closing"), which date must be a date
occurring on or prior to December 31, 1997, and which date must be not less
than five (5) business days after the date of the Option Notice and not
more than ten (10) business days after the date of LMCC's actual receipt of
the Option Notice.
(c) The transfer of the LMCC 77 Subordinate Loan Interests at the
Closing shall be accomplished by a General Assignment and Assumption in the
form attached hereto as Exhibit A.
(d) The obligation of LMCC to transfer the LMCC 77 Subordinate Loan
Interests to PGI, or to the Prime Affiliate
2
<PAGE>
designated by PGI, is subject to the satisfaction (or waiver by LMCC) of
the following conditions:
(i) PGI must have obtained, on or prior to the Closing, any and
all required consents to such transfer from KILICO/FKLA and all other
third parties;
(ii) The Assignment and Assumption shall have been executed by
and delivered by PGI;
(iii) LMCC shall have received from Borrower a release of any and
all liabilities arising from or in connection with the Participation
Agreement or any of the Subordinate Loan Documents in form reasonably
acceptable to LMCC;
(iv) PGI shall have given the notice as provided in Section 1(b)
hereof on or before December 19, 1997, and shall have paid to LMCC all
amounts due to LMCC under this Option Agreement; and
(v) PGI shall have delivered the confirmation described in
Section 1(e).
(e) At the Closing, PGI shall confirm the continuing truth and
accuracy of the warranties and representations made by PGI in this
Agreement by executing and delivering to LMCC the Confirmation of
Warranties and Representations in a form substantially similar to the form
attached to this Agreement as Exhibit B.
(f) At the Closing, LMCC shall confirm the continuing truth and
accuracy of the warranties and representations made by LMCC in this
Agreement by executing and delivering to PGI the Confirmation of Warranties
and Representations in a form substantially similar to the form attached to
this Agreement as Exhibit C.
(g) Assumption by PGI. As of the Closing, PGI hereby assumes and
agrees to perform each and every term, covenant, obligation and condition
required to be observed or performed by LMCC under the Participation
Agreement or the Subordinate Funding Agreement or otherwise relating to the
Subordinate Loan.
2. Option Payments. In consideration for the granting of the Option
provided herein, PGI shall pay to LMCC the sum of One Hundred Thousand and
no/100 Dollars ($100,000.00) on or before the fifth (5th) business day following
the execution of this Agreement by both parties hereto, and an additional One
Hundred Thousand and no/100 Dollars on or before October 1, 1997. (All payments
made pursuant to this Section 2 are referred to as the "Option
3
<PAGE>
Payments".) At the Closing, all Option Payments made by PGI to LMCC shall be
credited against, and shall reduce, the Purchase Price payable at the Closing.
In the event PGI fails to make any Option Payment in accordance with this
Section 2, LMCC shall have the right to terminate this Agreement. The Option
Payments shall be non-refundable unless the Closing hereunder does not occur as
a result of a material breach by LMCC of its representations and warranties
hereunder or as a result of a default by LMCC of its obligations hereunder.
3. Independent Credit Decision and Assumption of Credit Risk.
(a) PGI (i) acknowledges that, based in part on LMCC's
representations set forth in Section 4(c) hereof, it has received a copy of
the Participation Agreement and the Subordinate Loan Documents and the
schedules and exhibits thereto, and such other documents and information as
it has deemed appropriate in order to make its own credit and legal
analysis and decision whether to enter into this Agreement or exercise the
Option; and (ii) agrees that it will, independently and without reliance
upon LMCC and based on such documents and information as it shall deem
appropriate at the time continue to make its own credit and legal decisions
in taking or not taking action under this Agreement.
(b) PGI agrees as follows:
(i) From and after the Closing, PGI assumes all risk of loss in
connection with the Participating Interest, as if PGI has entered the
Participation Agreement directly;
(ii) LMCC has made no representations, express or implied, to PGI
with respect to (i) the existing or future solvency or financial worth
of Borrower, (ii) payment or collectability of the Loan (as defined in
the Participating Agreement), (iii) the due execution, legality,
validity, enforceability, genuineness, sufficiency or value of any of
the Loan Documents (as defined in the Participation Agreement), or
collateral covered thereby, or any other instrument or document
furnished pursuant hereto or thereto, or (iv) the validity,
effectiveness, value or adequacy of the liens created by the Loan
Documents (as defined in the Participation Agreement).
4. Representations and Warranties of LMCC.
(a) LMCC hereby represents and warrants to PGI that: (i) the
execution, delivery and performance of this Agreement by LMCC has been duly
and validly authorized by all necessary
4
<PAGE>
corporate action of LMCC; (ii) this Agreement has been duly executed and
delivered by an officer or authorized representative or agent of LMCC;
(iii) LMCC has not engaged or retained any broker or agent in connection
with the transactions contemplated by this Agreement; and (iv) assuming due
authorization, execution and delivery of this Agreement by PGI, this
Agreement constitutes a legal, valid and binding obligation of LMCC,
enforceable against LMCC in accordance with the terms hereof (subject to
laws affecting the exercise of creditors' rights and subject to principles
affecting the exercise of equitable remedies).
(b) LMCC hereby warrants and represents to PGI that LMCC is the legal
and beneficial owner of the Participating Interest and that the LMCC
Subordinate Loan Interests are free and clear of all claims, liens,
charges, security interests and encumbrances, subject to the terms of the
Participation Agreement and the Subordinate Loan Documents.
(c) Attached hereto as Exhibit D is a true, complete and correct copy
of the Participation Agreement, and the Participation Agreement has not
been amended or modified.
(d) Neither LMCC, nor any affiliate of LMCC, owns any debt or equity
interest in Borrower or in the property or building located at 77 West
Wacker Drive, Chicago, Illinois, other than the LMCC 77 Subordinate Loan
Interests.
(e) LMCC makes no representation or warranty in connection with, and
assumes no responsibility with respect to, the solvency, financial
condition or statements of Borrower, or the performance or observance by
the Borrower, of any of its obligations under the Subordinate Funding
Agreement and the Subordinate Loan Documents or any other instrument or
document furnishing in connection therewith.
5. Representations and Warranties of PGI. PGI hereby represents and
warrants to LMCC that: (a) the execution, delivery and performance of this
Agreement by PGI has been duly and validly authorized by all necessary corporate
action of PGI; (b) this Agreement has been duly executed and delivered by an
officer or authorized representative or agent of PGI; (c) PGI has not engaged or
retained any broker or agent in connection with the transactions contemplated by
this Agreement; and (d) assuming due authorization, execution and delivery of
this Agreement by LMCC, this Agreement constitutes a legal, valid and binding
obligation of PGI enforceable against PGI in accordance with the terms hereof
(subject to laws affecting the exercise of creditors' rights and subject to
principles affecting the exercise of equitable remedies).
5
<PAGE>
6. Indemnity. Each party hereto agrees to indemnify, defend, protect and
hold harmless the other party hereto and such other party's officers, directors,
shareholders, and employees and the successors and assignors of any of them
(collectively referred to as the "Indemnitees") from and against (a) any and all
claims, suits, charges, losses, liabilities, costs, damages and expenses
incurred by or asserted against any Indemnitiee as a result of a breach of any
warranty or representation made in this Agreement by such party to such
Indemnitee; and (b) all costs and expenses (including court costs and reasonable
attorneys' fees) which any Indemnitee may be required to pay in connection with
any matter which is the subject of the indemnity contained in this Section 5.
7. Continuing Obligations.
(a) Until the Closing, nothing in this Agreement shall, in any way,
reduce, diminish, alter or otherwise effect LMCC's obligations under the
Participation Agreement or otherwise relating to the Subordinate Loan, and
LMCC shall perform and satisfy all such obligations.
(b) After the Closing, PGI shall exercise, and shall cause its
successors and assigns to exercise, all rights and remedies, if any,
available to them relating to the Retained Swap Rights and resulting from
the transfer hereunder and shall otherwise take action to allow LMCC to
pursue the Retained Swap Rights, all as reasonably directed by LMCC;
provided, however, that LMCC advances, and indemnifies such party from and
against, all costs and expenses incurred in connection therewith.
8. Notices. Any notice required or permitted under this Agreement shall
be in writing and shall be given by: (a) personal service; (b) Federal Express,
Airborne Express or DHL; or (c) U.S. certified mail, return receipt requested,
with postage prepaid, and shall be deemed effective in the case of either (a) or
(b) above, upon receipt of delivery or upon refusal to accept delivery; and in
the case of (c) above, three (3) business days after mailing. Any such notice
shall be delivered to the parties to this Agreement at the following addresses
or any such other addresses as any party may from time to time give the other
party in writing:
If to LMCC, to:
Lumbermens Mutual Casualty Company
One Kemper Drive
Long Grove, Illinois 60049-0001
Attention: Chief Financial Officer
6
<PAGE>
with a copy to:
Lumbermens Mutual Casualty Company
One Kemper Drive
Long Grove, Illinois 60049-0001
Attention: General Counsel
If to PGI, to:
The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attention: Michael W. Reschke
with a copy to:
The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attention: Robert J. Rudnik, Esq.
9. Miscellaneous.
(a) All agreements, covenants, representations, warranties and other
provisions of this Agreement shall survive the Closing; provided, however,
that the representations and warranties set forth in this Agreement shall
survive the Closing for only one (1) year.
(b) This Agreement shall be governed by the laws of the State of
Illinois, without reference to its conflicts of law or choice of law rules.
(c) The terms and provisions of this Agreement shall be binding on
the successors and assigns of the parties hereto. PGI shall have the right
to assign its rights and interests in, to and under this Agreement to any
person or entity (a "Prime Affiliate") in which PGI or any affiliate of PGI
has an economic or ownership interest, subject to the receipt of any and
all consents to such assignment from third parties.
(d) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument. It shall not be necessary that any
single counterpart of this Agreement be executed by all of the parties
hereto, so long as each such parties shall have executed the same or any
other separate counterpart hereof.
7
<PAGE>
(e) As used herein, (i) the term "person" shall mean an individual, a
corporation, a partnership, a joint venture, a limited liability company,
an unincorporated organization, or a governmental body; (ii) the term
"including" shall mean including, without limiting the generality of the
foregoing; and (iii) the singular shall include the plural, and vice versa.
(f) If any provision of this Agreement should be found to be invalid,
void, or unenforceable, then it is the interest of the parties hereto that
the remainder of this Agreement be enforced to the fullest extent possible
in accordance with applicable law and the interests of the parties.
(g) As used herein, the term "business day" shall mean any day other
than Saturday, Sunday and any other day on which banks in Chicago, Illinois
are authorized to close.
(h) LMCC and PGI shall each pay their own attorney's fees and
expenses and other costs and expenses which have been or may be incurred in
connection with the preparation and negotiation of this Agreement and the
closing of the transactions contemplated by this Agreement.
(i) Each party to this Agreement will execute and deliver such other
documents and instruments as may be reasonably requested by the other party
to cause, effect, accomplish or evidence any of the transactions
contemplated by this Agreement.
(j) LMCC AND PGI EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY
WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AGREEMENT, ANY RELATED DOCUMENTS AND AGREEMENTS OR ANY COURSE OF
CONDUCT, COURSE OF DEALING OR STATEMENTS (WHETHER ORAL OR WRITTEN) WITH
RESPECT TO THIS AGREEMENT.
[Signature page follows]
8
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year first above written.
LUMBERMENS MUTUAL CASUALTY COMPANY,
an Illinois insurance corporation
By: /s/ xxxxxxxxxx
-------------------------------
Its: Executive Vice President
--------------------------
By: /s/ xxxxxxxxxx
-------------------------------
Its: Cash Management Officer
--------------------------
THE PRIME GROUP, INC., an Illinois
corporation
By: /s/ Michael W. Reschke
-------------------------------
Its: President
--------------------------
9
<PAGE>
EXHIBIT A
---------
ASSIGNMENT AND ASSUMPTION
-------------------------
KNOW ALL PEOPLE BY THESE PRESENTS, that Lumbermens Mutual Casualty Company,
an Illinois insurance corporation (collectively, "Assignor"), One Kemper Drive,
Long Grove, Illinois 60049-0001, in consideration of Ten and no/100 Dollars
($10.00) in lawful money of the United States, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, by these presents
does sell, assign, transfer and set over, unto _____________, a(n) _____________
________ ("Assignee"), and its successors and assigns, to their own proper use
and benefit, any and all rights, title and interests that Assignor may have in
and to each of the documents listed on Exhibit A attached hereto and by this
reference incorporated herein (the "Documents"), except the Retained Swap Rights
(as defined in the Option Agreement, defined below), without recourse,
representation and warranty of any kind, except as provided in that certain
Option Agreement, dated as of ___________________, 1997 (the "Option
Agreement"), by and between Assignor and The Prime Group, Inc., an Illinois
corporation. Assignee hereby accepts and agrees to perform all of the terms,
covenants and conditions of the Documents to be performed by Assignor and agrees
that, the Assignee will be bound by the terms of the Documents from and after
the Closing (as defined in the Option Agreement) as fully and to the same extent
as if the Assignee were the Participant (as defined in the Participation
Agreement, defined below) originally holding such interest in the Participation
Agreement (as defined in the Option Agreement). The Documents relate to the real
property described on Exhibit B attached hereto and made a part hereof.
Assignor does hereby give to Assignee, its successors and assigns, the full
power and authority for Assignee's own use and benefit, but at Assignee's sole
cost, to take all legal measures, which may be proper or necessary for the
complete recovery of the assigned property and in its name or otherwise to
prosecute and withdraw any suits or proceedings at law or in equity therefor.
[signature page follows]
EXHIBIT A - 1
<PAGE>
IN WITNESS WHEREOF, Assignor and Assignee have caused this General
Assignment to be executed this _____ day of ____________, 1997.
ASSIGNOR
--------
LUMBERMENS MUTUAL CASUALTY COMPANY,
an Illinois insurance corporation
By: ______________________________
Name: _____________________________
Its: ______________________________
ASSIGNEE
--------
___________________________________
By: ______________________________
Name: _____________________________
Its: ______________________________
EXHIBIT A - 2
<PAGE>
STATE OF ________ )
) SS.
COUNTY OF _______ )
I, _______________, a Notary Public in and for said County, in the State
aforesaid, DO HEREBY CERTIFY, that ____________________, personally known to me
to be the __________ of Lumbermens Mutual Casualty Company, an Illinois
insurance corporation, whose name is subscribed to the within instrument,
appeared before me this day in person and acknowledged that as such officer,
he/she signed and delivered the said instrument as his/her free and voluntary
act and as the free and voluntary act and deed of said corporation, for the uses
and purposes therein set forth.
GIVEN under my hand and Notarial Seal, this __ day of _________, 1997.
----------------------------------------
Notary Public
My Commission Expires:
- -----------------------
STATE OF ________ )
) SS.
COUNTY OF _______ )
I, ____________________, a Notary Public in and for said County, in the
State aforesaid, DO HEREBY CERTIFY, that ______________________, personally
known to me to be the _____ of _______________________, a(n) ______________,
whose name is subscribed to the within instrument, appeared before me this day
in person and acknowledged that as such officer, he/she signed and delivered the
said instrument as his/her free and voluntary act and as the free and voluntary
act and deed of said corporation, for the uses and purposes therein set forth.
GIVEN under my hand and Notarial Seal, this __ day of _________, 1997.
----------------------------------------
Notary Public
My Commission Expires:
- -----------------------
EXHIBIT A - 3
<PAGE>
EXHIBIT A
The following terms are used with the following meanings in this Exhibit A.
Administrative Agent: Bank of Montreal, Chicago Branch, acting in the manner
and to the extent described in Article 12 of the
Building Loan Agreement dated March 14, 1991 by and
between Borrower, the Co-Agents (as defined therein) and
the Administrative Agent.
Borrower: 77 West Wacker Limited Partnership, an Illinois limited
partnership
Prime: The Prime Group, Inc., an Illinois corporation
KILICO/FKLA: Kemper Investors Life Insurance Company, an Illinois
insurance corporation and Federal Kemper Life Assurance
Company, an Illinois insurance corporation
KILICO Realty: KILICO Realty Corporation, an Illinois corporation
LIST OF DOCUMENTS
-----------------
1. Subordinate Mortgage Funding Agreement dated March 14, 1991 by and among
KILICO/FKLA and Borrower.
2. Subordination Agreement dated March 14, 1991 by and between KILICO/FKLA and
the Administrative Agent, with Acknowledgment and Consent executed by the
Borrower, Recorded as Documents No. 91125471.
3. Note dated March 7, 1991 for up to $60,000,000.00 made by Borrower to
KILICO/FKLA.
4. Subordinate Mortgage, Security Agreement, Assignment and Leases, Rents and
Profits, Financing Statement and Fixture Filing dated March 14, 1991 made by
Borrower to KILICO/FKLA, Recorded with the Cook County, Illinois Recorder's
Office as Documents No. 91125469.
EXHIBIT A - 4
<PAGE>
5. Environmental Indemnity Agreement dated March 14, 1991 among Prime and
KILICO/FKLA -- Subordinate Mortgage.
6. Subordinate Assignment of Takeover Subleases dated March 14, 1991 made by
Borrower to and for the benefit of KILICO/FKLA.
7. Chicago Title Insurance Company Loan Title Insurance Policy No. 72-85-482-3
dated April 1, 1991 in the amount of $60,000,000.00 issued to KILICO/FKLA.
8. Reimbursement Agreement dated March 14, 1991 by and between KILICO Realty
and Borrower.
9. All other documents included in the definition of "Subordinate Loan
Documents" in the Option Agreement.
[Subject to Confirmation]
EXHIBIT A - 5
<PAGE>
EXHIBIT B
---------
CONFIRMATION OF WARRANTIES AND REPRESENTATIONS (PGI)
----------------------------------------------------
Reference is hereby made to that certain Option Agreement dated as of
__________________, 1997, by and between Lumbermens Mutual Casualty Company, an
Illinois insurance corporation ("LMCC"), and The Prime Group, Inc., an Illinois
corporation (the "Agreement").
The Prime Group, Inc., an Illinois corporation ("PGI"), hereby certifies,
represents and warrants to LMCC that, except as otherwise set forth on Exhibit A
attached hereto and made a part hereof, all warranties and representations made
by PGI in the Agreement are true and correct on and as of the date set forth
below.
This Confirmation of Warranties has been executed and delivered pursuant to
the terms and provisions of the Agreement. All defined terms contained in the
Agreement are used in this Confirmation of Warranties with the same meaning that
such terms have in the Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Confirmation of
Warranties as of this ___ day of ___________, 1997.
THE PRIME GROUP, INC.
By: ______________________________
Its: ______________________________
EXHIBIT B - 1
<PAGE>
EXHIBIT C
---------
CONFIRMATION OF WARRANTIES AND REPRESENTATIONS (LMCC)
-----------------------------------------------------
Reference is hereby made to that certain Option Agreement dated as of
__________________, 1997, by and between Lumbermens Mutual Casualty Company, an
Illinois insurance corporation ("LMCC") and The Prime Group, Inc., an Illinois
corporation (the "Agreement").
LMCC hereby certifies, represents and warrants to ___________________,
a(n) _______________ ("_________") that, except as otherwise set forth on
Exhibit A attached hereto and made a part hereof, all warranties and
representations made by LMCC in the Agreement are true and correct on and as of
the date set forth below.
This Confirmation of Warranties has been executed and delivered pursuant to
the terms and provisions of the Agreement. All defined terms contained in the
Agreement are used in this Confirmation of Warranties with the same meaning that
such terms have in the Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Confirmation of
Warranties as of this ___ day of ___________, 199_.
LUMBERMENS MUTUAL CASUALTY COMPANY
By: ______________________________
Its: ______________________________
EXHIBIT C - 1
<PAGE>
Exhibit 10.21
AMENDED AND RESTATED AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT ("Agreement") is made as of July 15,
1997 by and among Kemper Investors Life Insurance Company, an Illinois insurance
corporation ("KILICO"); Federal Kemper Life Assurance Company, an Illinois
insurance corporation ("FKLA"); KILICO Realty Corporation, an Illinois
corporation ("KRC"); FKLA Realty Corporation, an Illinois corporation ("FRC");
KR 77 Fitness Center, Inc., a Delaware corporation ("KR Fitness"); 77 West
Wacker Limited Partnership, an Illinois limited partnership ("Borrower"); K/77
Investors Limited Partnership, an Illinois limited partnership ("K/77"); The
Prime Group, Inc., an Illinois corporation ("TPG"); Prime Group Limited
Partnership, an Illinois limited partnership ("PGLP"); and Prime 77 Fitness
Center, Inc., an Illinois corporation ("Prime Fitness"). KILICO, FKLA, KRC, FRC,
and KR Fitness are referred to in this Agreement as the "Kemper Parties." TPG,
PGLP, and Prime Fitness are referred to in this Agreement as the "Prime
Parties."
RECITALS
A. Borrower is the owner of record title to certain property located at
77 W. Wacker Drive, Chicago, Illinois (the "Premises").
B. Borrower and The Mitsui Taiyo Kobe Bank, Ltd., Chicago Branch, The
Mitsui Trust and Banking Co., Limited, Chicago Branch, The Yasuda Trust and
Banking Co., Limited, Chicago Branch, Swiss Bank Corporation, New York Branch,
and Bank of Montreal, Chicago Branch (all of whom are referred to as the
"Co-Agents," with Bank of Montreal, Chicago Branch referred to as the
"Administrative Agent") have entered into that Building Loan Agreement dated as
of March 14, 1991 (the "Building Loan Agreement").
C. The Building Loan Agreement provides for the making of a first
mortgage loan on the Premises evidenced by a Note dated as of March 14, 1991
made by Borrower to the Administrative Agent for the benefit of the Co-Agents in
the face amount of Two Hundred Thirty Million Dollars ($230,000,000) (the
"Construction Note"). The Construction Note is secured by documents identified
in the Building Loan Agreement as "Loan Documents." The Building Loan Agreement,
the Construction Note, and any other documents identified in the Building Loan
Agreement as the "Loan Documents" are referred to in this Agreement as the
"Construction Loan Documents."
D. The Administrative Agent, the Co-Agents, KILICO, FKLA, and Borrower
have entered into that Standby First Mortgage Funding Agreement dated as of
March 14, 1991 (the "Standby Funding Agreement") regarding a loan to be made by
KILICO and FKLA, jointly and severally (together referred to as "KILICO/FKLA")
to Borrower to be secured by an interest in the Premises. Pursuant to the
Standby Funding Agreement, Borrower has executed and delivered to KILICO/FKLA
that KILICO/FKLA Standby Note and that KILICO/FKLA First Mortgage, as those
terms are defined in the Standby Funding Agreement. The Standby Funding
<PAGE>
Agreement, the KILICO/FKLA Standby Note, the KILICO/FKLA First Mortgage, and any
other documents identified in the Standby Loan Agreement as the "KILICO/FKLA
Loan Documents" are referred to herein as the "KILICO/FKLA Loan Documents."
E. To further secure the Construction Loan Documents, TPG and KRC have
executed and delivered for the benefit of the Administrative Agent the following
documents which are dated as of March 14, l991: a Guaranty of Completion, a
Guaranty of Cost Overruns, and a Guaranty of Operating Deficits (the
"Construction Guarantees").
F. Borrower and KILICO/FKLA have entered into that Subordinate Mortgage
Funding Agreement dated as of March 14, 1991, as amended by that First Amendment
to Subordinate Mortgage Funding Agreement dated as of November 13, 1991, made by
Borrower and KILICO/FKLA (as amended, the "Subordinate Funding Agreement"),
which requires KILICO/FKLA to advance certain amounts to be secured by a second
mortgage on the Premises. Pursuant to the Subordinate Funding Agreement,
Borrower has executed and delivered that Note dated as of March 14, 1991 in the
face amount of Sixty Million Dollars ($60,000,000) payable to KILICO/FKLA (the
"Subordinate Note"), which Subordinate Note is secured by the KILICO/FKLA
Subordinate Mortgage, as such term is defined in the Subordinate Funding
Agreement. The Subordinate Note, the KILICO/FKLA Subordinate Mortgage, the other
documents identified in the Subordinate Funding Agreement as the "KILICO/FKLA
Loan Documents," and the other documents described in the definition of
"Subordinate Loan Documents" on Schedule A attached hereto are defined herein as
the "Subordinate Loan Documents."
G. KRC and TPG have entered into that Option To Purchase Partnership
Interests dated as of June 17, 1994 but made effective as of March 22, 1994, as
amended by that Amendment To Option To Purchase Partnership Interests dated as
of January 21, 1997 (as amended, the "Partnership Option Agreement"). Pursuant
to the Partnership Option Agreement, TPG has an option (the "Partnership
Option") to acquire the interests of KRC in Borrower and in K/77.
H. On or about January 21, 1997, the Kemper Parties, Borrower, and the
Prime Parties entered into that Agreement dated as of January 21, 1997 (the
"Original Agreement") pursuant to which, among other matters, KILICO and FKLA
granted to TPG an option to purchase the Subordinate Loan Documents for the
price and on the terms stated in the Original Agreement.
I. The Kemper Parties, Borrower, and the Prime Parties desire to modify
some of the terms of the Original Agreement and have agreed to amend and restate
the Original Agreement in its entirety, and K/77 has agreed to join in this
Agreement to evidence its agreement with certain rights which have been granted
to KRC in its capacity as a general partner of the Borrower. Subject to the
terms and conditions stated in this Agreement, the parties hereto have agreed to
amend and restate the Original Agreement to provide that:
2
<PAGE>
(1) KILICO and FKLA shall grant TPG an option to acquire or to cause
a Prime Affiliate (as defined on Schedule A) to acquire the interests of
KILICO and FKLA in the Subordinate Loan Documents for the price and on the
terms stated in this Agreement.
(2) It shall be a condition to the obligations of KILICO and FKLA to
transfer their interests in the Subordinate Loan Documents at the Debt
Interest Closing (as defined below) in accordance with the terms and
conditions of this Agreement that: (a) all outstanding amounts secured by
the KILICO/FKLA Loan Documents must be paid in full on or before the Debt
Interest Closing; (b) all outstanding amounts secured by the Construction
Loan Documents must be paid in full at the Debt Interest Closing; (c) TPG
must exercise the Partnership Option and the Kemper Parties and the Prime
Parties must execute and deliver the Partnership Releases identified below;
(d) the Kemper Parties must obtain an Indemnity from Borrower and TPG as
provided below; and (e) TPG shall obtain the consent in a form reasonably
satisfactory to KILICO/FKLA to the transfer of the Subordinate Loan
Documents as contemplated by this Agreement from Lumbermens Mutual Casualty
Company, an Illinois mutual insurance company ("LMCC"), as holder of a
participation interest in the Subordinate Note, or, on or before the Debt
Interest Closing, TPG or a Prime Affiliate shall have purchased LMCC's
interests in the Subordinate Loan Documents.
(3) TPG shall waive, surrender, and terminate its right to receive an
administrative fee in its capacity as managing general partner of the
Borrower, as provided below.
NOW THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Agreement agree as follows:
Section 1 Amendment And Restatement. Except as otherwise provided in this
Section 1, the Original Agreement is hereby amended and restated in its entirety
and is superseded in all respects by this Agreement. Notwithstanding the
foregoing, the Third Amendment To The Amended And Restated Agreement Of Limited
Partnership Of 77 West Wacker Limited Partnership which was executed and
delivered concurrently with the execution and delivery of the Original Agreement
remains in full force and effect and is not affected by the superseding of the
Original Agreement. Notwithstanding the foregoing, the parties hereto
acknowledge that the "Closing" (as defined in the Original Agreement) has
occurred in accordance with the terms of the Original Agreement. All provisions
of the Original Agreement which relate to that Closing remain in full force and
effect and are not superseded by this Agreement.
Section 2 Option. KILICO and FKLA hereby grant to TPG an option (the
"Option") to acquire or to have a Prime Affiliate acquire the interests of
KILICO and FKLA in the Subordinate Loan Documents (the "Subordinate Debt
Interests") for the "Subordinate Debt
3
<PAGE>
Price" (as defined below) on or before September 30, 1997 (as the same may be
extended as provided herein, the "Outside Date"), on the terms and conditions
stated herein. The Subordinate Debt Interests consist of one hundred percent
(100%) of the record and beneficial interests of KILICO and FKLA in the
Subordinate Loan Documents, subject to the participation interest of LMCC in the
Subordinate Loan Documents.
Section 3 The Subordinate Debt Price.
3.1 As used herein, the term "1997 SFA Advances" shall mean the total of
all advances made by KILICO/FKLA under the Subordinate Funding Agreement or the
Subordinate Loan Documents in the period between January 1, 1997 and the date of
the Debt Interest Closing and shall include any amounts paid under the
Construction Guarantees, whether such payments are made by KILICO, FKLA, or KRC.
As used herein, the term "Credit Amount" shall mean Three Million Forty Two
Thousand Dollars ($3,042,000). As used herein, the term "Extension Option Fee
Credit" shall mean Fifty Percent (50%) of the amount of any Extension Option
Fees (as defined below) paid by TPG to KILICO in accordance with the terms of
Section 5 below.
3.2 At the Debt Interest Closing, TPG shall pay to KILICO the Subordinate
Debt Price, and KILICO shall pay to TPG the amount of any Extension Option Fee
Credit. All payments made at the Debt Interest Closing shall be by certified
check or by electronic funds wire transfer to an account designated by the
payee.
3.3 If the amount of the 1997 SFA Advances is greater than the Credit
Amount, then the "Subordinate Debt Price" shall be the remainder obtained after
subtracting the Credit Amount from the 1997 SFA Advances. If the Credit Amount
exceeds the 1997 SFA Advances, then the "Subordinate Debt Price" shall be One
Dollar (S1.00), and the amount which KILICO/FKLA would otherwise be entitled to
receive at the Debt Interest Closing pursuant to this Agreement with respect to
the KILICO/FKLA Loan Documents shall be reduced by the amount by which the
Credit Amount exceeds the 1997 SFA Advances.
Section 4 The Debt Interest Closing. If TPG elects to exercise the
Option, TPG must do so by delivery of written notice (the "Option Notice") to
KILICO and FKLA delivered in accordance with the notice provisions of this
Agreement stating that TPG is exercising the Option. The Option Notice must
state the business day on which TPG has elected to close the acquisition of the
Subordinate Debt Interests (the "Debt Interest Closing"), which date must be a
date occurring on or prior to the Outside Date and which must be not less than
five (5) business days after the date of the Option Notice and not more than ten
(10) business days after the date of the Option Notice.
Section 5 Extension Options To Extend The Outside Date. As noted
above, the Outside Date is initially September 30, 1997.
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5.1 TPG shall have one option (the "First Extension Option") to extend the
Outside Date from September 30, 1997 to October 31, 1997, which First Extension
Option must be exercised, if at all, in accordance with the following
conditions: (i) written notice of the exercise of the First Extension Option
must be delivered in accordance with the notice provisions of this Agreement to
KILICO not more than twenty five (25) and not less than fifteen (15) days prior
to September 30, 1997; (ii) that written notice must be accompanied by an option
fee (an "Extension Option Fee") in the form of a certified check payable to
KILICO or by a wire transfer to an account designated by KILICO in the amount of
Three Hundred Thousand Dollars ($300,000); (iii) TPG must have exercised an
option under the "Triad Agreement" (as defined below) to extend the date of the
"Triad Closing" (as defined below) to October 31, 1997; and (iv) the First
Extension Option may not be exercised if any of the Prime Parties are then in
default under this Agreement.
5.2 If TPG has timely exercised the First Extension Option in accordance
with the terms and conditions of this Agreement, TPG shall have one option (the
"Second Extension Option") to extend the Outside Date from October 31, 1997 to
December 1, 1997, which Second Extension Option must be exercised, if at all, in
accordance with the following conditions: (i) written notice of the exercise of
the Second Extension Option must be delivered in accordance with the notice
provisions of this Agreement to KILICO not more than twenty five (25) and not
less than fifteen (15) days prior to October 31, 1997; (ii) that written notice
must be accompanied by an option fee (an "Extension Option Fee") in the form of
a certified check payable to KILICO or a wire transfer to an account designated
by KILICO in the amount of Three Hundred Thousand Dollars ($300,000); (iii) TPG
must have exercised the First Extension Option in accordance with the terms and
conditions of this Agreement; (iv) TPG must have exercised an option under the
Triad Agreement to extend the date of the Triad Closing to December 1, 1997; and
(v) the Second Extension Option may not be exercised if any of the Prime Parties
are then in default under this Agreement.
5.3 If TPG has timely exercised the First Extension Option and the Second
Extension Option in accordance with the terms and conditions of this Agreement,
TPG shall have one option (the "Third Extension Option") to extend the Outside
Date from December 1, 1997 to December 31, 1997, which Third Extension Option
must be exercised, if at all, in accordance with the following conditions: (i)
written notice of the exercise of the Third Extension Option must be delivered
in accordance with the notice provisions of this Agreement to KILICO not more
than twenty five (25) and not less than fifteen (15) days prior to December 1,
1997; (ii) that written notice must be accompanied by an option fee (an
"Extension Option Fee") in the form of a certified check payable to KILICO or a
wire transfer to an account designated by KILICO in the amount of Three Hundred
Thousand Dollars ($300,000); (iii) TPG must have exercised the First Extension
Option and the Second Extension Option in accordance with the terms and
conditions of this Agreement; (iv) TPG must have exercised an option under the
Triad Agreement to extend the date of the Triad Closing to December 31, 1997;
and (v) the Third Extension Option may not be exercised if any of the Prime
Parties are then in default under this Agreement.
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5.4 If TPG has timely exercised the First Extension Option, the Second
Extension Option, and the Third Extension Option in accordance with the terms
and conditions of this Agreement, TPG shall have one option (the "Fourth
Extension Option") to extend the Outside Date from December 31, 1997 to February
2, 1998, which Fourth Extension Option must be exercised, if at all, in
accordance with the following conditions: (i) written notice of the exercise of
the Fourth Extension Option must be delivered in accordance with the notice
provisions of this Agreement to KILICO not more than twenty five (25) and not
less than fifteen (15) days prior to December 31, 1997; (ii) that written notice
must be accompanied by an option fee (an "Extension Option Fee") in the form of
a certified check payable to KILICO or a wire transfer to an account designated
by KILICO in the amount of Three Hundred Thousand Dollars (S300,000); (iii) TPG
must have exercised the First Extension Option, the Second Extension Option, and
the Third Extension Option in accordance with the terms and conditions of this
Agreement; (iv) TPG must have exercised an option under the Triad Agreement to
extend the date of the Triad Closing to February 2, 1998; and (v) the Fourth
Extension Option may not be exercised if any of the Prime Parties are then in
default under this Agreement.
5.5 If TPG has timely exercised the First Extension Option, the Second
Extension Option, the Third Extension Option, and the Fourth Extension Option in
accordance with the terms and conditions of this Agreement, TPG shall have one
option (the "Fifth Extension Option") to extend the Outside Date from February
2, 1998 to February 27, 1998, which Fifth Extension Option must be exercised, if
at all, in accordance with the following conditions: (i) written notice of the
exercise of the Fifth Extension Option must be delivered in accordance with the
notice provisions of this Agreement to KILICO not more than twenty five (25) and
not less than fifteen (15) days prior to February 2, 1998; (ii) that written
notice must be accompanied by an option fee (an "Extension Option Fee") in the
form of a certified check payable to KILICO or a wire transfer to an account
designated by KILICO in the amount of Three Hundred Thousand Dollars ($300,000);
(iii) TPG must have exercised the First Extension Option, the Second Extension
Option, the Third Extension Option, and the Fourth Extension Option in
accordance with the terms and conditions of this Agreement; (iv) TPG must have
exercised an option under the Triad Agreement to extend the date of the Triad
Closing to February 27, 1998; and (v) the Fifth Extension Option may not be
exercised if any of the Prime Parties are then in default under this Agreement.
Section 6 Conditions To The Debt Interest Closing.
6.1 The transfer of the Subordinate Debt Interests at the Debt Interest
Closing shall accomplished by the following documents: the Subordinate Note
shall be transferred by an Allonge in the form attached hereto as Exhibit A-1;
the KILICO/FKLA Subordinate Mortgage and the interests of KILICO and FKLA under
the other Subordinate Loan Documents shall be transferred by a General
Assignment in the form attached hereto as Exhibit A-2. The transferee shall be
TPG or such Prime Affiliate as TPG may identify in the Option Notice. In all
cases, such transfer documents shall be accompanied by the original document
being so transferred.
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6.2 The following are additional conditions to the obligations of
KILICO/FKLA to transfer the Subordinate Debt Interests to TPG or to the Prime
Affiliate designated by TPG:
A. on or before the Debt Interest Closing, TPG shall cause all
outstanding amounts due under or secured by the Construction Loan Documents
to be paid or released in full;
B. on or before the Debt Interest Closing, TPG shall cause all
outstanding amounts due under or secured by the KILICO/FKLA Loan Documents
to be paid in full;
C. at the Debt Interest Closing, TPG and the TPG affiliate which
holds interests in Borrower (and if Borrower shall no longer be the
beneficial owner of the Premises, then the TPG affiliate which holds
interests in Borrower's successor in interest as beneficial owner of the
Premises) shall execute and deliver to each of the Kemper Parties an
Indemnity Agreement in the form attached hereto as Exhibit B pursuant to
which TPG and such TPG affiliate will jointly and severally indemnify,
defend, protect and hold each of the Kemper Parties harmless from certain
obligations described in that Indemnity Agreement;
D. at the Debt Interest Closing, TPG and the Borrower shall execute
and deliver to each of the Kemper Parties an Environmental Indemnity
Agreement in the form attached hereto as Exhibit F;
E. at the Debt Interest Closing, TPG must pay to KILICO and FKLA or
to Goldman Sachs (at the direction of KILICO/FKLA) the amount of any
breakage costs which KILICO and FKLA would be obligated to pay by reason of
the termination of a counter swap agreement between Goldman Sachs and
KILICO/FKLA pursuant to that agreement identified on Schedule A as the
"Goldman Swap Confirmation;"
F. prior to the Debt Interest Closing, TPG must have exercised the
Partnership Option, and at the Debt Interest Closing, TPG or a Prime
Affiliate must acquire the interests defined in the Partnership Option
Agreement as the "Option Interests," assuming compliance with KRC of its
obligations under the Partnership Option Agreement;
G. concurrently with the acquisition of such Option Interests, TPG,
the Borrower, and the Prime Parties must execute and deliver the releases
identified in Section 7 below as the "Prime Releases," subject to the
concurrent delivery by the Kemper Parties of the releases identified in
Section 7 below as the "Kemper Releases;"
H. at the Debt Interest Closing, the party acquiring the Subordinate
Debt Interests must release KRC from liability under the Subordinate Loan
Documents in a manner reasonably satisfactory to KRC;
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I. TPG must have obtained the consent of LMCC to the
transfer of the Subordinate Debt Interests, if in the judgment of
KILICO/FKLA that consent is required under the Subordinate Loan
Documents or under any participation agreement between LMCC and KILICO
and FKLA regarding the Subordinate Note; under no circumstances shall
either KILICO, FKLA, or any Kemper Party be required to provide LMCC
with an indemnity or other financial undertaking regarding the
Subordinate Loan Documents, the Borrower, or the Project (as defined
in the Partnership Agreement) as a condition to the transfer of the
Subordinate Debt Interests;
J. TPG and the other Prime Parties must confirm at the Debt
Interest Closing the continuing truth and accuracy of the warranties
and representations made by such parties in this Agreement by
executing and delivering the Confirmation of Warranties attached to
this Agreement as Exhibit A-3; and
K. At the Debt Interest Closing, TPG shall pay or shall
cause to be paid to KILICO/FKLA the Subordinate Debt Price, with that
payment to be made concurrently with the transfer of the Subordinate
Debt Interests to TPG or to the Prime Affiliate designated by TPG;
concurrently with the payment of the Subordinate Debt Price, KILICO
shall pay to TPG the amount of the Extension Option Fee Credit. All
amounts to be paid at the Debt Interest Closing must be paid in
certified funds or by electronic wire transfer funds to an account
designated by the payee.
Section 7 Releases And Indemnities.
----------------------------------
7.1 The Kemper Parties agree to execute and deliver to Borrower and
the Prime Parties at the Debt Interest Closing releases in the form attached
hereto as Exhibit C-1 of the following obligations (the "Kemper Releases"):
A. Releases of the Borrower, the Prime Parties and their
respective shareholders, partners, officers, directors, affiliates,
agents and representatives from any and all Claims (as defined on
Schedule A) for matters occurring prior to the date of the Debt
Interest Closing which are related to the Property, the Borrower, the
Construction Loan Documents and the loan evidenced thereby, the
KILICO/FKLA Loan Documents and the loan evidenced thereby, and the
Subordinate Loan Documents and the Loan evidenced thereby, including
any rights of contribution with respect to the Borrower which KRC may
have against TPG either under Illinois law or under the Partnership
Agreement, and excepting from the scope of such Releases any matters
covered by any indemnity agreements made by Borrower or the Prime
Parties which will survive the Closing.
7.2 TPG agrees to execute and deliver and to cause the Borrower and
the other Prime Parties to execute and deliver to the Kemper Parties at the Debt
Interest Closing releases in the form attached hereto as Exhibit C-2 of the
following obligations (the "Prime Releases"):
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A. Releases of the Kemper Parties and their respective
shareholders, partners, officers, directors, affiliates, agents and
representatives from any and all Claims for matters occurring prior to
the date of the Debt Interest Closing which are related to the
Property, the Borrower, the Construction Loan Documents and the loan
evidenced thereby, the KILICO/FKLA Loan Documents and the loan
evidenced thereby, and the Subordinate Loan Documents and the Loan
evidenced thereby, including any rights of contribution with respect to
the Borrower which TPG may have against KRC either under Illinois law
or under the Partnership Agreement.
7.3 At the Debt Interest Closing, the Kemper Parties agree to execute
and deliver to the Prime Parties a certificate confirming the continuing
truth and accuracy of the warranties and representations made by such
parties in this Agreement, and if such warranties and representations are no
longer true, stating in what respects the warranties and representations are
no longer true, all in the form attached hereto as Exhibit A-3. At the Debt
Interest Closing, the Prime Parties agree to execute and deliver to the
Kemper Parties a certificate confirming the continuing truth and accuracy
of the warranties and representations made by such parties in this
Agreement, and if such warranties and representations are no longer true,
stating in what respects the warranties and representations are no longer
true, all in the form attached hereto as Exhibit A-3.
7.4 KILICO and FKLA hereby waive any rights which they may have to
consent to the transfer by LMCC concurrently with or after the Debt Interest
Closing of any interest held by LMCC under the Subordinate Loan Documents to
TPG or a Prime Affiliate.
Section 8 Change In Partner Status; Authority To Sell The Project.
------------------------------------------------------------------
8.1 TPG agrees that, upon occurrence of a Debt Interest Default, KRC
shall have the right, exercisable in its sole discretion, to cause the
general partner interest held by TPG in the Borrower to be converted to a
limited partnership interest in the Borrower. Concurrently with the
execution and delivery of this Agreement, TPG shall execute and deliver to
KRC an Amended Certificate Of Limited Partnership instrument in the form
attached hereto as Exhibit H-1 evidencing the conversion of the general
partnership interest of TPG in the Borrower to a limited partnership
interest in the Borrower. KRC will retain that Amended Certificate Of
Limited Partnership and will not record or file the same unless a Debt
Interest Default shall have occurred.
8.2 TPG agrees that, upon occurrence of a Debt Interest Default, then
KRC shall have the right, exercisable in its sole discretion, to cause TPG,
in its capacity as a general partner of the Borrower, to be classified as an
"Inactive Partner" under the Partnership Agreement; provided, however, that
such classification, in and of itself, shall not be construed to be evidence
that TPG is in default of any of its obligations under the Partnership
Agreement. Concurrently with the execution and delivery of this Agreement,
TPG shall execute and deliver to KRC an instrument in the form attached
hereto as Exhibit H-2 pursuant to which TPG shall grant to KRC
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all necessary power and authority to accomplish the matters described in
this Section upon occurrence of a Debt Interest Default; KRC shall hold
this instrument and shall not record it unless and until a Debt Interest
Default occurs. If the Debt Interest Closing occurs, this instrument shall
be returned to TPG.
8.3 TPG, PGLP, and K/77 agree that, upon occurrence of a Debt
Interest Default, then KRC shall have the rights, which shall be exercisable
in the sole discretion of KRC, (a) to cause the Borrower to sell the Project
on such terms and conditions as KRC may deem advisable, including for a
price equal to or less than the sum of the outstanding amounts due under the
Construction Loan Documents and the KILICO/FKLA Loan Documents; or (b) to
cause the Borrower to refinance the Project or to renegotiate the terms of
the Construction Loan Documents or the KILICO/FKLA Loan Documents. TPG,
PGLP, and K/77 agree that any such sale, refinancing, or renegotiating may
be conducted with no requirement of consent from any other partner in the
Borrower, including TPG in its capacity as either a general partner or as a
limited partner, and including K/77 in its capacity as a limited partner.
TPG, PGLP, and K/77 agree that any actions taken by KRC in exercise of its
rights under this Section shall be deemed to be "Approved by the General
Partners" within the meaning of the Partnership Agreement. TPG, PGLP, and
K/77 agree to execute such further documents and instruments as KRC may
reasonably require to evidence and confirm their undertakings and agreements
under this Section.
8.4 In the event KRC elects to obtain formal approval from the
Administrative Agent of any matters regarding the Borrower or the
Partnership Agreement, TPG will cooperate with KRC in seeking such
approval.
Section 9 Representations And Warranties; Indemnity.
----------------------------------------------------
9.1 KILICO and FKLA jointly and severally warrant and represent to
TPG that KILICO and FKLA are the record owners of the KILICO/FKLA Loan
Documents and that KILICO and FKLA own record title to the KILICO/FKLA Loan
Documents free and clear of all claims, liens, charges, security interests
and encumbrances, subject to the Intercreditor Agreement dated as of March
14, 1991 made by the Administrative Agent, KILICO/FKLA, and with Consent
executed by the Borrower.
9.2 KILICO and FKLA jointly and severally warrant and represent to
TPG that KILICO and FKLA are the record owners of the Subordinated Loan
Documents and that KILICO and FKLA own record title to the Subordinated
Loan Documents free and clear of all claims, liens, charges, security
interests and encumbrances, subject to: (a) the interests of LMCC as a
participant in the Subordinated Note and to the interests of persons
claiming through LMCC, if any, and subject to: (b) the Subordination
Agreement dated as of March 14, 1991 made by the Administrative Agent,
KILICO/FKLA, and with Consent executed by the Borrower; KILICO and FKLA
jointly and severally warrant and represent to TPG that KILICO and FKLA are
the record and beneficial owners of the Subordinated Debt Interests, and
that they own the
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Subordinate Debt Interests free and clear of all claims, liens, charges,
security interests and encumbrances.
9.3 Borrower hereby represents and warrants to KILICO and FKLA as
follows, with the agreement of KILICO and FKLA that such representations
and warranties are made to the best of Borrower's knowledge and subject to
any and all provisions in the respective documents limiting recourse
against Borrower, TPG, KRC, the partners in Borrower, and/or other persons
or entities otherwise entitled under those documents to protection from
recourse by KILICO or FKLA:
A. The Building Loan Agreement, the Construction Note, and
the Construction Loan Documents are in full force and effect, are
enforceable according to their terms (subject to laws affecting the
exercise of creditors' rights and subject to principles affecting the
exercise of equitable remedies), and are subject to no defenses of any
kind of which Borrower has knowledge. All representations and
warranties contained in the Construction Loan Documents (but not
including representations and warranties of which KRC, KILICO, FKLA,
or any other Kemper Party is the subject) are true and correct in all
material respects as of the date of this Agreement, except as
otherwise disclosed to KRC, KILICO, FKLA, or any of their
representatives.
B. The KILICO/FKLA Standby Note, the KILICO/FKLA First Mortgage,
and the KILICO/FKLA Loan Documents are in full force and effect, are
enforceable according to their terms (subject to laws affecting the
exercise of creditors' rights and subject to principles affecting the
exercise of equitable remedies), and are subject to no defenses of any
kind of which Borrower has knowledge. All representations and
warranties contained in the KILICO/FKLA Loan Documents (but not
including representations and warranties of which KRC, KILICO, FKLA,
or any other Kemper Party is the subject) are true and correct in all
material respects as of the date of this Agreement, except as
otherwise disclosed to KRC, KILICO, FKLA, or any of their
representatives.
C. The Subordinate Note, the KILICO/FKLA Subordinate Mortgage,
and the Subordinate Documents are in full force and effect, are
enforceable according to their terms (subject to laws affecting the
exercise of creditors' rights and subject to principles affecting the
exercise of equitable remedies), and are subject to no defenses of any
kind of which Borrower has knowledge. All representations and
warranties contained in the Subordinate Loan Documents (but not
representations and warranties of which KRC, KILICO, FKLA, or any
other Kemper Party is the subject) are true and correct in all
material respects as of the date of this Agreement, except as
otherwise disclosed to KRC, KILICO, FKLA, or any of their
representatives.
9.4 The Prime Parties jointly and severally warrant and represent to
the Kemper Parties that, to the best knowledge of TPG, as of the date of
this Agreement, none of the Prime
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Parties have any claims, charges, suits or rights of action against any of the
Kemper Parties with respect to the Premises, the Borrower, the Construction Loan
Documents, the Loans (as defined in the Standby Loan Agreement), the KILICO/FKLA
Loan Documents, or the Subordinate Loan Documents; provided, however, that the
foregoing shall not, in any way, affect the obligations of the Kemper Parties
under or with respect to the Construction Loan Documents, the Loans (as defined
in the Standby Funding Agreement), the KILICO/FKLA Loan Documents, the
Subordinate Loan Documents, this Agreement, the Partnership Option Agreement, or
the Partnership Agreement (as defined in Schedule A).
9.5 TPG warrants and represents to KRC that the Partnership Option
Agreement remains in full force and effect, is enforceable against TPG according
to its terms (subject to laws affecting the exercise of creditors' rights and
subject to principles affecting the exercise of equitable remedies), and is
subject to no defenses of any kind of which TPG has knowledge.
9.6 KRC warrants and represents to TPG that the Partnership Option
Agreement remains in full force and effect, is enforceable against KRC according
to its terms (subject to laws affecting the exercise of creditors' rights and
subject to principles affecting the exercise of equitable remedies), and is
subject to no defenses of any kind of which KRC has knowledge. All
representations and warranties made by KRC in the Partnership Option Agreement
are true and correct as of the date of this Agreement.
9.7 Each Party to this Agreement (each a "Warranting Party")
represents and warrants to the other parties to this Agreement that: (i) the
execution, delivery and performance of this Agreement by such Warranting Party
has been duly and validly authorized by all necessary corporate or partnership
action of such Warranting Party; (ii) this Agreement has been duly executed and
delivered by an officer, partner or authorized representative or agent of such
Warranting Party; (iii) such Warranting Party has not engaged or retained any
broker or agent in connection with any of the transactions contemplated by this
Agreement, unless such Warranting Party intends to be responsible for all costs
and expenses which may be required to be paid to such broker or agent; (iv)
assuming due authorization, execution, and delivery by the other parties hereto,
this Agreement constitutes a legal, valid and binding obligation of such
Warranting Party, enforceable against it in accordance with the terms hereof
(subject to laws affecting the exercise of creditors' rights and subject to
principles affecting the exercise of equitable remedies).
9.8 Each Warranting Party agrees to indemnify, defend, protect and
hold harmless the other parties to this Agreement and their respective officers,
directors, shareholders, and employees and the successors and assigns of any of
them (collectively referred to as the "Indemnitees") from and against: (i) any
Claim incurred by or asserted against any Indemnitee as a result of a breach of
any warranty or representation made in this Agreement by such Warranting Party
to such Indemnitee; and (ii) all Expenses (as defined below) which any
Indemnitee may be required to pay in connection with any matter which is the
subject of the indemnity contained in clause (i) above.
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9.9 As used in this Agreement, the phrases "of which TPG has
knowledge," "the best knowledge of TPG," of which Borrower has knowledge," and
"the best knowledge of Borrower," shall mean the actual knowledge of the
following persons and shall not mean or include knowledge of any facts,
circumstances or conditions which would be deemed to be imputed to TPG or
Borrower or of which TPG or Borrower could be said to have constructive
knowledge: Michael W. Reschke, Jeffrey A. Patterson, Robert J. Rudnik, and
Richard S. Curto. As used in this Agreement, the phrase "of which KRC has
knowledge" shall mean the actual knowledge of the following persons and shall
not mean or include knowledge of any facts, circumstances or conditions which
would be deemed to be imputed to KRC or of which KRC could be said to have
constructive knowledge: Frederick L. Stephens, Robert J. Korslin, Gregory A.
Lisauskas, and Timothy R. Verrilli.
Section 10 Additional Matters.
-------------------------------
10.1 Concurrently with the execution and delivery of this Agreement,
TPG shall execute and deliver to KILICO and FKLA a Springing Guaranty in the
form attached hereto as Exhibit E, and KILICO and FKLA shall return to TPG that
Springing Guaranty which was delivered by TPG to KILICO and FKLA concurrently
with the execution and delivery of the Original Agreement, which original
Springing Guaranty shall be marked "Cancelled."
10.2 Concurrently with the execution and delivery of this Agreement,
TPG and KRC shall execute and deliver that Second Amendment To Option To
Purchase Partnership Interests in the form attached hereto as Exhibit G (the
"Option Amendment"), which Option Amendment shall amend the Partnership Option
Agreement to provide that the Partnership Option must be exercised, if at all,
no later than the fifth (5th) business day prior to the Debt Interest Closing to
provide that the closing of the transfer of the Option Interests must occur no
later than the Outside Date, as the same may be extended under the terms of this
Agreement, and to provide that the Debt Interest Closing is a condition to the
closing of the transfer of the Option Interests.
10.3 In the event that the Borrower files a petition under the Title
11 of The United States Code (the "Bankruptcy Code") or under any other similar
federal or state law, the Borrower unconditionally and irrevocably agrees that
the KILICO/FKLA shall be entitled, and the Borrower hereby unconditionally and
irrevocably consents, to relief from the automatic stay so as to allow the
KILICO/FKLA to exercise its rights and remedies under the KILICO/FKLA Loan
Documents or the Subordinate Loan Documents with respect to the Project,
including taking possession of the Project, collecting rents, foreclosing its
mortgage liens or otherwise exercising its rights and remedies with respect to
the Project. In such event, the Borrower hereby agrees that it shall not, and
TPG, K/77, and PGLP agree that they shall not, in any manner, oppose or
otherwise delay any motion filed by the KILICO/FKLA for relief from the
automatic stay. KILICO/FKLA's enforcement of the right granted herein for relief
from the automatic stay is subject to the approval of the bankruptcy court in
which the case is then pending.
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Section 11 Notices. Any notice required or permitted under this
Agreement shall be in writing and shall be given by: (a) personal service; (b)
Federal Express, Airborne Express, or DHL; or (c) U.S. certified mail, return
receipt requested, with postage prepaid, and shall be deemed effective in the
case of either (a) or (b) upon receipt of delivery or upon refusal to accept
delivery; and in the case of (c) three (3) business days after mailing. Any such
notice shall be delivered to the parties to this Agreement at the following
addresses or at such other addresses as one party may from time to time give to
the other parties in writing:
If to any of the Kemper Parties or to Borrower or K/77:
c/o ZKS Real Estate Partners LLC
225 W. Washington, Suite 1450
Chicago, Illinois 60606
Attention: Gregory A. Lisauskas
with a copy to:
Zurich Kemper Life Companies
c/o ZKS Real Estate Partners LLC
225 W. Washington, Suite 1450
Chicago, Illinois 60606
Attention: Timothy R. Verrilli, Esq.
with a copy to:
Rudnick & Wolfe
203 N. LaSalle Street
Chicago, Illinois 60601-1293
Attention: Kenneth Hartmann
If to any of the Prime Parties or to Borrower or K/77:
c/o The Prime Group, Inc.
77 W. Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attention: Michael W. Reschke
with a copy to:
The Prime Group, Inc.
77 W. Wacker Drive
Suite 3900
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Chicago, Illinois 60601
Attention: Robert J. Rudnik, Esq.
Section 12 Miscellaneous.
-------------------------
12.1 All agreements, covenants, representations, warranties and other
provisions of this Agreement shall survive the Debt Interest Closing.
12.2 This Agreement shall be governed by the laws of the State of Illinois,
without reference to its conflicts of law or choice of law rules.
12.3 The terms and provisions of this Agreement shall be binding on the
successors and assigns of the parties hereto. The Prime Parties shall have the
right to designate a Prime Affiliate to take title to any interest which TPG may
be entitled to acquire under this Agreement; provided, however, float none of
the Prime Parties shall have any other right to assign any portion of their
respective interests under this Agreement without the prior written consent of
KILICO and FKLA.
12.4 This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. It shall not be necessary that any single
counterpart of this Agreement be executed by all of the parties hereto, so long
as each of such parties shall have executed the same or any other separate
counterpart hereof.
12.5 As used herein, the terms (i) "person" shall mean an individual, a
corporation, a partnership, a joint venture, a limited liability company, an
unincorporated organization, or a governmental body; (ii) "including" shall mean
including, without limiting the generality of the foregoing; and (iii) the
singular shall include the plural, and vice versa.
12.6 If any provision of this Agreement should be found to be invalid,
void, or unenforceable, then it is the intent of the parties hereto that the
remainder of this Agreement be enforced to the fullest extent possible in
accordance with the intentions of the parties.
12.7 Time is of the essence of this Agreement.
12.8 Each party to this Agreement waives any right to recover any
consequential or punitive damages from another party in connection with such
party's liabilities under this Agreement or under any document or instrument to
be delivered at the Debt Interest Closing, or otherwise pursuant hereto.
12.9 As used herein, the term "business day" shall mean any day on which
KILICO is open for business at its principal office in Long Grove, Illinois.
15
<PAGE>
12.10 The Kemper Parties and the Prime Parties shall each pay their own
attorneys' fees and expenses and other costs and expenses which have been or may
be incurred in connection with the preparation and negotiation of this Agreement
and the closing of the transactions contemplated by this Agreement.
12.11 The parties to this Agreement will execute and deliver such other
documents and instruments as may be reasonably requested by any other party to
cause, effect, accomplish, or evidence any of the transactions contemplated by
this Agreement.
12.12 For purposes of determining the beneficial owner of the Premises, as
that phrase is used in Section 6.2 of this Agreement, if title to the Premises
is held by a land trustee at any time, the beneficiary of that land trust shall
be deemed to be the "beneficial owner" of the Premises. If title to the Premises
is not held by a land trustee, the record owner of title to the Premises shall
be deemed to be the "beneficial owner of the Premises.
(Signature Page Follows)
16
<PAGE>
In Witness Whereof, the parties hereto have caused this Agreement to be
executed and delivered the day and year first above written.
KEMPER INVESTORS LIFE INSURANCE
COMPANY, an Illinois insurance
corporation
By: /s/ Frederick Stephens
-------------------------------
Name: Frederick Stephens
-----------------------------
Title: AUTHORIZED SIGNATORY
----------------------------
By: /s/ Robert Korslin
-------------------------------
Name: Robert Korslin
-----------------------------
Title: AUTHORIZED SIGNATORY
----------------------------
FEDERAL KEMPER LIFE ASSURANCE
COMPANY, an Illinois insurance
corporation
By: /s/ Frederick Stephens
-------------------------------
Name: Frederick Stephens
-----------------------------
Title: AUTHORIZED SIGNATORY
----------------------------
By: /s/ Robert Korslin
-------------------------------
Name: Robert Korslin
-----------------------------
Title: AUTHORIZED SIGNATORY
----------------------------
KILICO REALTY CORPORATION, an Illinois
corporation
By: /s/ Frederick Stephens
-------------------------------
Name: Frederick Stephens
-----------------------------
Title: PRESIDENT
----------------------------
17
<PAGE>
FKLA REALTY CORPORATION, an Illinois
corporation
By: /s/ Frederick Stephens
-----------------------------------------
Name: Frederick Stephens
---------------------------------------
Title: PRESIDENT
--------------------------------------
KR 77 FITNESS CENTER, INC., a Delaware
corporation
By: /s/ Frederick Stephens
-----------------------------------------
Name: Frederick Stephens
---------------------------------------
Title: PRESIDENT
--------------------------------------
77 WEST WACKER LIMITED PARTNERSHIP,
an Illinois limited partnership
By: THE PRIME GROUP, INC., an Illinois
corporation, a general partner
By: /s/ Michael W. Reschke
-----------------------------------
Name: Michael W. Reschke
---------------------------------
Title: PRESIDENT
--------------------------------
By: KILICO REALTY CORPORATION, an
Illinois corporation, a general partner
By: /s/ Frederick Stephens
-----------------------------------
Name: Frederick Stephens
---------------------------------
Title: PRESIDENT
--------------------------------
18
<PAGE>
K/77 INVESTORS LIMITED PARTNERSHIP, an
Illinois limited partnership
By: KILICO REALTY CORPORATION, an
Illinois corporation, a general partner
By: /s/ Frederick Stephens
-----------------------------------------
Name: Frederick Stephens
---------------------------------------
Title: PRESIDENT
-------------------------------------
THE PRIME GROUP, INC., an Illinois
corporation, a general partner
By: /s/ Michael W. Reschke
-----------------------------------------------
Name: Michael W. Reschke
---------------------------------------------
Title: PRESIDENT
--------------------------------------------
PRIME GROUP LIMITED PARTNERSHIP, an
Illinois limited partnership
By: /s/ Michael W. Reschke
-----------------------------------------------
Name: Michael W. Reschke
Title: General Partner
PRIME 77 FITNESS CENTER, INC., an Illinois
corporation
By: /s/ Michael W. Reschke
----------------------------------------------
Name: Michael W. Reschke
---------------------------------------------
Title: PRESIDENT
--------------------------------------------
19
<PAGE>
Schedule A
----------
Definitions
-----------
As used herein, the following terms shall have the following meanings assigned
to them:
<TABLE>
<CAPTION>
<S> <C>
1997 SFA Advances: As defined in Section 3.1 of this Agreement.
Administrative Agent: The Bank of Montreal, Chicago Branch.
Agreement: This Amended And Restated Agreement made by
KILICO, FKLA, KRC, FRC, K/77, TPG, Prime
Fitness and PGLP.
Bankruptcy Code: As defined in Section 10.3 of this Agreement.
Borrower: 77 West Wacker Limited Partnership, an
Illinois limited partnership
Building Loan Agreement: As defined in Recital B to this Agreement.
Claim: Any claim, suit, charge, loss liability, cost,
damages, or expense.
Construction Guarantees: As defined in Recital E to this Agreement.
Construction Loan Documents: As defined in Recital C to this Agreement.
Construction Note: As defined in Recital C to this Agreement.
Co-Agents: As defined in Recital B to this Agreement.
Credit Amount: As defined in Section 3.1 of this Agreement.
Debt Interest Closing: As defined in Section 4 of this Agreement.
Debt Interest Default: The failure of the Debt Interest Closing
to occur on or before the Outside Date for
any reason other than a default by KILICO,
FKLA, KRC OR K/77 under this Agreement.
Expenses: Any and all reasonable expenses incurred in
connection relating to, or arising out of, any
claim,
</TABLE>
Schedule A Page-1
<PAGE>
action, suit or proceeding incident to any
matter which is the subject of an indemnity
under this Agreement (including, without
limitation, court filing fees, court costs,
arbitration fees or costs, witness fees,
investigators, expert witnesses,
accountants, attorneys, and other
professionals, and the allocated cost of in-
house attorneys used in lieu of outside
counsel).
Extension Option Fee: As defined in Sections 5.1, 5.2, 5.3, 5.4,
and 5.5 of this Agreement.
Extension Option Fee Credit: As defined in Section 3.1 of this Agreement.
Fifth Extension Option: As defined in Section 5.5 of this Agreement.
First Extension Option: As defined in Section 5.1 of this Agreement.
Fourth Extension Option: As defined in Section 5.4 of this Agreement.
FKLA: Federal Kemper Life Assurance Company, an
Illinois insurance corporation.
FRC: FKLA Realty Corporation, an Illinois
corporation.
Goldman Sachs: Goldman Sachs Capital Markets, L.P.
Goldman Swap Confirmation: That Revised Confirmation dated August 6,
1992 made by Goldman Sachs to KILICO
identified as Ref. No.: NYUSS920705 (95004)
and that Revised Confirmation dated August
5, 1992 made by Goldman Sachs to FKLA
identified as Ref. No.: NYUSS920706 (95004).
Indemnitee: As defined in Section 9.8 of this Agreement.
K/77: K/77 Investors Limited Partnership, an
Illinois limited partnership.
Kemper Parties: KILICO, FKLA, KRC, FRC, and KR Fitness.
Kemper Releases: As defined in Section 7.1 of this Agreement.
Schedule A Page-2
<PAGE>
KILICO: Kemper Investors Life Insurance Company, an
Illinois insurance corporation.
KILICO/FKLA: KILICO and FKLA, jointly and severally.
KILICO/FKLA First Mortgage: As defined in the Standby Funding
Agreement.
KILICO/FKLA Loan Documents: As defined in Recital D to this Agreement.
KILICO/FKLA Standby Note: As defined in the Standby Funding Agreement.
KILICO/FKLA Subordinate Mortgage: As defined in Recital F to this Agreement.
KRC: KILICO Realty Corporation, an Illinois
corporation.
KR Fitness: KR 77 Fitness Center, Inc., a Delaware
corporation.
LMCC: Lumbermens Mutual Casualty Company, an
Illinois mutual insurance company.
Option: As defined in Section 2 of this Agreement.
Option Amendment: As defined in Section 10.3 of this
Agreement.
Option Interests: As defined in the Partnership Option
Agreement.
Option Notice: As defined in Section 4 of this Agreement.
Outside Date: As defined in Section 2 of this Agreement.
Partnership Agreement: That Third Amended And Restated Agreement Of
Limited Partnership Of 77 West Wacker
Limited Partnership dated as of March 14,
1991, as amended from time to time.
Partnership Option Agreement: As defined in Recital H to this
Agreement.
Partnership Option: As defined in Recital H to this Agreement.
PGLP: Prime Group Limited Partnership, an Illinois
limited partnership.
Schedule A Page-3
<PAGE>
Premises: As defined in Recital A to this Agreement.
Prime Affiliate: Any entity in which TPG or any person or
entity controlling, controlled by or under
common control with TPG has an economic or
ownership interest.
Prime Fitness: Prime 77 Fitness Center.
Prime Parties: TPG, PGLP, and Prime Fitness.
Prime Releases: As defined in Section 7.2 of this
Agreement.
Project: As defined in the Partnership Agreement.
Second Extension Option: As defined in Section 5.2 of this
Agreement.
Standby Funding Agreement: As defined in Recital D to this Agreement.
Subordinate Debt Price: The price for the Subordinate Debt
Interests, computed as provided in
Section 3.2 or Section 3.3 of this
Agreement.
Subordinate Debt Interests: As defined in Section 2 of this Agreement.
Subordinate Environmental
Indemnity: That Environmental Indemnity Agreement
dated as of March 14, 1991 made by TPG and
KILICO/FKLA.
Subordinate Funding Agreement: As defined in Recital F to this
Agreement.
Subordinate Loan Documents: The Subordinate Funding Agreement, the
Subordinate Note, the KILICO/FKLA
Subordinate Mortgage, all documents
defined in the Subordinate Funding
Agreement as KILICO/FKLA Loan Documents,
the Subordination and Forbearance
Agreement, dated as of June 17, 1994, but
made effective as of March 22, 1994, among
TPG, Prime Fitness, PGLP, KILICO, FKLA,
KRC, FRC and KR Fitness, the Agreement
Regarding Sharing of Proceeds and
Receipts, dated as of November 13, 1991,
among TPG, KRC, KILICO and FKLA, as
amended by Amendment to Agreement
Regarding
Schedule A Page-4
<PAGE>
Sharing of Proceeds and Receipts, dated as
of June 17, 1994, but made effective as of
March 22, 1994, among TPG, KRC, KILICO,
FKLA and FRC, the Security Agreement - 77
West Wacker Limited Partnership (Sharing
Agreement), dated as of November 13, 1991,
among TPG, KRC, KILICO and FKLA, as
amended by Amendment to Security
Agreement - 77 West Wacker Limited
Partnership (Sharing Agreement), dated as
of June 17, 1994, but made effective as of
March 22, 1994, among TPG, KILICO, FKLA,
KRC and FRC, and the Amended and Restated
Security Agreement, dated as of June 17,
1994, but made effective as of March 22,
1994, among TPG, KILICO and FKLA.
Subordinate Note: As defined in Recital F to this Agreement.
Third Extension Option: As defined in Section 5.3 of this
Agreement.
TPG: The Prime Group, Inc., an Illinois
corporation.
Triad Agreement: That certain letter agreement dated July
__, made between KILICO, KRC, KFC
Portfolio Corp., a Delaware corporation,
and TPG providing for the sale and
purchase of the interests held by KILICO,
KRC, and KFC Portfolio Corp. in Triad
Development Company and other related
entities.
Triad Closing: The event defined as the "Closing" under
the Triad Agreement.
Warranting Party: As defined in Section 9.7 of this
Agreement.
Schedule A Page-5
<PAGE>
EXHIBIT A
---------
THE TRANSFER INSTRUMENTS
------------------------
A-1
<PAGE>
EXHIBIT A-1
-----------
ALLONGE TO SUBORDINATE NOTE
---------------------------
This Allonge To Note (the "Allonge") is made to that certain Note dated
March 7, 1991 made by 77 West Wacker Limited Partnership, an Illinois limited
partnership, in favor of Kemper Investors Life Insurance Company, an Illinois
insurance corporation ("KILICO") and Federal Kemper Life Assurance Company, an
Illinois insurance corporation ("FKLA") in the principal amount of Sixty Million
Dollars ($60,000,000.00) (the "Note").
Pay to the order of _______________ without recourse to the endorser. This
Allonge is made without recourse and without representation or warranty of any
kind, whether express or implied, except as expressly provided to the contrary
in that Amended And Restated Agreement dated July 15, 1997 made by KILICO, FKLA,
KILICO Realty Corporation, an Illinois corporation, FKLA Realty Corporation, an
Illinois corporation, KR 77 Fitness Center, Inc., a Delaware corporation, 77
West Wacker Limited Partnership, an Illinois limited partnership, K/77 Investors
Limited Partnership, an Illinois limited partnership, The Prime Group, Inc.,
Prime Group Limited Partnership, and Prime Fitness Center, Inc.
Dated:
-------------------------
KEMPER INVESTORS LIFE INSURANCE COMPANY,
an Illinois insurance corporation
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
A-1-1
<PAGE>
FEDERAL KEMPER LIFE ASSURANCE COMPANY, an
Illinois insurance corporation
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
A-1-2
<PAGE>
EXHIBIT A-2
-----------
ASSIGNMENT INSTRUMENT
---------------------
A-2-1
<PAGE>
This document prepared
by and after recording
return to:
Kenneth Hartmann, Esq.
Rudnick & Wolfe This space reserved for Recorder's use only.
203 N. LaSalle Street
Suite 1800
Chicago, Illinois
60601-1293
GENERAL ASSIGNMENT
------------------
KNOW ALL PEOPLE BY THESE PRESENTS, that Kemper Investors Life Insurance
Company, an Illinois insurance corporation and Federal Kemper Life Assurance
Company, an Illinois insurance corporation (collectively, "Assignor"), 120 S.
LaSalle Street, Chicago, Illinois 60603, in consideration of Ten and No/100
Dollars ($10.00) in lawful money of the United States, and for other good and
valuable consideration, the receipt whereof is hereby acknowledged, by these
presents does sell, assign, transfer and set over, unto ______, a(n)______
______("Assignee"), and its successors and assigns, to their own proper use and
benefit, any and all of Assignor's right, title and interest in and to each of
the documents listed on Exhibit A attached hereto and by this reference
incorporated herein (the "Documents"), without recourse, representation and
warranty of any kind, except as provided in that certain Amended And Restated
Agreement ("Agreement") dated July 15, 1997, by and among Kemper Investors Life
Insurance Company, an Illinois insurance corporation, Federal Kemper Life
Assurance Company, an Illinois insurance corporation, KILICO Realty Corporation,
an Illinois corporation ("KRC"), FKLA Realty Corporation, an Illinois
corporation, KR 77 Fitness Center, Inc., a Delaware corporation, 77 West Wacker
Limited Partnership, an Illinois limited partnership, K/77 Investors Limited
Partnership, an Illinois limited partnership, The Prime Group, Inc., an Illinois
corporation, Prime Group Limited Partnership, an Illinois limited partnership
and Prime 77 Fitness Center, Inc., an Illinois corporation. The Documents relate
to the real property described on Exhibit B attached hereto and made a part
hereof.
Assignor does hereby give to Assignee, its successors and assigns, the full
power and authority for Assignee's own use and benefit, but at Assignee's sole
cost, to take all legal measures, which may be proper or necessary for the
complete recovery of the assigned property and in its name or otherwise to
prosecute and withdraw any suits or proceedings at law or in equity therefor.
<PAGE>
IN WITNESS WHEREOF, Assignor and Assignee have caused this General
Assignment to be executed this ___ day of __________ , 1997.
ASSIGNOR
--------
KEMPER INVESTORS LIFE INSURANCE COMPANY,
an Illinois insurance corporation
By:
--------------------------------------
Name:
------------------------------------
Its Authorized Signatory
By:
--------------------------------------
Name:
------------------------------------
Its Authorized Signatory
FEDERAL KEMPER LIFE ASSURANCE COMPANY, an
Illinois insurance corporation
By:
--------------------------------------
Name:
------------------------------------
Its Authorized Signatory
By:
--------------------------------------
Name:
------------------------------------
Its Authorized Signatory
2
<PAGE>
ASSIGNEE
By:
--------------------------------------
Name:
------------------------------------
Its Authorized Signatory
By:
--------------------------------------
Name:
------------------------------------
Its Authorized Signatory
3
<PAGE>
STATE OF ILLINOIS )
) SS.
COUNTY OF COOK )
I, ____________________, a Notary Public in and for said County, in the
State aforesaid, DO HEREBY CERTIFY, that ___________________ and ____________
_____________, personally known to me to be Authorized Signatories of Kemper
Investors Life Insurance Company, an Illinois insurance corporation, whose names
are subscribed to the within Instrument, appeared before me this day in person
and acknowledged that as such Authorized Signatories, they signed and delivered
the said Instrument as their free and voluntary act and as the free and
voluntary act and deed of said corporation, for the uses and purposes therein
set forth.
GIVEN under my hand and Notarial Seal, this ______ day of __________, 1997.
-----------------------------
Notary Public
My Commission Expires:
- -----------------------------
4
<PAGE>
STATE OF ILLINOIS )
) SS.
COUNTY OF COOK )
I, ________________________, a Notary Public in and for said County,
in the State aforesaid, DO HEREBY CERTIFY, that ___________________ and
_________________, personally known to me to be Authorized Signatories of
Federal Kemper Life Assurance Company, an Illinois insurance corporation,
whose names are subscribed to the within Instrument, appeared before me this
day in person and acknowledged that as such Authorized Signatories, they
signed and delivered the said Instrument as their free and voluntary act and
as the free and voluntary act and deed of said corporation, for the uses and
purposes therein set forth.
GIVEN under my hand and Notarial Seal, this __ day of _________, 1997.
____________________________________
Notary Public
My Commission Expires:
_________________________________
5
<PAGE>
STATE OF ILLINOIS )
) SS.
COUNTY OF COOK )
I, ________________________, a Notary Public in and for said County,
in the State aforesaid, DO HEREBY CERTIFY, that ___________________ and
_________________, personally known to me to be _______________________ of
_________________________ a (n) ___________ ____________________, whose
names are subscribed to the within Instrument, appeared before me this day
in person and acknowledged that as such Authorized Signatories, they signed
and delivered the said Instrument as their free and voluntary act and as the
free and voluntary act and deed of said corporation, for the uses and
purposes therein set forth.
GIVEN under my hand and Notarial Seal, this __ day of _________, 1997.
____________________________________
Notary Public
My Commission Expires:
_________________________________
6
<PAGE>
EXHIBIT A
---------
The following terms are used with the following meanings in this
Exhibit A.
Administrative Agent: Bank of Montreal, Chicago Branch, acting in the manner
and to the extent described in Article 12 of the Building
Loan Agreement dated March 14, 1991 by and between
Borrower, the Co-Agents (as defined therein) and the
Administrative Agent.
Borrower: 77 West Wacker Limited Partnership, an Illinois limited
partnership.
Prime: The Prime Group, Inc., an Illinois corporation.
KILICO/FKLA: Kemper Investors Life Insurance Company, an Illinois
insurance corporation and Federal Kemper Life Assurance
Company, an Illinois insurance corporation.
KILICO Realty: KILICO Realty Corporation, an Illinois corporation.
LIST OF DOCUMENTS
-----------------
A. Subordinate Mortgage Funding Agreement dated March 14, 1991 by and
among KILICO/FKLA and Borrower.
B. Subordination Agreement dated March 14, 1991 by and between KILICO/FKLA
and the Administrative Agent, with Acknowledgement and Consent executed by the
Borrower, Recorded as Document No. 91125471.
C. Note dated March 7, 1991 for up to $60,000,000.00 made by Borrower
to KILICO/FKLA.
D. Subordinate Mortgage, Security Agreement, Assignment of Leases, Rents
and Profits, Financing Statement and Fixture Filing dated March 14, 1991 made by
Borrower to KILICO/FKLA, Recorded with the Cook County, Illinois Recorder's
Office as Document No. 91125469.
E. Environmental Indemnity Agreement dated March 14, 1991 among Prime
and KILICO/FKLA -- Subordinate Mortgage.
A-1
<PAGE>
F. Subordinate Assignment of Takeover Subleases dated March 14, 1991
made by Borrower to and for the benefit of KILICO/FKLA.
G. Chicago Title Insurance Company Loan Title Insurance Policy No. 72-85-
482-3 dated April 1, 1991 in the amount of $60,000,000.00 issued to KILICO/FKLA.
H. Reimbursement Agreement dated March 14, 1991 by and between KILICO
Realty and Borrower.
I. All other documents included in the definition of "Subordinate Loan
Documents" in the Agreement.
[Subject to Confirmation]
A-2
<PAGE>
EXHIBIT B
---------
LEGAL DESCRIPTION
PARCEL 1:
LOT 3 (EXCEPT THE EAST 20.50 FEET THEREOF) TOGETHER WITH THE NORTH 1.00 FOOT OF
THE ORIGINAL 18.00 FOOT ALLEY LYING SOUTH OF AND ADJOINING THE SOUTH LINE OF
SAID LOT 3, IN BLOCK 17 IN THE ORIGINAL TOWN OF CHICAGO IN SECTION 9, TOWNSHIP
39 NORTH, RANGE 14, EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK COUNTY,
ILLINOIS.
AND
LOTS 1 TO 9, BOTH INCLUSIVE, IN THE SUBDIVISION OF LOT 4 TOGETHER WITH THE NORTH
1.50 FEET OF THE ORIGINAL 18.00 FOOT ALLEY LYING SOUTH OF AND ADJOINING THE
SOUTH LINE OF SAID SUBDIVISION OF LOT 4, IN BLOCK 17 IN THE ORIGINAL TOWN OF
CHICAGO IN SECTION 9, TOWNSHIP 39 NORTH, RANGE 14, EAST OF THE THIRD PRINCIPAL
MERIDIAN, IN COOK COUNTY, ILLINOIS.
PARCEL 2:
THAT PART OF THE WEST 1/2 OF NORTH GARVEY COURT (SAID NORTH GARVEY COURT BEING
THE WEST 1/2 OF LOT 2, AND THE EAST 20.50 FEET OF LOT 3, TOGETHER WITH THE NORTH
1.00 FOOT OF THE ORIGINAL 18.00 FOOT ALLEY LYING SOUTH OF AND ADJOINING THE
SOUTH LINE OF THE AFORESAID PARTS OF LOTS 2 AND 3, THE SOUTH LINE OF SAID 1.00
FOOT STRIP BEING THE NORTH LINE OF WEST HADDOCK PLACE AS ESTABLISHED BY
ORDINANCE PASSED SEPTEMBER 17, 1852) LYING ABOVE AN INCLINED PLANE HAVING AN
ELEVATION OF +17.26 FEET ABOVE CHICAGO CITY DATUM MEASURED ALONG THE NORTH LINE
OF BLOCK 17, AND HAVING AN ELEVATION OF +21.23 FEET ABOVE CHICAGO CITY DATUM
MEASURED ALONG THE NORTH LINE OF WEST HADDOCK PLACE, ALL IN BLOCK 17, (AS
VACATED BY THE CITY OF CHICAGO IN AN ORDINANCE PASSED MARCH 21, 1990 AND
RECORDED APRIL 11, 1990 AS DOCUMENT 90164868), IN THE ORIGINAL TOWN OF CHICAGO,
IN SECTION 9, TOWNSHIP 39 NORTH, RANGE 14, EAST OF THE THIRD PRINCIPAL MERIDIAN,
IN COOK COUNTY, ILLINOIS.
PARCEL 3:
B-1
<PAGE>
EASEMENT APPURTENANT TO AND FOR THE BENEFIT OF PARCELS 1, 2 AND 4 CREATED BY THE
GRANT OF EASEMENT RECORDED AS DOCUMENT NO. 90164870, AS AMENDED BY DOCUMENT NO.
91096330, FOR INGRESS, EGRESS, CONSTRUCTION, USE AND MAINTENANCE OF A PLAZA
WALKWAY OVER AND ACROSS:
THAT PART OF THE EAST 1/2 OF NORTH GARVEY COURT (SAID NORTH GARVEY COURT BEING
THE WEST 1/2 OF LOT 2, AND THE EAST 20.50 FEET OF LOT 3, TOGETHER WITH THE NORTH
1.00 FOOT OF THE ORIGINAL 18.00 FOOT ALLEY LYING SOUTH OF AND ADJOINING THE
SOUTH LINE OF THE AFORESAID PARTS OF LOTS 2 AND 3, THE SOUTH LINE OF SAID 1.00
FOOT STRIP BEING THE NORTH LINE OF WEST HADDOCK PLACE AS ESTABLISHED BY
ORDINANCE PASSED SEPTEMBER 17, 1852); LYING ABOVE AN INCLINED PLANED HAVING AN
ELEVATION OF +17.26 FEET ABOVE CHICAGO CITY DATUM MEASURED ALONG THE NORTH LINE
OF SAID BLOCK 17, AND HAVING AN ELEVATION OF +21.23 FEET ABOVE CHICAGO CITY
DATUM MEASURED ALONG THE NORTH LINE OF WEST HADDOCK PLACE, AND LYING BELOW AN
INCLINED PLANE HAVING AN ELEVATION OF +47.26 FEET ABOVE CHICAGO CITY DATUM
MEASURED ALONG THE NORTH LINE OF SAID BLOCK 17, AND HAVING AN ELEVATION OF
+51.23 FEET ABOVE CHICAGO CITY DATUM MEASURED ALONG THE NORTH LINE OF WEST
HADDOCK PLACE, ALL IN BLOCK 17, IN THE ORIGINAL TOWN OF CHICAGO, IN SECTION 9,
TOWNSHIP 39 NORTH, RANGE 14, EAST OF THE THIRD PRINCIPAL MERIDIAN, IN COOK
COUNTY, ILLINOIS.
PARCEL 4:
THAT PART OF WEST HADDOCK PLACE AS ESTABLISHED BY ORDINANCE PASSED SEPTEMBER 17,
1852, TOGETHER WITH THE SOUTH 1.50 FEET OF THE ORIGINAL 18.00 FOOT ALLEY LYING
NORTH OF AND ADJOINING THE NORTH LINE OF LOT 1 IN THE ASSESSOR'S DIVISION OF LOT
5 IN BLOCK 17; ALSO, THE SOUTH 1.00 FOOT OF SAID ORIGINAL 18.00 FOOT ALLEY LYING
NORTH OF AND ADJOINING THE NORTH LINE OF LOT 6 IN BLOCK 17, ALL TAKEN AS ONE
TRACT, LYING WEST OF THE SOUTHERLY EXTENSION OF THE WEST LINE OF THE EAST 20.50
FEET OF LOT 3 IN SAID BLOCK 17, AND LYING EAST OF THE WEST LINE OF BLOCK 17, AND
ITS EXTENSIONS, (AS VACATED BY THE CITY OF CHICAGO IN AN ORDINANCE PASSED MARCH
21, 1990 AND RECORDED APRIL 11, 1990 AS DOCUMENT 90164868), IN THE ORIGINAL TOWN
OF CHICAGO, IN SECTION 9, TOWNSHIP 39 NORTH, RANGE 14, EAST OF THE THIRD
PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS.
PARCEL 5:
B-2
<PAGE>
EASEMENT APPURTENANT TO AND FOR THE BENEFIT OF PARCELS 1, 2 AND 4 CREATED BY
THE GRANT OF EASEMENT RECORDED AS DOCUMENT NO. 90164870, AS AMENDED BY DOCUMENT
NO. 91096330 FOR INGRESS, EGRESS, USE, CONSTRUCTION AND MAINTENANCE OF A PLAZA
WALKWAY OVER AND ACROSS:
THAT PART OF WEST HADDOCK PLACE AS ESTABLISHED BY ORDINANCE PASSED SEPTEMBER 17,
1852, TOGETHER WITH THE SOUTH 1.00 FOOT OF THE ORIGINAL 18.00 FOOT ALLEY LYING
NORTH OF AND ADJOINING THE NORTH LINE OF THE WEST 1/2 OF LOT 7 AND THE NORTH
LINE OF THE EAST 20.50 FEET OF LOT 6, ALL TAKEN AS ONE TRACT LYING EAST OF THE
SOUTHERLY EXTENSION OF THE WEST LINE OF THE EAST 20.50 FEET OF LOT 3, IN BLOCK
17, IN THE ORIGINAL TOWN OF CHICAGO, LYING WEST OF THE SOUTHERLY EXTENSION OF
THE EAST LINE OF THE WEST 1/2 OF LOT 2 IN SAID BLOCK 17, LYING ABOVE AN INCLINED
PLANE, HAVING AN ELEVATION OF +21.23 FEET ABOVE CHICAGO CITY DATUM, MEASURED
ALONG THE NORTH LINE OF WEST HADDOCK PLACE AFORESAID, AND HAVING AN ELEVATION OF
+21.72 FEET ABOVE CHICAGO CITY DATUM, MEASURED ALONG THE SOUTH LINE OF 18.00
FOOT ALLEY AFORESAID, AND LYING BELOW AN INCLINED PLANE, HAVING AN ELEVATION OF
+71.23 FEET ABOVE CHICAGO CITY DATUM, MEASURED ALONG THE NORTH LINE OF WEST
HADDOCK PLACE AFORESAID, AND HAVING AN ELEVATION OF +71.72 FEET ABOVE CHICAGO
CITY DATUM, MEASURED ALONG THE SOUTH LINE OF THE ORIGINAL 18.00 FOOT ALLEY
AFORESAID, ALL IN SECTION 9, TOWNSHIP 39 NORTH, RANGE 14, EAST OF THE THIRD
PRINCIPAL MERIDIAN, IN COOK COUNTY, ILLINOIS.
PARCEL 6:
SUPPORT EASEMENTS APPURTENANT TO AND FOR THE BENEFIT OF PARCELS 1, 2 AND 4 OVER
THAT PART OF GARVEY COURT DEPICTED IN EXHIBIT "B" OF THE GRANT OF EASEMENT
RECORDED AS DOCUMENT 90164870, AS AMENDED BY DOCUMENT 91096330.
PARCEL 7:
LEASEHOLD ESTATE DESCRIBED BELOW APPURTENANT TO AND FOR THE BENEFIT OF PARCELS
1, 2 AND 4 CREATED BY LEASE DATED MARCH 7, 1991 BY AND BETWEEN AMERICAN NATIONAL
BANK AND TRUST COMPANY OF CHICAGO, AS TRUSTEE UNDER TRUST AGREEMENT DATED
NOVEMBER 26, 1985 AND KNOWN AS TRUST NO. 66121, AS LANDLORD, AND 77 WEST WACKER
LIMITED PARTNERSHIP, AN ILLINOIS LIMITED PARTNERSHIP, AS TENANT, (THE "AIR
RIGHTS LEASE") RECORDED AS DOCUMENT NO. 91119739:
B-3
<PAGE>
THE PROPERTY AND SPACE WHICH LIES BETWEEN HORIZONTAL PLANES WHICH ARE +50.63
FEET AND +80.63 FEET, RESPECTIVELY ABOVE THE CHICAGO CITY DATUM, AND WHICH IS
ENCLOSED BY VERTICAL PLANES EXTENDING UPWARD FROM THE BOUNDARIES, AT THE SURFACE
OF THE EARTH, OF THAT PART OF BLOCK 17 IN THE ORIGINAL TOWN OF CHICAGO, IN THE
SOUTH EAST 1/4 OF SECTION 9, TOWNSHIP 39 NORTH, RANGE 14 EAST OF THE THIRD
PRINCIPAL MERIDIAN, BOUNDED AND DESCRIBED AS FOLLOWS:
ALL OF SUB-LOTS 1 THROUGH 7, AND THE ALLEY IN THE ASSESSOR'S DIVISION OF LOT 5,
IN BLOCK 17 IN THE ORIGINAL TOWN OF CHICAGO. ALSO, LOT 6 (EXCEPT THE EAST 20.00
FEET THEREOF), IN BLOCK 17 IN THE ORIGINAL TOWN OF CHICAGO; ALL IN THE SOUTHEAST
1/4 OF SECTION 9, TOWNSHIP 39 NORTH, RANGE 14, EAST OF THE THIRD PRINCIPAL
MERIDIAN, IN COOK COUNTY, ILLINOIS.
TOGETHER WITH THE APPURTENANT RIGHTS SET FORTH AS "PARCEL B" IN EXHIBIT B TO
THE AIR RIGHTS LEASE.
Permanent Index Nos.: 17-09-421-006 through 17-09-421-009
17-09-421-012
17-09-421-013
17-09-422-001 through 17-09-422-008
Common Address: 77 West Wacker Drive
Chicago, Illinois 60603
B-4
<PAGE>
EXHIBIT A-3
-----------
CONFIRMATION OF WARRANTIES
--------------------------
A-3-1
<PAGE>
CONFIRMATION OF WARRANTIES
--------------------------
Reference is hereby made to that Amended And Restated Agreement dated
July 15, 1997 by and among Kemper Investors Life Insurance Company, an Illinois
insurance corporation, Federal Kemper Life Assurance Company, an Illinois
insurance corporation, KILICO Realty Corporation, an Illinois corporation, FKLA
Realty Corporation, an Illinois corporation, KR 77 Fitness Center, Inc., a
Delaware corporation, 77 West Wacker Limited Partnership, an Illinois limited
partnership, K/77 Investors Limited Partnership, an Illinois limited
partnership, The Prime Group, Inc., an Illinois corporation, Prime Group Limited
Partnership, an Illinois limited partnership and Prime 77 Fitness Center, Inc.,
an Illinois corporation (the "Agreement").
___________, a(n) ___________ ___________ ("_______") hereby
certifies, represents and warrants to ___________, a(n) ___________ ___________
(" ") that, except as otherwise set forth on Exhibit A attached hereto and
made a part hereof, all ___________ warranties and representations contained in
the Agreement are true and correct on and as of the date set forth below.
This Confirmation of Warranties has been executed and delivered
pursuant to the terms and provisions of the Agreement. All defined terms
contained in the Agreement are used in this Confirmation of Warranties with the
same meaning that such terms have in the Agreement.
IN WITNESS WHEREOF, the undersigned has executed this Confirmation of
Warranties as of this ____ day of ____________, 199_.
[SIGNATURE BLOCKS TO BE ADDED]
By:
-----------------------------------
1
<PAGE>
EXHIBIT B
---------
THE INDEMNITY
-------------
B-1
<PAGE>
INDEMNITY AGREEMENT
-------------------
This Indemnity Agreement (this "Agreement") is made and entered into as of
the ________ day of 1997, by and among The Prime Group, Inc., an Illinois
corporation ("TPG"),______________ (the "_______________"; TPG and
____________are each referred to as an "Indemnitor" and together referred to as
"Indemnitors"), KILICO Realty Corporation, an Illinois corporation ("KRC"),
Kemper Investors Life Insurance Company, an Illinois insurance corporation
("KILICO"), and Federal Kemper Life Assurance Company, an Illinois corporation
("FKLA"). KILICO and FKLA are sometimes referred to herein jointly and severally
as "KILICO/FKLA", KRC, KILICO and FKLA are sometimes referred to herein
collectively as the "Indemnitees".
R E C I T A L S:
----------------
A. TPG and KRC, as general partners, and KILICO, FKLA and TPG, as
limited partners, have heretofore entered into a certain Third Amended and
Restated Agreement of Limited Partnership of 77 West Wacker Limited Partnership
dated March 14, 1991 (as amended from time to time, the "Partnership
Agreement"), which continued the existence of 77 West Wacker Limited
Partnership, an Illinois limited partnership (the "Partnership"). All defined
terms used herein and not otherwise defined herein shall have the same meaning
as they have in the Partnership Agreement.
B. In connection with the construction, development and operation of the
Project and pursuant to the Building Loan Agreement, TPG, KRC, and the
Partnership executed and delivered the Co-Agent's Environmental Indemnity
Agreements. Acting as general partners of the Partnership, and in connection
with the construction, development and operation of the Project, TPG and KRC
have incurred liability to third parties, including without limitation,
liability under the Takeover Leases and the Takeover Subleases (as those terms
are defined in the Building Loan Agreement).
C. TPG, KRC, KILICO, FKLA, FKLA Realty, KR 77 Fitness Center, Inc., a
Delaware corporation, K/77 Investors Limited Partnership, an Illinois limited
partnership, the Partnership, and Prime Group Limited Partnership, an Illinois
limited partnership, and Prime Fitness Center, Inc., an Illinois corporation
have entered into a certain Amended And Restated Agreement dated July 15, 1997
(the "Agreement") which requires, as a condition to the closing of the
transactions contemplated thereby, that Indemnitor enter into this Agreement.
NOW THEREFORE, in consideration of the mutual premises and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties do hereby agree to the following:
1. The Indemnitors do hereby jointly and severally, absolutely and
unconditionally, agree to indemnify, defend, protect and hold harmless KILICO,
FKLA, KRC, FKLA Realty and
<PAGE>
their respective officers, directors, stockholders, employees, agents and
affiliates and the successors and assignees of any of them (collectively, the
"Indemnified Parties") from and against, and agree to reimburse the Indemnified
Parties upon demand for, any payment, loss, expense, liability, damage or injury
made, suffered or sustained by the Indemnified Parties, or any of them, by
reason of or arising out of any liability or obligation alleged or asserted
against any of the Indemnified Parties by a third party which is in any way
related to the Partnership, the Building Loan, the First Mortgage Loan, the Co-
Agents Environmental Indemnity Agreement, the Takeover Leases, the Takeover
Subleases, or the Project, whether arising out of any matter occurring before or
after the date hereof (all of the foregoing are referred to as "Claims"),
including, but not limited to, any judgment, award, settlement, reasonable
attorney's fees and other costs and expenses incurred in connection with the
defense of any actual or threatened action or proceeding concerning a Claim;
notwithstanding the foregoing, the term "Claim" shall not include any payment,
loss, expense, liability, damage or injury: a. resulting from a breach by KRC
of the Partnership Agreement; b. resulting from the gross negligence or willful
misconduct of any Indemnified Party; c. resulting from a breach by any
Indemnified Party of any of its obligations under the Agreement; or d. resulting
from a breach or an alleged breach by any Indemnified Party of any agreement
between an Indemnified Party and any party to the Building Loan Agreement, any
agreement between an Indemnified Party and a participant or co-lender under the
First Mortgage Funding Agreement, or any agreement between an Indemnified Party
and a participant or co-lender under the Subordinate Funding Agreement.
2. Nothing contained herein shall amend, modify, waive, annul or
terminate the indemnifications set forth in Section 6.10 of each of the
Partnership Agreement.
3. Any notice or other communication required or permitted hereunder
shall be (a)(i) in writing and shall be deemed to have been duly given (A) when
received, if delivered in person, (B) three (3) business days after deposit in a
regularly maintained receptacle of the United States mail as registered or
certified mail, first class postage prepaid, (C) the business day after notice
is sent for overnight delivery by nationally recognized overnight courier
service, or (D) on the day on which the party to whom such notice is addressed
refuses delivery by mail or by nationally recognized courier service, and (ii)
addressed as follows:
To any of the Indemnitees:
c/o Zurich Kemper Life
225 West Washington Street
Suite 1450
Chicago, IL 60606
With copies to:
Zurich Kemper Life Companies
c/o ZKS Real Estate Partners LLC
2
<PAGE>
225 W. Washington
Suite 1450
Chicago, Illinois 60606
Attention: Timothy R. Verrilli, Esq.
with a copy to:
Rudnick & Wolfe
203 N. LaSalle Street
Chicago, Illinois 60601-1293
Attention: Kenneth Hartmann
To Indemnitor:
c/o The Prime Group, Inc.
77 West Wacker Drive
39th Floor
Chicago, IL 60601
Attn: President
With a copy to:
The Prime Group, Inc.
77 West Wacker Drive
39th Floor
Chicago, IL 60601
Attn: General Counsel
or to any such other address as any party hereto shall designate in a written
notice to the other parties hereto.
4. Any of the Indemnitees hereunder may, at any time and from time to
time, waive or not insist on strict compliance with any one or more of the
provisions contained herein, but any such waiver or non-existence shall be
deemed to be made pursuant to the terms of said document and not in modification
thereof. Any waiver or non-insistence in any instance or under any particular
circumstance shall not be considered a waiver or non-insistence of such
provision in any other instance or any other circumstance. The remedies provided
herein shall be cumulative, may be exercised from time to time, singularly or
concurrently or in any combination, without any of the Indemnitees being
obligated to exercise any such right in any other circumstance, and are not
exclusive of any remedies provided by law.
5. This Agreement shall be governed by, and construed in accordance
with, the laws of the State of Illinois without regard to principles of conflict
of laws.
3
<PAGE>
6. EACH PARTY TO THIS AGREEMENT WAIVES, TO THE FULLEST EXTENT
PERMITTED BY LAW, THE RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM FILED BY ANY PARTY, RELATING DIRECTLY OR INDIRECTLY TO THIS
AGREEMENT.
7. This Agreement shall be binding upon and inure to the benefit of
each of the Indemnitors and the Indemnitees, and their respective successors and
assigns; provided, however, that neither Indemnitor may assign its duties and
obligations hereunder without the prior written consent of Indemnitees, in their
sole discretion.
8. The unenforceability or invalidity of any provision or provisions
of this Agreement shall not render any other provision or provisions herein
contained unenforceable or invalid.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered as of the date and year first above written.
INDEMNITORS:
THE PRIME GROUP, INC., an Illinois
corporation
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
77 WEST WACKER LIMITED PARTNERSHIP,
an Illinois limited partnership
By:
By:
----------------------------------
Name:
----------------------------------
Title:
----------------------------------
4
<PAGE>
INDEMNITEES:
KILICO REALTY CORPORATION, an Illinois
corporation
By:
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
KEMPER INVESTORS LIFE INSURANCE COMPANY,
an Illinois insurance corporation
By:
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
By:
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
FEDERAL KEMPER LIFE ASSURANCE CORPORATION
By:
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
By:
-----------------------------------
Name:
-----------------------------------
Title:
-----------------------------------
5
<PAGE>
EXHIBIT C-1
-----------
THE KEMPER RELEASES
-------------------
C-1-1
<PAGE>
RELEASE AGREEMENT
THIS RELEASE AGREEMENT ("Release Agreement") is made on this ____ day
of , 1997, by and between Kemper Investors Life Insurance Company, an
Illinois insurance corporation ("KILICO"); Federal Kemper Life Assurance
Company, an Illinois insurance corporation ("FKLA"); KILICO Realty Corporation,
an Illinois corporation ("KRC"); FKLA Realty Corporation, an Illinois
corporation ("FRC") and KR 77 Fitness Center, Inc., a Delaware corporation ("KR
Fitness"), individually and collectively, "Releasor") and The Prime Group, Inc.,
an Illinois corporation ("TPG"); Prime Group Limited Partnership, an Illinois
limited partnership ("PGLP"), Prime 77 Fitness Center, Inc., an Illinois
corporation ("Prime Fitness"); and 77 West Wacker Limited Partnership, an
Illinois limited partnership ("Borrower") (individually and collectively,
"Releasee").
W I T N E S S E T H:
WHEREAS, Prime and KRC, as general partners, and KILICO, FKLA and
Prime, as limited partners, have heretofore entered into a certain Third Amended
and Restated Agreement of Limited Partnership of 77 West Wacker Limited
Partnership dated March 14, 1991 (as amended from time to time, the "Partnership
Agreement"), which continued the existence of 77 West Wacker Limited
Partnership, an Illinois limited partnership (the "Partnership"). All defined
terms used herein and not expressly defined herein shall have the same meaning
as they have in the Partnership Agreement.
WHEREAS, Prime, KRC, KILICO, FKLA, FRC, KR Fitness, K/77 Investors
Limited Partnership, an Illinois limited partnership, the Partnership, PGLP and
Prime Fitness have entered into a certain Amended And Restated Agreement dated
as of July 15, 1997 (the "Agreement") which requires, as a condition to the
closing of the transactions contemplated thereby, that Releasor enter into this
Release Agreement.
NOW, THEREFORE, for good and valuable consideration, the adequacy of
which is hereby acknowledged, the parties hereto agree as follows:
1. Release. Releasor, on behalf of itself and its affiliates,
officers, directors, shareholders, partners, agents, attorneys, employees and
all of such persons' respective heirs, successors and assigns, jointly,
severally and individually hereby absolutely, unconditionally and irrevocably
releases, remises and forever discharges Releasee and its affiliates, officers,
directors, shareholders, partners, agents, attorneys, employees and all such
persons' respective heirs, predecessors, successors, assigns, present and former
shareholders, affiliates, subsidiaries, divisions, directors, officers,
attorneys, employees, agents and other representatives (Releasee together with
such related parties, called the "Released Parties") from any and all claims by
reason of or arising out of any liability or obligation alleged or asserted
against any of the Released Parties and in any way related to the Partnership,
the Building Loan, the First
<PAGE>
Mortgage Loans, the Second Mortgage Loans, the Guaranty of Cost Overruns, the
Guaranty of Operating Deficits, the Co-Agents Environmental Indemnity
Agreement, or the Project, whether arising out of any matter occurring before or
after the date hereof ("Claim"), including, but not limited to, any claim by
Prime against KRC for contribution under the Partnership Agreement, and any
judgment, award, settlement, reasonable attorney's fees and other costs and
expenses incurred in connection with the defense of any actual or threatened
action, proceeding or claim, provided that the claim, loss, expense, damage or
injury was not the result of a declared Default by Releasee under the
Partnership Agreement.
2. Non-Release of Liability under the Indemnity Agreement and the
Partnership Agreement. Anything to the contrary notwithstanding contained in
paragraph 1 herein, this Release Agreement shall in no way affect or release any
and all of Releasee's obligations or liabilities (i) under that certain
Indemnity Agreement dated as of the date hereof and attached hereto as Exhibit
A, (ii) any of Releasee's obligations under the Agreement, or (iii) for a
declared Default under the Partnership Agreement, all of which are hereby
preserved.
3. Warranties of Releasor. Releasor hereby represents and warrants for
itself and for all persons claiming through it as follows:
a. it has not assigned or transferred to any third party all or any part
or portion of any Claim which it may have at any time had or owned;
b. it has full legal capacity to enter into, execute and perform this
Release Agreement;
c. it has duly authorized, executed and delivered this Release Agreement
to Releasee, and the agreements and obligations contained herein
represent the legal, valid and enforceable obligations of the
Releasor, subject to applicable bankruptcy, insolvency,
reorganization, receivership, moratorium or similar laws or judicial
decisions affecting the rights and remedies of creditors generally,
and general principles of equity, including, without limitation,
requirements of good faith, fair dealing and reasonableness, the
possible unavailability of particular equitable remedies, the possible
availability of particular equitable defenses, and concepts of
materiality, unconscionable conduct of an enforcing party or
impracticability or impossibility of performance;
d. it has read carefully and fully understands both the nature of this
Release Agreement and the contents of each of the provisions hereof;
e. it is executing this Release Agreement of its own free will, and is
under no duress, compulsion or coercion to execute this Release
Agreement;
2
<PAGE>
f. it has been represented by counsel in connection with the review,
negotiation, execution and delivery of this Release Agreement, has
discussed and assessed the merits of any Claim or potential Claim (if
any) against Releasee with counsel, and has been duly apprised of its
rights in connection therewith; and
g it understands, acknowledges and agrees that this instrument may be
pleaded as a full and complete defense, and may be used as a basis for
an injunction, against any action, suit or other proceeding which may
be instituted, prosecuted or attempted in breach of the provisions of
this Release Agreement.
4. Other Facts and Circumstances. Releasor agrees that no fact, event,
circumstance, evidence or transaction which could now be asserted or which may
hereafter be discovered with respect to it shall affect in any manner the final
and unconditional nature of Section 1 of this Release Agreement.
5. Other Claims and Parties Not Affected. The parties agree that this
Release Agreement is not intended to constitute or be construed or deemed to be
a release of, or a covenant not to sue or a covenant not to assist in suit
against, Released Parties with respect to demands, actions, causes of action,
suits, counterclaims, defenses, rights of set-off, demands and liabilities other
than the Claims set forth in Section 1 hereof, it being expressly understood
that Releasor retains any causes of action and all legal remedies it may have
now or hereafter with respect thereto. This Release Agreement is not intended
and shall in no event be construed or deemed to be a release of, or a covenant
not to sue, or a covenant not to assist in suit against, any party, person,
firm, partnership, limited liability company or corporation that is not a
Released Party.
6. Successors. This Release Agreement shall be binding upon Releasor and
its successors, assigns and other legal representatives.
7. Choice of Law. This Release Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Illinois,
without regard to its conflict of laws provisions.
8. Amendments. This Release Agreement may be amended or otherwise varied
only by an instrument in writing executed by Releasor and Releasee.
9. Counterparts. This Agreement may be executed in counterparts, each of
which shall be binding upon the party executing the same and all of which, when
taken together, shall constitute one single Agreement.
3
<PAGE>
A WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties on the first day hereinabove written.
RELEASOR:
---------
KEMPER INVESTORS LIFE INSURANCE
COMPANY, an Illinois
corporation
By:
-----------------------------------
Its: Authorized Signatory
By:
-----------------------------------
Its: Authorized Signatory
FEDERAL KEMPER LIFE
ASSURANCE COMPANY, an Illinois
limited partnership
By:
-----------------------------------
Its: Authorized Signatory
By:
-----------------------------------
Its: Authorized Signatory
KILICO REALTY CORPORATION, an
Illinois corporation
By:
-----------------------------------
Its: Authorized Signatory
FKLA REALTY CORPORATION, an
Illinois corporation
By:
-----------------------------------
Its: Authorized Signatory
4
<PAGE>
KR 77 FITNESS CENTER, INC. a Delaware
corporation
By:
----------------------------------
Its: Authorized Signatory
RELEASEE:
---------
THE PRIME GROUP, INC., an Illinois
corporation
By:
----------------------------------
Name:
-------------------------
Title:
------------------------
PRIME GROUP LIMITED PARTNERSHIP, an
Illinois limited partnership
By:
----------------------------------
Name:
-------------------------
Title:
------------------------
PRIME 77 FITNESS CENTER, INC., an
Illinois corporation
By:
----------------------------------
Name:
-------------------------
Title:
------------------------
77 WEST WACKER LIMITED PARTNERSHIP, an
Illinois limited partnership
5
<PAGE>
By: THE PRIME GROUP, INC., an Illinois
corporation, a general partner
By:
----------------------------------
Name:
-------------------------------
Title:
------------------------------
6
<PAGE>
EXHIBIT C-2
-----------
THE PRIME RELEASES
-------------------
C-2-1
<PAGE>
RELEASE AGREEMENT
THIS RELEASE AGREEMENT ("Release Agreement") is made on this ____ day of
____________, 199_, by and between The Prime Group, Inc., an Illinois
corporation ("TPG"); Prime Group Limited Partnership, an Illinois limited
partnership ("PGLP"); Prime 77 Fitness Center, Inc., an Illinois corporation
("Prime Fitness"); and 77 West Wacker Limited Partnership, an Illinois limited
partnership ("Borrower") (individually and collectively, "Releasor") and Kemper
Investors Life Insurance Company, an Illinois insurance corporation ("KILICO");
Federal Kemper Life Assurance Company, an Illinois insurance corporation
("FKLA"); KILICO Realty Corporation, an Illinois corporation ("KRC"); FKLA
Realty Corporation, an Illinois corporation ("FRC") and KR 77 Fitness Center,
Inc., a Delaware corporation ("KR Fitness") (individually and collectively,
"Releasee").
W I T N E S S E T H:
WHEREAS, Prime and KRC, as general partners, and KILICO, FKLA and Prime, as
limited partners, have heretofore entered into a certain Third Amended and
Restated Agreement of Limited Partnership of 77 West Wacker Limited Partnership
dated March 14, 1991 (as amended from time to time, the "Partnership
Agreement"), which continued the existence of 77 West Wacker Limited
Partnership, an Illinois limited partnership (the "Partnership"). All defined
terms used herein and not expressly defined herein shall have the same meaning
as they have in the Partnership Agreement.
WHEREAS, Prime, KRC, KILICO, FKLA, FRC, KR Fitness, K/77 Investors Limited
Partnership, an Illinois limited partnership, the Partnership, PGLP and Prime
Fitness have entered into a certain Amended And Restated Agreement dated as of
July 15, 1997 (the "Agreement") which requires, as a condition to the closing of
the transactions contemplated thereby, that Releasor enter into this Release
Agreement.
NOW, THEREFORE, for good and valuable consideration, the adequacy of which
is hereby acknowledged, the parties hereto agree as follows:
1. Release. Releasor, on behalf of itself and its affiliates, officers,
directors, shareholders, partners, agents, attorneys, employees and all of such
persons' respective heirs, successors and assigns, jointly, severally and
individually hereby absolutely, unconditionally and irrevocably releases,
remises and forever discharges Releasee and its affiliates, officers, directors,
shareholders, partners, agents, attorneys, employees and all such persons'
respective heirs, predecessors, successors, assigns, present and former
shareholders, affiliates, subsidiaries, divisions, directors, officers,
attorneys, employees, agents and other representatives (Releasee, together with
such related parties, called the "Released Parties") from any and all claims by
reason of or arising out of any liability or obligation alleged or asserted
against any of the Released Parties and in any way related to the Partnership,
the Building Loan, the First
<PAGE>
Mortgage Loans, the Second Mortgage Loans, the Guaranty of Cost Overruns, the
Guaranty of Operating Deficits, the Co-Agents Environmental Indemnity Agreement,
or the Project, whether arising out of any matter occurring before or after the
date hereof ("Claim"), including, but not limited to, any claim by Prime against
KRC for contribution under the Partnership Agreement, and any judgment, award,
settlement, reasonable attorney's fees and other costs and expenses incurred in
connection with the defense of any actual or threatened action, proceeding or
claim, provided that the claim, loss, expense, damage or injury was not the
result of a declared Default by Releasee under the Partnership Agreement.
2. Non-Release of Liability under Partnership Agreement. Anything to the
contrary notwithstanding contained in paragraph 1 herein, this Release Agreement
shall in no way affect or release any and all of Releasee's obligations or
liabilities for a declared Default under the Partnership Agreement or any of
Releasee's obligations under the Agreement, all of which are hereby preserved.
3. Warranties of Releasor. Releasor hereby represents and warrants for
itself and for all persons claiming through it as follows:
a. it has not assigned or transferred to any third party all or any
part or portion of any Claim which it may have at any time had or
owned;
b. it has full legal capacity to enter into, execute and perform this
Release Agreement;
c. it has duly authorized, executed and delivered this Release
Agreement to Releasee, and the agreements and obligations
contained herein represent the legal, valid and enforceable
obligations of the Releasor, subject to applicable bankruptcy,
insolvency, reorganization, receivership, moratorium or similar
laws or judicial decisions affecting the rights and remedies of
creditors generally, and general principles of equity, including,
without limitation, requirements of good faith, fair dealing and
reasonableness, the possible unavailability of particular
equitable remedies, the possible availability of particular
equitable defenses, and concepts of materiality, unconscionable
conduct of an enforcing party or impracticability or impossibility
of performance;
d. it has read carefully and fully understands both the nature of
this Release Agreement and the contents of each of the provisions
hereof;
e. it is executing this Release Agreement of its own free will, and
is under no duress, compulsion or coercion to execute this Release
Agreement;
f. it has been represented by counsel in connection with the review,
negotiation, execution and delivery of this Release Agreement, has
discussed and assessed the
2
<PAGE>
merits of any Claim or potential Claim (if any) against Releasee
with counsel, and has been duly apprised of its rights in
connection therewith; and
g. it understands, acknowledges and agrees that this instrument may
be pleaded as a full and complete defense, and may be used as a
basis for an injunction, against any action, suit or other
proceeding which may be instituted, prosecuted or attempted in
breach of the provisions of this Release Agreement.
4. Other Facts and Circumstances. Releasor agrees that no fact, event,
circumstance, evidence or transaction which could now be asserted or which may
hereafter be discovered with respect to it shall affect in any manner the final
and unconditional nature of Section 1 of this Release Agreement.
5. Other Claims and Parties Not Affected. The parties agree that this
Release Agreement is not intended to constitute or be construed or deemed to be
a release of, or a covenant not to sue or a covenant not to assist in suit
against, Released Parties with respect to demands, actions, causes of action,
suits, counterclaims, defenses, rights of set-off, demands and liabilities other
than the Claims set forth in Section 1 hereof, it being expressly understood
that Releasor retains any causes of action and all legal remedies it may have
now or hereafter with respect thereto. This Release Agreement is not intended
and shall in no event be construed or deemed to be a release of, or a covenant
not to sue, or a covenant not to assist in suit against, any party, person,
firm, partnership, limited liability company or corporation that is not a
Released Party.
6. Successors. This Release Agreement shall be binding upon Releasor and
its successors, assigns and other legal representatives.
7. Choice of Law. This Release Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Illinois,
without regard to its conflict of laws provisions.
8. Amendments. This Release Agreement may be amended or otherwise varied
only by an instrument in writing executed by Releasor and Releasee.
9. Counterparts. This Agreement may be executed in counterparts, each of
which shall be binding upon the party executing the same and all of which, when
taken together, shall constitute one single Agreement.
3
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed and delivered by
the parties on the first day hereinabove written.
RELEASOR:
---------
THE PRIME GROUP, INC., an Illinois
corporation
By: __________________________________
Name: _____________________________
Title: _____________________________
PRIME GROUP LIMITED PARTNERSHIP,
an Illinois limited partnership
By:
__________________________________
Name: Michael W. Reschke
Title: Managing General Partner
PRIME 77 FITNESS CENTER, INC., an
Illinois corporation
By: __________________________________
Name: _____________________________
Title: ____________________________
77 WEST WACKER LIMITED PARTNERSHIP,
an Illinois limited partnership
By: THE PRIME GROUP, INC., an
Illinois corporation, a general
partner
By: ____________________________
Name: __________________________
Title:__________________________
4
<PAGE>
RELEASEE:
---------
KEMPER INVESTORS LIFE INSURANCE COMPANY,
an Illinois corporation
By:
------------------------------------
Its: Authorized Signatory
By:
------------------------------------
Its: Authorized Signatory
FEDERAL KEMPER LIFE ASSURANCE COMPANY,
an Illinois insurance company
By:
------------------------------------
Its: Authorized Signatory
By:
------------------------------------
Its: Authorized Signatory
KILICO REALTY CORPORATION, an Illinois
corporation
By:
------------------------------------
Its: Authorized Signatory
FKLA REALTY CORPORATION, an Illinois
corporation
By:
------------------------------------
Its: Authorized Signatory
5
<PAGE>
KR 77 FITNESS CENTER, INC., a Delaware
corporation
By:
------------------------------------
Its: Authorized Signatory
By:
------------------------------------
Its: Authorized Signatory
6
<PAGE>
EXHIBIT D
---------
Intentionally Deleted
D-1
<PAGE>
EXHIBIT E
---------
THE SPRINGING GUARANTY
----------------------
E-1
<PAGE>
GUARANTY
--------
THIS GUARANTY is made as of the 15th day of July, 1997 by THE PRIME GROUP,
INC., an Illinois corporation ("TPG" or "Guarantor") in favor of KEMPER
INVESTORS LIFE INSURANCE COMPANY, an Illinois insurance corporation ("KILICO"),
and FEDERAL KEMPER LIFE ASSURANCE COMPANY, an Illinois insurance corporation
("FKLA"); KILICO and FKLA are sometimes referred to jointly and severally as
"KILICO/FKLA").
R E C I T A L S:
WHEREAS, on or as of March 14, 1991, KILICO/FKLA, 77 West Wacker Limited
Partnership, an Illinois Limited Partnership ("Borrower"), The Mitsui Taiyo Kobe
Bank, Ltd., Chicago Branch, The Mitsui Trust and Banking Co., Limited, Chicago
Branch, The Yasuda Trust and Banking Co., Limited, Chicago Branch, Swiss Bank
Corporation, New York Branch, and Bank of Montreal, Chicago Branch, entered into
that certain Standby First Mortgage Funding Agreement (the "Standby Funding
Agreement"), pursuant to which KILICO/FKLA have agreed to make certain loans to
Borrower, or be deemed to have made certain loans to or on behalf of Borrower,
as described in the Standby Funding Agreement and referred to herein
collectively as the "Standby Loans");
WHEREAS, as evidence of the Borrower's obligation to repay the Standby
Loans to KILICO/FKLA, the Borrower executed and delivered to KILICO/FKLA a
certain Note (the "Standby Note"), dated as of March 14, 1991, in the original
principal amount of Two Hundred Thirty Million Dollars ($230,000,000);
WHEREAS, the payment of all amounts due by the Borrower under the terms of
the Standby Note are secured in accordance with that certain Mortgage, Security
Agreement, Assignment of Leases, Rents and Profits, Financing Statement and
Fixture Filing (the "Standby Mortgage"), dated as of March 14, 1991, by and
between the Borrower, as debtor, and KILICO/FKLA, as secured party;
WHEREAS, on or as of March 14, 1991, KILICO/FKLA and Borrower entered into
that certain Subordinate Mortgage Funding Agreement (the "Subordinate Funding
Agreement"), pursuant to which KILICO/FKLA have agreed to make certain loans to
Borrower, or be deemed to have made certain loans to or on behalf of Borrower,
as described in the Subordinate Funding Agreement and referred to herein
collectively as the "Subordinate Loans");
WHEREAS, as evidence of the Borrower's obligation to repay the Subordinate
Loans to KILICO/FKLA, the Borrower executed and delivered to KILICO/FKLA a
certain Note (the "Subordinate Note"), dated as of March 14, 1991, in the
original principal amount of Sixty
<PAGE>
Million Dollars ($60,000,000); the Standby Note and the Subordinate Note are
referred to herein as the "Notes;"
WHEREAS, the payment of all amounts due by the Borrower under the terms of
the Subordinate Note are secured in accordance with that certain Subordinate
Mortgage, Security Agreement, Assignment of Leases, Rents and Profits, Financing
Statement and Fixture Filing (the "Subordinate Mortgage"), dated as of March 14,
1991, by and between the Borrower, as debtor, and KILICO/FKLA, as secured party;
the Standby Mortgage and the Subordinate Mortgage are referred to herein as the
"Mortgages;"
WHEREAS, TPG is a general partner and a limited partner of the Borrower;
WHEREAS, pursuant to that certain Agreement of even date herewith ("Option
Agreement") among and between KILICO, FKLA, KILICO Realty Corporation, an
Illinois corporation ("KRC"), FKLA Realty Corporation, an Illinois corporation,
KR 77 Fitness Center, Inc., a Delaware corporation, K/77 Investors Limited
Partnership, an Illinois limited partnership, Borrower, TPG, Prime Group Limited
Partnership, an Illinois limited partnership, and Prime Fitness Center, Inc., an
Illinois corporation, the Kemper Parties, among other things, agreed to grant to
TPG the option to purchase the interests of KILICO and FKLA in the Subordinate
Loan Documents; and
WHEREAS, as a material inducement to KILICO/FKLA to execute and deliver,
and cause the Kemper Parties to execute and deliver the Option Agreement and
perform their respective duties and obligation thereunder, the Guarantor has
agreed to make this Guaranty.
NOW, THEREFORE, in consideration of the foregoing premises, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Guarantor hereby agrees as follows:
1. Guaranty
(a) Subject to the express limitations contained in Paragraphs 9 and 10
hereof, Guarantor hereby absolutely and unconditionally guarantees the punctual
payment when due and payable under the Standby Funding Agreement and the Standby
Note, whether at stated maturity, by acceleration or otherwise, and regardless
of whether such amount may be in excess of the face amount of the Standby Note,
of all other amounts due to KILICO/FKLA under the Standby Note, the Standby
Mortgage, the Standby Funding Agreement, or under any other documents and
instruments executed and delivered to KILICO/FKLA, or either of them, in order
to evidence or perfect the lien or security interest in collateral for the
Standby Note (the Standby Mortgage, the Standby Funding Agreement, and such
other documents, are sometimes referred to collectively as the "Standby
Collateral Documents"), and any and all extensions, renewals or modifications of
any of the foregoing (such principal, interest and other amounts are hereinafter
referred to collectively as the "Standby Obligations").
2
<PAGE>
(b) Subject to the express limitations contained in Paragraphs 9 and 10
hereof, Guarantor hereby absolutely and unconditionally guarantees the punctual
payment when due and payable under the Subordinate Funding Agreement and the
Subordinate Note, whether at stated maturity, by acceleration or otherwise, and
regardless of whether such amount may be in excess of the face amount of the
Subordinate Note, of all other amounts due to KILICO/FKLA under the Subordinate
Note, the Subordinate Mortgage, the Subordinate Funding Agreement, or under any
other documents and instruments executed and delivered to KILICO/FKLA, or either
of them, in order to evidence or perfect the lien or security interest in
collateral for the Subordinate Note (the Subordinate Mortgage, the Subordinate
Funding Agreement, and such other documents, are sometimes referred to
collectively as the "Subordinate Collateral Documents"), and any and all
extensions, renewals or modifications of any of the foregoing (such principal,
interest and other amounts are hereinafter referred to collectively as the
"Subordinate Obligations").
(c) The Standby Collateral Documents and the Subordinate Collateral
Documents are referred to herein as the "Collateral Documents." The Standby
Obligations and the Subordinate Obligations are referred to herein as the
"Obligations."
(d) In addition, Guarantor shall pay any and all fees, costs and expenses
(including attorneys' fees) incurred by KILICO/FKLA, or either of them, at any
time prior or subsequent to default, whether litigation is involved or not, and
if involved, whether at the trial or appellate levels or in pre or post-judgment
or bankruptcy proceedings, in enforcing or realizing upon the obligations of
Guarantor hereunder (collectively, "Enforcement Costs"). The Obligations, Notes,
Collateral Documents and any instrument, document or agreement, express or
implied, which has been or may hereafter be made or entered into by the Borrower
or the Guarantor in reference to the Obligations shall all be hereinafter
collectively referred to as the "Terms".
2. Guaranty Absolute. Guarantor guarantees that the Obligations will be
paid and performed strictly in accordance with the terms and provisions of the
Terms, regardless of any law, regulation, order or judgment now or hereafter in
effect in any jurisdiction affecting any of the Terms or the rights of
KILICO/FKLA with respect thereto. The liability of Guarantor under this Guaranty
shall continue and be absolute and unconditional irrespective of:
(a) Any lack of validity or enforceability of any of the Terms;
(b) Any change in the time, manner or place of payment of, or in any
other term, including the applicable rate of interest, of, all or
any of the Terms, or any other renewal, extension, amendment,
modification or waiver of or any consent to departure from any of
the Terms;
(c) Any act or omission of KILICO/FKLA of any nature whatsoever,
excluding any willful misconduct or gross negligence on the part
of KILICO/FKLA;
3
<PAGE>
(d) With respect to the Guarantor, the Borrower or any other person
or entity liable in respect of the Borrower, any failure to obtain required
authorization by all necessary corporate, partnership or other action
relating so the incurring by the Borrower of the Obligations or to the
execution, delivery, or performance of any of the Terms, or to any
violation of any provision of any of the articles of incorporation, by-
laws, partnership agreement or any other document, Terms, by the execution,
delivery or performance of any of the Terms, or by any failure of same to
have been duly authorized by all necessary corporate or other action;
(e) Any release, amendment, waiver, modification, extension or
renewal of or consent to departure from or forbearance of any other action
or inaction under or in respect of this Guaranty or any other of the Terms;
(f) Any exchange, release, forbearance or surrender of or any other
action or inaction with respect to any collateral at any time and from time
to time now or hereafter securing any or all of the Obligations or Terms or
the liability of the Borrower, the Guarantor or any other person or entity
in respect of all or any of the Terms or any failure to perfect or
continue as perfected any security interest or other lien with respect to
any such collateral, or any loss or destruction of any such collateral, or
any matter impairing the value of such collateral as security for all or
any of the Terms or the liability of the Guarantor or any other person or
entity in respect of all or any of the Obligations or Terms; or
(g) Any other circumstance or matter of any nature whatsoever that
might otherwise constitute a defense (other than payment) available to, or
a discharge of, the Borrower, the Guarantor or any other person or entity
liability to KILICO/FKLA in respect of any of the Terms.
This Guaranty shall continue to be effective or shall be reinstated, as the case
may be, regardless of whether any payment of any of the Obligations is rescinded
or must otherwise be returned by KILICO/FKLA upon the insolvency, bankruptcy or
reorganization of any person or entity or for any reason whatsoever, all as
though such payment had not been made. The Obligations of Guarantor hereunder
shall be absolute and primary, shall be complete and binding as to Guarantor
upon its execution of this Guaranty, shall be subject to no conditions
precedent, and shall be independent of and cumulative to any other of the Terms,
and KILICO/FKLA may exercise any of its rights and remedies under this Guaranty,
any other of the Terms or otherwise singly or concurrently.
3. Waiver: No Duties. To the extent permitted by law, Guarantor waives:
(a) all statutes of limitations as a defense to any action brought against
Guarantor by KILICO/FKLA; (b) any defense based upon any legal disability of
the Borrower or any discharge or limitation of the liability of the Borrower to
KILICO/FKLA, whether consensual or arising by operation of law or any
bankruptcy, insolvency or debtor-relief proceeding, or from any other cause;
4
<PAGE>
(c) promptness, diligence, presentment, demand, protect and notice of any kind;
(d) any defense based upon or arising out of any defense which the Borrower may
have to the payment or performance of any part of the Obligations; (e) any and
all rights of indemnity, contribution or reimbursement against Borrower; and (f)
all rights of subrogation, all rights to enforce any remedy that KILICO/FKLA may
have against the Borrower, and all rights to participate in any security held by
KILICO/FKLA for the Obligations. KILICO/FKLA shall not be obligated to exhaust
any right or take any action against the Borrower or any other person of its
rights hereunder. KILICO/FKLA shall not be required to obtain the consent of the
Guarantor with respect to any matter.
4. Warranties. Guarantor makes the following representations and
warranties to KILICO/FKLA:
(a) Authorization. Guarantor has full right, power and authority to
enter into this Guaranty and carry out its obligations hereunder.
(b) No Conflict. The execution, delivery and performance by Guarantor
of this Guaranty will not violate or be in conflict with, result in a
breach of, or constitute a default under, any indenture, agreement or any
other instrument to which Guarantor is a party or by which Guarantor or any
of its assets or properties is bound, or any order, writ, injunction or
decree of any court or governmental agency.
(c) Litigation. There are no actions, suits or proceedings pending,
or to the knowledge of Guarantor threatened against or adversely affecting
such Guarantor at law or in equity or before or by a governmental agency or
instrumentality, domestic or foreign, which involve any of the transactions
herein contemplated, or the possibility of any judgment or liability which
may result in any material and adverse change in the financial condition of
such Guarantor. Such Guarantor is not in default with respect to any
judgment, order, writ, injunction, decree, rule or regulation of any court
or governmental agency.
(d) Enforceability. This Guaranty is a legal, valid and binding
obligation of such Guarantor, enforceable in accordance with its terms,
except as enforceability may be limited by applicable bankruptcy,
insolvency or similar laws affecting the rights of creditors generally.
(e) Financial Statements. The financial statements and other
financial information from time to time furnished by Guarantor to
KILICO/FKLA are correct and complete and accurately present the financial
condition of the respective Guarantor at and for the periods covered
therein; said financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
except as indicated on said financial statements; and since the respective
periods covered by such financial statements, there has been no material
adverse change in the financial
5
<PAGE>
condition of Guarantor.
5. Affirmative Covenant. Guarantor covenants and agrees that from the
date hereof and so long as any of the Obligations remains outstanding and unpaid
and unperformed, upon at least thirty (30) days prior written request of
KILICO/FKLA, Guarantor will furnish to KILICO/FKLA as soon as available, but in
any event no later than April 1, of each year, a copy of the current balance
sheet of Guarantor as at the end of the last calendar year, certified to be true
and correct by such Guarantor and prepared in accordance with generally accepted
accounting principles or tax accounting principles applied on a consistent
basis.
6. Notices. All notices or other communications required or permitted
hereunder shall be (a) in writing and shall be deemed to be given (i) when
delivered in person, (ii) the second business day after deposit in a regularly
maintained receptacle of the United States mail as registered or certified mail,
postage prepaid, (iii) when received if sent by private courier service, or (iv)
on the day on which the party to whom such notice is addressed refuses delivery
by mail or by private courier service and (b) addressed as follows:
If to KILICO/FKLA, to:
c/o ZKS Real Estate Partners LLC
Suite 1450
225 West Washington Street
Chicago, Illinois 60606
Attn: Gregory A. Lisauskas
With a copy to:
Zurich Kemper Life Companies
c/o ZKS Real Estate Partners LLC
Suite 1450
225 West Washington Street
Chicago, Illinois 60606
Attn: Timothy R. Verrilli, Esq.
With a copy to:
Rudnick & Wolfe
Suite 1800
203 North LaSalle Street
Chicago, Illinois 60601
Attn: Kenneth Hartmann, Esq.
6
<PAGE>
If to TPG to:
c/o The Prime Group, Inc.
Suite 3900
77 West Wacker Drive
Chicago, Illinois 60601
Attn: Michael W. Reschke
With a copy to:
The Prime Group, Inc.
Suite 3900
77 West Wacker Drive
Chicago, Illinois 60601
Attn: Robert J. Rudnik
or to any such other address as any party hereto shall designate in a written
notice to the other parties hereto.
7. No Waiver: Cumulative Remedies. KILICO/FKLA may, at any time and from
time to time, waive or not insist on strict compliance with any one or more of
the provisions contained in any document relating to this Guaranty, but any such
waiver or non insistence shall not be considered a waiver or non insistence of
such provision in any other instance or any other circumstance, OR AS CREATING A
REQUIREMENT THAT KILICO/FKLA MUST, AS A RESULT OF A PREVIOUS WAIVER OR NON-
INSISTENCE. THEREAFTER GIVE NOTICE TO THE BORROWER, GUARANTOR, OR ANY OTHER
PERSON OR ENTITY THAT IT DOES NOT INTEND TO GIVE A FURTHER WAIVER OR NOT INSIST
UPON STRICT PERFORMANCE BEFORE KILICO/FKLA CAN EXERCISE ANY RIGHTS OR REMEDIES
UNDER ANY DOCUMENT OR BEFORE ANY EVENTS OF DEFAULT OR DEFAULTS CAN OCCUR,
WHETHER OCCASIONED BY THE PROVISION PREVIOUSLY WAIVED OR NOT INSISTED UPON OR
OTHERWISE, OR AS ESTABLISHING A COURSE OF DEALING FOR INTERPRETING THE
EXPRESSIONS AND OTHER CONDUCT BETWEEN KILICO/FKLA AND THE BORROWER, GUARANTOR OR
ANY OTHER PERSON OR ENTITY. The remedies provided herein and in the other
documents executed contemporaneously herewith and referred to herein shall be
cumulative, may be exercised from time to time, singularly or concurrently or in
any combination, without KILICO/FKLA being obligated to exercise any such right
in any other circumstance, and are not exclusive of any remedies provided by
law.
8. Continuing Guaranty: Transfer. This Guaranty is a continuing guaranty
and shall:
(a) Remain in full force and effect until the Obligations have been
fully discharged at which time this Guaranty shall terminate;
7
<PAGE>
(b) Be binding upon Guarantor and its successors and assigns, who
shall be jointly and severally liable hereunder; provided, however,
Guarantor may not assign any of its rights and obligations hereunder
without the prior written consent of KILICO/FKLA; and
(c) Inure to the benefit of and be enforceable by KILICO/FKLA and its
successors, transferees, participants, and assigns. Without limiting the
generality of this clause, KILICO/FKLA may assign or otherwise transfer any
of the Obligations (in compliance with the terms of the Notes and the
Standby Funding Agreement and the Subordinate Funding Agreement) and/or any
of the Terms to any other person or entity, and such other person or
entity shall thereupon become vested with all the rights in respect thereof
granted to KILICO/FKLA herein or otherwise.
9. Maximum Liability. Notwithstanding anything to the contrary herein
contained, the aggregate obligation and liability of the Guarantor hereunder
shall be limited to (a) $20,000,000 ("Guaranteed Amount") plus (b) the
Enforcement Costs. The portion of the Obligations in excess of the Guaranteed
Amount is herein called the "Remaining Amount". Accordingly, (a) Alternate
Payments (as hereinafter defined) shall be applied pro tanto to the Remaining
Amount until the Remaining Amount shall have been paid in full prior to any
application of any Alternate Payment upon any Guaranteed Amount; and (b) for the
purposes hereof, the term "Alternate Payments" shall mean any of the following
which may be applied upon the Obligations: (i) proceeds of insurance (both
casualty insurance upon any property encumbered to secure the Obligations and
proceeds of any life insurance policy assigned as collateral for the
Obligations; (ii) awards, compensation or damages consequent upon any
condemnation or taking by any process of eminent domain or a conveyance in lieu
thereof of any property encumbered to secure the Obligations; or (iii) proceeds
of any sale of collateral or security given as security for the Obligations.
10. Covenant Not to Sue. Notwithstanding anything to the contrary herein
contained, KILICO/FKLA covenants and agrees not to sue and not to commence,
assert, bring or file in any court or tribunal, in any jurisdiction, any suit,
action, litigation or complaint setting forth any claim or cause of action
against Guarantor which KILICO/FKLA may have against Guarantor under this
Guaranty unless Borrower (through the actions of TPG or a Prime Affiliate and
not through the actions of KILICO Realty Corporation as a general partner of
Borrower or through the actions of any party other than TPG or a Prime
Affiliate), Guarantor or any Prime Affiliate (as hereinafter defined) suffers,
permits, commences, asserts, or incurs an Insolvency Event or a Lender
Liability Action (as such terms are hereinafter defined). For purposes hereof:
(a) "Prime Affiliate" means any (i) Person (as hereinafter defined)
owning a majority interest in any class of capital stock of TPG, (ii)
Person owning an interest as general partner or limited partner of Borrower
or PGLP (but not including KRC), (iii) Person who is an officer, director,
trustee, general partner, limited partner holding a greater than 50%
limited partnership interest, or holder of a majority interest in any
8
<PAGE>
class of capital stock of or in Guarantor or any Person described in the
preceding clause (ii), (iv) Michael W. Reschke, (v) Prime Group Limited
Partnership, an Illinois limited partnership, or (vi) any Person that is an
affiliate of any Person described in the preceding clauses (i), (ii) and
(iii) within the meaning of Rule 144 of the Securities Act of 1933, as
amended. "Person" means any individual, partnership, association,
corporation, limited liability company, trust or other entity;
(b) "Insolvency Event" means that either TPG or a Prime Affiliate
shall have caused or directed Borrower, without the prior written consent
of KRC, to: (aa) apply for or consent to the appointment of a receiver,
trustee, liquidator or custodian or the like of itself or of its property,
(bb) make a general assignment for the benefit of creditors, (cc) be
adjudicated a bankrupt or insolvent, or (dd) commence a voluntary case
under the Federal bankruptcy laws of the United States of America or file a
voluntary petition or answer seeking reorganization, an arrangement with
creditors or an order for relief or seeking to take advantage of any
insolvency law or file an answer admitting the material allegations of a
petition filed against it in any bankruptcy, reorganization or insolvency
proceeding, or take any action for the purpose of effecting any of the
foregoing. The term "Insolvency Event" shall also include the institution
or commencement by a Prime Affiliate of a proceeding involving Borrower in
any court under any law relating to bankruptcy, insolvency, reorganization
or relief of debtors, seeking an order for relief or an adjudication in
bankruptcy, reorganization, dissolution winding up, liquidation, a
composition or arrangement with creditors, a readjustment of debts, or the
appointment of a trustee, receiver liquidator or custodian or the like for
Borrower, or of all of any substantial part of its assets, or other like
relief in respect thereof under any bankruptcy or insolvency law, including
the filing by a partner in Borrower of an involuntary petition in
bankruptcy against Borrower; and
(c) Lender Liability Action means any suit, action, litigation,
complaint, defense, counterclaim or cross-claim commenced, asserted,
brought or filed by Borrower (other than with the written consent of KRC),
TPG, or a Prime Affiliate in any court or tribunal, in any jurisdiction,
whether at law or in equity, or whether in a separate action or action
commenced by KILICO/FKLA or other Person, seeking to (i) void, diminish,
reduce or defeat the Obligations or the liens or security interests created
or imposed pursuant to the Collateral Documents, (ii) hinder, delay or
impede the enforcement of the rights, remedies, liens and security
interests created, granted or imposed in favor of the holder(s) of the
Notes and Collateral Documents including, but without limitation, opposing
the appointment of a receiver or mortgagee in possession of the property
encumbered by the Mortgage or (iii) impose any liability upon the holder(s)
of the Notes and Collateral Documents arising out of or from the Standby
Loans or the enforcement of the rights, remedies, liens and security
interests, created, granted or imposed in favor of such holders.
Notwithstanding anything contained in the foregoing to the contrary, the
term "Lender Liability Action" shall not include any action resulting from
or based upon the gross negligence or willful misconduct of KILICO, FKLA,
KRC or any of their
9
<PAGE>
respective Affiliates (as defined in the Third Amended And Restated
Agreement Of Limited Partnership of 77 West Wacker Limited Partnership
dated as of March 14, 1991) or any action based on a breach by any of the
Kemper Parties (as defined in the Option Agreement) or any Affiliate of the
Kemper Parties occurring after the date hereof of any of their respective
obligations under: (w) the Option Agreement; (x) the Construction Loan
Documents (as defined in the Option Agreement); (y) the KILICO/FKLA Loan
Documents (as defined in the Option Agreement; or (z) the Subordinate Loan
Documents (as defined in the Option Agreement).
11. Governing Law. This Guaranty shall be governed by, and construed in
accordance with, the laws of the State of Illinois without regard to principles
of conflict of laws, Guarantor hereby waives any plea of jurisdiction or venue
as not being a resident of Cook County, Illinois and hereby specifically
authorize any action brought by KILICO/FKLA upon this Guaranty to be instituted
and prosecuted in either the Circuit Court of Cook County, Illinois or in the
United States District Court for the Northern District of Illinois, at the
election of KILICO/FKLA. Guarantor hereby irrevocably authorizes service of
process to be made upon it at the address given and in the manner provided
above, in any action which may be instituted against it arising out of or
relating to this Guaranty.
12. Headings. Paragraph headings in this Guaranty are included herein for
convenience of reference only and shall not constitute a part of this Guaranty
for any other purposes.
13. Counterparts. This Guaranty may be executed in separate counterparts,
each of which shall constitute an original copy hereof.
14. Business Day. For purposes hereof, the term "Business Day" shall mean
any calendar day other than a Saturday, Sunday, legal holiday or any day on
which banking institutions in Chicago, Illinois are authorized to close.
15. Waiver of Jury Trial. EACH PARTY TO THIS GUARANTY WAIVES, TO THE
FULLEST EXTENT PERMITTED BY LAW, THE RIGHT TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM FILED BY ANY PARTY, RELATING DIRECTLY OR INDIRECTLY
TO THIS GUARANTY.
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Guaranty to be
executed and delivered on the date and year first above written.
THE PRIME GROUP, INC., an Illinois
corporation
By:
-------------------------------
Its:
-------------------------
KEMPER INVESTORS LIFE INSURANCE
COMPANY, an Illinois insurance corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
By:
-------------------------------
Name :
----------------------------
Title:
----------------------------
FEDERAL KEMPER LIFE ASSURANCE COMPANY,
an Illinois insurance corporation
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
11
<PAGE>
EXHIBIT F
---------
ENVIRONMENTAL INDEMNITY AGREEMENT
---------------------------------
F-1
<PAGE>
ENVIRONMENTAL INDEMNITY AGREEMENT
---------------------------------
This ENVIRONMENTAL INDEMNITY AGREEMENT is dated as of___________________
199_ (the "Agreement") and is made among 77 WEST WACKER LIMITED PARTNERSHIP,
an Illinois limited partnership (the "Borrower"), THE PRIME GROUP, INC., an
Illinois corporation ("Prime"), (Borrower and Prime shall hereinafter be
sometimes collectively referred to as the "Indemnitors"), KILICO REALTY
CORPORATION, an Illinois corporation ("KRC"), KEMPER INVESTORS LIFE INSURANCE
COMPANY, an Illinois insurance corporation ("KILICO"), and FEDERAL KEMPER LIFE
ASSURANCE COMPANY, an Illinois insurance corporation ("FKLA"); KRC, KILICO, and
FKLA shall hereinafter be sometimes collectively referred to as "Indemnitees".
RECITALS.
A. Borrower, Prime, KRC, KILICO, FKLA, FKLA Realty Corporation, an
Illinois corporation, KR 77 Fitness Center, Inc., a Delaware corporation, K/77
Investors Limited Partnership, an Illinois limited partnership, Prime Group
Limited Partnership, an Illinois limited partnership, and Prime Fitness Center,
Inc., an Illinois corporation have entered into that Amended And Restated
Agreement dated as of July 15, 1997 (the "Agreement"). Terms defined in the
Agreement are used with the same meanings herein.
B. Borrower is the owner of the Premises, and TPG is a general partner of
Borrower.
C. As a condition to the Debt Interest Closing (as defined in the
Agreement), KILICO/FKLA have required that Borrower and TPG execute and deliver
this Agreement.
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Indemnitors hereby jointly and severally represent, warrant
and covenant to the Indemnitees as follows:
Section 1. Representations and Warranties. Each of the Indemnitors
severally represents and warrants to the Indemnitees that, except as set forth
in the environmental reports listed or described on Exhibit A attached hereto,
(i) to the best of such Indemnitor's knowledge, Hazardous Materials have not at
any time been generated, used, treated or stored on, or transported to or from
the Property in any quantity or manner which violates any Environmental
Requirements (as hereinafter defined), (ii) to the best of such Indemnitor's
knowledge, Hazardous Materials have not at any time been released on the
Property in any quantity or manner which violates any Environmental
Requirements, (iii) to the best of Borrower's knowledge, Borrower is in
compliance with all applicable Environmental Requirements with respect to the
Property and the requirements of any permits issued under such Environmental
Requirements with respect to the Property, (iv) there are no pending or, to the
best of such Indemnitor's knowledge, past or threatened Environmental Claims (as
hereinafter defined)
<PAGE>
against the Borrower or the Property, (v) to the best of such Indemnitor's
knowledge, there is no condition or occurrence at the Property that could
reasonably be anticipated (x) to form the basis of any Environmental Claim (as
hereinafter defined) against the Borrower or the Property, or (y) to cause the
Property to be subject to any restrictions on the ownership, occupancy, use or
transferability thereof under any Environmental Requirement, and (vi) there are
not now and, to the best of such Indemnitor's knowledge, never have been any
underground storage tanks located on the Property.
Section 2. Covenants. Each of the Indemnitors jointly and severally
covenants and agrees as follows:
(a) The Borrower will (i) comply with all Environmental Requirements
applicable to the ownership or use of the Property, (ii) immediately pay or
cause to be paid all costs and expenses incurred in such compliance, (iii)
use its best efforts to cause all tenants and other persons occupying the
Property to comply with all Environmental Requirements, and (iv) keep or
cause the Property to be kept free and clear of any liens imposed thereon
pursuant to any Environmental Requirement.
(b) The Borrower will not generate, use, treat, store, release or
dispose of, and will use its best efforts not to permit the generation,
use, treatment, storage, release or disposal of, any Hazardous Materials on
the Property, will not transport and will use its best efforts not to
permit the transportation of any Hazardous Materials to or from the
Property, in each case in a manner which violates any Environmental
Requirements or in quantities greater than that which is customary for
similar office buildings located in Chicago, Illinois.
(c) The Borrower will advise KRC in writing promptly upon learning of
any of the following: (i) any pending or threatened (in writing)
Environmental Claim against the Borrower of the Property; (ii) any
condition or occurrence on the Property that (x) results in noncompliance
by the Borrower with any applicable Environmental Requirement, or (y) could
reasonably be anticipated to form the basis of an Environmental Claim
against the Borrower or the Property; (iii) any condition or occurrence on
the Property to be subject to any restrictions on the ownership, occupancy,
use or transferability of the Property under any Environmental Requirement;
and (iv) the taking of any removal or remedial action in response to the
actual or alleged presence, in any quantity or manner which violates any
Environmental Requirement, of any Hazardous Materials on the Property. Each
such notice shall describe in reasonable detail the nature of the claim,
investigation, condition, occurrence or removal or remedial action and the
Borrower's response thereto. In addition, the Borrower will provide KRC
with copies of all communications to or from the Borrower and any person
relating to Environmental Claims, and such detailed reports of any
Environmental Claim as may reasonably be requested by KRC.
2
<PAGE>
Section 3. Indemnity
(a) Each of the Indemnitors jointly and severally agrees, at their
sole cost and expense, to defend (with attorneys reasonably satisfactory to
the Indemnitees), protect, indemnify and hold harmless the Indemnitees and
their respective officers, directors, employees and agents from and against
any and all liabilities, obligations (including removal and remedial
actions), losses, damages (including foreseeable and unforeseeable
consequential damages and punitive damages), penalties, actions, judgments,
suits, claims, costs, expenses and disbursements (including attorneys' and
consultants' fees and disbursements) of any kind or nature whatsoever that
may at any time be incurred by, imposes on or asserted against any of them
directly or indirectly based on, or arising or resulting from (i) the
actual or alleged presence of Hazardous Materials on the Property or the
removal, handling, transportation, disposal or storage of such Hazardous
Materials, (ii) any Environmental Claim with respect to the Property,
(iii) any failure to comply and the resulting costs to come to compliance
with all applicable Environmental Requirements with respect to the Property
and the requirements of any permits issued under such Environmental
Requirements with respect to the Property, or (iv) the exercise of any of
Indemnitee's rights under this Agreement (collectively, the "Indemnified
Matters"), regardless of when such Indemnified Matters arise, but excluding
as to any Indemnitee any Indemnified Matter resulting directly from gross
negligence or willful misconduct by, through or under that Indemnitee in
the handling or removal of any such Hazardous Material, and excluding any
Indemnified Matter with respect to Hazardous Materials first placed on
released on the Property after the date the Borrower no longer holds title
to the Property. KRC, on behalf of the Indemnitees, shall cooperate with
the Indemnitors in their defense of the Indemnitees. To the extent that
this indemnity is unenforceable because it violates any law or public
policy, each of the Indemnitors agrees on a joint and several basis to
contribute the maximum portion that is permitted to contribute under
applicable law to the payment and satisfaction of all Indemnified Matters.
(b) Each of the Indemnitors jointly and severally agrees to reimburse
each Indemnitee for all sums paid and costs incurred by each Indemnitee
with respect to any Indemnified Matter, within ten (10) Business Days
following written demand therefor.
(c) Should any Indemnitee institute any action or proceeding at law
or in equity, or in arbitration, to enforce any provision of this Agreement
(including any action for declaratory relief or for damages by reason of an
alleged breach of any provision of this Agreement) or otherwise in
connection with this Agreement or any provision hereof, it shall be
entitled to recover from the Indemnitors on a joint and several basis its
fees and disbursements incurred in connection therewith if it is the
prevailing party in such action or proceeding.
Section 4. Survival.
3
<PAGE>
(a) The representations, warranties, covenants and indemnity set
forth in this Agreement shall survive the Closing and the Debt Interest
Closing.
(b) This Agreement shall be binding on and inure to the benefit of
the Indemnitors, the Indemnitees and their respective successors and
assigns. The Indemnitors, without the prior written consent of KRC in each
instance, may not assign, transfer or set over in whole or in part, all or
any part of its or their benefits, rights, duties and obligations
hereunder.
Section 5. Definitions. As used in this Agreement, the following terms
shall have the following meanings:
"Property" means any real property interests (including fee simple,
easement air rights, and leasehold interests), improvements, fixtures, and
related personal property included in the Project (as defined in the
Partnership Agreement).
"Hazardous Materials" means (a) any petroleum or petroleum products,
radioactive materials, asbestos in a form that is or could become friable,
urea formaldehyde foam insulation, transformers or other equipment that
contain dialectic fluid containing levels of polychlorinated biphenyls, and
radon gas; (b) any chemicals, materials or substances defined as or
included in the definition of "hazardous materials," "hazardous wastes,"
"hazardous substance," "extremely hazardous wastes," "restricted hazardous
wastes," "toxic substances," "toxic pollutants," "contaminants" or
"pollutants," or words of similar import, under any applicable
Environmental Requirements; and (c) any other chemical, material or
substance, exposure to which is prohibited, limited or regulated by any
Governmental Authority (as defined in the Partnership Agreement).
"Environmental Requirement" means any federal, state or local
statute, law, rule, regulation, ordinance, code, policy, plan or rule of
common law now or hereafter in effect and in each case as amended, and any
judicial or administrative interpretation thereof, including any judicial
or administrative order, consent decree or judgment, relating to the
environment, health, safety or Hazardous Materials, including, without
limitation, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, 42 U.S.C. (S)9601 et seq.; the Hazardous
Materials Transportation Act, as amended, 49 U.S.C. (S)1801 et seq.; the
Resource Conservation and Recovery Act, as amended, 42 U.S.C. (S)6901 et
seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C.
(S)1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. (S)2601 et
seq.; the Clean Air Act, 42 U.S.C. (S)7401 et seq.; the Oil Pollution Act
of 1990, Public Law 101-380, and the Safe Drinking Water Act, 42 U.S.C.
(S)3808 et seq. and any state or local counterparts or equivalents.
"Environmental Claims" means any and all administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices of
non-compliance or
4
<PAGE>
violation, investigations or proceedings relating in any way to any
Environmental Requirements (hereinafter "Claims") or any permit issued
under any such Environmental Requirement, including without limitation (a)
any and all Claims by governmental or regulatory authorities for
enforcement, cleanup, removal, response, remedial or other actions or
damages pursuant to any applicable Environmental Requirement, and (b) any
and all Claims by any third party seeking damages, contribution,
indemnification, cost recovery, compensation or injunctive relief resulting
from Hazardous Materials or arising form alleged injury or threat of injury
to health, safety or the environment.
"Release" means disposing, discharging, injecting, spilling, leaking,
leaching, dumping, emitting, escaping, emptying, seeping, placing and the
like, into or upon any land or water or air, or otherwise entering into the
environment.
Section 6. Miscellaneous.
(a) Any party liable upon or in respect of this Agreement may be
released without affecting the liability of any party not so released.
(b) No failure or delay on the party of any of the Indemnities in
exercising any right, power or privilege hereunder and no course of dealing
between the Indemnitors and the Indemnitees (or any of them) shall operate
as a waiver thereof; nor shall any single or partial exercise of any right,
power or privilege hereunder preclude any other or further exercise thereof
or the exercise of any other right, power or privilege hereunder. The
rights, powers and remedies herein expressly provided are cumulative and
not exclusive of any rights, powers or remedies which the Indemnitees would
otherwise have. No notice to or demand on any of the Indemnitors in any
case shall, ipso facto, entitle any Indemnitor to any other or further
notice or demand in similar or other circumstances or constitute a waiver
of the rights of the Indemnitees to any other or further action in any
circumstances without notice or demand where notice or demand is not
otherwise required.
(c) Any notice, demand, request or other communication which any
party may be required or may desire to give hereunder shall be in writing
and shall be effective only if the same is (i) hand-delivered, in which
event it shall be effective upon delivery, (ii) mailed, by United States
registered or certified mail, return receipt requested, postage prepaid (in
which event it shall be effective three (3) business days after mailing),
or (iii) sent by Federal Express or other reliable express courier service
effective the next business day after delivery to such express courier
service, addressed as follows:
5
<PAGE>
If to KRC or any of the Indemnitees:
c/o ZKS Real Estate Partners LLC
225 W. Washington
Suite 1450
Chicago, Illinois 60606
Attention: Gregory A. Lisauskas
with a copy to:
Zurich Kemper Life Companies
c/o ZKS Real Estate Partners LLC
225 W. Washington
Suite 1450
Chicago, Illinois 60606
Attention: Timothy R. Verrilli, Esq.
with a copy to:
Rudnick & Wolfe
203 N. LaSalle Street
Chicago, Illinois 60601-1293
Attention: Kenneth Hartmann
If to Borrower or TPG:
c/o The Prime Group, Inc.
77 W. Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attention: Michael W. Reschke
with a copy to:
The Prime Group, Inc.
77 W. Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attention: Robert J. Rudnik, Esq.
(d) Neither this Agreement nor any term hereof may be changed,
waived, discharged or terminated unless such change, waiver, discharge or
termination is in writing and signed by each of the parties hereto.
6
<PAGE>
(e) This Agreement and the rights and obligations of the parties
hereunder shall be construed in accordance with and be governed by the law
of the State of Illinois.
Section 7. Waiver of Jury Trial. EACH PARTY TO THIS AGREEMENT WAIVES, TO
THE FULLEST EXTENT PERMITTED BY LAW, THE RIGHT TO TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM FILED BY ANY PARTY, RELATING DIRECTLY OR INDIRECTLY
TO THIS AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute and deliver this Agreement as of the date first above
written.
77 WEST WACKER LIMITED PARTNERSHIP, an
Illinois limited partnership
By: The Prime Group, Inc., an Illinois corporation,
its managing general partner
By:
Name:
------------------------------------------
Title:
-----------------------------------------
THE PRIME GROUP, INC., an Illinois corporation
By:
-----------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
7
<PAGE>
EXHIBIT A
---------
ENVIRONMENTAL REPORTS
---------------------
1. Environmental Reconnaissance and Subsurface Exploration dated December 17,
1990 by STS Consultants, Ltd.
2. Environmental Reconnaissance and Subsurface Exploration Supplemental Letter
dated February 22, 1991 by STS Consultants, Ltd.
3. Indoor Air Investigation, dated November 10, 1992, prepared by Carnow,
Conibear & Associates, Ltd.
A-1
<PAGE>
EXHIBIT G
---------
SECOND AMENDMENT TO OPTION AGREEMENT
------------------------------------
G-1
<PAGE>
SECOND AMENDMENT TO
OPTION TO PURCHASE PARTNERSHIP INTERESTS
THIS SECOND AMENDMENT TO OPTION TO PURCHASE PARTNERSHIP INTERESTS ("Second
Amendment") is made as of this day _____ of July, 1997 by KILICO Realty
Corporation, an Illinois corporation ("KRC" or "Optionor") and The Prime Group,
Inc., an Illinois corporation ("TPG" or "Optionee").
RECITALS
A. KRC and TPG have entered into that Option To Purchase Partnership
Interests entered into as of June 17, 1994 but made effective as of March 22,
1994 (the "Original Option").
B. KRC and TPG have also entered into that First Amendment to Option to
Purchase Partnership Interests entered into as of January 21, 1997 (the "First
Amendment") amending the Original Option (the Original Option and the First
Amendment shall be collectively referred to herein as the "Option Agreement").
C. KRC and TPG have also entered into that Agreement dated as of January
21, 1997 made by Kemper Investors Life Insurance Company, an Illinois insurance
corporation ("KILICO"); Federal Kemper Life Assurance Company, an Illinois
insurance corporation ("FKLA"); KRC; FKLA Realty Corporation, an Illinois
corporation ("FRC"); KR 77 Fitness Center, Inc., a Delaware corporation ("KR
Fitness"); 77 West Wacker Limited Partnership, an Illinois limited partnership
("77 West"); TPG; Prime Group Limited Partnership, an Illinois limited
partnership ("PGLP"); and Prime 77 Fitness Center, Inc., an Illinois corporation
("Prime Fitness") (KILICO, FKLA, KRC, FRC, KR Fitness, 77 West, TPG, PGLP and
Prime Fitness shall be collectively referred to herein as the "Parties") (the
"Original Agreement").
D. KRC and TPG have also entered into that Amended and Restated Agreement
dated as of July 15, 1997 made by the Parties and K/77 Investors Limited
Partnership, an Illinois limited partnership (the "Amended Agreement"), amending
the Original Agreement. Terms defined in the Amended Agreement are used with
the same meanings in this Second Amendment.
E. As required by the Amended Agreement, KRC and TPG have agreed to enter
into this Second Amendment to amend certain provisions of the Option Agreement.
NOW THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Second Amendment agree as follows:
Section 1. Amendments. The Option Agreement is hereby amended as follows:
<PAGE>
a. Section 1(b)(i) of the Option Agreement is hereby deleted in its
entirety and the following material substituted in lieu thereof:
(i) The Option shall expire if not exercised on or before fifteen
(15) days prior to the Outside Date (as defined in the Amended
Agreement), and the Optionee shall designate the closing to occur
no later than the Outside Date.
Section 2. Miscellaneous.
a. Except as otherwise specifically modified herein, the Option Agreement
shall remain unchanged and in full force and effect and is hereby ratified in
all respects.
b. This Amendment shall be governed by the laws of the State of Illinois,
without reference to its conflicts of law or choice of law rules.
c. The terms and provisions of this Amendment shall be binding on the
successors and assigns of the parties hereto.
d. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. It shall not be necessary that any single
counterpart of this Amendment be executed by all of the parties hereto, so long
as each of such parties shall have executed the same or any other separate
counterpart hereof.
e. As used herein, the terms (i) "person" shall mean an individual, a
corporation, a partnership, a joint venture, a limited liability company, an
unincorporated organization, or a governmental body; (ii) "including" shall mean
including, without limiting the generality of the foregoing; and (iii) the
singular shall include the plural, and vice versa.
f. If any provision of this Amendment should be found to be invalid, void,
or unenforceable, then it is the intent of the parties hereto that the remainder
of this Amendment be enforced to the fullest extent possible in accordance with
the intentions of the parties.
g. The parties to this Amendment will execute and deliver such other
documents and instruments as may be reasonably requested by any other party to
cause, effect, accomplish, or evidence any of the transactions required by this
Amendment.
2
<PAGE>
In Witness Whereof, the parties hereto have caused this Amendment to be
executed and delivered the day and year first above written.
KILICO REALTY CORPORATION, an Illinois
corporation
By:
-----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
THE PRIME GROUP, INC., an Illinois corporation
By:
-----------------------------------------------
Name:
---------------------------------------------
Title:
--------------------------------------------
3
<PAGE>
EXHIBIT H
---------
AMENDED CERTIFICATE OF LIMITED PARTNERSHIP
------------------------------------------
H-1
<PAGE>
Form LP 202
(Rev. Jan. 1995)
Filing Fee $25
SUBMIT IN DUPLICATE!
All correspondence GEORGE H. RYAN
regarding this filing will SECRETARY OF STATE
be sent to the registered STATE OF ILLINOIS
agent of the limited
partnership unless a self- CERTIFICATE OF AMENDMENT
addressed envelope with TO THE
pre-paid postage is CERTIFICATE OF LIMITED PARTNERSHIP
included. (Illinois limited partnership)
1. Limited partnership's name: 77 West Wacker Limited Partnership
-----------------------------------------
2. File number assigned by the Secretary of State: C001826
---------------------
3. Federal Employer Identification Number (F.E.I.N.): 36-3637023
------------------
4. The certificate of limited partnership is amended as follows:
(Check all applicable changes)
(Address changes P.O. Box alone and c/o are unacceptable)
___a) Admission of a new general partner (give name and business address
below).
X b) Withdrawal of a general partner (give name below).
---
___c) Change of registered agent and/or registered agent's office (give new
name and address, including county below).
___d) Change in the address of the office at which the records required by
Section 201 of the Act are kept (give new address, including county
below).
___e) Change in the general partners name and/or business
address (give name and new address below).
___f) Change in the partners' total aggregate contribution amount
(give new dollar amount below).
___g) Change in limited partnership's name (give new name below).
___h) Change in date of dissolution (give new date below).
___i) Other (give information below).
4.b) The Prime Group, Inc.
If additional space is needed, it must be continued on the reverse side and/or
in the same format on a plain white 8 1/2" x 11" sheet, which must be stapled to
this form.
CLP-9.5
<PAGE>
Form LP 202
(Rev. Jan. 1995)
5. NAME(S) & BUSINESS ADDRESS(ES) OF GENERAL PARTNER(S)
The undersigned affirms, under penalties of perjury, that the
facts stated herein are true.
The original certificate of amendment must be signed by a general
partner, all new general partners and at least one withdrawing
general partner.
<TABLE>
<S> <C>
SIGNATURE AND NAME BUSINESS ADDRESS
1. Signature X Number/Street 77 W. Wacker Drive, Suite 3900
-------------------------------------------- ---------------------------------------
Type or print name and title Robert J. Rudnik City/town Chicago
------------------------------ ------------------------------------------
- ---------------------------------------------------------- ----------------------------------------------------
Name of General Partner if a corporation or
other entity The Prime Group, Inc. State Illinois ZIP Code 60601
--------------------------------------------- -------------------- ---------------
2. Signature X Number/Street 120 South LaSalle Street
-------------------------------------------- -------------------------------------
Type or print name and title City/town Chicago
---------------------------- ------------------------------------------
- ---------------------------------------------------------- ----------------------------------------------------
Name of General Partner if a corporation or
other entity Kilico Realty Corporation State Illinois ZIP Code 60603
--------------------------------------------- --------------------- -------------
3. Signature Number/Street
--------------------------------------------- ---------------------------------------
Type or print name and title City/town
----------------------------- ------------------------------------------
- ---------------------------------------------------------- ----------------------------------------------------
Name of General Partner if a corporation or
other entity State ZIP Code
--------------------------------------------- -------------------------- -----------
</TABLE>
(Signatures must be in BLACK INK on an original document. Carbon copy, photocopy
or rubber stamp signatures may only be used on conformed copies.)
<TABLE>
<S> <C>
FORMS OF PAYMENT: RETURN TO:
Payment must be made by certified check, Secretary of State
cashier's check, Illinois attorney's check, Illinois Department of Business Services
C.P.A.'s check or money order, payable to "Sec- Limited Partnership Division
retary of State." Room 357, Howlett Building
Springfield, Illinois 62756
DO NOT SEND CASH! Telephone: (217) 785-8960
</TABLE>
<PAGE>
Exhibit 10.22
July 18, 1997
KILICO Realty Corporation and
Kemper Investors Life Insurance Company
c/o ZKS Real Estate Partners, LLC
225 W. Washington Street
Suite 1450
Chicago, Illinois 60606
Attention: Robert J. Korslin
Re: Triad Development Company
-------------------------
Dear Bob:
This letter (this "Agreement") sets forth the terms upon which The Prime
Group, Inc. ("PGI"), or one or more of its affiliates or assigns (PGI, together
with certain of its affiliates or assigns, depending on the context, is or are
referred to herein as "Prime"), will purchase, and KILICO Realty Corporation, an
Illinois corporation ("Realty"), KFC Portfolio Corp., a Delaware corporation
("KFC"), and Kemper Investors Life Insurance Company, an Illinois insurance
corporation ("KILICO"; Realty, KFC and KILICO are sometimes referred to
collectively herein as "Kemper"), will sell, the Kemper Triad Interests (defined
below). Upon acceptance of this Agreement by Kemper, this Agreement will
constitute the binding agreement of Kemper and Prime to proceed with the
transactions described herein upon the terms and subject to the conditions set
forth herein:
1. Agreement to Sell and Purchase.
Upon and subject to the terms and conditions set forth in this Agreement,
on the Closing Date (defined below), Kemper shall sell, transfer, convey, assign
and deliver to Prime, and Prime shall purchase, acquire and accept from Kemper,
all of the rights, title and interests (including debt and equity interests,
if any) owned or held by Kemper (the "Kemper Triad Interests") in and to Triad
Development Company, an Illinois limited partnership ("Triad"), all partnerships
in which Triad has an interest (the "Building Partnerships"), Triad Parking
Company, Ltd., a Tennessee limited partnership ("Parking Ltd."), and Triad
Parking Corporation, a
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 2
Tennessee corporation ("Parking Corp."; Triad, the Building Partnerships,
Parking Ltd. and Parking Corp. are sometimes referred to herein collectively as
the "Triad Entities" and individually as a "Triad Entity"), and in and to the
property owned by any of the Triad Entities. The Kemper Triad Interests are more
fully described on Exhibit A attached hereto. The Building Partnerships are
listed on Exhibit B attached hereto. Kemper and Prime agree that the Kemper
Triad Interests shall include any and all rights and interests, if any, which
Kemper may have in and to any and all cash, deposits, and other funds in any
bank accounts maintained by any of the Triad Entities and any and all securities
held in the name of any of the Triad Entities as of the Closing Date. Kemper and
Prime agree that, between the date of this Agreement and the Closing Date,
unless otherwise specified in this Agreement, none of the Triad Entities shall
make any distributions to any partner in any of the Triad Entities or otherwise
use any of the funds of any of the Triad Entities for any purpose other than the
payment of authorized operating expenses and other authorized expenses.
Authorized operating expenses and other authorized expenses shall mean expenses
set forth or identified in a budget duly authorized and approved by the general
partner or general partners of Triad, a Building Partnership or Parking Ltd., as
applicable, for one or more of the Triad Entities, and expenses otherwise duly
authorized and approved by the general partner or general partners of Triad, a
Building Partnership or Parking Ltd., as applicable.
2. Purchase Price.
(a) The aggregate consideration for all of the Kemper Triad Interests
shall be (i) the amount of the outstanding principal balance of the Parking
Unsecured Note (as such term is defined on Exhibit A attached hereto) as of
the Closing Date, together with all accrued but unpaid interest thereon as
of the Closing Date, which amount shall be applied in repayment, in full,
of such obligations, plus (ii) an amount equal to the difference between
$1,750,000 and the total amount referred to in the preceding clause (i),
plus (iii) the aggregate amount of capital contributions (other than any
capital contributions made pursuant to paragraph 3(a) hereof), if any, made
by Kemper to Triad from and after the date hereof, plus any and all accrued
but unpaid interest thereon if and to the extent provided for in that
certain Second Amended and Restated Agreement of Limited Partnership of
Triad, entered as of April 15, 1991, effective as of December 27, 1990, as
amended (the "Triad Partnership Agreement"), and
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 3
(iv) the release and termination of all current or future standby credit
enhancement obligations of Kemper and its affiliates (referred to herein as
"Kemper Exiting Standby Credit Enhancement") with respect to the tax exempt
bonds issued for the benefit of the Building Partnerships, which bonds are
described on Exhibit G attached hereto (collectively the "Bonds"). In
addition, at the Closing, Prime shall cause to be repaid to Kemper in full
the outstanding principal balance of all Capital Loans (as such term is
defined in the Triad Partnership Agreement), if any, made by Kemper to
Prime after the date of this Agreement in accordance with the terms of the
Triad Partnership Agreement, plus any and all accrued but unpaid interest
thereon if and to the extent provided for in the Triad Partnership
Agreement. The total of the sums described in the preceding clauses (i),
(ii) and (iii) is referred to herein as the "Purchase Price".
(b) The parties hereto acknowledge that (i) Parking Ltd. issued that
certain Promissory Note, dated as of December 19, 1996 (the "Parking First
Mortgage Note"), payable to the order of First Tennessee Bank National
Association in the original principal amount of $1,150,000.00, which
Parking First Mortgage Note evidences the obligation of Parking Ltd. to
repay a non-recourse loan (the "Parking First Mortgage Loan") secured by a
first mortgage on the property owned by Parking Ltd., and (ii) Nashville
Office Building I, Ltd., one of the Building Partnerships, issued that
certain Promissory Note, dated as of October 20, 1993 (the "Nashville First
Mortgage Note"), payable to the order of First Tennessee Bank National
Association in the original principal amount of $5,600,000.00, which
Nashville First Mortgage Note evidences the obligation of Nashville Office
Building I, Ltd. to repay a non-recourse loan (the "Nashville First
Mortgage Loan") secured by a first mortgage on the property owned by
Nashville Office Building I, Ltd. Prime will either repay in full, on or
prior to the Closing, all amounts payable under the Parking First Mortgage
Loan or assume, or take the Kemper Triad Interests in Parking Ltd. and the
property owned by Parking Ltd. subject to, the Parking First Mortgage Loan,
and Prime will either repay in full, on or prior to the Closing, all
amounts payable under the Nashville First Mortgage Loan or assume, or take
the Kemper Triad Interests in Nashville Office Building I, Ltd. and the
property owned by Nashville Office Building I, Ltd. subject to, the
Nashville First Mortgage Loan. At the Closing, unless either all amounts
under the Parking First
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 4
Mortgage Loan have been paid in full or Prime has delivered to Kemper
reasonably satisfactory evidence that Kemper has been fully released from
all potential liabilities and obligations with respect to the Parking First
Mortgage Loan, PGI shall execute and deliver to Kemper at Closing an
indemnification agreement whereby PGI agrees to indemnify, defend and hold
Kemper harmless from any and all loss, cost, damage, liability or expense
(including reasonable attorneys' fees and legal expenses) with respect to
Parking First Mortgage Loan. At the Closing, unless either all amounts
payable under the Nashville First Mortgage Loan have been paid in full or
Prime has delivered to Kemper reasonably satisfactory evidence that Kemper
has been fully released from all potential liabilities and obligations with
respect to the Nashville First Mortgage Loan, PGI shall execute and deliver
to Kemper at Closing an indemnification agreement whereby PGI agrees to
indemnify, defend and hold Kemper harmless from any and all loss, cost,
damage, liability, or expense (including reasonable attorneys' fees and
legal expenses) with respect to Nashville First Mortgage Loan.
3. Payment of Centre Square Land Loans; Waiver of Administrative Fees
(a) Within one (1) Business Day following the execution and delivery
by the parties hereto of this Agreement, each of PGI and Kemper shall
contribute, or cause to be contributed, to Triad an amount equal to fifty
percent (50%) of the difference between (i) the aggregate outstanding
principal amount of the Centre Square Land Loans (as such term is defined
on Exhibit A attached hereto), together with all accrued but unpaid
interest thereon (but not including any late payment charges or interest at
a default rate), less (ii) $200,000.00. The parties hereto hereby agree to
cause Triad to pay to KFC, promptly following the receipt by Triad of the
contributions described in the immediately preceding sentence, the
aggregate amount of such contributions plus $200,000.00 of the cash in the
bank accounts of the Triad Entities, in payment in full of all amounts due
under the Centre Square Land Loans, and, in connection with such payment,
KFC shall deliver to Prime, on behalf of Triad, the original Promissory
Notes evidencing the Centre Square Land Loans, which Promissory Notes shall
be marked "PAID IN FULL", and KFC shall release all collateral and other
security securing the Centre Square Land Loans.
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 5
(b) Prime hereby waives its rights to receive, and agrees not to
cause or accept payment of, any and all administrative fees or other fees
payable to Prime from and after the date hereof by any of the Triad
Entities, excepting only an overhead reimbursement fee in the amount of
$6,250 per month.
(c) Contemporaneously with the execution and delivery of this
Agreement, Prime shall cause Parking Corp. to deliver to Kemper a certified
copy of (i) the current Certificate of Limited Partnership of Parking Ltd.,
(ii) the current Certificate of Incorporation of Parking Corp., (iii) the
current By-Laws of Parking Corp., (iv) the current Shareholders Agreement
of Parking Corp., (v) any other documents or agreements of which Parking
Corp. is aware which may restrict the ability of Kemper to transfer its
stock in Parking Corp. as contemplated by this Agreement and (vi) all
amendments to any of the foregoing.
4. Closing; Closing Date.
(a) The sale and purchase of the Kemper Triad Interests (the
"Closing") shall occur on a date (the "Closing Date") designated by Prime
and reasonably acceptable to Kemper upon not less than five (5) Business
Days (defined below) written notice to Kemper; provided, however, the
Closing Date shall not be later than September 30, 1997 (the "Outside
Closing Date"), subject to the provisions of Section 4(b) hereof;
(b) Prime shall have the right to extend the Outside Closing Date for
up to five (5) months (with the monthly periods ending October 31, 1997,
December 1, 1997, December 31, 1997, February 2, 1998 and February 27,
1998), on a month-for-month basis, by (i) the delivery by Prime to Kemper
of written notice of such extension, which written notice must be delivered
on or before the fifteenth (15th) day prior to the then applicable Outside
Closing Date, as previously extended, and by the payment by Prime to Kemper
of the sum of Two Hundred Thousand and no/100 Dollars ($200,000.00) for
each one-month extension (the "Extension Payments"), and (ii) the taking of
all actions required by Prime to cause a contemporaneous extension of the
closing date to the end of the same monthly period under the terms of
that certain Amended and Restated Agreement, dated as of the date hereof,
among (A) PGI, Prime Group Limited Partnership and Prime 77
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 6
Fitness Center, Inc., (B) Realty, KILICO, Kemper Federal Life Assurance
Company, FKLA Realty Corporation and KR 77 Fitness Center, Inc.
(collectively, the "Kemper 77 Sellers"), and (C) 77 West Wacker Limited
Partnership providing for, among other things, the purchase and sale of the
interests in the Kemper 77 Sellers of all of their interests in the office
building located at 77 West Wacker Drive, Chicago, Illinois. The Extension
Payments shall not be refundable to Prime for any reason except as provided
otherwise in Section 9(b) hereof, but one-half of the Extension Payments
shall be credited against, and shall reduce, the Purchase Price.
5. Closing Deliveries.
(a) At the Closing, Prime shall deliver to Kemper such documents
reasonably requested by Kemper evidencing that Kemper and its affiliates
have been released from all of their obligations under Kemper's Existing
Standby Credit Enhancement and under the Standby Bond Purchase and
Indemnity Agreements evidencing Kemper's Existing Standby Credit
Enhancement.
(b) At the Closing, Kemper shall deliver, or cause to be delivered,
all instruments, certificates and other documents, reasonably acceptable to
Prime, pursuant to which the Kemper Triad Interests are transferred,
conveyed, assigned and delivered to Prime and pursuant to which Kemper
releases any and all security interests held by Kemper in or with respect
to the Kemper Triad Interests and the Triad Entities.
(c) At the Closing, Kemper will release any and all security interests
in units in Ambassador Apartments, L.P. securing any obligations to Kemper
of Prime, any of the Triad Entities or any of their affiliates relating to
the Triad Entities or to the property owned by, or the obligations of, any
of the Triad Entities.
(d) At the Closing, Prime shall cause an amount equal to the Purchase
Price (plus the outstanding principal balance of all Capital Loans, if any,
made by Kemper to Prime after the date of this Agreement in accordance with
the terms of the Triad Partnership Agreement, plus any and all accrued but
unpaid interest thereon if and to the extent provided in the Triad
Partnership Agreement), less one-half of any and all Extension Payments
made pursuant hereto, to be paid to Kemper by wire transfer in immediately
available funds. The parties
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 7
agree that there shall be no proration adjustments at the Closing related
to the Kemper Triad Interests and that there will be no other adjustments
to the Purchase Price except that the Purchase Price shall be reduced by
one-half of any and all Extension Payments made pursuant hereto. Prime will
not be entitled to any fee or commission by reason of this Agreement or the
transactions contemplated hereunder which would result in a reduction in
the amount payable to Kemper hereunder.
(e) At the Closing, Kemper and Prime shall each execute and deliver to
the other an Assignment and Assumption of Partnership Interests in the form
of Exhibit C attached hereto, pursuant to which the Kemper Triad Interests
which are partnership interests are transferred, assigned and delivered to
Prime and certain obligations related thereto are assumed by Prime.
(f) At the Closing, Realty shall execute and deliver to Prime a Stock
Power executed in blank pursuant to which Realty transfers and assigns the
stock in Parking Corp. owned by Realty.
(g) At the Closing, Kemper shall execute and deliver to Prime a
Release and Covenant Not to Sue in the form of Exhibit D attached hereto,
and Prime shall execute and deliver, and shall cause Prime of Tennessee,
Inc. and Triad to execute and deliver, to Kemper a Release and Covenant Not
to Sue in the form of Exhibit E attached hereto (Kemper hereby consenting
to the execution by Triad of such Release and Covenant Not to Sue).
(h) At Closing, Prime shall execute and deliver to Kemper the
indemnification agreement or indemnification agreements if and to the
extent required to be delivered pursuant to the last two sentences of
paragraph 2(b) hereof.
(i) At Closing, Prime shall cause to be delivered to Kemper an opinion
of counsel, from Winston & Strawn or another law firm reasonably acceptable
to Kemper and in a form reasonably acceptable to Kemper, to the effect that
the assignment by Kemper to Prime (or to Prime's assignee or designee) of
the Kemper Triad Interests as contemplated by this Agreement will not have
an adverse effect on the tax-exempt status of the Bonds.
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 8
(j) At the Closing, Kemper and Prime shall execute and deliver any
and all other instruments, certificates and other documents reasonably
requested by the other party to cause, effect, accomplish or evidence the
transactions contemplated by this Agreement.
6. Representations and Warranties of Kemper. In order to induce Prime to
enter into this Agreement, Kemper hereby represents and warrants to Prime that
on the date of this Agreement and on the Closing Date:
(a) Each of Realty, KFC and KILICO is a corporation duly formed and
validly existing and is in good standing under the laws of its respective
state of incorporation and is duly qualified to do business and is in good
standing under the laws of each state in which the failure to qualify to do
business would have a material adverse affect on such entity's ability to
perform its obligations under this Agreement.
(b) The execution and delivery of this Agreement by Realty, KFC and
KILICO and the performance by Realty, KFC and KILICO of their respective
obligations under this Agreement have been duly and validly authorized by
all necessary corporate action of Realty, KFC and KILICO. This Agreement
has been duly executed and delivered by a duly authorized officer or agent
of Realty, KFC and KILICO and constitutes the legal, valid and binding
obligations of Realty, KFC and KILICO, enforceable against each such entity
in accordance with the terms hereof.
(c) No consent, waiver, approval or authorization of, or notice to,
any governmental unit or any other person is required to be made, obtained
or given by Realty, KFC or KILICO in connection with the execution and
delivery of this Agreement by Realty, KFC and KILICO, or in connection with
the performance by Realty, KFC and KILICO of their respective obligations
under this Agreement, except to the extent any such consents, waivers,
approvals and authorizations have been obtained prior to the date of this
Agreement, or any such notices have been given prior to the date of this
Agreement, as applicable.
(d) None of the execution or delivery of this Agreement by Realty,
KFC and KILICO, or the performance by Realty, KFC and KILICO of their
respective obligations under this
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 9
Agreement does or will, with or without the giving of notice, lapse of
time, or both, violate, conflict with or constitute a default under any
term or condition of (i) any organizational document (including articles of
incorporation, charters and by-laws) of Realty, KFC or KILICO or any
material agreement to which Realty, KFC or KILICO is a party or by which
Realty, KFC or KILICO is bound or which is applicable to any of the
properties or assets of Realty, KFC or KILICO, or (ii) any term or
provision of any presently existing judgment, decree, order, statute,
injunction, rule or regulation of any governmental unit applicable to
Realty, KFC or KILICO or any of the assets or properties of Realty, KFC or
KILICO; provided, however, no representation or warranty is made with
respect to any possible violation, conflict or default under any document
or instrument made by any of the Triad Entities or under any document or
instrument of which any of the Triad Entities is aware affecting the assets
or properties of any of the Triad Entities or affecting the Kemper Triad
Interests.
(e) None of Realty, KFC, KILICO or any subsidiary or affiliate of
Realty, KFC or KILICO has relied upon or engaged any real estate broker or
other finder in connection with, or to assist Realty, KFC or KILICO or any
subsidiary or affiliate of Realty, KFC or KILICO in entering into or
consummating, the transactions contemplated by this Agreement. Realty, KFC
and KILICO shall indemnify, defend and hold harmless Prime from and against
any and all losses, damages, costs and expenses (including, without
limitation, reasonable attorneys' fees and expenses) suffered or incurred
by Prime in connection with any claims asserted by any real estate broker
or finder based on any agreement or alleged agreement with Realty, KFC or
KILICO or any subsidiary or affiliate of Realty, KFC or KILICO in
connection with this Agreement or any of the transactions contemplated by
this Agreement.
(f) Realty is the sole owner and holder of the Kemper Triad Interests
owned by it as shown on Exhibit A hereto and has good title thereto free
and clear of any liens, claims, pledges, encumbrances or security interests
of any person or party which will not be terminated or released on or
before the Closing Date, and has full power and authority to sell, assign,
transfer and deliver such Kemper Triad Interests in accordance with the
terms of this Agreement.
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 10
(g) KILICO is the sole owner and holder of the Kemper Triad
Interests owned or held by it as shown on Exhibit A hereto and has good
title thereto free and clear of any liens, claims, pledges, encumbrances or
security interests of any person or party which will not be terminated or
released on or before the Closing Date, and has full power and authority to
sell, assign, transfer and deliver such Kemper Triad Interests in
accordance with the terms of this Agreement.
(h) KFC is the sole owner and holder of the Kemper Triad Interests
owned or held by it as shown on Exhibit A hereto and has good title thereto
free and clear of any liens, claims, pledges, encumbrances or security
interests of any person or party which will not be terminated or released
on or before the Closing Date, and has full power and authority to sell,
assign, transfer and deliver such Kemper Triad Interests in accordance with
the terms of this Agreement.
(i) The Kemper Triad Interests, as described on Exhibit A attached
hereto, are all of the rights, title and interests (including debt and
equity interests) owned or held by Realty, KILICO, KFC, Kemper Corporation
or any subsidiary or affiliate of Realty, KFC, KILICO or Kemper Corporation
in and to any of the Triad Entities or any of the properties or assets of
any of the Triad Entities (other than any interests which Realty, KFC,
KILICO, Kemper Corporation or any subsidiary or affiliate of Realty, KFC
KILICO or Kemper Corporation may have under or by reason of Kemper's
standby credit enhancement obligations with respect to the Bonds, which
interests shall be terminated as of the Closing).
7. Representations and Warranties of Prime. In order to induce Kemper
to enter into this Agreement, Prime hereby represents and warrants to Kemper
that, on the date of this Agreement and on the Closing Date:
(a) PGI is a corporation duly formed and validly existing and is in
good standing under the laws of the State of Illinois and is duly qualified
to do business and is in good standing under the laws of each state in
which the failure to qualify to do business would have a material adverse
affect on the ability of PGI to perform its obligations under this
Agreement.
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 11
(b) The execution and delivery of this Agreement by PGI and the
performance by PGI of its obligations under this Agreement have been duly
and validly authorized by all necessary corporate action of PGI. This
Agreement has been duly executed and delivered by a duly authorized officer
or agent of PGI and constitutes the legal, valid and binding obligations of
PGI, enforceable against PGI in accordance with the terms hereof.
(c) No consent, waiver, approval or authorization of, or notice to,
any governmental unit or any other person is required to be made, obtained
or given by PGI in connection with the execution and delivery by PGI of
this Agreement, or in connection with the performance by PGI of its
obligations under this Agreement, except to the extent any such consents,
waivers, approvals and authorizations have been obtained prior to the date
of this Agreement, or any such notices have been given prior to the date of
this Agreement, as applicable.
(d) None of the execution or delivery of the this Agreement by PGI or
the performance by PGI of its obligations under this Agreement does or
will, with or without the giving of notice, lapse of time, or both,
violate, conflict with or constitute a default under any term or condition
of (i) any organizational document (including, articles of incorporation
and by-laws) of PGI or any material agreement to which PGI is a party or by
which PGI is bound or which is applicable to any of the properties or
assets of PGI, or (ii) any term or provision of any presently existing
judgment, decree, order, statute, injunction, rule or regulation of any
governmental unit applicable to PGI or any of the assets or properties of
PGI.
(e) Neither PGI nor any subsidiary or affiliate of PGI has relied upon
or engaged any real estate broker or other finder in connection with, or to
assist PGI in entering into or consummating, the transactions contemplated
by this Agreement. PGI shall indemnify, defend and hold harmless Kemper
from and against any and all losses, damages, costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses)
suffered or incurred by Kemper in connection with any claims asserted by
any real estate broker or finder based on any agreement or alleged
agreement with PGI or any subsidiary or affiliate of PGI in connection with
this Agreement or any of the transactions contemplated by this
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 12
Agreement. The representations and warranties set forth in the first
sentence of this subparagraph 7(e) shall not apply to any agreements or
arrangements that PGI or any subsidiary or affiliate of PGI may have for or
related to any financing or replacement credit enhancement obtained by
Prime in connection with the transactions contemplated by this Agreement,
and PGI shall be responsible for the payment of any and all fees with
respect thereto and shall indemnify Kemper with respect thereto as provided
in the second sentence of this paragraph 7(e).
(f) PGI has no knowledge and has received no written notice: (a) that
any property owned by any of the Triad Entities or the use or operation
thereof violates any laws, rules, or regulations of any federal, state,
city or county governmental body or subdivision thereof; (b) of any pending
or threatened claim, actions, suits or proceedings against or affecting any
of the Triad Entities or their respective properties or the use or
operation thereof except as disclosed on Exhibit F attached hereto; or (c)
of any other material liabilities or obligations concerning any of the
Triad Entities or their respective properties or the business or operations
thereof that are not reflected in the most recent available financial
statements of the Triad Entities, which financial statements are attached
hereto as Exhibit H.
(g) All disclosures of this Agreement, any provisions of this
Agreement or any of the parties to this Agreement in any registration
statement, prospectus, offering memorandum or similar document filed by or
on behalf of Prime with the Securities and Exchange Commission (the "SEC")
or pursuant to any state securities law or disseminated by or on behalf of
Prime to underwriters or other potential investors are and will be true and
accurate in all material respects and will not omit to state a material
fact necessary to make the statements therein not misleading. PGI hereby
covenants and agrees to deliver, or cause to be delivered, to Kemper a copy
of all registration statements, prospectuses, offering memorandums or
similar documents filed by or on behalf of Prime with the SEC in which this
Agreement or any provisions of this Agreement are disclosed or otherwise
described, together with all material drafts thereof prior to each such
filing. Notwithstanding the provisions of the preceding sentence, Kemper
shall have no obligation or responsibility whatsoever, to respond or
communicate in any way with respect
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 13
to the accuracy or inaccuracy of any information contained in any such
registration statement, prospectus, offering memorandum or similar document
referred to above. From and after the date of this Agreement and continuing
whether or not the Closing hereunder occurs, Prime agrees to indemnify,
defend and hold harmless Kemper, its affiliates and controlling persons
from and against any and all costs, expenses, losses, liabilities, causes
of actions and damages suffered or incurred by such parties arising out of
a breach of the provisions of the first sentence of this paragraph 7(g).
8. Acknowledgments of PGI. PGI has inspected and familiarized itself with
the respective properties and assets of the Triad Entities, and is fully aware
of all of the conditions thereof and restrictions applicable thereto; and Prime
will accept such properties and assets on the Closing Date in their "as is"
condition. PGI further acknowledges and agrees that no representations,
warranties or agreements, expressed or implied, of any kind whatsoever have been
made by Kemper concerning the state of title or condition of any property or
asset of any of the Triad Entities, the ability of any of the Triad Entities to
obtain all permits, licenses and approvals required for its business and
operations, or the financial condition, results of operations or prospects of
the respective businesses and operations of any of the Triad Entities. Except
as otherwise provided herein, Prime expressly assumes all risks attendant to the
ownership of the Kemper Triad Interests.
9. Remedies.
(a) In the event Prime fails to purchase the Kemper Triad Interests in
accordance with the terms and conditions of this Agreement for any reason
other than a default by Kemper, or in the event of any other material
default by PGI in any of its obligations under this Agreement, or in the
event PGI is in material breach of any of its representations and
warranties contained in this Agreement and such material default or
material breach is not cured within ten (10) Business Days after written
notice to PGI specifying such default or breach, Kemper shall have the
right, upon notice to PGI, to terminate this Agreement as Kemper's sole and
exclusive remedy, in addition to its retention of any Extension Payments
and rights granted under Sales Right Reconfirmation (defined below). In the
event of such
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 14
termination, neither Kemper nor Prime shall have any further obligations to
the other under this Agreement.
(b) In the event of a material default by Kemper in any of its
obligations under this Agreement or in the event Kemper is in material
breach of any of its representations and warranties contained in this
Agreement, and such material default or material breach is not cured within
ten (10) Business Days after written notice to Kemper specifying such
default or breach, Prime may terminate this Agreement, and receive the
prompt return of any and all Extension Payments made pursuant hereto, and
may pursue any and all other rights and remedies available to Prime at law
or in equity, including, but not limited to the right to seek specific
performance; provided, in no event, shall Kemper be liable for monetary
damages in excess of One Million and no/100 Dollars ($l,000,000.00). In no
event shall Kemper be liable for consequential damages, including damages
suffered by Prime on account of a delay or an abandonment of a public
offering of stock of an entity to which Prime expected to assign its rights
under this Agreement, even if such delay or abandonment is caused, in whole
or in part, by a default by Kemper under this Agreement.
(c) Prime hereby acknowledges that, under Section 6.2 of the Triad
Partnership Agreement, Realty has the right at any time to terminate for
cause or without cause the appointment of Prime of Tennessee, Inc. as
Managing General Partner (as such term is defined in the Triad Partnership
Agreement) of Triad. Realty hereby agrees not to exercise such right at any
time prior to the Outside Closing Date (as may be extended), and Prime
hereby acknowledges that Realty may exercise such right at any time after
the Outside Closing Date (as may be extended) in the event the Closing does
not occur on or prior to the Outside Closing Date (as may be extended).
Upon and in connection with the execution of this Agreement, Prime shall
cause PGI, Prime of Tennessee, Inc. and PGC Development, Ltd. to execute
and deliver the Fourth Amendment to Second Amended and Restated Agreement
of Limited Partnership of Triad (the "Fourth Amendment"), in the form
attached hereto as Exhibit J. The Fourth Amendment shall not be effective
unless the transactions contemplated by this Agreement do not occur on or
before the Outside Closing Date (as extended) for any reason other than a
material default by Kemper, and the
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 15
Fourth Amendment shall be held in accordance with the provisions of the
Sales Right Reconfirmation.
10. No Amendment or Waiver.
(a) Except as otherwise provided herein, this Agreement shall not
constitute, and shall not be interpreted to be, a modification or amendment
to, or waiver or release of, any of the terms of any document, instrument
or agreement now in effect between Kemper and Prime. Kemper and Prime shall
continue to perform in compliance with all terms and conditions of such
agreements as presently in force unless and until the same shall be
modified and amended by definitive documents. Except as otherwise provided
herein, this Agreement shall not (a) limit Kemper or Prime in initiating,
continuing or otherwise proceeding to exercise any right or remedy either
of them may have under any of such existing agreements, instruments or
other documents or (b) relieve Prime or Kemper of any obligation under any
loan, partnership or other documents and agreements between Prime and
Kemper. Without limitation of the foregoing, the obligation to obtain
Kemper's and Prime's approval of all "Major Decisions" under the
applicable partnership agreements of the Triad Entities shall remain in
force. Notwithstanding the foregoing, unless and until this Agreement has
terminated, Kemper shall not transfer to any third party any of the Kemper
Triad Interests or portion thereof, nor shall Kemper grant to any third
party any option or right to acquire any of the Kemper Triad Interests or
any portion thereof. If, during the term of this Agreement, Kemper receives
any written offer or any written expression of interest in, or any written
inquiry for, the purchase of any of the Kemper Triad Interests or in the
purchase of any of the Triad Entities or any project owned by any of the
Triad Entities, Kemper shall notify Prime of such offers or expressions of
interest or inquiries.
(b) Upon and in connection with the execution of this Agreement,
Prime shall cause Prime of Tennessee, Inc. (in its capacity as managing
general partner of Triad, the managing general partner of each Building
Partnership) and Parking Corp. (in its capacity as managing general partner
of Parking Ltd.) to execute and deliver that certain letter agreement (the
"Sales Right Reconfirmation"), with Realty and KILICO, substantially in the
form attached hereto as Exhibit I. Realty and KILICO hereby consent to and
approve the execution
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 16
on behalf of each Building Partnership and Parking Ltd. of the Sales Right
Reconfirmation. Upon and in connection with the execution of this
Agreement, Realty and KILICO shall execute and deliver the Sales Right
Reconfirmation, and PGI shall execute and deliver, and cause Prime of
Tennessee, Inc. and PGC Development, Ltd. to execute and deliver, the
consent to the Sales Right Reconfirmation.
11. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Illinois.
12. Notices. All notices and other communications permitted or required
hereunder between the parties shall be (a) in writing and shall be deemed to be
given and received (i) when delivered in person, (ii) one (1) Business Day after
sent by private courier guaranteeing next-day delivery, delivery charges
prepaid, (iii) three (3) Business Days after sent by United States registered or
certified mail, postage prepaid, return receipt requested ("Certified Mail") or
(iv) if sent by facsimile transmission, upon receipt by the sender of written
confirmation from the addressee's facsimile machine that the transmission has
been received, provided a "hard copy" of the notice or other communication is
sent by Certified Mail within one (1) Business Day after transmission, or (v) on
the date either party refuses delivery in person, by Certified Mail or by
private courier service, and, (b) in any case, addressed to the respective
parties at the following addresses:
If to Kemper, to:
c/o ZKS Real Estate Partners, LLC
225 W. Washington
Suite 1450
Chicago, Illinois 60606
Attention: Robert J. Korslin
Timothy A. Doman
Facsimile: (312) 236-1548/1549
with a copy to:
Zurich Kemper Life
c/o ZKS Real Estate Partners, LLC
22S W. Washington
Suite 1450
Chicago, Illinois 60606
Attention: Timothy R. Verrilli, Esq.
<PAGE>
Mr. Robert J . Korslin
July 18, 1997
Page 17
Facsimile: (312) 236-1548/1549
and to:
D'Ancona & Pflaum
30 North LaSalle Street
Suite 2900
Chicago, Illinois 60602
Attention: Laurance P. Nathan, Esq.
Facsimile: (312) 580-0923
If to Prime, to:
The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attention: Michael W. Reschke
Facsimile: (312) 917-1511
with a copy to:
The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attention: Robert J. Rudnik
Facsimile: (312) 917-1684
with a copy to:
The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attention: Jeffrey A. Patterson
Facsimile: (312) 782-5867
or to each such party at such other addresses as such party may designate in a
written notice to the other party.
13. Successors and Assigns. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns. It is expressly agreed that
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 18
Prime shall have the right to assign its rights and interests, or any portion of
such rights and interests, in and to this Agreement to any party, provided that
the assignee shall be subject to the terms and conditions of this Agreement, and
Prime shall not be relieved of its obligations under this Agreement.
14. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same agreement.
15. Entire Understanding. This Agreement sets forth the entire
understanding between the parties with respect to the subject matter hereof, and
the parties hereby represent that as of the date of this Agreement there are no
oral covenants, promises, agreements, conditions or understandings between them
relating to the transactions contemplated by this Agreement except as stated in
this Agreement. This Agreement may not be altered, amended, changed or modified,
except by a subsequent or contemporaneous agreement reduced to writing and
signed by all of the parties hereto. Time is of the essence of this Agreement.
16. Expenses and Legal Fees. Each party hereto shall be responsible for
the payment of any and all fees and other charges due any attorney, attorneys,
law firm or law firms, and any consultants, engineers and accountants retained
by such party in connection with the negotiation, delivery and performance by or
on behalf of such party of this Agreement or the transactions contemplated
hereby.
17. Waiver and Severability. No covenant, term or condition of this
Agreement shall be deemed to have been waived by either party, unless such
waiver is in writing signed by the party charged with such waiver. If any term,
covenant or condition of this Agreement or the application thereof to any
person, entity or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Agreement or the application of such term,
covenant or condition to persons, entities or circumstances other than those as
to which it is held invalid or unenforceable shall not be affected thereby, and
each term, covenant or condition of this Agreement shall be valid and be
enforced to the fullest extent permitted by law.
18. Further Assurances. Kemper and Prime each agree, that upon the
reasonable request of the other, that they will each
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 19
execute, acknowledge and deliver such further documents and instruments and
perform such further acts as may be reasonably necessary, desirable or proper to
carry out the transactions contemplated by this Agreement.
19. Business Day. The term "Business Day" shall mean any calendar day
other than Saturday, Sunday and any day on which banks in Chicago, Illinois are
authorized to close.
20. Prevailing Party. In the event any litigation is commenced with
respect to this Agreement, the party determined to be the prevailing party in
such litigation shall be entitled to collect reasonable attorneys' fees and
costs from the other party.
[signature page follows]
<PAGE>
Mr. Robert J. Korslin
July 18, 1997
Page 20
If the foregoing corresponds to Kemper's understanding of the terms of the
agreement between Kemper and Prime with respect to the matters addressed herein,
please so signify by having a duly authorized officer of Kemper execute the
enclosed copy of this letter and returning the executed copy of this letter to
the undersigned.
Very truly yours,
THE PRIME GROUP, INC.
By: /s/ Michael W. Reschke
-----------------------
Name: Michael W. Reschke
-----------------------
Title: President
-----------------------
ACCEPTED AND AGREED TO:
KILICO Realty Corporation
By: /s/ Robert Korslin
-----------------------
Name: Robert Korslin
-----------------------
Title: Vice President
-----------------------
Date: July 21, 1997
-----------------------
Kemper Investors Life Insurance Company
By: /s/ Robert Korslin
-----------------------
Name: Robert Korslin
-----------------------
Title: Authorized Signatory
-----------------------
Date: July 21, 1997
-----------------------
By: /s/ Frederick Stephens
-----------------------
Name: Frederick Stephens
-----------------------
Title: Authorized Signatory
-----------------------
Date: July 21, 1997
-----------------------
KFC Portfolio Corp.
By: /s/ Robert Korslin
-----------------------
Name: Robert Korslin
-----------------------
Title: Vice President
-----------------------
Date: July 21, 1997
-----------------------
<PAGE>
EXHIBIT A
---------
THE KEMPER TRIAD INTERESTS
--------------------------
1. 25% general partnership interest in Triad Development Company held by
KILICO Realty Corporation.
2. 25% limited partnership interest in Triad Development Company held by
Kemper Investors Life Insurance Company.
3. 500 shares of stock in Triad Parking Corporation, a Tennessee corporation,
owned by KILICO Realty Corporation.
4. The Promissory Note, dated as of December 26, 1996, issued by Triad Parking
Company, Ltd. payable to the order of Kemper Investors Life Insurance
Company ("KILICO") in the original principal amount of $290,000.00 (the
"Parking Unsecured Note") held by KILICO.
5. The Promissory Note, dated as of July 24, 1986, issued by Triad Development
Company payable to the order of Kemper Investors Life Insurance Company in
the original principal amount of $475,000.00, as assigned to KFC Portfolio
Corp. ("KFC") and as modified by that certain First Allonge to Promissory
Note, dated as of July 24, 1994, and by that certain Second Allonge to
Promissory Note, dated as of July 31, 1996, with respect to the land on
which the One Centre Square Building is situated, together with all
documents and instruments evidencing or securing the loan (the "One Centre
Square Land Loan") evidenced by such Promissory Note and all documentation
and collateral securing the One Centre Square Land Loan held by KFC.
6. The Promissory Note, dated as of July 24, 1986, by Triad Development Company
payable to the order of Kemper Investors Life Insurance Company in the
original principal amount of $665,000.00, as assigned to KFC and as modified
by that certain First Allonge to Promissory Note, dated as of July 24, 1994,
and by that certain Second Allonge to Promissory Note, dated as of July 31,
1996, with respect to the land on which the Two Centre Square Building is
situated, together with all documents and instruments evidencing or securing
the loan (the "Two Centre Square Land Loan"; the One Centre Square Land
Loan and the Two Centre Square Land Loan are referred to collectively as the
"Centre Square Land Loans") evidenced by such Promissory Note and all
documentation and collateral securing the Two Centre Square Land Loan held
by KFC.
<PAGE>
EXHIBIT B
---------
THE BUILDING PARTNERSHIPS
-------------------------
1. Professional Plaza, Ltd., a Tennessee limited partnership.
2. Centre Square II, Ltd., a Tennessee limited partnership.
3. Old Kingston Properties, Ltd., a Tennessee limited partnership.
4. Nashville Office Building I, Ltd., a Tennessee limited partnership.
<PAGE>
EXHIBIT C
---------
ASSIGNMENT AND ASSUMPTION OF PARTNERSHIP INTEREST
-------------------------------------------------
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are
hereby acknowledged, ________________________, a __________________ corporation
("Assignor"), does hereby sell, assign, transfer and convey to
_________________________, a _____________________corporation ("Assignee"), the
partnership interest held by Assignor consisting of a ______ percent (_______%)
percentage interest as a ____________________________ partner of ______________,
an Illinois ____________________ partnership (the "Interest"), standing in the
name of Assignor on the books and records of _______________________________, an
Illinois limited partnership (the "Partnership"), together with any and all
right, title and interest in any property, both real and personal, to which the
Interest relates, and any other rights, privileges and benefits appertaining
thereto including, without limitation, all of Assignor's right, title and
interest in and to the profits, losses, assets and distributions to which
Assignor is or may be entitled as a holder of the Interest.
This Assignment is made subject to all of the terms and conditions of
the partnership agreement of the Partnership, as amended (the "Agreement"), and
Assignee, by execution of this Assignment, agrees to hereafter abide by and to
be bound by all of the terms and provisions of the Agreement as now in effect or
hereafter amended, in the place and stead of Assignor. Assignee hereby (1)
accepts the assignment and transfer of the Interest and expressly assumes any
and all duties, obligations and liabilities with respect to or in connection
with the Interest (a) occurring or arising from and after the date of this
Assignment, and (b) relating to obligations or liabilities of the Partnership
with respect to deposits or fees paid by tenants for security or otherwise,
whether arising prior to or after the date of this Assignment, and (2) agrees to
indemnify and hold harmless Assignor and Assignor's officers, directors,
stockholders, employees and agents, and its and their respective heirs, legal
representatives, successors and assigns from and against any liability, demand,
claim or action arising from or relating to any and all duties, obligations and
liabilities so assumed.
Assignor hereby represents that it has full power and authority to
make this Assignment, that it has good and valid title to the Interest free and
clear of all liens, security interests and encumbrances and that the Interest
has not otherwise been conveyed, sold, transferred, assigned, pledged or
encumbered. Except as expressly set forth herein, this Assignment is made
without representation or warranty.
<PAGE>
IN WITNESS WHEREOF, Assignor and Assignee have executed this
Assignment, effective as of the __________ day of ____________________, 1997.
ASSIGNOR:
____________________________________________________________
______________________, a________________________corporation
By:_________________________________________________________
Its:________________________________________________________
ASSIGNEE:
___________________________________________________
______________, a ______________________________ corporation
By:
_________________________________________________________
Its:
_________________________________________________________
<PAGE>
EXHIBIT D
RELEASE AND COVENANT NOT TO SUE
THIS RELEASE AND COVENANT NOT TO SUE (this "Release") is made as of
the ___________ day of _____________, 1997, by the undersigned entities, Kilico
Realty Corporation, an Illinois corporation ("Realty"), KFC Portfolio Corp., a
Delaware corporation ("KFC"), and Kemper Investors Life Insurance Company, an
Illinois insurance corporation ("Kilico"), each for itself and on behalf of each
of its and their respective successors and assigns (collectively, the
"Releasors"), in favor of The Prime Group, Inc., an Illinois corporation
("Prime"), and all of its direct or indirect subsidiaries and affiliates
(including, without limitation, Prime Group Limited Partnership, an Illinois
limited partnership, Prime of Tennessee, Inc., an Illinois corporation, Triad
Development Company, an Illinois limited partnership, and the "Entities" defined
below), and each of its and their respective officers, directors, shareholders,
partners, employees and agents, in such capacities, and each of the respective
successors and assigns of the foregoing (collectively, the "Released Parties").
RECITALS:
A. Realty, KFC, Kilico and Prime entered into a letter agreement
dated March __, 1997 (the "Letter Agreement") providing for the sale and
purchase of the interests directly or indirectly owned by Realty, KFC and Kilico
in the projects (collectively, the "Projects") owned by any Triad Entity (as
such term is defined in the Letter Agreement).
B. The undersigned have agreed to execute and deliver this Release
upon the consummation of the transactions contemplated under the Letter
Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration given to the Releasors, the receipt and sufficiency
of which are hereby acknowledged, the Releasors hereby agree as follows:
I. Subject to the terms of Section 2, below, each of the Releasors
hereby releases and forever discharges each and every one of the Released
Parties from, and covenants and agrees not to sue and not to assert, file or
commence in any court, arbitration proceeding or other tribunal, any suit,
action, litigation, complaint, counterclaim, cross claim or other pleading
setting forth any cause of action or claim against any of the Released Parties
for, any of the following (individually, a "Released Claim," and collectively,
the "Released Claims"):
<PAGE>
any claim, demand, debt, sum of money, account, judgment, liability,
obligation, loss, damage, suit, action or cause of action of any kind
or nature whatsoever, known or unknown, fixed or contingent, at law or
in equity which any of the Releasors now has, claims to have, has had
or may have had, as of the date hereof, or may hereafter have or claim
to have under any obligations or agreements existing prior to or as of
the date hereof, against any one or more of the Released Parties, in
its or their capacities as a purchaser, owner, joint venturer,
partner, shareholder, director, option holder or other interest
holder, with respect to, or in any way arising from or in connection
with the Projects or the Triad Entities, or any of them.
II. Notwithstanding the express release and covenant not to sue set
forth in paragraph 1, above, the Released Claims shall not include, and this
Release shall not be construed as a release of any Released Party from any
obligations or liabilities such Released Party may have (a) under the Letter
Agreement, or any documents or agreements entered into by any such Released
Party pursuant to the Letter Agreement to the extent such obligations are to be
performed after the date hereof, (b) under any loan agreement, partnership,
joint venture or similar agreement, commitment or other agreement or document
which does not pertain to the Projects or the Triad Entities, or (c) under any
environmental or other indemnity or agreement, which obligation or liability by
its terms survives release of any applicable security documents in favor of any
Releasor.
III. Each of the Releasors severally represents and warrants to the
Released Parties that it has not encumbered or sold, transferred, assigned or
otherwise conveyed to any other person or entity (other than another Releasor),
in whole or in part, any Released Claims.
IV. Each of the Releasors hereby covenants and agrees not to assist
any third party in bringing any claim, cause of action or proceeding of any
nature against any of the Released Parties with respect to any matter relating
to any of the Projects, the Triad Entities or the Released Claims.
V. This Release shall be governed by and construed in accordance
with the internal laws of the State of Illinois.
VI. This Release may be executed in multiple counterparts, all of
which taken together shall constitute one and same instrument.
<PAGE>
VII. This Release pertains only to the Released Claims. No obligation,
liability or undertaking of any kind or nature whatsoever of any Released Party
in favor of any of the Releasors other than the Released Claims shall be deemed
released, terminated, canceled or in any other way modified or amended by this
Release.
VIII. The undersigned Releasors hereby severally represent and warrant
that no subsidiaries or affiliates of the undersigned have any claim, demand or
cause of action of any kind or nature whatsoever against any one or more of the
Released Parties with respect to or in any way arising from or in connection
with the Projects or the Triad Entities.
IX. The Releasors hereby acknowledge and confirm that any prior
release given in connection with any of the Projects or Triad Entities remains
in full force and effect in accordance with its terms, and in no event shall any
such prior release be deemed to be superseded, diminished or otherwise affected
by the execution of this Release.
X. The undersigned Releasors jointly and severally represent and
warrant that each Releasor has the power and authority to execute and deliver
this Release and the execution and delivery of this Release has been duly and
validly authorized by such Releasor.
[Signature Page to Follow]
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Release to be
duly executed and delivered by their respective duly authorized officers as of
the day and year first above written.
KEMPER INVESTORS LIFE INSURANCE
COMPANY
By:
--------------------------------
Its:
-------------------------------
By:
--------------------------------
Its:
-------------------------------
KILICO REALTY CORPORATION
By:
--------------------------------
Its:
-------------------------------
KFC Portfolio Corp.
By:
--------------------------------
Its:
-------------------------------
<PAGE>
EXHIBIT E
---------
RELEASE AND COVENANT NOT TO SUE
-------------------------------
THIS RELEASE AND COVENANT NOT TO SUE (this "Release") is made as of the
day of ________, 1997, by The Prime Group, Inc., an Illinois corporation
("Prime"), Prime of Tennessee, Inc., an Illinois corporation ("POT"), and Triad
Development Company, an Illinois limited partnership ("Triad"), for themselves
and on behalf of each of their respective successors and assigns in favor of
Kilico Realty Corporation, an Illinois corporation ("Realty"), KFC Portfolio
Corp., a Delaware corporation ("KFC") and Kemper Investors Life Insurance
Company, an Illinois insurance corporation ("Kilico"), and all of the direct or
indirect subsidiaries and affiliates of Realty, KFC and Kilico, and each of its
and their respective officers, directors, shareholders, partners, employees and
agents, in such capacities, and each of the respective successors and assigns of
the foregoing (collectively, the "Released Parties").
RECITALS:
--------
A. Realty, KFC, Kilico and Prime entered into a letter agreement
dated March , 1997 (the "Letter Agreement") providing for the sale and
purchase of the interests directly or indirectly owned by Realty, KFC and
Kilico in the projects (collectively, the "Projects") that are owned by any of
the Triad Entities (as such term is defined in the Letter Agreement).
B. Prime has agreed to execute and deliver this Release upon the
consummation of the transactions contemplated under the Letter Agreement.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration given to Prime, POT and Triad, the receipt and
sufficiency of which are hereby acknowledged, Prime, POT and Triad hereby agree
as follows:
I. Subject to the terms of Section 2, below, each of Prime, POT and
Triad hereby releases and forever discharges each and every one of the Released
Parties from, and covenants and agrees not to sue and not to assert, file or
commence in any court, arbitration proceeding or other tribunal, any suit,
action, litigation, complaint, counterclaim, cross claim or other pleading
setting forth any cause of action or claim against any of the Released Parties
for, any of the following (individually, a "Released Claim," and collectively,
the "Released Claims"):
any claim, demand, debt, sum of money, account, judgment, liability,
obligation, loss, damage, suit, action or cause of action of any kind
or
<PAGE>
nature whatsoever, known or unknown, fixed or contingent, at law or in
equity which Prime, POT or Triad now has, claims to have, has had or
may have had, as of the date hereof, or may hereafter have or claim to
have under any obligations or agreements existing prior to or as of
the date hereof, against any one or more of the Released Parties, in
its or their capacities as a lender, credit enhancer, purchaser,
owner, joint venturer, partner, shareholder, director, option holder
or other interest holder, with respect to, or in any way arising from
or in connection with the Projects or the Triad Entities, or any of
them, including without limitation (i) any lender liability or
recharacterization claim or any claim against a Released Party
alleging that such Released Party has taken actions in the nature of a
partner of the borrower or otherwise outside of its capacity as a
lender, or (ii) any claim asserting, or arising in connection with,
any funding obligations or commitments or any environmental
indemnity/liability sharing agreements.
II. Notwithstanding the express release and covenant not to sue set
forth in paragraph 1, above, the Released Claims shall not include, and this
Release shall not be construed as a release of any Released Party from any
obligations or liabilities such Released Party may have (a) under the Letter
Agreement, or any documents or agreements entered into by any such Released
Party pursuant to the Letter Agreement to the extent such obligations are to be
performed after the date hereof, or (b) under any loan agreement, partnership,
joint venture or similar agreement, commitment or other agreement or document
which does not pertain to the Projects or the Triad Entities.
III. Each of Prime, POT and Triad represents and warrants to the
Released Parties that it has not encumbered or sold, transferred, assigned or
otherwise conveyed to any other person or entity, in whole or in part, any
Released Claims.
IV. Each of Prime, POT and Triad hereby covenants and agrees not to
assist any third party in bringing any claim, cause of action or proceeding of
any nature against any of the Released Parties with respect to any matter
relating to any of the Projects, Triad Entities or the Released Claims.
V. This Release shall be governed by and construed in
accordance with the internal laws of the State of Illinois.
VI. This Release may be executed in multiple counterparts, all of
which taken together shall constitute one and same instrument.
<PAGE>
VII. This Release pertains only to the Released Claims. No
obligation, liability or undertaking of any kind or nature whatsoever of any
Released Party in favor of Prime other than the Released Claims shall be deemed
released, terminated, canceled or in any other way modified or amended by this
Release.
VIII. Each of Prime, POT and Triad hereby represents and warrants that
no subsidiaries or affiliates of Prime, POT or Triad have any claim, demand or
cause of action of any kind or nature whatsoever against any one or more of the
Released Parties with respect to or in any way arising from or in connection
with the Projects or the Triad Entities.
IX. Each of Prime, POT and Triad hereby acknowledges and confirms
that any prior release given in connection with any of the Projects or Triad
Entities remains in full force and effect in accordance with its terms, and in
no event shall any such prior release be deemed to be superseded, diminished or
otherwise affected by the execution of this Release.
X. Each of Prime, POT and Triad represents and warrants that it has
the power and authority to execute and deliver this Release and the execution
and delivery of this Release has been duly and validly authorized by Prime.
IN WITNESS WHEREOF, the undersigned have caused this Release to be
duly executed and delivered by its respective duly authorized officers as of the
day and year first above written.
THE PRIME GROUP, INC., an Illinois corporation
By: _____________________________________
Its:_____________________________________
PRIME OF TENNESSEE, INC., an Illinois corporation
By: _____________________________________
Its: _____________________________________
TRIAD DEVELOPMENT COMPANY
By: Prime of Tennessee, Inc.
Managing General Partner
By: _________________________________
Its: _________________________________
<PAGE>
EXHIBIT F
SCHEDULE OF LITIGATION
No material pending or threatened litigation.
<PAGE>
EXHIBIT G
THE BONDS
1. $9,000,000 The Industrial Development Board of the County of Knox, Tennessee
Floating Rate Monthly Demand Industrial Development Revenue Bonds
(Professional Plaza, Ltd. Project).
2. $9,000,000 The Industrial Development Board of the County of Knox, Tennessee
Floating Rate Monthly Demand Industrial Development Revenue Bonds (Centre
Square II, Ltd. Project).
3. $3,500,000 The Industrial Development Board of the County of Knox, Tennessee
Floating Rate Monthly Demand Industrial Development Revenue Bonds (Old
Kingston Properties, Ltd. Project).
4. $4,800,000 The Industrial Development Board of the Metropolitan Government
of Nashville and Davidson County Floating Rate Monthly Demand Industrial
Development Revenue Bonds (Nashville Office Building I, Ltd. Project).
<PAGE>
EXHIBIT H
---------
FINANCIAL STATEMENTS
--------------------
[OMITTED]
<PAGE>
EXHIBIT I
---------
SALES RIGHT RECONFIRMATION
--------------------------
See Attached.
<PAGE>
July 18, 1997
KILICO Realty Corporation, KFC Portfolio Corp.
and Kemper Investors Life Insurance Company
c/o ZKS Real Estate Partners, LLC
225 W. Washington
Suite 1450
Chicago, Illinois 60606
Re: Triad Development Company
Gentlemen:
Reference is made to that certain Letter Agreement dated June 12, 1995, as
amended and reaffirmed by Letter Agreement dated January 8, 1996 (the "Sale
Right Letter Agreement") among Professional Plaza Ltd., Centre Square II, Ltd.,
Old Kingston Properties, Ltd. and Nashville Office Building I, Ltd. (each a
Tennessee limited partnership and herein referred to individually as a "Project
Partnership" and collectively as the "Project Partnerships"), KILICO Realty
Corporation and Kemper Investors Life Insurance Company, pursuant to which each
Project Partnership grants to KILICO Realty Corporation the rights, among other
rights, to market, negotiate a contract for sale, and sell the "Projects"
(defined therein) owned by the Project Partnerships.
Contemporaneously herewith, you and The Prime Group, Inc. ("Prime") are
entering into an agreement of even date (the "Sale Agreement") pursuant to which
you agree to sell, and Prime agrees to purchase, the Kemper Triad Interests (as
defined in the Sale Agreement) on and subject to the terms and conditions set
forth therein. As an inducement to you to enter into the Sale Agreement, the
undersigned agree as follows:
1. The Sale Right Letter Agreement constitutes the valid and binding
obligation of the undersigned, enforceable against the undersigned in accordance
with its terms. As of the date hereof, the undersigned have no defenses to the
performance of any of the rights granted to you under the Sale Right Letter
Agreement or any claim against you which might become a defense against the
enforceability of the obligations of the undersigned under the Sale Right Letter
Agreement. The undersigned hereby agree that the "Effective Time" under the Sale
Right Letter Agreement is August 1, 1996 notwithstanding any assertions to the
contrary relating to that certain Prime Portfolio Letter Agreement dated June
12, 1995, as amended and restated.
2. Until the "Outside Closing Date" (as defined in, and as may be extended
under the provisions of the Sale Agreement) the rights granted to you under the
Sale Right Letter Agreement will be suspended and may not be enforced. However,
from and after the Outside Closing Date or upon earlier termination of the Sale
Agreement for any reason whatsoever (excepting only the concatenation of the
transactions thereunder), the rights granted to you under the Sale Right Letter
Agreement will be automatically reinstated and the Sale Right Letter Agreement
shall be fully enforceable against the undesigned. The Sale Right Letter
Agreement will automatically terminate upon the consummation of the
transactions contemplated by the Sale Agreement.
3. In the event the transactions contemplated under the Sale Agreement
have not been consummated on or before the Outside Closing Date, then from and
after the Outside Closing Date
<PAGE>
KILICO Realty Corporation and
Kemper Investors Life Insurance Company
July 18, 1997
Page 2
or the earlier termination of the Sale Agreement, the Sale Right Letter
Agreement shall automatically be deemed amended as follows: (a) Triad Parking
Company, Ltd., a Tennessee limited partnership ("Triad Parking") shall be added
as an additional "Project Partnership", and the commercial real estate project
owned and operated by Triad Parking and situated on the real estate legally
described in Exhibit "A" hereto, together with all improvements thereon and all
rights, easements and appurtenances thereunto belonging, shall be added as an
additional "Project"; and (b) Triad Parking hereby joins in the execution and
delivery of, and agrees to be bound by all of the provisions of, the Sale Right
Letter Agreement, as amended hereby, as applicable to it as a "Project
Partnership" and the "Project" owned and operated by it; provided, however, that
there are no outstanding "Bonds" (within the meaning of the Sale Right Letter
Agreement) and any gross proceeds realized by Triad Parking from any sale or
disposition of its Project after deducting and paying the existing first
mortgage balance, commissions, disposition fees, title insurance and survey
charges, legal expenses and other costs or expenses incurred in connection
therewith, shall be immediately applied at the closing of such transaction to
repayment of that certain Promissory Note dated as of December 26 1996, issued
by Triad Parking and payable to the order of Kemper Investors Life Insurance
Company in the original principal amount of $290,000, with the balance, if any,
distributed to the partners of Triad Parking in accordance with the terms of the
agreement of limited partnership of Triad Parking.
4. To effectuate the provisions hereof: (a) the undersigned Project
Partnerships are each executing and delivering herewith an irrevocable power of
attorney (undated) in favor of KILICO Realty Corporation authorizing it to
exercise, in the name of and on behalf of the undersigned, the rights granted
under the Sale Right Letter Agreement, as amended hereby; (b) the partners of
Triad Development Company are executing and delivering herewith a Fourth
Amendment to Second Amended and Restated Agreement of Limited Partnership of
Triad Development Company and a Certificate of Amendment to the Certificate of
Limited Partnership of Triad Development Company (both undated); and (c) PGC
Development, Ltd. is executing and delivering an Assignment Separate From
Certificate (undated) whereby it assigns and transfers 500 shares of stock in
Triad Parking Corporation, a Tennessee corporation representing 50% of the
issued and outstanding shares of capital stock of said corporation. Until the
reinstatement of the Sale Right Letter Agreement as provided in paragraph 2
above, KILICO Realty Corporation shall hold the documents and instruments
referred to in the preceding subparagraphs (a), (b) and (c), after which time it
may date and complete such documents and instruments and take any and all
actions authorized thereunder or required to effectuate the same. At the closing
of the transactions contemplated by the Sale Agreement, KILICO Realty
Corporation shall return to the appropriate party the documents and instruments
referred to in the preceding subparagraphs (a), (b) and (c), and the rights
granted to you under the Sale Right Letter Agreement shall automatically
terminate.
5. KILICO Realty Corporation shall have full power and authority to
exercise the rights granted under the Sale Right Letter Agreement with respect
to the Project owned by Triad Parking. notwithstanding any provisions requiring
a minimum sale or disposition price as set forth in a letter agreement dated
March 8, 1996 between you and Prime, which provisions are hereby terminated.
To confine your agreement to suspend the operation of the Sale Right Letter
Agreement as provided in Paragraph 2 above, to acknowledge the termination of
the Sale Right Letter Agreement
<PAGE>
KILICO Realty Corporation and
Kemper Investors Life Insurance Company
July 18, 1997
Page 3
upon the consummation of the transactions contemplated by the Sale Agreement and
hold the documents and instruments as provided in Paragraph 3 above, please sign
the enclosed copy of this letter and return it to the undersigned.
Sincerely,
PROFESSIONAL PLAZA, LTD., a Tennessee
limited partnership
By: TRIAD DEVELOPMENT COMPANY, an Illinois
limited partnership, its general partner
By: PRIME OF TENNESSEE, INC., an Illinois
limited partnership, its general partner
By:
------------------------------------
Its:
------------------------------------
CENTRE SQUARE II, LTD., a Tennessee limited
partnership
By: TRIAD DEVELOPMENT COMPANY, an Illinois
limited partnership, its general partner
By: PRIME OF TENNESSEE, INC., an
Illinois limited partnership, its
general partner
By:
--------------------------------
Its:
--------------------------------
OLD KINGSTON PROPERTIES, LTD., a Tennessee
limited partnership
By: TRIAD DEVELOPMENT COMPANY, an Illinois
limited partnership, its general partner
By: PRIME OF TENNESSEE, INC., an
Illinois limited partnership, its
managing general partner
By:
--------------------------------
Its:
-------------------------------
<PAGE>
KILICO Realty Corporation and
Kemper Investors Life Insurance Company
July 18, 1997
Page 4
NASHVILLE OFFICE BUILDING I, LTD., a
Tennessee limited partnership
By: TRIAD DEVELOPMENT COMPANY, an Illinois
limited partnership, its managing
general partner
By: PRIME OF TENNESSEE, INC., an
Illinois limited partnership, its
general partner
By:
--------------------------------
Its:
--------------------------------
TRIAD PARKING COMPANY, LTD., a Tennessee
limited partnership
By: TRIAD PARKING CORPORATION, its general
partner
By:
-------------------------------------
Its:
------------------------------------
CONFIRMED:
KILICO REALTY CORPORATION, an Illinois corporation
By:
---------------------------------------
Its:
--------------------------------------
KEMPER INVESTORS LIFE INSURANCE COMPANY, an Illinois insurance
corporation
By:
---------------------------------------
Its:
--------------------------------------
By:
---------------------------------------
Its:
--------------------------------------
KFC PORTFOLIO CORP., a Delaware corporation
By:
---------------------------------------
Its:
--------------------------------------
<PAGE>
KILICO Realty Corporation and
Kemper Investors Life Insurance Company
July 18, 1997
Page 5
CONSENT:
The Prime Group, Inc., PGC Development, Ltd. and Prime of Tennessee, Inc.,
individually and as Managing General Partner of Triad Development Company, the
general partner of Professional Plaza, Ltd., Centre Square II, Ltd., Old
Kingston Properties, Ltd. and Nashville Office Building I, Ltd., each hereby
consents to and agrees to be bound by the provisions of the foregoing letter.
THE PRIME GROUP, INC., an Illinois
corporation
By:
-----------------------------------------
Its:
-----------------------------------------
Date:
----------------------------------------
PRIME OF TENNESSEE, INC., an Illinois
corporation
By:
-----------------------------------------
Its:
-----------------------------------------
Date:
----------------------------------------
PGC DEVELOPMENT, LTD., an Illinois united
partnership
By: PGC, INC., a Delaware corporation, its
general partner
By:
--------------------------------------
Its:
--------------------------------------
<PAGE>
EXHIBIT J
---------
FOURTH AMENDMENT TO
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
TRIAD DEVELOPMENT COMPANY
See Attached.
<PAGE>
FOURTH AMENDMENT TO SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
TRIAD DEVELOPMENT COMPANY
THIS FOURTH AMENDMENT TO SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF TRIAD DEVELOPMENT COMPANY (this "Amendment") is made and entered
into as of the ______ day of _________, 199___, by and among Prime of Tennessee,
Inc., an Illinois corporation ("PTI"), KILICO Realty Corporation, an Illinois
corporation ("Realty"), The Prime Group, Inc., an Illinois corporation
("Prime"), Kemper Investors Life Insurance Company, an Illinois insurance
corporation ("KILICO"), and PGC Development, Ltd., an Illinois limited
partnership ("PGC Development") (collectively, the "Partners" and individually,
a "Partner").
R E C I T A L S:
A. Realty, KILICO and PGC Development entered into that certain Agreement
of Limited Partnership of Triad Development Company, dated March 26, 1986
("Original Agreement"), as amended by that certain First Amendment to Original
Agreement, dated as of June 18, 1986, that certain Second Amendment to Original
Agreement, dated January 14, 1988, that certain Third Amendment to Original
Agreement, dated April 6, 1989, that certain Fourth Amendment to Original
Agreement, dated January 22, 1990, and that certain Fifth Amendment to Original
Agreement, dated May 14, 1990, providing for, among other things, the formation
of the partnership known as Triad Development Company, an Illinois limited
partnership (the "Partnership"). The Partners entered into that certain Amended
and Restated Agreement of Limited Partnership of Triad Development Company,
dated December 11, 1990, as amended and restated by that certain Second Amended
and Restated Agreement of Limited Partnership of Triad Development Company,
dated April 15, 1991, effective as of December 27, 1990, as amended by that
certain First Amendment to Second Amended and Restated Agreement of Limited
Partnership of Triad Development Company, dated December 31, 1991 (the "First
Amendment"), by that certain Second Amendment to Second Amended and Restated
Agreement of Limited Partnership of Triad Development Company, dated March 22,
1994 (the "Second Amendment"), and by that certain Third Amendment to Second
Amended and Restated Agreement of Limited Partnership of Triad Development
Company entered into as of June 12, 1995, effective as of August 31, 1994 (the
"Third Amendment") (the Original Agreement as both amended and restated and
further amended by the First Amendment, Second Amendment and Third Amendment is
hereinafter referred to as the "Partnership Agreement"). Terms used herein and
not otherwise defined herein and which are defined in the Partnership Agreement
shall have the meaning given such terms in the Partnership Agreement.
B. The Partners desire to amend the Partnership Agreement to, among other
things, convert the interest of PTI from that of a General Partner to that of a
Limited Partner, and to modify the authority and powers of the General Partners
and Limited Partners on the terms hereinafter set forth.
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and other good and valuable consideration, the receipt and sufficiency of which
are herein acknowledged, the Partners hereby agree as follows:
1. Section 1.4 of the Partnership Agreement is hereby amended in its
entirety as follows:
"1.4 'Approved by the General Partners' or 'Approval of the General
Partners', or any other similar references in the Partnership
Agreement, means approved by the Managing General Partner."
2. Section 2.4 of the Partnership Agreement is hereby amended in its
entirety to read as follows:
"2.4 Principal Place of Business. The principal place of business
of the Partnership shall be c/o ZKS Real Estate Partners, LLC, 225
West Washington Street, Suite 1450, Chicago, Illinois 60606, or any
other location approved by the Managing General Partner."
3. Section 2.6(c) of the Partnership Agreement is hereby amended in its
entirety to read as follows:
"(c) The agent for service of process on the Partnership in the State
of Illinois shall be Timothy R. Verrilli, c/o ZKS Real Estate
Partners, LLC, 225 West Washington Street, Suite 1450, Chicago,
Illinois 60606, or any successor appointed by the Managing General
Partner."
4. Realty is hereby designated the sole General Partner of the
Partnership. PTI is hereby designated a Limited Partner of the Partnership and
shall no longer be deemed, or act as, a General Partner of the Partnership.
PTI's ownership interest in the Partnership, including its interest in capital,
Profits and Losses and rights to distribution, shall be an Interest as a Limited
Partner. For purposes of Sections 3.1 and 3.2 of the Partnership Agreement,
Exhibit "A" of the Partnership Agreement is hereby replaced by Exhibit "A-1"
attached to this Amendment, setting forth the names, addresses, Capital
Contributions and Percentage Interests of the General Partner and Limited
Partners, respectively.
5. Section 3.5 of the Partnership Agreement is hereby amended in its
entirety to read as follows:
"3.5 Additional Capital Contributions. The General Partner may make
additional Capital Contributions to the Partnership from time to time
in the exercise of its sole and absolute discretion."
2
<PAGE>
6. Sections 3.6, 3.7 and 3.8 of the Partnership Agreement are hereby
deleted.
7. Section 6.1 of the Partnership Agreement is hereby amended in its
entirety to read as follows:
"6.1 Management of Partnership. The exclusive management and control
of the business and affairs of the Partnership shall be vested in the
General Partner. PTI shall not have any power or authority to bind the
Partnership with respect to the conduct, business, or affairs of the
Partnership. Neither PTI nor any other Limited Partner shall have any
right to give or to withhold any approval or consent, or to participate
in any decision, or exercise any right, in each case with respect to
the business or affairs of the Partnership. Each Partner hereby waives
any and all claims such Partner may have against the Partnership or any
Partner for breach of fiduciary duty, or any other similar
responsibility or obligation whether or not relating to any agreement,
commitment, loan or extension of credit by or on behalf of a Partner or
an Affiliate of a Partner."
8. Section 6.2 of the Partnership Agreement is hereby amended in its
entirety to read as follows:
"6.2 Managing General Partner. Realty is hereby designated the
Managing General Partner with the full and complete authority,
discretion and power with respect to the conduct of the business and
the affairs of the Partnership in accordance with the terms of this
Agreement. Any actions performed by or obligations undertaken by the
Managing General Partner shall be binding on and enforceable against
the Partnership, whether or not any other Partner consents thereto or
concurs therewith. The Managing General Partner shall have the right
to designate another Person (including an Affiliate) as Managing Agent
of the Partnership ("Manager"). Any Manager so designated shall have
all the rights, duties and responsibilities of the Managing General
Partner under this Agreement. The Manager shall be entitled to receive
a reasonable fee for its services and be reimbursed reasonable out-of-
pocket expenses incurred in the performance of its duties hereunder,
any amounts so paid or reimbursed shall be an expense of the
Partnership."
9. All "Major Decisions" described in Section 6.3 of the Partnership
Agreement may be taken and implemented by the Managing General Partner in its
sole discretion without the approval or consent of any other Partner.
3
<PAGE>
10. Section 6.12 of the Partnership Agreement is hereby amended in its
entirety to read as follows:
"6.12 Voting Rights. The Limited Partners shall have no voting
rights whatsoever under this Agreement."
11. Article VII of the Partnership Agreement is hereby deleted in its
entirety.
12. Sections 9.2 and 12.16 of the Partnership Agreement are hereby deleted
in their entirety.
13. Section 10.1(d) of the Partnership Agreement is hereby amended by
adding the word "or" at the end of clause (iv), deleting "; or" at the end of
clause (v) and substituting a period and deleting all of clause (vi).
14. The Partnership shall have no liability or obligation for payment
of Administration Fees, and all references thereto in the Second Amendment and
Third Amendment are hereby deleted.
15. Except as expressly amended herein, the Partnership Agreement
shall remain in full force and effect, in accordance with its terms.
[Signature Page Follows]
4
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the
day and year first above written.
PRIME OF TENNESSEE, INC., an Illinois
corporation
By:
_______________________________________
Its:
_______________________________________
KILICO REALTY CORPORATION, an Illinois
corporation
By:
___________________________________________
Its:
__________________________________________
THE PRIME GROUP, INC., an Illinois corporation
By:
___________________________________________
Its:
___________________________________________
KEMPER INVESTORS LIFE INSURANCE
COMPANY, an Illinois insurance corporation
By:
___________________________________________
Its:
___________________________________________
By:
___________________________________________
Its:
___________________________________________
PGC DEVELOPMENT, LTD., an Illinois limited
partnership
By: PGC, INC., a Delaware corporation
its general partner
By:
_______________________________________
Its:
______________________________________
5
<PAGE>
Exhibit 10.28
AGREEMENT TO CONTRIBUTE
-----------------------
THIS AGREEMENT TO CONTRIBUTE ("Agreement") is entered into this 12th day of
August, 1997, by and between TUCKER B. MAGID, of Highland Park, Illinois
("Contributing Partner") and THE PRIME GROUP, INC., an Illinois corporation
("Prime").
RECITALS
A. The Contributing Partner is a partner in 1001 Technology Way, LLC,
MacArthur Drive Properties and CLE Limited Partnership (collectively, the
"Partnerships") and holds such partnership interests (the "Interests"), which
Interests give the Contributing Partner the percentage interests in each of the
Partnerships as set forth on Exhibit A attached hereto.
B. Prime has entered into that certain contribution agreement
(the "Contribution Agreement") dated July 8, 1997 pursuant to which the
"Contributor" (as such term is defined in the Contribution Agreement) will cause
each of the partners in the Partnerships (including the Contributing Partner)
and other partnerships to contribute Interests to the "Partnership" (as such
term is defined in the Contribution Agreement).
C. The Contributing Partner has received a copy of the Contribution
Agreement and desires to contribute its Interests and all of its right, title
and interest therein to the Partnership as provided in the Contribution
Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
respective representations, warranties, agreements, covenants and conditions
herein contained and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Contributing Partner and Prime
agree as follows:
1. All capitalized terms used herein but not otherwise defined herein
shall have the meanings set forth in the Contribution Agreement.
2. The Contributing Partner hereby agrees to execute and deliver the
Assignments of Partnership Interests for each of the Interests set forth on
Exhibit A, and to receive the percentage share of the OP Units received by the
Partnerships equal to the percentage set forth on Exhibit A, subject to the
conditions and terms contained in the Contribution Agreement, including but not
limited to all conditions precedent to the Contributor's obligations thereunder.
3. Prime agrees to cause the Partnership to accept the Assignments of
Partnership Interests for the Interests set forth on Exhibit A, and to otherwise
disburse OP Units to the Contributing Partner in accordance with the terms of
the Contribution Agreement or as otherwise instructed by the Contributor.
4. The Contributing Partner is not obligated for any of the
representations and warranties of the Contributor as set forth in the
Contribution Agreement or to fulfill any other terms,
<PAGE>
agreements or obligations therein. The Contributing Partner shall not be
obligated to contribute its Interests to the Partnership or to any other party
to whom Prime assigns its rights, unless the Contributors obligated to make the
contributions set forth in Article II of the Contribution Agreement.
5. Any notice, request, demand, instruction or other document to be given
or served hereunder or under any document or instrument executed pursuant hereto
shall be in writing and shall be delivered personally or sent by United States
registered or certified mail, return receipt requested, postage prepaid or by
overnight express courier, postage prepaid and addressed to the parties at their
respective addresses set forth below, and the same shall be effective upon
receipt if delivered personally, on the next business day if delivered by
overnight courier or two business days after deposit in the mail if mailed by
certified or registered mail. A party may change its address for receipt of
notices by service of a notice of such change in accordance herewith.
If to the Company: The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: Jeffrey A. Patterson
With a copy to: The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: Robert J. Rudnik
With a copy to: Winston & Strawn
35 West Wacker Drive
Suite 4200
Chicago, Illinois 60601
Attn: Wayne D. Boberg and William J. Ralph
If to Contributing
Partner: Tucker B. Magid
Industrial Building and Development Company
3184 MacArthur Blvd.
Northbrook, Illinois 60062
With a copy to: Shefsky & Froelich Ltd.
444 North Michigan Avenue
Suite 2500
Chicago, Illinois 60611
Attn: James M. Teper
-2-
<PAGE>
6. This Agreement and the Exhibits attached hereto contain the entire
agreement and understanding of the parties in respect to the subject matter
hereof, and the same may not be amended, modified or discharged nor may any of
its terms be waived except by an instrument in writing signed by the party to be
bound thereby.
7. The parties hereto agree to do, execute, acknowledge and deliver all
such further acts, instruments and assurances and to take all such further
action before or after the closing at no cost to Contributing Partner as shall
be necessary or desirable to fully carry out this Agreement and to fully
consummate and effect the transactions contemplated hereby.
8. This Agreement and any document or instrument executed pursuant hereby
may be executed in any number of counterparts each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
9. This Agreement shall be governed by and construed in accordance with
the laws of the State of Illinois.
10. Time is of the essence of this Agreement.
IN WITNESS WHEREOF, this Agreement to Contribute has been executed and
delivered by the Contributing Partner and Prime on the respective dates set
forth below and is intended effective as of the latest of such dates.
CONTRIBUTING PARTNER:
Dated: August 12, 1997 /s/ Tucker B. Magid
--------------------------------------------
Tucker B. Magid
PRIME:
-----
THE PRIME GROUP, INC., an Illinois corporation
Dated: August 12, 1997 By:/s/ Richard E. Curto
--------------------------------------------
Richard E. Curto, Executive Vice President
-3-
<PAGE>
EXHIBIT A
---------
PARTNERSHIP INTERESTS
PERCENTAGE
PARTNERSHIPS PROPERTIES INTEREST
------------ ---------- --------
1001 Technology Way, 1001 Technology Way 10%
LLC, an Illinois limited
liability company
MacArthur Drive 1301 Ridgeview 10%
Properties, an Illinois
limited partnership
CLE Limited Partnership, 1301 Ridgeview 10%
an Illinois limited
partnership
A-1
<PAGE>
Exhibit 10.29
AGREEMENT TO CONTRIBUTE
-----------------------
THIS AGREEMENT TO CONTRIBUTE ("Agreement") is entered into this 12th day of
August, 1997, by and between FRANCES S. SHUBERT, of Waukegan, Illinois
("Contributing Partner") and THE PRIME GROUP, INC., an Illinois corporation
("Prime").
RECITALS
A. The Contributing Partner is a partner in The Grandville Road Property
Limited Partnership (collectively, the "Partnerships") and holds such
partnership interests (the "Interests"), which Interests give the Contributing
Partner the percentage interests in each of the Partnerships as set forth on
Exhibit A attached hereto.
B. Prime has entered into that certain contribution agreement (the
"Contribution Agreement") dated July 8, 1997 pursuant to which the "Contributor"
(as such term is defined in the Contribution Agreement) will cause each of the
partners in the Partnerships (including the Contributing Partner) and other
partnerships to contribute Interests to the "Partnership" (as such term is
defined in the Contribution Agreement).
C. The Contributing Partner has received a copy of the Contribution
Agreement and desires to contribute its Interests and all of its right, title
and interest therein to the Partnership as provided in the Contribution
Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
respective representations, warranties, agreements, covenants and conditions
herein contained and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Contributing Partner and Prime
agree as follows:
1. All capitalized terms used herein but not otherwise defined herein
shall have the meanings set forth in the Contribution Agreement.
2. The Contributing Partner hereby agrees to execute and deliver the
Assignments of Partnership Interests for each of the Interests set forth in
Exhibit A, and to receive the percentage share of the OP Units received by the
Partnerships equal to the percentage set forth on Exhibit A, subject to the
conditions and terms contained in the Contribution Agreement, including but not
limited to all conditions precedent to the Contributor's obligations thereunder.
3. Prime agrees to cause the Partnership to accept the Assignments of
Partnership Interests for the Interests set forth on Exhibit A, and to otherwise
disburse OP Units to the Contributing Partner in accordance with the terms of
the Contribution Agreement or as otherwise instructed by the Contributor.
4. The Contributing Partner is not obligated for any of the representations
and warranties of the Contributor as set forth in the Contribution Agreement or
to fulfill any other terms,
<PAGE>
agreements or obligations therein. The Contributing Partner shall not be
obligated to contribute its Interests to the Partnership or to any other party
to whom Prime assigns its rights, unless the Contributors obligated to make the
contribution set forth in Article II of the Contribution Agreement.
5. Any notice, request, demand, instruction or other document to be given
or served hereunder or under any document or instrument executed pursuant hereto
shall be in writing and shall be delivered personally or sent by United States
registered or certified mail, return receipt requested, postage prepaid or by
overnight express courier, postage prepaid and addressed to the parties at their
respective addresses set forth below, and the same shall be effective upon
receipt if delivered personally, on the next business day if delivered by
overnight courier or two business days after deposit in the mail if mailed by
certified or registered mail. A party may change its address for receipt of
notices by service of a notice of such change in accordance herewith.
If to the Company: The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: Jeffrey A. Patterson
With a copy to: The Prime Group, Inc.
77 West Wacker Drive
Suite 3900
Chicago, Illinois 60601
Attn: Robert J. Rudnik
With a copy to: Winston & Strawn
35 West Wacker Drive
Suite 4200
Chicago, Illinois 60601
Attn: Wayne D. Boberg and William J. Ralph
If to Contributing
Partner: Frances S. Shubert
Industrial Building and Development Company
3184 MacArthur Blvd.
Northbrook, Illinois 60062
With a copy to: Shefsky & Froelich Ltd.
444 North Michigan Avenue
Suite 2500
Chicago, Illinois 60611
Attn: James M. Teper
-2-
<PAGE>
6. This Agreement and the Exhibits attached hereto contain the entire
agreement and understanding of the parties in respect to the subject matter
hereof, and the same may not be amended, modified or discharged nor may any of
its terms be waived except by an instrument in writing signed by the party to be
bound thereby.
7. The parties hereto agree to do, execute, acknowledge and deliver all
such further acts, instruments and assurances and to take all such further
action before or after the closing at no cost to Contributing Partner as shall
be necessary or desirable to fully carry out this Agreement and to fully
consummate and effect the transactions contemplated hereby.
8. This Agreement and any document or instrument executed pursuant hereby
may be executed in any number of counterparts each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
9. This Agreement shall be governed by and construed in accordance with
the laws of the State of Illinois.
10. Time is of the essence of this Agreement.
IN WITNESS WHEREOF, this Agreement to Contribute has been executed and
delivered by the Contributing Partner and Prime on the respective dates set
forth below and is intended effective as of the latest of such dates.
CONTRIBUTING PARTNER:
---------------------
Dated: August 12, 1997 /s/ Frances S. Shubert
----------------------------
Frances S. Shubert
PRIME
-----
THE PRIME GROUP, INC., an Illinois
corporation
Dated: August 12, 1997 By: /s/ Richard E. Curto
--------------------------
Richard E. Curto, Executive Vice
President
-3-
<PAGE>
EXHIBIT A
---------
PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
PERCENTAGE
PARTNERSHIP PROPERTY INTEREST
----------- -------- --------
<S> <C> <C>
1001 Technology Way, 3818 Grandville Road/ 21.24%
LLC, an Illinois limited 1200 Northwestern Avenue
liability company
</TABLE>
A-1
<PAGE>
Exhibit 12.1
Earnings to Fixed Charges
Prime Group Realty Trust
Ratio of Funds From Operations to Combined Fixed Charges and Preferred Share
Dividends and Excess (Deficit) of Funds From Operations to Combined Fixed
Charges and Preferred Share Dividends
(in $000)
<TABLE>
<CAPTION>
Historical (1)
Six Months Ended June 30, Year Ended December 31,
1997 1996 1996 1995 1994 1993 1992
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Funds From Operations $ (8,180) $ (8,891) $ (17,367) $ (12,733) $ (12,930) $ (9,345) $ (7,150)
Interest expense 19,236 18,364 37,217 36,234 33,387 29,162 17,635
Amortization of debt
issuance costs 298 298 594 1,148 714 859 882
--------------------------------------------------------------------------------------
Adjusted Funds From
Operations $ 11,354 $ 9,771 $ 20,444 $ 24,649 $ 21,171 $ 20,676 $ 11,367
======================================================================================
Fixed Charges
- -------------
Interest expense $ 19,236 $ 18,364 $ 37,217 $ 36,234 $ 33,387 $ 29,162 $ 17,635
Capital interest expense - - - - - - 4,844
Amortization of debt
issuance costs 298 298 594 1,148 714 859 882
Preferred share dividend - - - - - - -
--------------------------------------------------------------------------------------
Total fixed charges $ 19,534 $ 18,662 $ 37,811 $ 37,382 $ 34,101 $ 30,021 $ 23,361
======================================================================================
Ratio of Funds From
Operations to Combined
Fixed Charges and
Preferred Share Dividend 0.58 0.52 0.54 0.66 0.62 0.69 0.49
======================================================================================
Excess (deficit) of Funds
From Operations to Combined
Fixed Charges and Preferred
Share Dividends $ (8,180) $ (8,891) $ (17,367) $ (12,733) $ (12,930) $ (9,345) $(11,994)
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
Pro Forma (2)
Six Months Year Ended
Ended June 30, December 31,
1997 1996
------------------------------
<S> <C> <C>
Funds From Operations $ 15,647 $ 28,086
Interest expense 4,709 9,291
Amortization of debt issuance costs 244 487
------------------------------
Adjusted Funds From Operations $ 20,600 $ 37,864
==============================
Fixed Charges
- -------------
Interest expense $ 4,709 $ 9,291
Capital interest expense - -
Amortization of debt issuance costs 244 487
Preferred share dividend 1,400 2,800
------------------------------
Total fixed charges $ 6,353 $ 12,578
==============================
Ratio of Funds From Operations to Combined
Fixed Charges and Preferred Share Dividend 3.24 3.01
==============================
Excess (deficit) of Funds From Operations to Combined
Fixed Charges and Preferred Share Dividends $ 14,247 $ 25,286
==============================
</TABLE>
(1) Represents the combined historical operations of the Prime Properties for
the periods noted.
(2) Represents the combined pro forma operations of Prime Group Realty Trust
for the periods noted.
<PAGE>
<TABLE>
<CAPTION>
Earnings to Fixed Charges
Prime Group Realty Trust
Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends and
Excess(Deficit) of Earnings to Combined Fixed Charges and Preferred Share Dividends
(in $000)
Historical (1)
Six Months Ended June 30, Year Ended December 31,
1997 1996 1996 1995 1994 1993 1992
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
- --------
Income(loss) before preferred share
dividend and minority interest
per the combined financial statements $(17,579) $(14,151) $(31,417) $(29,576) $(22,062) $(20,829) $(14,708)
Interest expense 19,236 18,364 37,217 36,234 33,387 29,162 17,635
Amortization of debt issuance costs 298 298 594 1,148 714 859 882
----------------------------------------------------------------------------------------
Earnings $ 1,955 $ 4,511 $ 6,394 $ 7,806 $ 12,039 $ 9,192 $ 3,809
========================================================================================
Fixed Charges
- -------------
Interest expense $ 19,236 $ 18,364 $ 37,217 $ 36,234 $ 33,387 $ 29,162 $ 17,635
Capital interest expense - - - - - - 4,844
Amortization of debt issuance costs 298 298 594 1,148 714 859 882
Preferred share dividend - - - - - - -
----------------------------------------------------------------------------------------
Total fixed charges $ 19,534 $ 18,662 $ 37,811 $ 37,382 $ 34,101 $ 30,021 $ 23,361
========================================================================================
Ratio of Earnings to Combined Fixed
Charges and Preferred Share Dividend 0.10 0.24 0.17 0.21 0.35 0.31 0.16
========================================================================================
Excess(deficit) of Earnings to
Combined Fixed Charges and Preferred
Share Dividend $(17,579) $(14,151) $(31,417) $(29,576) $(22,062) $(20,829) $(19,552)
========================================================================================
Pro Forma (2)
Six Months Year Ended
Ended June 30, December 31,
1997 1996
--------------------------
Earnings
- --------
Income(loss) before preferred share
dividend and minority interest
per the combined financial statements $ 5,183 $ 11,594
Interest expense 4,709 9,291
Amortization of debt issuance costs 244 487
--------------------------
Earnings $ 10,136 $ 21,372
==========================
Fixed Charges
- -------------
Interest expense $ 4,709 $ 9,291
Capital interest expense - -
Amortization of debt issuance costs 244 487
Preferred share dividend 1,400 2,800
--------------------------
Total fixed charges $ 6,353 $ 12,578
==========================
Ratio of Earnings to Combined Fixed
Charges and Preferred Share Dividend 1.60 1.70
==========================
Excess(deficit) of Earnings to
Combined Fixed Charges and Preferred
Share Dividend $ 3,783 $ 8,794
==========================
(1) Represents the combined historical operations of the Prime Properties for the periods noted.
(2) Represents the combined pro forma operations of Prime Group Realty Trust for the periods noted.
</TABLE>
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated July 21, 1997 with respect to the balance sheet of
Prime Group Realty Trust, dated August 20, 1997 with respect to the combined
financial statements of the Prime Properties, the combined statements of revenue
and certain expenses of Prime Industrial Contribution Properties, the combined
statements of revenue and certain expenses of IBD Properties, the statements
of revenue and certain expenses of Citibank Office Plaza, and the combined
statements of revenue and certain expenses of Salt Creek Office Center and dated
October 10, 1997 with respect to the combined statements of revenue and certain
expenses of NAC Properties, the statements of revenue and certain expenses of
280 Schuman Boulevard and the statements of revenue and certain expenses of 475
Superior Avenue in Amendment No. 2 to the Registration Statement (Form S-11) and
related Prospectus of Prime Group Realty Trust for the registration of 2,105,000
its convertible preferred shares of beneficial interest and 14,237,000 of its
common shares of beneficial interest.
ERNST & YOUNG LLP
Chicago, Illinois
October 22, 1997
<PAGE>
[RCG LETTERHEAD GOES HERE] Exhibit 23.4
CONSENT OF ROSEN CONSULTING GROUP
To Prime Group Realty Trust:
In connection with Prime Group Realty Trust's initial public offering
of its Common Shares of beneficial interest, we hereby consent (i) to the use of
our report, Economic, Office and Industrial Market Trends in Chicago, Nashville,
Knoxville and Columbus, dated October 9, 1997, (the "Report"), in this
Registration Statement on Form S-11 (this "Registration Statement"), (ii) to all
references to our firm and the Report included in or made a part of this
Registration Statement, (iii) to the reference to our firm as experts in the
section under the caption "Experts" in the Registration Statement and (iv) to
the filing of the Report with the United States Securities and Exchange
Commission as an exhibit to the Registration Statement.
Sincerely,
ROSEN CONSULTING GROUP
/s/ Kenneth T. Rosen
----------------------------
By: Kenneth T. Rosen
Its: President
Berkeley, California
October 13, 1997
<PAGE>
Exhibit 23.5.1
CONSENT TO BE NAMED AS A TRUSTEE OR EXECUTIVE OFFICER
Do you consent to being named as trustee or executive officer in the
Registration Statement to be filed with the Securities and Exchange Commission
on behalf of Prime Group Realty Trust?
YES X NO
---------- ----------
/s/ James R. Thompson
- ----------------------
Signature
James R. Thompson
- ----------------------
Name
Dated: Aug. 12, 1997
----------------
<PAGE>
Exhibit 23.5.2
CONSENT TO BE NAMED AS A TRUSTEE OR EXECUTIVE OFFICER
Do you consent to being named as trustee or executive officer in the
Registration Statement to be filed with the Securities and Exchange Commission
on behalf of Prime Group Realty Trust?
YES X NO
---------- ----------
/s/ Christopher J. Nassetta
- ----------------------------
Signature
Christopher J. Nassetta
- ----------------------------
Name
Dated: October 2, 1997
----------------------
<PAGE>
Exhibit 23.5.3
CONSENT TO BE NAMED AS A TRUSTEE OR EXECUTIVE OFFICER
Do you consent to being named as trustee or executive officer in the
Registration Statement to be filed with the Securities and Exchange Commission
on behalf of Prime Group Realty Trust?
YES X NO
---------- ----------
/s/ Jacque Ducharme
- ----------------------------
Signature
Jacque Ducharme
- ----------------------------
Name
Dated: July 21, 1997
----------------------
<PAGE>
Exhibit 23.5.4
CONSENT TO BE NAMED AS A TRUSTEE OR EXECUTIVE OFFICER
Do you consent to being named as trustee or executive officer in the
Registration Statement to be filed with the Securities and Exchange Commission
on behalf of Prime Group Realty Trust?
YES X NO
---------- ----------
/s/ Stephen J. Nardi
- ---------------------------
Signature
Stephen J. Nardi
- ---------------------------
Name
Dated: October __, 1997
---------------------
<PAGE>
Exhibit 23.5.5
CONSENT TO BE NAMED AS A TRUSTEE OR EXECUTIVE OFFICER
Do you consent to being named as trustee or executive officer in the
Registration Statement to be filed with the Securities and Exchange Commission
on behalf of Prime Group Realty Trust?
YES X NO
---------- ----------
/s/ Thomas J. Saylak
- ----------------------------
Signature
Thomas J. Saylak
- ----------------------------
Name
Dated: October 22, 1997
----------------------
<PAGE>
- --------------------------------------------------------------------------------
Chicago Metropolitan Economy
- --------------------------------------------------------------------------------
Overview
Chicago is the nation's largest and one of its fastest-growing economies. The
Chicago metropolitan area has an economic base of 3,997,400 jobs as of April of
1997, which ranks it as the largest metropolitan economy nationwide. In four out
of seven major employment sectors (manufacturing; trade; transportation,
communications and public utilities; and construction), Chicago has the largest
number of employees of any other metropolitan area nationwide. Because of its
large size, Chicago has been one of the fastest-growing metropolitan areas
nationwide in absolute terms. During the last five years, from April of 1992
through April of 1997, Chicago ranked second nationwide in terms of total jobs
added. The Chicago metropolitan economy grew by 389,400 jobs over the last five
years compared to the first-ranked Atlanta, which added 407,300 jobs and the
third-ranked, Phoenix, which added 354,800 new jobs over the same period (see
Exhibits 1.1 and 1.2 below).
- --------------------------------------------------------------------------------
Exhibits 1.1 and 1.2.
- --------------------------------------------------------------------------------
Total Employment as of April 1997
Top Five MSAs
[CHART APPEARS HERE]
Fastest Growing MSAs, 4/92 to 4/97
in Absolute Terms (000 jobs)
[CHART APPEARS HERE]
Rosen Consulting Group 1
<PAGE>
Recent Economic Trends
Chicago's economy is highly diversified. Traditionally strong industries such as
manufacturing and transportation continue to be vibrant sectors of the economy,
and, increasingly, knowledge-based industries are growing at a rapid pace. The
dynamic growth of knowledge-based industries is evident in the strong growth in
subsectors within the services and finance, insurance and real estate (FIRE)
industries. During the year ended in April, the services sector, which has grown
from 25.1% of the total employment base in 1987 to 31.1% in 1997, grew at a
robust rate of 3.2% compared to 3.4% nationally (see Exhibit 1.3). Growth was
particularly strong in the following knowledge-based services employment
subsectors: educational services (5.6%); engineering and management (5.3%); and,
business services (4.6%). Tourism-related services also enjoyed strong growth,
with employment in amusement and recreation up 5.2% and hotel employment up 3.7%
(see Exhibit 1.4). The recent $675 million expansion of McCormick Place
Convention Center will boost visitor volume and, thus, tourism-related services,
in Chicago. In addition, Chicago has a large legal services industry. Twelve of
the one hundred largest law firms are based in Chicago, a concentration which is
second only to New York. In addition, seven more of the top one hundred law
firms have offices in Chicago.
- --------------------------------------------------------------------------------
Exhibit 1.3.
- --------------------------------------------------------------------------------
Chicago's Changing Economic Base
[CHART APPEARS HERE]
Total employment by sector, 1987 vs 1997
Chicago, MSA
<TABLE>
<CAPTION>
Total Mining Con. Trade Man. TCPU FIRE Services Gov. Total
----- ------ ---- ----- ---- ---- ---- -------- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1987 3467.4 2.4 145.4 877.0 654.6 210.2 274.2 872.0 431.6 3467.4
% of total 100.0% 0.1% 4.2% 25.3% 18.9% 6.1% 7.9% 25.1% 12.4% 1
1997 4,018.9 1.6 153.9 907.2 662.7 252.4 304.4 1,249.5 487.2 4018.9
% of total 100.0% 0.0% 3.8% 22.6% 16.5% 6.3% 7.6% 31.1% 12.1% 1
</TABLE>
Rosen Consulting Group 2
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Exhibit 1.4
Nonagricultural Payroll Employment by Sector
Chicago, IL MSA
1992 1993 1994 1995 1996 Apr-97
---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Total Nonagricultural Employment 3,648.6 3,724.9 3,810.2 3,908.5 3,969.7 3,997.4
% Change -0.1% 2.1% 2.3% 2.6% 1.6% 1.7%
Construction 134.9 138.3 139.4 147.6 152.8 149.3
% Change -6.9% 2.5% 0.8% 5.9% 3.5% 0.5%
Manufacturing 628.2 637.5 649.4 653.6 656.4 660.5
% Change -1.9% 1.5% 1.9% 0.6% 0.4% 1.6%
Durable Goods 348.1 354.9 366.6 372.5 375.8 379.3
% Change 17.8% 2.0% 3.3% 1.6% 0.9% 2.0%
Fabricated Metal Products 69.4 71.1 73.6 75.3 75.1 75.9
% Change 14.7% 2.4% 3.5% 2.3% -0.3% 1.6%
Industrial Machinery & Equipment 72.6 76.1 79.1 82.8 87.0 88.5
% Change 28.0% 4.8% 3.9% 4.7% 5.1% 3.1%
Metal Working Machinery 21.5 22.3 22.6 22.3 22.4 22.6
% Change 4.4% 3.7% 1.3% -1.3% 0.4% 1.8%
Electrical & Other Elec. Equipment 84.0 86.2 92.9 97.3 96.8 97.9
% Change 11.7% 2.6% 7.8% 4.7% -0.5% 3.3%
Electrical Components & Accessories 20.5 22.0 23.4 24.8 24.7 24.8
% Change 21.3% 7.3% 6.4% 6.0% -0.4% 2.1%
Nondurable Goods 280.1 282.6 282.7 281.1 280.6 281.2
% Change 21.2% 0.9% 0.0% -0.6% -0.2% 0.9%
Paper & Allied Products 24.7 24.5 25.8 27.4 27.0 27.0
% Change 17.1% -0.8% 5.3% 6.2% -1.5% 0.0%
Paperboard Containers 14.1 14.1 15.4 16.8 15.9 16.0
% Change 11.0% 0.0% 9.2% 9.1% -5.4% 0.6%
Printing and Publishing 78.9 79.9 79.2 77.0 76.5 76.6
% Change 7.9% 1.3% -0.9% -2.8% -0.6% 0.9%
Commercial Printing 28.0 28.5 28.3 28.0 28.1 28.2
% Change 8.5% 1.8% -0.7% -1.1% 0.4% 0.4%
Chemical & Allied Products 54.1 53.3 51.4 50.9 51.3 51.7
% Change 63.0% -1.5% -3.6% -1.0% 0.8% 1.6%
Rubber & Misc. Plastic Products 40.7 42.3 44.0 44.2 43.6 43.7
% Change 33.9% 3.9% 4.0% 0.5% -1.4% 0.2%
Misc. Plastic Products 32.8 34.5 36.2 36.2 35.6 35.7
% Change 43.2% 5.2% 4.9% 0.0% -1.7% 0.0%
Transportation, Communications, & P.U. 221.8 226.0 233.6 236.5 244.3 250.2
% Change -0.5% 1.9% 3.4% 1.2% 3.3% 3.2%
Railroad Transportation 12.5 12.5 12.5 12.9 13.7 13.6
% Change 2.5% 0.0% 0.0% 3.2% 6.2% -0.7%
Trucking & Warehousing* 54.3 58.3 64.8 68.2 48.5 54.4
% Change 9.0% 7.4% 11.1% 5.2% -28.9% 7.1%
Transportation by Air* 42.5 43.8 43.9 42.8 57.3 64.0
% Change -4.5% 3.1% 0.2% -2.5% 33.9% 0.9%
Transportation Services 21.0 21.8 23.8 24.4 26.3 27.4
% Change 13.5% 3.8% 9.2% 2.5% 7.8% 5.0%
</TABLE>
* Note: Approximately 15,000 to 20,000 UPS and Fedex jobs were redefined as
transportation by air jobs, resulting in a large increase in that category at
the expense of trucking and warehousing.
Source: Bureau of Labor Statistics
- --------------------------------------------------------------------------------
Rosen Consulting Group 3
<PAGE>
- --------------------------------------------------------------------------------
Exhibit 1.4 (Cont'd)
Nonagricultural Payroll Employment by Sector
Chicago, IL MSA
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 Apr-97
---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Trade 858.8 873.4 892.4 913.5 906.0 895.6
% Change -2.1% 1.7% 2.2% 2.4% -0.8% 1.1%
Wholesale Trade 264.2 262.9 263.8 267.8 262.4 256.7
% Change -4.0% -0.5% 0.3% 1.5% -2.0% -1.4%
Retail Trade 594.6 610.5 628.6 645.7 643.6 638.9
% Change -1.3% 2.7% 3.0% 2.7% -0.3% 2.1%
Finance, Insurance, & Real Estate 294.8 300.9 303.8 300.7 301.1 303.7
% Change -0.1% 2.1% 1.0% -1.0% 0.1% 1.1%
Depository Institutions 82.5 83.5 83.0 81.3 78.8 78.5
% Change 9.6% 1.2% -0.6% -2.0% -3.1% -0.6%
Commercial Banks 57.1 57.9 57.7 57.2 55.9 55.6
% Change 11.3% 1.4% -0.3% -0.9% -2.3% -0.7%
Nondepository Institutions 19.9 22.8 24.5 23.9 25.4 26.6
% Change 40.1% 14.6% 7.5% -2.4% 6.3% 5.6%
Security & Commodity Brokers 32.6 33.6 35.2 36.2 36.5 37.2
% Change 5.8% 3.1% 4.8% 2.8% 0.8% 2.8%
Security Brokers & Dealers 15.2 16.0 16.9 17.5 17.5 17.9
% Change 7.0% 5.3% 5.6% 3.6% 0.0% 3.5%
Insurance Carriers 76.8 76.9 76.4 75.3 77.2 78.2
% Change 14.8% 0.1% -0.7% -1.4% 2.5% 1.3%
Fire, Marine, and Casualty Insurance 32.2 31.6 31.2 31.7 32.7 32.9
% Change 15.0% -1.9% -1.3% 1.6% 3.2% -0.3%
Real Estate 44.7 45.7 46.4 45.3 44.9 45.0
% Change 8.8% 2.2% 1.5% -2.4% -0.9% 2.3%
Services 1,045.6 1,081.4 1,117.0 1,169.8 1,217.7 1,243.2
% Change 3.6% 3.4% 3.3% 4.7% 4.1% 3.2%
Business Services 228.1 248.1 265.1 286.9 304.2 309.2
% Change 15.8% 8.8% 6.9% 8.2% 6.0% 4.6%
Legal Services 38.6 38.5 38.9 39.1 39.3 39.2
% Change 7.5% -0.3% 1.0% 0.5% 0.5% 1.0%
Educational Services 70.0 69.9 69.1 73.9 78.0 84.9
% Change 14.2% -0.1% -1.1% 6.9% 5.5% 5.6%
Engineering & Management Services 115.7 118.1 121.7 132.7 141.7 146.1
% Change 15.7% 2.1% 3.0% 9.0% 6.8% 5.3%
Total Government 462.3 465.4 472.7 485.1 489.8 493.3
% Change 0.9% 0.7% 1.6% 2.6% 1.0% -0.7%
Goods Producing 765.2 777.9 790.7 803.0 810.9 811.4
% Change 18.5% 1.7% 1.6% 1.6% 1.0% 1.3%
Service Producing 2,883.4 2,947.0 3,019.5 3,105.5 3,158.8 3,186.0
% Change 16.3% 2.2% 2.5% 2.8% 1.7% 1.8%
Private Employment 3,186.3 3,259.5 3,337.5 3,423.4 3,479.9 3,504.1
% Change -0.2% 2.3% 2.4% 2.6% 1.7% 2.0%
Source: Bureau of Labor Statistics
</TABLE>
- --------------------------------------------------------------------------------
Rosen Consulting Group 4
<PAGE>
Growth in knowledge-based industries is also occurring in the financial services
industry. As the home of the Chicago Board of Trade, the Chicago Mercantile
Exchange and the Chicago Board Options Exchange, Chicago is the international
center of options, futures and commodity trading and an important center of
international finance. The Chicago Board of Trade (CBOT) is the world's oldest
and largest futures and options exchange. Initially trading only agricultural
contracts, in 1975 the CBOT expanded to include financial contracts, including
one of the world's most actively traded contracts, the Treasury bond futures
contract, and in 1982 added options on futures contracts. In February 1997,the
CBOT opened its new 60,000 square-foot trading facility, which combined with
its existing facility, makes it the largest trading facility in the world. The
Chicago Mercantile Exchange (CME), consisting of twin 40-story office towers
with one of the world's largest trading floors, is by far the world's largest
financial marketplace in terms of open interest (open interest represents the
number of futures contracts and options positions outstanding at the close of
trading). With the increasing use of options, the Chicago Board Options Exchange
(CBOE) has grown to become the world's largest options exchange and the second
largest securities exchange in the U.S. Currently, the CBOE captures the largest
share of the U.S. options market, trading 700,000 option contracts daily. As of
year-end 1996, CBOE's option trades accounted for more than 47% of equity option
trading, 95% of index option trading and 65% of all option trading.
Indeed, reflecting the importance of Chicago as a center of derivative finance,
employment in finance, insurance and real estate (FIRE) is highly concentrated
in Chicago's economic base, with a location quotient of 1.3 (meaning that FIRE
employment as a share of total employment in Chicago is 1.3 times greater than
for the nation as a whole) (see Exhibit 1.5). In particular, security and
commodity broker jobs are 2.0 times more concentrated in Chicago's employment
base than in the total U.S. employment base. Employment in these sectors has
grown at a robust rate during the last year. Employment in the security and
commodity brokers industry was up 2.8% and employment in the security brokers
and dealers industry was up 3.5% during the year ended in April 1997. The high
concentration of financial services employment has significant spillover effects
into other industries, such as business services and publishing. For example,
one the nation's largest financial publishers, R.R. Donnelley, is a Fortune 500
company headquartered in Chicago.
Strong employment growth in the services and finance, insurance and real estate
sectors bode well for the Chicago office market, since employment growth in
these two sectors is the major source of demand for office space.
Rosen Consulting Group 5
<PAGE>
- --------------------------------------------------------------------------------
Exhibit 1.5
Chicago Location Quotients
Sector Location Quotient*
- ------ ------------------
Transportation By Air 2.218
Paperboard Containers And Boxes 2.200
Metal Forgings And Stampings 2.073
Security And Commodity Brokers 2.028
Metalworking Machinery 1.957
Fire, Marine, And Casualty Insurance 1.848
Transportation Services 1.802
Railroad Transportation 1.777
Electronic & Other Electric Equipment 1.767
Fabricated Metal Products 1.559
Miscellaneous Plastics Products 1.516
Chemicals And Allied Products 1.514
Commercial Printing 1.510
Printing And Publishing 1.507
Insurance Carriers 1.500
Nondepository Institutions 1.493
Engineering & Management Services 1.475
Professional & Commercial Equipment 1.435
Rubber And Misc. Plastics Products 1.356
Finance, Insurance, And Real Estate 1.300
Security Brokers And Dealers 1.279
Business Services 1.277
Legal Services 1.270
Industrial Machinery And Equipment 1.255
Electronic Components And Accessories 1.216
U.S. Postal Service 1.207
Paper And Allied Products 1.201
Wholesale Trade 1.200
Apparel And Accessory Stores 1.185
Educational Services 1.173
Depository Institutions 1.171
Transportation And Public Utilities 1.165
Commercial Banks 1.144
* A location quotient measures the regional concentration of employment in a
particular industry. If employment in an industry were evenly distributed
throughout the U.S., a region's location quotient would be 1.0. Mathematically,
it is defined as the ratio of the percentage of total employment in industry x
in a given region divided by the percentage of total employment in industry x
nationally.
Source: U.S. Bureau of Labor Statistics
- --------------------------------------------------------------------------------
Rosen Consulting Group 6
<PAGE>
Chicago, historically a national center of heavy manufacturing, has the second
fastest growing manufacturing employment base nationwide. Much of the fast
growth is occurring in high-wage, high technology industries, which are
relocating and expanding in the Chicago area, due to its large pool of educated
workers and affordable cost of living. In fact, Illinois surpassed Massachusetts
in high technology employment during 1996 and is behind only California, New
York and Texas, according to a 1997 ranking by the American Electronics
Association (AEA). Similarly, Illinois is also ranked fourth in terms of high
technology merchandise exports, according to the 1997 AEA survey. Because of the
continued strong presence of heavy manufacturing and the increased presence of
high technology manufacturing, Chicago's manufacturing employment base has
expanded at an average rate of 1.2% during the last five years, compared to
national growth of 0.2% over the same period. Similarly, during the year ended
April 1997, Chicago's manufacturing base expanded 1.6% compared to a national
rate of 0.1%. During the last year, the fastest growing manufacturing subsectors
all have been high technology industries such as electronics and other electric
equipment (3.3%); medical instruments (2.2%) and electronic components (2.1%).
Several large high technology employers are headquartered in Chicago, including
Motorola and 3Com, formerly US Robotics (see Exhibit 1.6).
While high technology is a fast-growing segment of the manufacturing industry in
Chicago, the steel industry remains a stable and important local industry. Many
of the manufacturing subsectors associated with steel manufacturing and
fabrication are highly concentrated in the Chicago metropolitan economic base,
such as metal forgings and stamping, metalworking machinery, and fabricated
metal products. Inland Steel Industries and Acme Metals are the largest steel
processors, with approximately 2,000 and 1,500 Chicago-area employees,
respectively. Several large steel fabricators are in Chicago, including Tempel
Steel Company, a manufacturer of magnetic steel laminations, with 1,250 local
employees and A.M. Castle Company, a processor of specialty metals, with 350
local employees.
The retail and wholesale trade sectors have enjoyed moderate growth over the
last year. During the year ended April 1997, trade employment was up 1.1%
compared to 2.8 in the U.S. Growth in the retail sector has been particularly
strong, registering 2.1% during the last year. Sears, Roebuck & Co., a large
Fortune 500 retail company headquartered in Chicago, is growing rapidly, hiring
on average 400 new employees annually for the past several years. Walgreen's and
Spiegel Inc. are large retailers which are also headquartered in the Chicago
metropolitan area (see Exhibits 1.6 and 1.7 for a list of top public and private
sector employers).
Reflecting its role as a major international trade center, Chicago's economy has
a high concentration of transportation-related employment. Transportation jobs
as a proportion of the total employment base represent roughly 1.4 times more
than their share of national employment. Air transportation is particularly
concentrated in the Chicago economy, with 1.6% of employment, roughly 2.2 times
more than their share of employment nationally. The high concentration of air
transportation jobs is a direct result of the size and volume of activity of
Chicago O'Hare International Airport. Chicago O'Hare International Airport is
the commercial aviation capital of the world, a position which it has held for
the past 30 years, since it handles more passengers and aircraft operations than
any other airport in the world. As the hub of the nation's rail system and the
primary port linking the Great Lakes with the Mississippi River and the Gulf of
Mexico, Chicago also has a high concentration of employment in trucking and
warehousing and transportation services. Employment growth in these two sectors
was up a strong 5.0% and 7.1%, respectively, as of the year ended in April 1997.
Rosen Consulting Group 7
<PAGE>
- --------------------------------------------------------------------------------
Exhibit 1.6
Chicago's Top Public Firms
<TABLE>
<CAPTION>
Worldwide
Company Type of Business Employees
- ------- ---------------- --------
<S> <C> <C>
Sears, Roebuck and Company Retail 359,700
Amoco Corporation Oil and natural gas 42,689
Motorola Manufacturer of electric equipment 142,000
Allstate Insurance 44,300
Sara Lee Manufacturer of various foods 149,100
Caterpillar Manufacturer of construction equipment 54,352
UAL Corporation Air transportation 77,900
CNA Financial Insurance 15,600
Ameritech Communications 63,345
Archer Daniels Midland Agriculture 14,833
Walgreen Retail 68,800
Deere & Company Manufacturer of mobile powered machinery 33,375
WMX Technologies Hazardous waste disposal service 74,400
Abbott Laboratories Manufacturer of health care products 50,241
McDonald's Restaurants 183,000
Stone Container Corporation Manufacturer of unbleached packaging products 25,900
Unicom Corporation Electric 18,460
R.R. Donnelley & Sons Printing 41,000
Quaker Oats Food-processing company 17,300
Navistar International Manufacturer of heavy trucks 16,079
Household International Consumer services 15,500
Baxter International Manufacturer of health care products 56,580
Inland Steel Industries Manufacturer of steel 15,410
FMC Corporation Manufacturer of machinery and chemicals 22,164
Illinois Tool Works Manufacturer of engineered components 21,200
Premark International Marketing 24,300
Aon Corporation Insurance 18,000
Morton International Manufacturer of specialty chemicals, airbags and salt 13,800
W.W. Grainger Distribution 11,853
ServiceMaster Holding company for health care 34,000
Spiegel Marketing 15,000
Brunswick Corporation Manufacturer of marine engines and bowling equipment 20,900
Whitman Corporation Manufacturer of refrigeration equipment 15,271
Dean Foods Manufacturer of dairy and other food products 11,800
Newell Corporation Manufacturer of housewares and hardware 23,000
USG Corporation Holding company of building supply companies 12,400
General Instrument Corporation Supplies equipment for cable industries 12,300
Source: Crain's Chicago Business
</TABLE>
- --------------------------------------------------------------------------------
Rosen Consulting Group 8
<PAGE>
- --------------------------------------------------------------------------------
Exhibit 1.7
Chicago's Top Private Firms
<TABLE>
<CAPTION>
Chicago
Company Type of Business Employees
- ------- ---------------- --------
<S> <C> <C>
Dominick's Finer Foods Retail foods 18,000
Montgomery Ward Holding Specialty retailer 7,712
Lettuce Entertain You Enterprises Restaurants 3,600
Becco Group Temporary Services 3,508
Hyatt Hotels Hotel and resort management 3,350
Kemper National Insurance Insurance 3,153
Hewitt Associates Consultant in employee benefits 3,128
Marmon Group International manufacturing and service 2,500
Follett Corporation Educational services 2,200
Hostmark Management Group Hotel and restaurant development 2,200
Leo Burnett Company Advertising 2,064
Farley Foods Manufacturer of candy and snacks 2,000
Fel-Pro Manufacturer of engine gaskets 1,950
Levy Restaurants Restaurants 1,800
Wirtz Corporation Liquor distribution, real estate, insurance 1,500
Duchossois Enterprises Manufacturer of garage doors and misc. items 1,500
S&C Electric Company Manufacturer of high-voltage switching products 1,350
Tempel Steel Manufacturer of magnetic steel laminations 1,250
Archibald Candy Manufacturer of candy 1,200
Lane Industries Manufacturing, broadcasting, hospitality and agriculture 1,200
Ace Hardware Wholesale hardware and building supplies 1,161
Medline Industries Manufacturer of medical supplies 1,100
Fellowes Manufacturing Manufacturer of office products 1,085
Tang Industries Diversified manufacturer and distributor 1,000
Quo-Fast Corporation Manufacturer of industrial fasteners 1,000
JMB Realty Real estate 1,000
Source: Crain's Chicago Business
</TABLE>
- --------------------------------------------------------------------------------
Rosen Consulting Group 9
<PAGE>
Telecommunications, a subsector of transportation, communications and public
utilities, is also an important high technology industry in Chicago. Both
AT&T and Ameritech are located in Chicago. Ameritech, a large Fortune 500
company, is headquartered in Chicago with over 19,038 of its 66,000 employees
worldwide located there. Ameritech is expanding rapidly, mainly in new areas,
including cable television, Internet access, long-distance service and cellular
communications. Ameritech plans to hire 400 new employees to fill new positions
in its information services division, all 1,600 of which will be housed in a new
290,000 square-foot building which the company plans to build in Hoffman
Estates. AT&T, with approximately 4,000 employees in the Chicago metropolitan
area, downsized significantly during 1996 and is now poised to resume growth.
All four of these sectors, manufacturing, retail and wholesale trade, and
transportation are important indicators of demand for warehouse/distribution
space.
Reflecting the health and robust growth of the Chicago metropolitan economy, the
metropolitan unemployment rate has fallen to a 23-year low of 4.7% compared to
4.9% nationally as of April 1997.
Forecasted Employment Trends
Chicago's employment base will continue to grow at a moderate rate of 1.1% to
1.4% per year during the next three years, with absolute growth of
approximately 50,000 jobs per year on average. The strongest job growth will
continue to occur in services, finance, and manufacturing (particularly high
technology manufacturing)(see Exhibits 1.8 and 1.9). Due to Chicago's major
concentration of metalworking and fast-growing high technology industry, we
anticipate that manufacturing growth in Chicago will continue to out pace that
of the U.S. over the next three to four years.
- --------------------------------------------------------------------------------
Exhibit 1.8.
- --------------------------------------------------------------------------------
Chicago vs. U.S.
Total Non-Agricultural Employment
<TABLE>
<CAPTION>
Exhibit 1.8
Total Non-Agricultural Employment: Chicago vs U.S.
79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Chicago 2.37 0.20 -1.30 -3.09 -0.38 5.40 4.17 0.80 2.53 2.72 2.63 1.03 -1.57 -0.06 2.09 2.29 2.58 1.57 1.40 1.10 1.30
U.S. 3.61 0.65 0.83 -1.76 0.68 4.72 3.16 2.01 2.63 3.19 2.55 1.41 -1.06 1.00 2.10 3.10 1.9 2.2 2 1.6 2.2
</TABLE>
Rosen Consulting Group 10
<PAGE>
Exhibit 1.9
Nonagricultural Payroll Employment Forecast
Chicago, IL MSA
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997f 1998f 1999f
---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total 3,648.6 3,724.9 3,810.2 3,908.5 3,969.7 4,025.3 4,069.5 4,122.4
% Change -0.1% 2.1% 2.3% 2.6% 1.6% 1.4% 1.1% 1.3%
Construction 134.9 138.3 139.4 147.6 152.8 159.9 155.3 153.2
% Change -6.9% 2.5% 0.8% 5.9% 3.5% 4.6% -2.9% -1.4%
Manufacturing 628.2 637.5 649.4 653.6 656.4 662.0 651.8 644.3
% Change -1.9% 1.5% 1.9% 0.6% 0.4% 0.9% -1.5% -1.2%
T.C.P.U. 221.8 226.0 233.6 236.5 244.3 250.4 251.9 252.6
% Change -0.5% 1.9% 3.4% 1.2% 3.3% 2.5% 0.6% 0.3%
Trade 858.8 873.4 892.4 913.5 906.0 900.2 909.6 922.4
% Change -2.1% 1.7% 2.2% 2.4% -0.8% -0.6% 1.0% 1.4%
F.I.R.E. 294.8 300.9 303.8 300.7 301.1 303.4 307.5 312.1
% Change -0.1% 2.1% 1.0% -1.0% 0.1% 0.8% 1.4% 1.5%
Services 1,045.6 1,081.4 1,117.0 1,169.8 1,217.7 1,263.0 1,304.0 1,347.4
% Change 3.6% 3.4% 3.3% 4.7% 4.1% 3.7% 3.2% 3.3%
Government 462.3 465.4 472.7 485.1 489.8 484.2 487.3 488.2
% Change 0.9% 0.7% 1.6% 2.6% 1.0% -1.1% 0.6% 0.2%
</TABLE>
Sources: Bureau of Labor Statistics, RCG
Rosen Consulting Group 11
<PAGE>
- ------------------------------------------------------------------------------
Chicago Metropolitan Office Market
- ------------------------------------------------------------------------------
Overview
The Chicago metropolitan office market has improved significantly over the last
five years, with the overall vacancy rate declining from 19.3% in 1992 to a
recent low of 13.2% as of the second quarter of 1997. As the major financial and
business center of the Midwest and the major international center of derivative
finance, Chicago has a large and growing office employment sector. Strong growth
in office-consuming employment sectors is the main factor contributing to the
improved health of the Chicago office market. During the five years from April
1992 to April 1997, the office employment base (conservatively defined as
employment in FIRE and business services) grew by 97,500 jobs, representing
roughly 25% of total job growth during that period and an annual average of
approximately 19,500 jobs per year, ranking Chicago first among all metropolitan
areas nationwide in terms of absolute office employment growth over the last
five years.
Size of Market
Reflecting the large size of the metropolitan economy, Chicago is one of the top
three office markets nationwide, according to second quarter 1997 statistics
gathered by both CB Commercial and RCG. In terms of the size of the overall
metropolitan market, Chicago ranks third, behind New York City's Manhattan and
Washington, DC. However, Chicago's large downtown office market ranks second
only to Manhattan's combined Midtown and Downtown office markets (see Exhibit
2.1).
- ------------------------------------------------------------------------------
Exhibit 2.1.
- ------------------------------------------------------------------------------
Largest U.S. Office Markets
Metro Total and Downtown
===============================================
1996 Office Market Stock
Ranked by Total Space (000)
<TABLE>
<CAPTION>
Rank Place Total
---- ----- -----
<S> <C> <C>
1 New York 358,628
2 Washington 243,196
3 Chicago 185,545
4 Los Angeles 265,131
5 Houston 146,181
Rank Place Downtown
---- ----- --------
1 New York 358,628
2 Chicago 118,820
3 Washington 78,801
4 Newark 50,687
5 Boston 47,390
</TABLE>
Source: CB Commercial and RCG
Rosen Consulting Group 12
<PAGE>
Metropolitan Office Market Trends
The Chicago metropolitan office market has tightened steadily over the last five
years, with the overall vacancy rate declining from a high of 19.3% in 1992 to a
recent low of 13.2% as of the second quarter of 1997 (see Exhibit 2.2). The
greatest gains have occurred in Chicago's Class A market, where the vacancy rate
had fallen to 8.5% as of the second quarter of 1997 from 9.3% in 1996 and a high
of 20.5% in 1992 (see Exhibit 2.3). The Class A market has enjoyed strong net
absorption of about 2.1 million square feet per year compared to the total
market, which has averaged about 2.2 million square feet per year since year-end
1992. This reflects the outmovement of Class B and C tenants into the Class A
market, where rents have remained moderate, albeit moving higher.
Recent rent statistics suggest rent growth is accelerating, particularly in the
tight Class A market. While rent concessions measured 30% to 40% of face rents
in the early 1990s, they have not been a feature in the market for the last
several years. Not only have concessions disappeared, but landlords are lowering
the amount they are willing to contribute to tenant improvements.
Exhibit 2.2
Chicago Total Metropolitan Area Office Market (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 190,329 190,534 190,490 189,899 188,849 188,342 189,139 189,549 189,599
New Construction 3,893 205 230 0 216 0 797 1,410 800
Conversion/Demolition 0 0 274 591 1,266 507 507 1,000 750
Net Absorption 1,257 3,510 2,721 1,322 1,059 2,650 3,150 2,700
Occupied Stock 153,596 154,853 158,363 161,084 162,406 163,465 165,056 168,206 170,906
Vacancy Rate 19.3% 18.7% 16.9% 15.2% 14.0% 13.2% 12.7% 11.3% 9.9%
Sources: CB Commercial, RCG
</TABLE>
Exhibit 2.3
Chicago Metropolitan Class A Office Market (000SF)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 73,544 73,749 73,979 73,979 74,195 74,195 74,992 76,402 77,202
New Construction 3,893 205 230 0 216 0 797 1,410 800
Net Absorption 759 2,116 2,678 2,425 1,639 591 1,700 1,800 1,400
Occupied Stock 58,452 60,568 63,246 65,671 67,310 67,900 69,010 70,810 72,210
Vacancy Rate 20.5% 17.9% 14.5% 11.2% 9.3% 8.5% 8.0% 7.3% 6.5%
Sources: CB Commercial, RCG
</TABLE>
Rosen Consulting Group
13
<PAGE>
Office Submarket Analysis
Downtown Office Market
Chicago's downtown office market is the primary location within the metropolitan
area for financial institutions, business services companies, law firms and
government agencies. Many major corporations have a significant presence in the
downtown area, including R.R. Donnelley & Sons, Leo Burnett, Quaker Oats, Amoco,
Morton International, First Chicago NBD, Wrigley, Everen Securities, Aon
Corporation, Blue Cross/Blue Shield and U.S. Gypsum. Chicago's downtown office
market has improved since the early 1990s, when the overall office vacancy rate
peaked in the mid-19% range (see Exhibit 2.4 and 2.5). As of the second quarter
of 1997, the downtown total office vacancy rate had fallen to 14.9%, down from
its peak of 19.6% in 1993.
The downtown office market's improvement is the result of both strong growth in
office employment and the fact that no new construction has occurred in the
downtown office market since 1992, when approximately 3.9 million square feet of
Class A office space were delivered to the market. During the first half of
1997, several large users leased space in the downtown, which resulted in a
significant reduction of vacant space. Examples of large lessors during the
first half of 1997 include Commonwealth Edison (245,000 sf), the State of
Illinois (243,000 sf), and Andersen Consulting (220,000 sf). The Class A office
market has been the main beneficiary of strong office employment growth. Class A
vacancy rates have declined to a low of 9.3% as of the second quarter of 1997
from a peak of 25.0% in 1992 (see Exhibit 2.4 and 2.6).
During the remainder of 1997 and 1998, we anticipate a further tightening in the
downtown office market, due to continued moderate to strong growth in office
employment, no new office space being built, and the conversion of many Class C
buildings to other uses. No new speculative office space will come on line
during the next two years and, in all likelihood, before the year 2001. Given a
three-year construction cycle for a highrise office building in Downtown Chicago
and the fact that no building is currently under construction, it is certain
that no office space will be delivered to the downtown prior to the year 2000.
- --------------------------------------------------------------------------------
Exhibit 2.4.
- --------------------------------------------------------------------------------
Downtown Office Vacancy Rate
Total vs Class A
[GRAPH APPEARS HERE]
Office
Chicago Downtown Vacancy Rates
<TABLE>
<CAPTION>
year Total Class A
---- ----- -------
<S> <C> <C>
1991 19.4% 25.0%
1992 19.3% 23.1%
1993 19.6% 20.3%
1994 18.2% 16.5%
1995 17.6% 13.1%
1996 15.9% 10.3%
2Q97 14.9% 9.3%
1997f 13.9% 8.5%
1998f 11.5% 6.7%
1999f 9.5% 5.3%
</TABLE>
Sources: Bureau of Labor Statistics, RCG
Rosen Consulting Group
14
<PAGE>
The momentum of office building conversions is set to increase. Since 1994, the
downtown office stock has shrunk by over two million square feet, due to both
conversions and demolitions. Old and obsolete Class C office buildings are being
converted mainly to residential, both condominium and rental, and hotel uses.
During the first half of 1997, three conversions resulted in the removal of
507,000 square feet from the office market. Specifically, the 185,000
square-foot 400 North Franklin building in the River North submarket was
converted to condominium use and the 102,000 square-foot 10 South Wabash
building in the East Loop submarket was converted to hotel use and one Central
Loop building was converted. With the passage on February 7, 1997 of an
amendment to the North Loop Tax Increment Financing District (TIF), originally
established in 1984, the number of conversions will increase. In February, the
North Loop TIF was enlarged to encompass 139 acres of the East Loop/Michigan
Avenue area. A sum of $300 million was earmarked for both infrastructure
improvements and direct subsidies to redevelop older office buildings in the
eastern portion of the Downtown where the stock of older, Class C office
buildings is the largest. Given the new redevelopment subsidies and the fact
that Downtown Chicago is a vibrant, 24-hour tourist and residential area which
is experiencing a housing renovation boom and a tight hotel market, we expect
the rate of conversions of older office buildings will accelerate, resulting in
a tightening of the downtown Class C and overall downtown office market. In
fact, according to the Chicago Department of Planning and Development, over
twenty conversion projects in the downtown are either under construction or in
the planning stages.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Exhibit 2.5
Chicago Total Downtown Office Market (000 SF)
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 111,329 111,329 111,055 110,464 109,198 108,691 108,691 107,691 106,941
New Construction 3,893 0 0 0 0 0 0 0 0
Conversion/Demolition 0 0 274 591 1,266 507 507 1,000 750
Net Absorption (334) 1,334 179 813 661 1,700 1,750 1,500
Occupied Stock 89,843 89,509 90,843 91,022 91,836 92,496 93,536 95,286 96,786
Vacancy Rate 19.3% 19.6% 18.2% 17.6% 15.9% 14.9% 13.9% 11.5% 9.5%
Sources: CB Commercial, RCG
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Exhibit 2.6
Chicago Downtown Class A Office Market (000 SF)
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 43,915 43,915 43,915 43,915 43,915 43,915 43,915 43,915 43,915
New Construction 3,893 0 0 0 0 0 0 0 0
Net Absorption 759 1,230 1,669 1,493 1,230 439 800 800 600
Occupied Stock 33,771 35,000 36,669 38,162 39,392 39,831 40,192 40,992 41,592
Vacancy Rate 23.1% 20.3% 16.5% 13.1% 10.3% 9.3% 8.5% 6.7% 5.3%
Sources: CB Commercial, RCG
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Rosen Consulting Group 15
<PAGE>
All of the five downtown submarkets have tightened during the last two quarters,
with the exception of the West Loop (see Exhibit 2.7). The West Loop, with its
close proximity to suburban train links and high proportion of new, Class A
office buildings, was the earliest to recover. This submarket has experienced
stable vacancy in the 12% range during the last three quarters. River North,
which is the smallest of the five downtown office submarkets, has experienced
the most tightening during the last two quarters and, indeed, is experiencing
very tight conditions with a low overall second quarter vacancy rate of 7.5%.
The weakest submarket is the East Loop, with a second quarter vacancy rate of
17.4%. The outlook for all of the submarkets is for continued tightening in the
medium-term.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Exhibit 2.7
Downtown Office Submarkets: Recent Vacancy Rate Statistics
(000SF) Change in 1997 (000SF) 1996 (000SF)
N.R.A. % Vacant Vac. Rate 1st Half Year-end
Submarket 2Q97 2Q97 1Q97 4Q96 4Q96-2Q97 Net Absorp. Net Absorp.
- --------- ---- ---- ---- ---- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
West Loop 26,577 12.2% 12.4% 12.2% 0.0% (4) 1,148
Central Loop 44,511 15.5% 16.2% 16.8% -1.2% 543 62
East Loop 21,827 17.4% 18.6% 19.1% -1.6% 274 146
North Michigan Ave. 13,307 15.3% 14.9% 15.7% -0.4% 50 213
River North 2,744 7.5% 7.7% 14.3% -6.8% 72 163
Downtown Total 108,966 14.9% 15.4% 15.9% -1.0% 935 1,732
Sources: CB Commercial
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The one exception to a positive near-term outlook is the North Michigan Avenue
submarket, which currently has a second quarter overall vacancy rate of 15.5%.
With the return of 859,470 square feet of Class B-space by Blue Cross/Blue
Shield to the submarket during the third quarter of 1997, we expect that the
vacancy rate in this submarket will temporarily rise. However, given the
overall strength of the downtown office market, we do not expect this return of
space to have any lasting effect on the Class B office market and little, if
any, effect on the Class A office market. In fact, all of the downtown office
submarkets, with the exception of North Michigan Avenue, recently have Class A
vacancy rates of below 10%.
Finally, the number of office buildings for sale in Downtown Chicago has
increased significantly during the last year. During the first quarter alone,
nearly 1.4 million square fee was sold. In addition, Investment Properties
Associates (IPA), an affiliate of Helmsley Spear, has placed their five downtown
office buildings on the market. The effect of new owners should be positive, as
better capitalized owners will have the effect of stabilizing and increasing
rents.
Rosen Consulting Group 16
<PAGE>
Central Loop Submarket
The Central Loop office submarket is the largest of five downtown office
submarkets, with over 40% of the total downtown office stock. Many of the
downtown's large financial and business services firms are located in the
Central Loop submarket, including the Chicago Board of Trade (see Economy
section for discussion). Among the other tenants are large law firms, corporate
headquarters and government agencies.
As of the second quarter of 1997, the Central Loop total office vacancy rate was
down to 15.5%, down from its recent peak of 18.2% in 1993. After remaining in
the high 16% range from 1994 through the fourth quarter of 1996, the Central
Loop submarket (including Class A, B and C) has experienced considerable
tightening during the first half of 1997 (see Exhibit 2.7 on the previous page).
The Central Loop Class A submarket is particularly healthy, with a low 9.1%
vacancy rate compared to a Class A vacancy rate of 9.3% for the total Downtown
office market (see Exhibit 2.8). So far during 1997, this submarket has
experienced the greatest amount of net absorption of any of the five downtown
submarkets. Examples of large leases which were written during the first half
of 1997 include Commonwealth Edison, Andersen Consulting and the law firm,
O'Donnell, Wicklun, Pigozzi and Peterson.
Like the overall Downtown office market, no new construction has been delivered
to the Central Loop market since 1992, when approximately 2.8 million square
feet of Class A space were completed. While rents are rising, particularly in
the tight Class A market, no new construction is expected to be delivered before
2001 at the earliest. Actually, a few older Class C office buildings are being
converted to other uses, causing the overall stock to shrink. For instance,
during the second quarter of 1997, the 220,000 square-foot 201 North Wells
Street building was converted to residential use.
The Central Loop, with its strong base of financial and legal services,
corporate offices and government agencies, will remain a popular submarket. We
anticipate Class A net absorption will moderate during the next few years due to
increasing rents and a shrinkage of available Class A space. This rate of demand
growth will cause the Class A vacancy rate to decline to the 5% range by 1999.
While average rent growth for all classes of office space will grow only
slightly over the next three years, Class A rent growth will accelerate more
quickly, in the 4% to 6% range during the next three years because of the
projected low availability of Class A space (see Exhibits 2.9 and 2.10).
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Exhibit 2.8
Central Loop Class A Office Market (000SF)
-----
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 18,999 18,999 18,999 18,999 18,999 18,999 18,999 18,999 18,999
New Construction 2,841 0 0 0 0 0 0 0 0
Net Absorption 3,901 114 931 665 323 171 350 360 240
Occupied Stock 15,066 15,180 16,111 16,776 17,099 17,270 17,449 17,809 18,049
Vacancy Rate 20.7% 20.1% 15.2% 11.7% 10.0% 9.1% 8.2% 6.3% 5.0%
------
Sources: CB Commercial, RCG
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Rosen Consulting Group 17
<PAGE>
- --------------------------------------------------------------------------------
Exhibits 2.9 and 2.10
- --------------------------------------------------------------------------------
Central Loop Office Market
Construction and Net Absorption Trends
============================================
[GRAPH APPEARS HERE]
[SEE DATA IN EXHIBIT 2.8]
Rosen Consulting Group 18
<PAGE>
Suburban Office Market
The suburban Chicago office market has experienced a dramatic decline in office
vacancy rates, from 19.3% in 1992 to 10.9% as of the second quarter of 1997 (see
Exhibit 2.11). The Class A suburban office market, which has a second quarter
vacancy rate of 7.3%, has improved at the expense of the Class B and Class C
suburban office markets. During the last five years, net absorption of Class A
space has surpassed total net absorption, reflecting the outmovement from Class
B and Class C space into Class A space. During the last four and a half years,
Class A net absorption has averaged over 0.75 million square feet per year
compared to total net absorption of 1.6 million square feet per year over the
same period.
Class A rents have risen to the point where new construction is becoming
economically feasible again. During 1996, one building totaling 216,100 square
feet was delivered to the market. The pipeline of new construction is growing. A
total of ten new office buildings are expected to be completed during 1997,
totaling 796,800 square feet. During 1998, nine new buildings totaling 1.41
million square feet are estimated to be delivered (see Exhibit 2.12). Several
other office buildings are in the proposal stages, but are unlikely to come on
line before 1999.
The outlook for the suburban office market is strong (see Exhibits 2.13 and
2.14). With office employment growth expected to remain in the 2% range, we
anticipate that total vacancy rates will remain relatively low, in the 10% to
11% range during the forecast horizon, despite the addition of new space.
Suburban Class A vacancy rates are headed into the 7% to 8% range during the
next three years. Given the disparity between the Class A and Class B office
markets, the opportunity for conversion of Class B space to Class A space is
growing increasingly attractive.
- -------------------------------------------------------------------------------
Exhibit 2.11.
- -------------------------------------------------------------------------------
Suburban Office Vacancy Rate
Total vs Class A
<TABLE>
<CAPTION>
Office
Chicago Suburban Vacancy Rates
Year Total Class A
---- ----- -------
<S> <C> <C>
1992 19.3% 16.7%
1993 17.5% 14.3%
1994 15.0% 11.6%
1995 11.8% 8.5%
1996 11.4% 7.8%
2Q97 10.9% 7.3%
1997f 11.1% 7.3%
1998f 10.9% 8.2%
1999f 10.3% 8.0%
</TABLE>
Sources: Bureau of Labor Statistics, RCG
Rosen Consulting Group 19
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Exhibit 2.12
Suburban Chicago Office Construction
1997 and 1998 Deliveries
1997 1998
Project City Submarket Square Feet Square Feet
- ------- ---- --------- ----------- -----------
<S> <C> <C> <C> <C>
Randall Point I Elgin Schaumburg 37,980 ---
Spring Lake Executive Center Itasca Schaumburg 50,845 ---
Lislie Oaks XIII Elgin Schaumburg 40,000 ---
Leslie Oaks XII Elgin Schaumburg 20,000 ---
Randall Point II Elgin Schaumburg --- 80,000
Transamerica Hoffman Estates Schaumburg --- 205,000
Subtotal --- Schaumburg 148,825 285,000
Indeck Energy Buffalo Grove Lake County 46,620 ---
1650 Lake County Road Deerfield Lake County 125,000 ---
Bannockburn Lakes Bannockburn Lake County --- 105,000
Conway Park II Lake Forest Lake County --- 115,000
Amhurst Business Park Waukegan Lake County --- 100,000
Subtotal --- Lake County 171,620 320,000
Westwood of Lisle II Lisle Oak Brook 148,664 ---
Centre Point V Naperville Oak Brook 53,713 ---
Centre Point IV Naperville Oak Brook 30,000 ---
Highland Landmark Downers Grove Oak Brook 244,000 ---
Highland Landmark II Downers Grove Oak Brook --- 260,000
Cantera Warrenville Oak Brook --- 150,000
Arboretum West Lisle Oak Brook --- 200,000
Oak Creek V Lombard Oak Brook --- 40,000
Corporate Lakes IV Lisle Oak Brook --- 155,000
Subtotal --- Oak Brook 476,377 805,000
Total 796,822 1,410,000
Source: CB Commercial
- --------------------------------------------------------------------------------------------
</TABLE>
The next section of the paper will turn to a discussion of Oak Brook and
Schaumburg, the two largest suburban submarkets (see Exhibit 2.15).
Rosen Consulting Group 20
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Exhibit 2.13
Chicago Suburban Office Market
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 79,000 79,205 79,435 79,435 79,651 79,651 80,448 81,858 82,658
New Construction 0 205 230 0 216 0 797 1,410 800
Net Absorption --- 1,591 2,176 2,542 509 398 950 1,400 1,200
Occupied Stock 63,753 65,344 67,520 70,062 70,571 70,969 71,521 72,921 74,121
Vacancy Rate 19.3% 17.5% 15.0% 11.8% 11.4% 10.9% 11.1% 10.9% 10.3%
Sources: CB Commercial, RCG
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Exhibit 2.14
Chicago Suburban Class A Office Market (000SF)
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 29,629 29,834 30,064 30,064 30,280 30,280 31,077 32,487 33,287
New Construction 0 205 230 0 216 0 797 1,410 800
Net Absorption 1,133 887 1,009 932 410 151 900 1,000 800
Occupied Stock 24,681 25,568 26,577 27,509 27,918 28,070 28,818 29,818 30,618
Vacancy Rate 16.7% 14.3% 11.6% 8.5% 7.8% 7.3% 7.3% 8.2% 8.0%
Sources: CB Commercial, RCG
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------
Exhibit 2.15
Suburban Office Submarkets: Recent Vacancy Rate Statistics
N.R.A. % Vacant Change
Submarket 2Q97 2Q97 1Q97 4Q96 4Q96-2Q97
--------- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C>
Lake Shore 4,210,145 13.4% 13.4% 13.0% 0.3%
North Suburbs 5,088,456 6.3% 6.2% 6.7% -0.4%
Schaumburg 21,595,252 10.7% 10.9% 12.6% -1.8%
O'Hare 12,847,991 13.0% 13.1% 13.9% -0.9%
Oak Brook 26,276,766 10.1% 10.3% 9.4% 0.7%
West Cook 1,276,779 14.3% 13.7% 12.9% 1.4%
South Suburbs 2,395,264 12.9% 12.8% 13.3% -0.4%
Lake County 6,070,883 10.5% 12.5% 12.8% -2.3%
Suburban Total 79,761,536 10.9% 11.1% 11.4% -0.6%
Sources: CB Commercial
</TABLE>
---------------------------------------------------------------
Rosen Consulting Group 21
<PAGE>
Oak Brook Office Submarket
The Oak Brook office submarket is located immediately west of downtown Chicago
and has the highest concentration of office space in the suburban office market,
with 26.3 million square feet as of the second quarter of 1997. The submarket is
centered in eastern DuPage County along I-88 between I-294 and I-355 in the
cities of Oak Brook, Lombard, Downers Grove and Elmhurst. Oak Brook was the
first suburban office market developed outside of downtown Chicago that
attracted large firms and corporate headquarters in large numbers. Some of the
Oak Brook area's largest employers are WMX Technologies, McDonalds and Spiegel.
Naperville, which is in the southwest portion of the Oak Brook submarket, has
several large companies and many corporate headquarters. The largest employer in
Naperville is AT&T, which has an electronic switching system and research and
development facility in Naperville that employs 8,900. Of the 39 companies in
Naperville that have a minimum of 100 employees, 17 are corporate headquarters.
The Oak Brook office submarket had a healthy vacancy rate of 10.1% as of the
second quarter of 1997, well below its peak of 24.7% in 1986. Unlike other
submarkets, Class A, B and C buildings within the market are all faring well
(see Tables 2.16 and 2.17 for Class A and B statistics). As of the second
quarter, the respective vacancy rate for each class of office product was 8.1%,
10.9% and 12.3%. Leasing activity during the first half of 1997 was fairly
strong, with several large leases signed. Among the largest leases were
Ameritech (63,316 sf), Wausau Insurance (63,000 sf), Deutsche Financial (50,000
sf), Raytheon Engineers and Constructors (36,024), Rockwell International
(20,000) and R.R. Donnelley (20,000 sf).
As the largest and one of the most popular of the suburban office markets, the
Oak Brook market has experienced and continues to experience a high volume of
new construction relative to other suburban submarkets. During 1997, four
buildings totalling 476,000 square feet are scheduled to be completed. Another
five buildings totalling 805,000 square feet will be completed during 1998.
The outlook for the Oak Brook office submarket is strong. We anticipate that
overall office market conditions will continue to tighten through 1997 (see
Exhibit 2.18). With the large supply of office space slated for delivery during
1998, we anticipate some softening; however, based on the popularity of this
well-located office submarket, we anticipate that vacancy rates will trend
downward thereafter. Class A vacancy rates will range between 7% and 8% during
the forecast horizon. Class B vacancy rates will be slightly higher.
- --------------------------------------------------------------------------------
Exhibit 2.16
Oak Brook Submarket Class A Office Market (000SF)
1992 1993 1994 1995 1996 2Q97 1997f 1998f
----- ----- ----- ----- ------ ------ ------ ------
Stock 9,550 9,550 9,915 9,915 10,159 10,159 10,635 11,440
New Construction 247 0 365 0 244 0 476 805
Net Absorption 316 535 779 30 136 (61) 500 600
Occupied Stock 7,917 8,452 9,231 9,261 9,397 9,336 9,897 10,497
Vacancy Rate 17.1% 11.5% 6.9% 6.6% 7.5% 8.1% 6.9% 8.2%
1999f
------
Stock 11,840
New Construction 400
Net Absorption 475
Occupied Stock 10,972
Vacancy Rate 7.3%
Sources: CB Commercial, RCG
- --------------------------------------------------------------------------------
Rosen Consulting Group 22
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Exhibit 2.17
Oak Brook Submarket Class B Office Market (000SF)
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 10,566 10,759 10,759 10,759 10,759 10,759 10,759 10,759 10,759
New Construction 0 193 0 0 0 0 0 0 0
Net Absorption (190) 235 430 43 215 (53) 75 50 75
Occupied Stock 8,717 8,951 9,382 9,425 9,640 9,587 9,715 9,765 9,840
Vacancy Rate 17.5% 16.8% 12.8% 12.4% 10.4% 10.9% 9.7% 9.2% 8.5%
Sources: CB Commercial, RCG
- ---------------------------------------------------------------------------------------------------
</TABLE>
Exhibit 2.18
Oak Brook Office Market
Construction and Net Absorption Trends
============================================
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 25,000 25,247 25,440 25,805 25,805 26,049 26,049 26,525 27,330 27,730
New Construction 579 247 193 365 0 244 0 476 805 400
Net Absorption 354 592 1,289 310 531 (182) 650 700 600
Occupied Stock 20,525 20,879 21,471 22,760 23,070 23,600 23,418 24,068 24,768 25,368
Vacancy Rate 17.9% 17.3% 15.6% 11.8% 10.6% 9.4% 10.1% 9.3% 9.4% 8.5%
</TABLE>
Rosen Consulting Group 23
<PAGE>
Schaumburg Office Submarket
The Schaumburg office submarket encompasses northwest Cook County and has the
second highest concentration of office space in the suburban office market.
During the 1980s, Schaumburg emerged as a popular business corridor.
Approximately 70% of the submarket's current inventory of 18.8 million square
feet of Class A and B space was built during the 1980s. The Schaumburg Class A
office submarket has experienced the most dramatic tightening in vacancy rates
of any office submarket in the Chicago metropolitan area, with vacancy declining
from a high of 20.1% in 1992 to 5.5% as of the second quarter of 1997. During
1996, the Schaumburg submarket recorded the largest amount of leasing activity
of any suburban submarket. Large leases included Ameritech and U.S. Robotics
(now 3Com). So far during 1997, several large leases have been written,
including Prudential Insurance, Cincinatti Bell, 3Com and Boise Cascade. As of
the second quarter of 1997, the submarket's overall office vacancy rate had
fallen to 10.7%, less than half of its 1992 vacancy rate of 23.9%. The tightness
in the Class A market is beginning to spill over to the Class B market, where
vacancy still remains relatively high as of the second quarter at 16.7% (see
Exhibits 2.17 through 2.20).
Located twenty to thirty minutes to the west of the Chicago O'Hare International
Airport and encompassing the communities of Schaumburg, Hoffman Estates, Itasca,
Mt. Prospect, Rolling
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Exhibit 2.19
Schaumburg Submarket Class A Office Market (000SF)
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 10,175 10,175 10,230 10,285 10,285 10,285 10,434 10,719 10,919
New Construction 0 55 55 0 0 0 149 285 200
Net Absorption (51) 265 536 439 206 144 250 250 175
Occupied Stock 8,130 8,394 8,931 9,370 9,575 9,719 9,825 10,075 10,250
Vacancy Rate 20.1% 17.5% 12.7% 8.9% 6.9% 5.5% 5.8% 6.0% 6.1%
Sources: CB Commercial, RCG
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Exhibit 2.20
Schaumburg Submarket Class B Office Market (000SF)
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 8,624 8,624 8,624 8,624 8,624 8,624 8,624 8,624 8,624
New Construction 0 0 0 0 0 0 0 0 0
Net Absorption 60 276 207 405 (336) 147 300 225 275
Occupied Stock 6,537 6,813 7,020 7,425 7,089 7,236 7,389 7,614 7,889
Vacancy Rate 24.2% 21.0% 18.6% 13.9% 17.8% 16.1% 14.3% 11.7% 8.5%
Sources: CB Commercial, RCG
- ---------------------------------------------------------------------------------------------------
</TABLE>
Rosen Consulting Group 24
<PAGE>
Meadows and Arlington Heights, the Schaumburg submarket has a significant list
of large and fast-growing tenants. Indeed, the strength of the Schaumburg office
submarket reflects the presence of many dynamic employers. For instance,
Schaumburg is the headquarters for Motorola and its 139,000 worldwide employees
of which a total of 7,000 were located at the headquarters in Schaumburg as of
mid-year 1997. Hoffman Estates is headquarters for Sears with 5,000 employees.
In addition, several other major office employers have large facilities in
Hoffman Estates, including Ameritech (3,000 employees) and Siemens (950
employees). Ameritech, in particular, is poised to grow its employment base
significantly in the Schaumburg submarket. Rolling Meadows' largest employer is
Northrup, which employs approximately 2,000 employees.
While demand growth has been extremely strong during the last four years,
resulting in average annual absorption of 360,000 and 500,000 square feet per
year, respectively, in the Class A and Class B markets, construction has been
minimal. During the last five years, only two buildings totalling 110,000 square
feet were constructed. However, six small office buildings will be delivered
during 1997 and 1998. Four office buildings totalling 148,825 square feet will
be delivered during 1997 and another two buildings totalling 285,200 square feet
will be delivered during 1998. Two proposed buildings, Siemens Center II in
Schaumburg and Continental Towers IV in Rolling Meadows, will likely find anchor
tenants soon and, thus, enter the pipeline for completion in early 1999.
The outlook for the Schaumburg office market is strong. Demand growth is
expected to remain robust, but will be constrained by the lack of new supply in
the Class A market where vacancy is already low. We expect that Class A vacancy
rates will remain in the 5% to 6% range through the forecast horizon and the
Class B vacancy rates will decline into the single digit range by 1999 as
tenants settle for Class B space because of the tightness in the Class A market.
Average net rents will grow in the 4.5% to 7.5% range during the next three
years. However, Class A rents should grow faster because of the much lower
availability of Class A space compared to Class B space.
- --------------------------------------------------------------------------------
Exhibit 2.21
- --------------------------------------------------------------------------------
Schaumburg Office Market
Construction and Net Absorption Trends
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 18,799 18,799 18,799 18,854 18,909 18,909 18,909 19,058 19,343 19,543
New Construction 0 0 0 0 0 0 0 149 285 200
Net Absorption 9 541 743 844 (131) 291 550 475 450
Occupied Stock 14,657 14,667 15,207 15,951 16,795 16,664 16,955 17,214 17,689 18,139
Vacancy Rate 22.0% 22.0% 19.1% 15.4% 11.2% 11.9% 10.3% 9.7% 8.5% 7.2%
</TABLE>
Rosen Consulting Group 25
<PAGE>
- --------------------------------------------------------------------------------
Chicago Industrial Market
- --------------------------------------------------------------------------------
Size of Market
Chicago has one of the nation's largest industrial markets, according to CB
Commercial. Chicago's industrial market ranks second to Los Angeles in terms of
the total square footage of its vacant and occupied stock of industrial space,
with nearly 900 million square feet. According to CB Commercial, Chicago's total
industrial vacancy rate as of the first quarter of 1997 was 7.30% which was low
by comparison to the national average of 8.1%. As of the second quarter, the
total industrial vacancy rate was up slightly to 7.46%, but this still reflects
a healthy supply-demand balance.
Demand Factors
The Chicago industrial market benefits both from strong manufacturing and trade-
related demand. First, Chicago is the nation's metal-working capital and one of
the nation's major manufacturing centers. Chicago's central location and highly
efficient, extensive, well-integrated transportation system contribute to the
high volume of trade which flows through the area's distribution system.
Strategically located mid-way between the East and West coasts and Canada and
Mexico, with the world's busiest airport, the hub of the nation's rail system
and the primary port connecting the Great Lakes with the Mississippi River and
the Gulf of Mexico, Chicago plays a preeminent role in U.S. trade,
transportation and manufacturing.
Historical Trends
Chicago's industrial market comprises approximately 898 million square feet of
space. Demand growth has been strong over the last two years, with net
absorption averaging approximately 17.5 million square feet a year (see Exhibit
2.22 and 2.23). Gross leasing activity, which is another good measure of demand
growth, with the exception that it may double-count new leases, has also been
robust (see Exhibit 2.24). During the first two quarters of 1997, gross leasing
activity was nearly double 1996's level and close to the peak of 45.1 million
square feet in 1995. While the second quarter industrial vacancy rate was up
compared to its low of 6.38% in 1995, this reflects a surge in new space coming
onto the market, rather than a weakness in demand. Construction activity in the
last few years has been heaviest in the big box warehouse/distribution category.
Thus, vacancy rates have risen the most quickly in this category. In fact, the
warehouse/distribution vacancy rate rose during the last six months to 11.4% as
of the second quarter of 1997. The manufacturing vacancy rates declined to 7.5%
as of the second quarter.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Exhibit 2.22
Chicago Total Metropolitan Area Industrial Market (000SF)
-----
1992 1993 1994 1995 1996 2Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock -- -- 858,378 870,377 888,264 898,298 906,264 918,264 928,264
New Construction -- -- -- 11,999 17,887 10,034 18,000 12,000 10,000
Net Absorption -- -- -- 26,169 9,373 7,065 13,000 11,000 12,000
Occupied Stock -- -- 788,678 814,847 824,220 831,285 837,220 848,220 860,220
Vacancy Rate 8.5% 8.4% 8.1% 6.4% 7.2% 7.5% 7.6% 7.6% 7.3%
------
Sources: CB Commercial, RCG
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Rosen Consulting Group 26
<PAGE>
- --------------------------------------------------------------------------------
Exhibits 2.23 and 2.24.
- --------------------------------------------------------------------------------
Industrial Market
Chicago Metropolitan Area
==================================
[GRAPH APPEARS HERE]
Sources: CB Commercial, RCG
Industrial Market Gross Leasing Volume
Chicago Metropolitan Area
==================================
[GRAPH APPEARS HERE]
Sources: CB Commercial
Rosen Consulting Group 27
<PAGE>
Warehouse/Distribution Submarket
The strength of trade-related activity in the industrial market is reflected in
the high concentration of transportation-related jobs in Chicago. Transportation
by air is the most highly concentrated employment sector in Chicago, with over
twice the share of total employment as nationally, reflecting the size and
volume of activity of the International Airport. Transportation services is also
highly concentrated in the local economy and is growing significantly, with
growth averaging at 5.5% per year over the last five years. Chicago remains the
national railroad transportation center, with a high concentration of jobs in
this sector. Trucking and warehousing employment has also grown robustly during
the last few years, with growth ranging from 5% to 11% per year since 1992.
After four consecutive years of declining vacancy rates, new construction has
surpassed strong demand growth, pushing the second quarter vacancy rate back up
to 11.4% (see Exhibit 2.25). Gross leasing activity is particularly strong,
averaging over 20 million square feet per year. While the outlook for demand
growth in this market continues to be strong, new construction will keep the
vacancy rate from declining significantly in the near-term.
- --------------------------------------------------------------------------------
Exhibit 2.25.
- --------------------------------------------------------------------------------
Warehouse/Distribution Submarket
Chicago Metropolitan Area
======================================
[GRAPH APPEARS HERE]
Sources: CB Commercial
Rosen Consulting Group 28
<PAGE>
Manufacturing Submarket
Chicago's manufacturing sector is one of the healthiest of any metropolitan
areas nationally, both in terms of size and growth rate. Chicago has the largest
manufacturing employment base, with over 660,000 manufacturing employees as of
April 1997, and the second fastest growing manufacturing employment base over
the five years ending April 1997. Manufacturing jobs have increased at an
average rate of 1.2% per year over the last five years compared to a national
average growth rate of 0.2% over the same period. Similarly, during the year
ended April 1997, manufacturing employment expanded 1.6% compared to a national
average rate of 0.1%.
As a major center of manufacturing activity in the nation, Chicago has a large
stock manufacturing buildings. Gross leasing activity has averaged approximately
14.6 million square feet between year-end 1991 and year-end 1996. Construction
of manufacturing space has remained relatively moderate, which has allowed net
absorption to shrink the available supply of manufacturing space. As of the
second quarter, the manufacturing vacancy rate had fallen to 7.5% (see Exhibit
2.26). The outlook for the manufacturing submarket is for continued moderate to
strong growth in demand, which in conjunction with moderate construction, will
result in stable vacancy rates over the forecast horizon.
- ------------------------------------------------------------------------------
Exhibit 2.26.
- ------------------------------------------------------------------------------
Manufacturing Submarket
Chicago Metropolitan Area
==================================
[GRAPH APPEARS HERE]
Sources: CB Commercial
Rosen Consulting Group
29
<PAGE>
Overhead Crane Submarket
Chicago is the nation's largest overhead crane market, with 444 major overhead
crane facilities. Overhead crane buildings are a specialized niche within the
manufacturing submarket which typically house tenants involved in steel
processing or steel servicing. Of the 444 major overhead crane buildings in
Chicago, the majority are larger overhead crane facilities concentrated in the
southside of Chicago, East Chicago and northeastern Indiana, the traditional
center of steel processing in the Chicago area. The overhead crane facilities
which are found in other areas of Chicago are generally smaller facilities of
less than 100,000 square feet which are associated with a specific manufacturer
that relies on steel as an input in the manufacturing process.
The current condition and outlook for the overhead crane market is strong, with
a vacancy rate of less than 4% according to Thomas Brown of CB Commercial and
Carl Manofsky with Hiffman Schaeffer and Anderson. Indiana and Illinois
combined are the nation's largest steel processing market, with more than 30% of
the nation's steel output, based on raw steel production statistics compiled by
the American Iron and Steel Institute as of May 1997. Indiana alone produces 23%
of the nation's steel output. Much of the steel processing occurs in northwest
Indiana and northeastern Illinois, where the Chicago metropolitan area borders
Indiana.
Over the last ten to fifteen years, with the devaluation of the dollar against
the yen and more recently, during the last five years, the strengthening of the
U.S. manufacturing sector, the production of steel in the U.S. has increased,
contributing to an increased demand for overhead crane facilities. During the
last five years, strong industrial output, particularly of large durable, steel-
intensive products like automobiles, has increased the demand for steel and,
thus, overhead crane facilities to handle the processing and distribution of
steel. In addition, to cut costs, the major steel companies and major steel end-
users, including the automobile companies, have increased outsourcing of certain
steel processing operations, which has also increased the demand for overhead
crane buildings by small steel processing and steel servicing companies.
While demand has grown for these facilities during the last ten to fifteen
years, few overhead crane buildings have been built during the last seven years.
With high land costs and the much greater structural reinforcing required for
crane facilities, the cost to erect a 100,000 square-foot building with 20-ton
cranes is approaching $60 per square foot and the rents required to justify new
construction are currently close to $8.00 per square foot compared to a market
rent of $3.25 to $4.50 per square foot. Within the overhead crane building
submarket, the quality of the space and the cranes vary widely, with some
facilities still lacking heat, insulation and concrete floors. Currently, demand
is greatest for larger overhead crane buildings of 100,000 square feet or more.
Rosen Consulting Group 30
<PAGE>
- -------------------------------------------------------------------------------
Nashville Metropolitan Economy
- -------------------------------------------------------------------------------
Recent Economic Trends
Nashville is Tennessee's largest metropolitan economy, with an employment base
of 612,700 as of April 1997 and an estimated population of 1.14 million as of
mid-1997. During the five years from April 1992 to April 1997, employment growth
in Nashville averaged 3.7% per year compared with a 2.3% average annual rate for
the nation (see Exhibit 3.1). For the year ended in April 1997, total employment
growth in Nashville slipped to 1.3% compared with the national growth rate of
2.2%. Weaker Nashville growth resulted from cyclical weakness in the
manufacturing sector.
Office employment in Nashville grew at an annual average 5.0% rate during the
April 1992 to April 1997 period compared with a 3.2% yearly average rate for the
nation. For the year ended in April 1997, office employment grew 3.4% compared
with the national growth rate of 3.1%.
Except for the recent cyclical weakness in manufacturing, growth has been strong
in Nashville as companies move into the area and expand. Nashville is attractive
because of its central location, high quality of life and favorable business
climate, created by low taxes, right-to-work laws, and relatively low costs. An
increasingly diverse array of businesses are relocating to Nashville in
industries ranging from trucking to music recording. The mainstays of
Nashville's economic growth are in manufacturing, especially in printing and
publishing, furniture, and leather products, and automobile manufacturing, and
in services, including entertainment and tourism, and health care (see Exhibit
3.2). In addition, Nashville
- -------------------------------------------------------------------------------
Exhibit 3.1.
- -------------------------------------------------------------------------------
Nashville vs. U.S.
Total Non-Agricultural Employment
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
79 80 81 82 83 84 85 86 87 88 89
-- -- -- -- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nashville 3.64 -1.07 2.86 -1.13 3.90 7.07 6.53 5.07 4.52 2.79 1.47
90 91 92 93 94 95 96 97f 98f 99f
-- -- -- -- -- -- -- --- --- ---
Nashville 0.95 -0.30 2.82 5.31 5.35 4.31 1.98 2.12 1.81 2.60
</TABLE>
Sources: Bureau of Labor Statistics,
Rosen Consulting Group 31
<PAGE>
- --------------------------------------------------------------------------------
Exhibit 3.2
Nashville Location Quotients
<TABLE>
<CAPTION>
Sector
------
Sector Location Quotient* Employment
- ------ ------------------ ----------
<S> <C> <C>
Leather And Leather Products 3.031 1.5
Printing And Publishing 1.828 14.2
Transportation Equipment 1.687 15.1
Furniture And Fixtures 1.550 3.9
Educational Services 1.355 13.8
Hotels And Other Lodging Places 1.207 10.3
Electronic & Other Electric Equipment 1.172 9.8
Fabricated Metal Products 1.125 8.3
Health Services 1.052 51.1
Total Government 0.783 77.4
</TABLE>
* A location quotient measures the regional concentration of employment in a
particular industry. If employment in an industry were evenly distributed
throughout the U.S., a region's location quotient would be 1.0. Mathematically,
it is defined as the ratio of the percentage of total employment in industry x
in a given region divided by the percentage of total employment in industry x
nationally.
Source: U.S. Bureau of Labor Statistics
- --------------------------------------------------------------------------------
serves as the capital of Tennessee. The Wall Street Journal recently ranked
Nashville as one of the top five relocation cities in the nation.
Office employment is directly related to employment in the services sector, and
in the finance, insurance, and real estate sector. The services sector in
Nashville is its largest sector, and about 40% of services sector employment
contributes to office employment. Nashville's services sector is 6.2% larger in
relative size than the services sector in the nation, and from 1992 to 1995 this
sector grew at dramatic rates of between 5.8% and 8.1% (see Exhibit 3.3). In
1996, services sector employment slowed to a still-strong growth rate of 3.3%.
Recent employment growth in the services sector has been steady. During the year
ended in April 1997, Nashville's services sector employment growth was 3.2%
accounting for 6,000 jobs during the year.
Important service industries in Nashville include health care, entertainment and
tourism. Nashville is a major health care center in the South, with several
major health care institutions. With 8,100 employees, Columbia/HCA Healthcare
Corporation is Nashville's second largest private-sector employer. In addition
to these organizations, America Service Group, a healthcare company, is
relocating its administrative office to Nashville. Tourism in Nashville is
largely centered around Opryland USA, the amusement park with a country music
theme. Opryland is Nashville's fourth largest private-sector employer, with
8,000 employees. The $200 million expansion of the Opryland Hotel and Convention
Center was recently completed. In addition, a 65,000-seat National Football
League stadium is under construction on the other side of the Cumberland River.
Nashville is also the country music capital, with more than 200 recording
studios.
Rosen Consulting Group 32
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Exhibit 3.3
Nonagricultural Payroll Employment by Sector
Nashville, TN MSA
1992 1993 1994 1995 1996 Apr-97
---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Total Nonagricultural 514.5 541.8 570.8 595.4 607.2 612.7
% Change 2.8% 5.3% 5.4% 4.3% 2.0% 1.3%
Construction 19.2 21.7 24.7 26.8 28.9 29.1
% Change -5.2% 13.0% 13.8% 8.5% 7.8% 0.7%
Manufacturing 90.7 94.2 98.7 99.8 96.9 95.4
% Change 4.4% 3.9% 4.8% 1.1% -2.9% -2.5%
Furniture And Fixtures 3.8 4.3 4.4 4.1 3.9 3.5
% Change 8.6% 13.2% 2.3% -6.8% -4.9% -16.7%
Fabricated Metal Products 8.6 9.3 10.1 9.9 8.3 8.2
% Change 2.4% 8.1% 8.6% -2.0% -16.2% -2.4%
Electronic & Other Electric Equip. 8.8 8.9 9.2 9.6 9.8 9.7
% Change -- 1.1% 3.4% 4.3% 2.1% -3.0%
Transportation Equipment 12.7 13.5 14.4 15.1 15.1 15.1
% Change 15.5% 6.3% 6.7% 4.9% 0.0% 0.0%
Printing And Publishing 14.4 14.4 15 15.2 14.2 14.1
% Change 2.1% 0.0% 4.2% 1.3% -6.6% 0.0%
Leather And Leather Products 1.7 1.7 1.7 1.6 1.5 1.4
% Change 0.0% 0.0% 0.0% -5.9% -6.3% -6.7%
Transportation, Communications & P.U. 30.3 32.2 32.4 32.2 31.5 31.7
% Change 3.8% 6.3% 0.6% -0.6% -2.2% 2.6%
Trade 125 129.9 137.3 143.1 147.2 147.6
% Change 1.8% 3.9% 5.7% 4.2% 2.9% 1.9%
Finance, Insurance, & Real Estate 30.6 31.4 33.1 34.4 36.5 37.3
% Change -0.3% 2.6% 5.4% 3.9% 6.1% 3.6%
Services 149.3 159.3 168.6 182.2 188.2 192.1
% Change 6.5% 6.7% 5.8% 8.1% 3.3% 3.2%
Hotels And Other Lodging Place -- -- -- 12.1 10.3 10.8
% Change -- -- -- -- -14.9% 11.3%
Health Services -- -- -- 51.2 51.1 51.4
% Change -- -- -- -- -0.2% 1.4%
Educational Services -- -- -- 13.7 13.8 13.8
% Change -- -- -- -- 0.7% -3.5%
Total Government 68.8 72.6 75.4 76.3 77.4 79.1
% Change -1.3% 5.5% 3.9% 1.2% 1.4% -1.2%
Source: Bureau of Labor Statistics
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Because Nashville is the state capital, business services related to consulting,
law, administrative services that support the business of government are
important to the Nashville economy. Also in the business services, area, CUC
Travel Services expanded into a new 52,000 square-foot building in the fourth
quarter of 1996. Envoy Corporation has acquired National Electronic Information
Corporation and has boosted its Nashville employment as a result.
Rosen Consulting Group 33
<PAGE>
The finance, insurance, and real estate (FIRE) sector also contributes to office
employment. During 1996, the FIRE sector was the second fastest-growing major
sector after the construction sector. FIRE sector employment gained 6.1% during
1996, and by April 1997 employment growth in the FIRE sector slowed to a
still-healthy 3.6% year-ago rate. By comparison, the FIRE sector growth rate for
the nation during the year ended in April 1997 was 2.5%.
In addition to services and finance, the manufacturing sector in Nashville is an
important part of its economic base. The Nashville manufacturing sector is 4.4%
larger in relative terms than the national manufacturing sector making it a
significant contributor to the economic base of the metropolitan area. An
important part of the manufacturing sector in Nashville is printing and
publishing, a sector which has expanded recently. Printing and publishing firms
such as Quebecor Printing Corporation, RR Donnelley & Sons are expanding in
Nashville, and American Banknote Corporation and Adnet Midwest are relocating
to Nashville.
The 2.9% decline in overall manufacturing sector employment during 1996 had the
effect of slowing overall Nashville employment. The manufacturing sector
weakness during 1996 was centered in the durable goods sector, which includes
the important automobile sector. Despite the recent short-term cyclical weakness
in durable goods, manufacturers are planning long-term expansion in the
Nashville area. Pillsbury announced a $50 million expansion of its strudel
manufacturing operation in Murfreesboro, and Field Container Company is opening
a plant in Nashville to produce containers for Pillsbury Foods. Precision
Painting is expanding its presence, and Gibson Guitar is undergoing a five-year
expansion plan to increase production of its popular guitar lines. Also, the
Teksid Aluminum Foundry is undergoing a $15 million expansion. In connection
with the Saturn plant, Ryder Systems, Saturn's truck carrier, will expand its
Spring Hill operation. National Fulfillment and Sunbeam also announced expansion
plans. The Sunbeam expansion is in connection with the relocation of its
headquarters to Nashville. In addition, Bentz Companies and Jamison Bedding both
have plans for expansion in Nashville. As the manufacturing sector expands, the
demand for ancillary business services also expands, creating demand for office
space.
Rosen Consulting Group
34
<PAGE>
Forecasted Employment Trends
Overall employment in Nashville should grow at a 2.2% average annual rate
through 1999 compared with the national employment growth rate averaging 1.9%
per year during the same interval. This expansion will be led by faster growth
in the services and finance, insurance, and real estate sectors. Through 1999,
the services sector will grow at an average annual pace of 4.4% and the finance,
insurance, and real estate sector will grow at an average annual rate of 3.1%
(see Exhibit 3.4). These growth rates for the primary office using sectors
suggest strong fundamental demand conditions in the Nashville economy.
- --------------------------------------------------------------------------------
Exhibit 3.4
Nonagricultural Payroll Employment Forecast
Nashville, TN MSA
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997f 1998f 1999f
---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total 514.5 541.8 570.8 595.4 607.2 620.1 631.3 647.7
% Change 2.8% 5.3% 5.4% 4.3% 2.0% 2.1% 1.8% 2.6%
Construction 19.2 21.7 24.7 26.8 28.9 30.5 30.5 31.3
% Change -5.2% 13.0% 13.8% 8.5% 7.8% 5.5% 0.0% 2.6%
Manufacturing 90.7 94.2 98.7 99.8 96.9 95.0 94.9 96.0
% Change 4.4% 3.9% 4.8% 1.1% -2.9% -2.0% -0.1% 1.2%
T.C.P.U. 30.3 32.2 32.4 32.2 31.5 31.1 31.4 31.8
% Change 3.8% 6.3% 0.6% -0.6% -2.2% -1.3% 1.0% 1.3%
Trade 125.0 129.9 137.3 143.1 147.2 149.8 152.2 156.2
% Change 1.8% 3.9% 5.7% 4.2% 2.9% 1.8% 1.6% 2.6%
F.I.R.E. 30.6 31.4 33.1 34.4 36.5 38.1 38.9 40.0
% Change -0.3% 2.6% 5.4% 3.9% 6.1% 4.4% 2.1% 2.8%
Services 149.3 159.3 168.6 182.2 188.2 197.6 205.2 214.4
% Change 6.5% 6.7% 5.8% 8.1% 3.3% 5.0% 3.8% 4.5%
Government 68.8 72.6 75.4 76.3 77.4 77.5 77.6 77.5
% Change -1.3% 5.5% 3.9% 1.2% 1.4% 0.1% 0.1% -0.1%
</TABLE>
Sources: Bureau of Labor Statistics, RCG
- --------------------------------------------------------------------------------
Rosen Consulting Group 35
<PAGE>
- --------------------------------------------------------------------------------
Nashville Metropolitan Office Market
- --------------------------------------------------------------------------------
Nashville has one of the lowest office vacancy rates in the nation. During the
past year and one-quarter, the overall office vacancy rate in Nashville fell
from 9.5% at the beginning of 1996 to 7.5% during the first quarter of 1997.
Nashville's office market ranked fourteenth lowest out of 72 metropolitan office
markets with respect to its vacancy rate as of year-end 1996.
During the first quarter of 1997, the downtown Nashville office vacancy rate
declined to 12.4% from 14.6% at year-end 1996 (see Exhibit 4.1 through 4.3). The
rise in the vacancy rate during 1996 was the result of various government
departments moving from leased space into the newly acquired Tennessee Tower.
The impact of that public sector consolidation is now over. In addition, more
tenants may be attracted to the downtown because of a lack of space options in
the suburbs and the relative parity of rents in the downtown market. In
addition, entertainment and retail users are making the downtown a more vibrant
place to live, work and play.
The suburban office vacancy rate was a low 5.5% during the first quarter of
1997, down from 8.0% a year earlier at the beginning of 1996. Leasing has been
active. Through 1996, nearly 600,000 square feet of office space (net) were
leased in the suburbs. Tight market conditions have resulted in a renewal of
speculative construction activity and have attracted national firms into the
market. The acquisitions of Eakin & Smith by Highwoods Properties and
NWI/Buckley by Weeks Corporation, for example, have brought national firms to
Nashville, meaning that large institutional public companies will be central to
the development of new office and industrial supply in the future. The suburban
speculative supply of new office space includes more than 560,000 square feet of
new office space. The suburban build-to-suit office market is also active,
including projects for Columbia/HCA, American General, and Primus, the financial
services division of Ford Motor Company.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Exhibit 4.1
Nashville Downtown Office Market (000SF)
1992 1993 1994 1995 1996 1Q97 1997f 1998f 1999f
---- ---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 5,026 5,026 5,026 5,026 5,026 5,026 5,026 5,026 5,026
New Construction 0 0 0 0 0 0 0 0 0
Net Absorption 85 10 (30) 171 (80) 111 200 70 50
Occupied Stock 4,222 4,232 4,202 4,373 4,292 4,403 4,492 4,562 4,612
Vacancy Rate 16.0% 15.8% 16.4% 13.0% 14.6% 12.4% 10.6% 9.2% 8.2%
Gross Rent $16.62 $16.03 $15.51 $15.39 $15.65 $15.83 $16.33 $16.90
% Change -3.5% -3.2% -0.8% --- 2.9% 3.2% 3.5%
Sources: CB Commercial, Trammell Crow, RCG
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Rosen Consulting Group 36
<PAGE>
- --------------------------------------------------------------------------------
Exhibits 4.2 and 4.3.
- --------------------------------------------------------------------------------
Nashville Office Market
Central Business District
==============================
[See Exhibit 4.1 for data]
Nashville Office Market
CBD Rent and Vacancy Rate
==============================
[See Exhibit 4.1 for data]
Rosen Consulting Group
37
<PAGE>
- --------------------------------------------------------------------------------
Knoxville Metropolitan Economy
- --------------------------------------------------------------------------------
Recent Economic Trends
Knoxville's economy has grown rapidly and has displayed stability so far during
the 1990s. During the April 1992 to April 1997 period, the employment growth
rate in Knoxville average 2.1% per year compared with the national employment
growth rate of 2.3% (see Exhibit 5.1). For the year ended in April 1997, the
employment level declined 0.1%, and the office employment level declined 0.3%.
These declines were primarily the result of a large 2.4% employment decline in
the manufacturing sector, a trend we think is temporary.
Knoxville's economy is relatively robust. During the national recession ended in
March 1991, Knoxville's employment did not turn down. For 1991, the employment
growth rate in Knoxville was 1.8% compared with a national employment decline at
the rate of -1.1%. During the 1982 national recession, employment in Knoxville
also did not decline.
Part of the relative robustness of the Knoxville economy derives from the large
government sector. By comparison to the nation, Knoxville's government sector is
nearly 10% larger in relative terms (see Exhibit 5.2). Government sector
employment has rebounded during 1996 from the decline suffered in 1995.
Important public sector employers include the Knox County Public School System,
The University of Tennessee, the University of Tennessee Medical Center, the
State of Tennessee (Regional Offices), and the County of Knox.
- --------------------------------------------------------------------------------
Exhibit 5.1
- --------------------------------------------------------------------------------
Knoxville vs. U.S.
Total Non-Agricultural Employment
=======================================
<TABLE>
<CAPTION>
79 80 81 82 83 84 85 86 87 88 89
-- -- -- -- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Knoxville 1.85 -1.31 5.02 1.32 7.84 3.79 1.03 2.98 4.09 1.71 2.26
90 91 92 93 94 95 96 97f 98f 99f
-- -- -- -- -- -- -- -- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Knoxville 1.56 1.84 5.28 4.00 2.49 3.19 0.57 2.45 1.98 3.67
</TABLE>
Rosen Consulting Group
38
<PAGE>
- --------------------------------------------------------------------------------
Exhibit 5.2
Knoxville Location Quotients
<TABLE>
<CAPTION>
Sector
------
Sector Location Quotient* Employment
- ------ ------------------ ----------
<S> <C> <C>
Apparel And Other Textile Products 3.067 6.9
Total State Government 1.744 21.4
Hotels And Other Lodging Places 1.502 6.7
Eating And Drinking Places 1.245 24.6
Retail Trade 1.151 65.6
Stone, Clay, And Glass Products 1.024 1.5
Durable Goods 1.011 28.5
</TABLE>
* A location quotient measures the regional concentration of employment in a
particular industry. If employment in an industry were evenly distributed
throughout the U.S., a region's location quotient would be 1.0. Mathematically,
it is defined as the ratio of the percentage of total employment in industry x
in a given region divided by the percentage of total employment in industry x
nationally.
Source: U.S. Bureau of Labor Statistics
- --------------------------------------------------------------------------------
Knoxville is considered to be a national energy center because of the presence
of the Tennessee Valley Authority (TVA), the Department of Energy's (DoE) Oak
Ridge facility, and the University of Tennessee. Knoxville is the headquarters
of the TVA. The TVA has more than 2,100 employees and operates 39 dams, 12 steam
plants, and four nuclear plants. Recently, the TVA is undergoing an internal
review that may result in some consolidation of employment levels. Knoxville is
also home of the DoE's Oak Ridge research facility. The DoE contracts much of
the work at Oak Ridge to Lockheed Martin Energy Systems. In fact, Lockheed
Martin Energy Systems is the largest private sector employer in Knoxville with
more than 14,000 employees. The chemical industry, which is centered around
nuclear technology and the Oak Ridge facility has faced cutbacks as defense
sector spending has been reduced. A number of other businesses have been
attracted by the Oak Ridge facility. Boeing Defense and Space, for example,
manufactures electronic airplane components at its Oak Ridge facility.
In the private sector, the largest employers include Lockheed Martin Energy
Systems, Covenant Health Alliance, Levi Strauss & Company, St. Mary's Medical
Center, DeRoyal Industries, Clayton Homes, The Kroger Company, and Aluminum
Company of America. Apparel and textile products is the most concentrated sector
in the Knoxville economy, making up 14.4% of the manufacturing sector employment
(see Exhibit 5.3). Levi Strauss Jeanswear Division is the third largest private
sector employer, with nearly 3,600 employees. In addition, Palm Beach Company,
New Cherokee Corporation, and Bike Athletic Company are all major employers in
Knoxville's apparel and textile industry.
Rosen Consulting Group 39
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Exhibit 5.3
Nonagricultural Payroll Employment by Sector
Knoxville, TN MSA
1992 1993 1994 1995 1996 Apr-97
---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Total Nonagricultural 285.3 296.7 304.1 313.8 315.6 313.5
% Change 5.3% 4.0% 2.5% 3.2% 0.6% -0.1%
Construction 12.4 13.7 15.0 17.9 18.5 18.6
% Change 7.8% 10.5% 9.5% 19.3% 3.4% 1.1%
Manufacturing 49.7 50.6 50.1 49.3 48.1 47.9
% Change 1.6% 1.8% -1.0% -1.6% -2.4% -0.4%
Durable Goods 30.2 30.0 29.0 28.9 28.5 28.0
% Change -- -0.7% -3.3% -0.3% -1.4% -2.1%
Stone, Clay, And Glass Product 1.4 1.5 1.4 1.4 1.5 1.3
% Change -- 7.1% -6.7% 0.0% 7.1% -13.3%
Apparel & Other Textile Products 8.4 9.2 8.6 7.7 6.9 6.9
% Change -- 9.5% -6.5% -10.5% -10.4% 1.5%
Transportation, Communications & P.U. 10.3 11.2 12.2 13.4 14.1 14.1
% Change 2.0% 8.7% 8.9% 9.8% 5.2% -0.7%
Trade 73.4 75.0 78.1 81.4 81.4 81.0
% Change 2.1% 2.2% 4.1% 4.2% 0.0% 0.9%
Eating And Drinking Places -- -- -- 25.0 24.6 24.6
% Change -- -- -- -- -1.6% 0.0%
Finance, Insurance, And Real Estate 10.6 11.0 11.4 12.0 13.2 13.3
% Change 7.1% 3.8% 3.6% 5.3% 10.0% 3.1%
Services 74.9 79.9 81.4 84.2 84.0 81.8
% Change 12.3% 6.7% 1.9% 3.4% -0.2% -1.7%
Hotels And Other Lodging Place -- -- -- 6.6 6.7 6.6
% Change -- -- -- -- 1.5% -1.5%
Total Government 53.5 54.7 55.6 55.1 55.8 56.3
% Change 4.3% 2.2% 1.6% -0.9% 1.3% 0.2%
Source: Bureau of Labor Statistics
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The high concentration of employment in the hotel and lodging places subsector
indicates the importance of tourism to Knoxville. The Great Smoky Mountains
National Park, the Lost Sea, and the Forbidden Caverns are nearby. Also
Dollywood, Dolly Parton's amusement park in Pigeon Forge, is a big employer
(1,800 jobs) and tourist draw.
Rosen Consulting Group 40
<PAGE>
Forecasted Employment Trends
The employment growth rate in Knoxville should bounce back from the weakness
displayed during 1996. That weakness was primarily in the manufacturing sector.
Employment should grow between 2.0% and 2.5% for 1997 and 1998, and it should
accelerate beyond those rates during 1999 (see Exhibit 5.4). The services sector
will lead the growth acceleration. During 1996, the services sector experienced
an uncharacteristic downturn, the first since 1985. Monthly data through April
1997 indicate that the services sector downturn has reversed. Through 1999, the
services sector should lead Knoxville employment gains with a sector growth rate
averaging 4.5%. The finance, insurance, and real estate (FIRE) sector, the
second primary office-using sector, should also grow well throughout the
forecast horizon. During 1996, FIRE sector employment levels gained 10% in
Knoxville, and we project an average growth rate throughout the forecast horizon
of 3.7% per year for the FIRE sector. We think that one reason that this sector
is growing relatively rapidly is because the sector is relatively small compared
with the national sector size. That is, the Knoxville metropolitan area is
relatively under-served by this sector. These sectoral trends suggest a 4.3%
average annual gain in office employment throughout the forecast horizon.
Exhibit 5.4
Nonagricultural Payroll Employment Forecast
Knoxville, TN MSA
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997f 1998f 1999f
---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total 285.3 296.7 304.1 313.8 315.6 323.3 329.7 341.8
% Change 5.3% 4.0% 2.5% 3.2% 0.6% 2.4% 2.0% 3.7%
Construction 12.4 13.7 15.0 17.9 18.5 19.1 19.7 20.5
% Change 7.8% 10.5% 9.5% 19.3% 3.4% 3.5% 2.9% 3.8%
Manufacturing 49.7 50.6 50.1 49.3 48.1 47.3 46.2 46.7
% Change 1.6% 1.8% -1.0% -1.6% -2.4% -1.6% -2.4% 1.0%
T.C.P.U 10.3 11.2 12.2 13.4 14.1 14.7 15.1 15.8
% Change 2.0% 8.7% 8.9% 9.8% 5.2% 4.0% 2.8% 4.5%
Trade 73.4 75.0 78.1 81.4 81.4 83.8 86.2 89.6
% Change 2.1% 2.2% 4.1% 4.2% 0.0% 3.0% 2.8% 4.0%
F.I.R.E. 10.6 11.0 11.4 12.0 13.2 13.8 14.2 14.7
% Change 7.1% 3.8% 3.6% 5.3% 10.0% 4.5% 3.1% 3.7%
Services 74.9 79.9 81.4 84.2 84.0 87.4 90.6 95.8
% Change 12.3% 6.7% 1.9% 3.4% -0.2% 4.0% 3.7% 5.8%
Government 53.5 54.7 55.6 55.1 55.8 56.7 57.3 58.2
% Change 4.3% 2.2% 1.6% -0.9% 1.3% 1.6% 1.0% 1.7%
Sources: Bureau of Labor Statistics, RCG
</TABLE>
Rosen Consulting Group 41
<PAGE>
- --------------------------------------------------------------------------------
The Knoxville Metropolitan Office Market
- --------------------------------------------------------------------------------
Office employment in Knoxville grew at an annual average rate of 2.9% from April
1992 to April 1997 compared with a 3.2% average annual rate for the nation. For
the year ended in April 1997, Knoxville's office employment level declined 0.3%.
Monthly data for 1997 suggest that this decline has already been reversed.
Office employment has fueled a recovery in the office sector so far during the
1990s as the glut of space of early in the decade has given way to relatively
low vacancy rates and rising rents. During the fourth quarter of 1996, the
Metropolitan Planning Commission reports that the overall office vacancy rate in
Knoxville was 9.1%, and the vacancy rate in the Central Business District (CBD)
was 10.6% (see Exhibits 6.1 through 6.3). These vacancy rates place Knoxville
fifteenth on the list of 73 major overall office markets in the country, and
17th on the list of 62 major CBD office markets in the country.
Several factors in Knoxville will affect the CBD office market in the near
future. First, Clayton Homes, one of the largest private sector employers in
Knoxville, is considering purchase of the Miller Building in the CBD. If the
purchase in completed, the company plans to renovate the building in order to
house 500 new jobs in the downtown market. The purchase would also take the six-
story, 200,000 square-foot building out of the competitive stock thereby
lowering the CBD vacancy rate. Second, the General Services Administration is
converting the Whittle Communications building into the new Baker Courthouse.
Completion is scheduled for the fourth quarter 1997, at which time federal
employees now scattered around Knoxville in leased space will be consolidated in
the new courthouse. The impact of the federal government's actions will be to
raise the CBD vacancy rate. This impact is a one-time, temporary phenomenon.
Given the average office employment growth rate during the 1990s, this impact
will take less than three months to absorb. Third, the Tennessee Valley
Authority (TVA) has proposed an internal reorganization. That reorganization may
affect a block of downtown space to an unknown extent. Fourth, a speculative and
a build-to-suit project are planned for the suburbs. The Atrium, an 80,000
square-foot speculative office project, was scheduled to begin early 1997. In
addition, Centerpoint Plaza III, a 42,000 square-foot project will be completed
during 1997. Covenant Health, one of the largest private sector employers, is
scheduled to occupy the building.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Exhibit 6.1
Knoxville Downtown Office Market (000SF)
1992 1993 1994 1995 1996 1997f 1998f 1999f
---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Stock 5,590 5,590 5,590 5,590 5,590 5,590 5,590 5,590
New Construction 0 0 0 0 0 0 0 0
Net Absorption 129 28 (274) 235 (61) 50 40 65
Occupied Stock 5,070 5,098 4,824 5,059 4,997 5,047 5,087 5,152
Vacancy Rate 9.3% 8.8% 13.7% 9.5% 10.6% 9.7% 9.0% 7.8%
Gross Rent $11.80 $9.68 $10.67 $10.57 $11.57 $11.97 $12.44 $13.01
% Change -18.0% 10.2% -0.9% 9.5% 3.4% 3.9% 4.6%
Sources: Knoxville Metropolitan Planning Commission, RCG
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Rosen Consulting Group 42
<PAGE>
The CBD office market is undergoing a relative strengthening compared with the
suburban office market in Knoxville. During the past two years, the CBD office
vacancy rate declined from its near-term peak of 13.7% to 10.6%. During the
same time interval, the suburban office vacancy rate increased from 6.9% to
7.6%. During 1996, CBD office rents gained 9.5% compared with 2.7% for suburban
office rents. While the vacancy rate in the downtown office market is higher
than in the suburban market, the relative supply constraint in the CBD, and the
approximate parity of rent levels has created firming market conditions in the
CBD from both the supply and the demand sides of the market.
- --------------------------------------------------------------------------------
Exhibits 6.2 and 6.3.
- --------------------------------------------------------------------------------
Knoxville Office Market
Central Business District
[BAR CHART APPEARS HERE]
Knoxville Office Market
CBD Rent and Vacancy Rate
[BAR CHART APPEARS HERE]
Rosen Consulting Group 43
<PAGE>
- --------------------------------------------------------------------------------
Columbus Metropolitan Economy
- --------------------------------------------------------------------------------
Recent Economic Trends
With an employment base of 803,800 as of the year ended in April, 1997, the
Columbus metropolitan economy is the smallest, but fastest growing, of Ohio's
three large metropolitan areas. Columbus' employment base has growth by 2.6%
during the last five years compared to 1.8% and 1.7% for Cincinnati and
Cleveland, respectively. Actually, the Columbus's growth over the last five
years has exceeded that of the nation, which grew 2.0% between 1991 and 1996.
For the year ended April 1997, the Columbus economy grew 1.3% compared to 2.3%
for the nation as a whole (see Exhibits 7.1 and 7.2).
Unlike Ohio's other major metropolitan areas, where employment contraction in
traditional manufacturing industries has hampered overall employment growth,
Columbus' economy has a higher concentration in fast-growing, leading edge
industries. Two types of companies find the Columbus business atmosphere
attractive: (i) logistics companies that distribute merchandise nationwide and,
increasingly, worldwide; and (ii) information-based firms to add to the city's
growing synergy in that industry. Lucent Technologies Sterling Commerce are just
two of the city's larger information-based firms.
Similarly, Fortune magazine recently ranked Greater Columbus among the top five
cities judging by the number of innovative firms in Columbus and by the quality
of its labor force. Corporations with reputations for excellence, such as
CompuServ, Battelle Memorial Institute, OCLC, Chemical Abstracts, Worthington
Industries, and the Limited, are headquartered in Columbus.
- --------------------------------------------------------------------------------
Exhibit 7.1.
- --------------------------------------------------------------------------------
Columbus vs. U.S.
Total Non-Agricultural Employment
=======================================
<TABLE>
<CAPTION>
79 80 81 82 83 84 85 86 87 88 89
-- -- -- -- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Columbus 2.78 0.32 -0.59 -2.32 0.83 5.09 4.72 4.49 4.33 0.96 3.22
90 91 92 93 94 95 96 97f 98f 99f
-- -- -- -- -- -- -- -- --- ---
Columbus 2.44 -0.30 1.78 2.13 3.83 3.65 1.97 2.00 1.80 2.20
</TABLE>
Rosen Consulting Group 44
<PAGE>
Exhibit 7.2
Nonagricultural Payroll Employment by Sector
Columbus, OH MSA
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 Apr-97
---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Total Nonagricultural 712.8 728.0 755.9 783.5 798.9 803.8
% Change 1.8% 2.1% 3.8% 3.7% 2.0% 1.3%
Construction 26.8 27.4 29.8 31.2 32.6 32.5
% Change 1.5% 2.2% 8.8% 4.7% 4.5% 3.8%
Manufacturing 91.5 92.2 92.0 93.4 91.6 91.3
% Change -0.9% 0.8% -0.2% 1.5% -1.9% -0.4%
Stone, Clay, And Glass Product 9.8 9.9 10.1 10.1 10.1 9.8
% Change 1.0% 1.0% 2.0% 0.0% 0.0% -2.0%
Glass And Glassware, Pressed Or Blown 3.9 4.1 3.9 4.1 4.1 4.1
% Change 5.4% 5.1% -4.9% 5.1% 0.0% 2.5%
Dairy Products 4.3 4.6 4.6 4.3 4.3 4.3
% Change 4.9% 7.0% 0.0% -6.5% 0.0% 2.4%
Transportation, Communications & P.U. 30.4 30.8 32.8 34.5 35.7 36.2
% Change 1.0% 1.3% 6.5% 5.2% 3.5% 2.8%
Trade 184.4 189.7 199.7 210.4 216.7 213.9
% Change 2.7% 2.9% 5.3% 5.4% 3.0% 0.4%
Retail Trade 148.4 153.0 161.5 170.9 176.5 173.2
% Change 3.1% 3.1% 5.6% 5.8% 3.3% -0.1%
Finance, Insurance, And Real Estate 59.2 60.9 63.2 64.7 67.6 68.5
% Change -0.7% 2.9% 3.8% 2.4% 4.5% 2.7%
Commercial Banks 10.0 9.8 10.1 11.0 11.5 11.1
% Change -6.5% -2.0% 3.1% 8.9% 4.5% -2.6%
Insurance Carriers 22.5 22.9 23.1 23.4 24.6 25.5
% Change -0.4% 1.8% 0.9% 1.3% 5.1% 4.5%
Services 188.7 194.6 204.9 214.9 220.5 225.1
% Change 3.4% 3.1% 5.3% 4.9% 2.6% 2.7%
Business Services 42.5 46.8 53.5 59.4 60.8 62.7
% Change 4.2% 10.1% 14.3% 11.0% 2.4% 5.6%
Personnel Supply Services 15.3 18.1 22.2 25.1 23.2 23.8
% Change 4.8% 18.3% 22.7% 13.1% -7.6% 6.7%
Total Government 131.1 131.7 132.8 133.6 133.6 135.7
% Change 1.5% 0.5% 0.8% 0.6% 0.0% 0.2%
Total State Government 56.6 57.3 57.9 58.0 57.5 59.1
% Change -0.4% 1.2% 1.0% 0.2% -0.9% 0.9%
State Government Education 23.2 23.2 23.2 23.0 22.9 24.2
% Change -1.7% 0.0% 0.0% -0.9% -0.4% 0.8%
</TABLE>
Source: Bureau of Labor Statistics
The most rapidly growing sectors in Columbus during the year ended in April 1997
were construction (3.8%), services (2.7%) and finance, insurance and real estate
(2.7%). Construction employment growth has been strong because of strong
activity in residential, commercial and public sectors. In fact, a major
infrastructure project will be completed during 1997. The I-270 overpass south
of Morse Road as well as the widening of I-270 in the Easton corridor are
scheduled to be completed by the third quarter of 1997. After 1997, we expect
construction employment will stabilize, as construction in all sectors slows.
Rosen Consulting Group 45
<PAGE>
Services sector employment has been strong and is expected to remain strong.
Growth in the services sector will accelerate during the next two to three years
into the 3.7% to 4.0% range as a result of several large hotel, health center
and sport facility completions. Plans have been announced for a $50 million,
300-room Hilton Hotel & Towers luxury hotel at the 1,200-acre Easton development
in Northeast Columbus. The hotel will anchor the lodging portion of the planned
Easton Town Center, which will include the hotel, several restaurants, a 30,000
square-foot conference center and a megaplex theater. Easton Town Center will
commence construction in late 1997 or early 1998 and is scheduled to be
completed in the second or third quarter of 1999. Partly to entice a National
Hockey League franchise to locate in Columbus, the owners of the Columbus Chill
will build a $4.5 million Olympic-size hockey facility in the next year. The
86,000 square-foot retail-office-entertainment project will likely be built in
Easton. Wendt-Bristol Health Services continues its rapid expansion with plans
for at least three new diagnostic centers in Franklin County as well as an
addition to an existing center on Kenny Road. These projects in the healthcare,
hospitality and professional sports industries will buoy employment in the
services sector during the coming years.
The finance, insurance and real estate (FIRE) sector is an important sector in
Columbus, as illustrated by a location quotient of 1.4 (see Exhibit 7.3). As the
home of Bank One and Nationwide Insurance, Columbus has a stable base of finance
and insurance companies. The sector posted a 2.7% payroll gain during the twelve
months ended in April of 1997. Contributing to this growth is Chase Manhattan,
which is moving 600 jobs to Columbus from Tampa as a result of its merger with
Chemical Bank. The lender will relocate an additional 1,000 jobs from central
Ohio. Chase is building a new $35 million, 240,000 square-foot facility to house
the new workers. The facility is scheduled for occupancy in 1998. Modest growth
in real estate employment will be offset in 1997 as a result of the second
quarter 1997 merger between Galbreath and LaSalle, which will result in some job
losses.
Exhibit 7.3
Columbus Location Quotients
Sector
------
Sector Location Quotient* Employment
------ ------------------ ----------
Glass And Glassware, Pressed Or Blown 8.665 4.1
Dairy Products 4.346 4.3
Stone, Clay, And Glass Products 2.811 10.1
Insurance Carriers 2.377 24.6
Total State Government 1.853 57.5
State Government Education 1.752 22.9
Finance, Insurance, And Real Estate 1.449 67.6
Personnel Supply Services 1.316 23.2
Business Services 1.268 60.8
Retail Trade 1.223 176.5
Commercial Banks 1.171 11.5
* A location quotient measure the regional concentration of employment in a
particular industry. If employment in an industry were evenly distributed
throughout the U.S., a region's location quotient would be 1.0.
Mathematically, it is defined as the ratio of the percentage of total
employment in industry x in a given region divided by the percentage of total
employment in industry x nationally.
Source: U.S. Bureau of Labor Statistics
Rosen Consulting Group 46
<PAGE>
Employment in the transportation, communications and public utilities (TCPU)
sector increased a robust 2.8% during the year ended in April 1997. Rickenbacker
International Airport is one of six airports being considered as a possible hub
location for DHL Worldwide Express, the world's largest international air
express service. LCI International, the nation's sixth largest long distance
carrier, plans to add 1,000 jobs to its local work force. Many of the jobs to be
filled at the network control center will be in high-tech positions. American
Freightways Corporation is planning to expand its less-than-truckload shipping
operations in Columbus during 1998.
In addition, activity at Port Columbus International Airport is increasing at a
robust rate, with positive effect on transportation employment. The airport
expects to move forward with plans to open 200 acres on the North Airfield for
commercial projects this year. The airport sees the North Airfield as a place to
consolidate non-airline aircraft activities away from the terminal and Southeast
Airfield. The move should improve airfield efficiency and safety. America West
Airlines plans to bolster its service from Port Columbus International Airport
to Florida during the fourth quarter of 1997 and will add its second nonstop
destination to the West Coast in early 1998. The airline now has 12 nonstop
destinations out of Port Columbus. With four new destinations and one renewed
market, it will serve 17 markets from Columbus by early 1998. America West
reported over 375,000 passengers through Port Columbus through the first quarter
of 1997, a 17.5% increase from the first quarter of 1996. Delta Airlines ranks
second with first quarter 1997 traffic of almost 250,000 passengers, a 19%
increase from 1996 levels. In addition, Executive Jet is looking for extra space
to house its expanding operations center and maintenance facility. The company
at the end of 1996 had 540 employees at Port Columbus, including 265 pilots,
about 100 of which were hired in 1996. Executive Jet expects to hire another 200
pilots and 60 operations center workers in 1997, raising local employment to
800. Columbus Municipal Airport Authority officials said Executive Jet Aviation
has delayed plans for a 60,000 square-foot office building and 120,000
square-foot hanger as it considers a site within the former Air Force Plant 85
complex.
The government sector forms an important part of the Columbus economy. As both
the state capital and the home of Ohio State University, Columbus has a large
number of state employees. The metropolitan area also had a large number of
federal government jobs, but the realignment of the Defense Distribution Depot
in Columbus has cost the metropolitan area more than 700 jobs, accounting for
weakness in this sector during 1995 and 1996. The Columbus City Council approved
$4 million to $8 million in tax increment financing to complete the Spring
Sandusky interchange, creating the final links between Route 315, Interstate 670
and Route 33. Bank One recently pledged $35 million toward a downtown civic
arena in exchange for naming rights. Government employment gained 0.2% during
the twelve months ended in May 1997.
Manufacturing sector employment was down slightly during the year ended April
1997, reflecting a substantial amount of volatility among the area's
manufacturing employers. Large employers, including transit bus-producer
Flexible Corporation and range-maker Amana Home Appliances, have caused the
metropolitan area to lose more than 1,000 jobs.
However, many of the area's manufacturing employers have expanded or have
announced plans to expand, creating a more positive outlook for the sector.
Columbus' central location and transportation network make it an attractive
place for manufacturing and distribution. In addition, Columbus has a steady
supply of high-tech workers coming into the employment pipeline with 13
universities and colleges nearby.
Rosen Consulting Group 47
<PAGE>
Specifically, in recent years, large companies such as Whirlpool have added
hundreds of new jobs to the area. Notably, Kraft Foods will consolidate three
distribution facilities in suburban Cincinnati, Youngstown and Livonia, Michigan
into a warehouse complex at Rickenbacker Air Industrial park, resulting in the
creation of nearly 200 jobs within three years of the facility's completion in
mid-1998. In addition, AK Steel has proposed a $1.1 billion plant that would
employ 500 workers near Columbus. General Castings Company, a manufacturer of
iron castings and provider of machine shop services, has announced a $2.8
million expansion of its three Delaware County foundries on top of the 206 jobs
it has added since 1993. In addition, Coca-Cola has begun a $9 million expansion
of its East Side syrup plant to be completed in late 1997. Finally, Crane
Plastics Company has proposed an expansion of its two South Side operations for
a new product line that would create 95 jobs and retain 27 of the company's
current 675 jobs through the year 2000. The new product line involves a
composition of sawdust and plastics called TimberTech, a wood composite used to
build decks.
Forecasted Employment Trends
The Columbus economy has followed the regional trend of slowing employment
growth in early 1997. The slowdown is consistent with many Midwestern
metropolitan areas despite the fact that Columbus is not a manufacturing center.
With services sector employment growth expected to accelerate somewhat during
the next two to three years, total employment growth should remain moderately
strong, in the 1.8% to 2.2% range, during the next three years (see Exhibit
7.4).
<TABLE>
<CAPTION>
Exhibit 7.4
Nonagricultural Payroll Employment Forecast
Columbus, OH MSA
1992 1993 1994 1995 1996 1997f 1998f 1999f
---- ---- ---- ---- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total 712.8 728.0 755.9 783.5 798.9 814.5 829.0 847.4
% Change 1.8% 2.1% 3.8% 3.7% 2.0% 2.0% 1.8% 2.2%
Construction 26.8 27.4 29.8 31.2 32.6 34.3 34.3 34.8
% Change 1.5% 2.2% 8.8% 4.7% 4.5% 5.2% 0.0% 1.5%
Manufacturing 91.5 92.2 92.0 93.4 91.6 91.6 91.4 91.9
% Change -0.9% 0.8% -0.2% 1.5% -1.9% 0.0% -0.2% 0.5%
T.C.P.U. 30.4 30.8 32.8 34.5 35.7 36.7 37.1 37.5
% Change 1.0% 1.3% 6.5% 5.2% 3.5% 2.8% 1.1% 1.1%
Trade 184.4 189.7 199.7 210.4 216.7 218.7 222.1 226.8
% Change 2.7% 2.9% 5.3% 5.4% 3.0% 0.9% 1.6% 2.1%
F.I.R.E. 59.2 60.9 63.2 64.7 67.6 69.4 70.7 72.3
% Change -0.7% 2.9% 3.8% 2.4% 4.5% 2.7% 1.9% 2.3%
Services 188.7 194.6 204.9 214.9 220.5 228.6 237.1 246.6
% Change 3.4% 3.1% 5.3% 4.9% 2.6% 3.7% 3.7% 4.0%
Government 131.1 131.7 132.8 133.6 133.6 134.6 135.7 136.8
% Change 1.5% 0.5% 0.8% 0.6% 0.0% 0.7% 0.8% 0.8%
</TABLE>
Sources: Bureau of Labor Statistics, RCG
Rosen Consulting Group 48
<PAGE>
- --------------------------------------------------------------------------------
The Columbus Metropolitan Industrial Market
- --------------------------------------------------------------------------------
Columbus has a healthy industrial market measuring approximately 92 million
square feet, of which 5.1% was vacant as of the second quarter of 1997. The
Ohio Valley, of which Columbus is a part, is one of the nation's major
industrial markets, due to its central location relative to manufacturing
centers and to major markets to the north, west, east and south. Columbus'
existing available inventory consists of older, encumbered buildings which do
not have the high ceilings, super-flat floors or the tax abatements which are
offered in newly constructed buildings. As a result, new space is in high
demand.
Demand generators for industrial space include manufacturers, retailers and
wholesale distributors. Trade employment, one of the indicators of warehouse
space demand, has grown at a rate of 3.3% over the past five years compared to
2.8% nationally. For instance, a major retailer, Levi Strauss & Company, will
serve as the anchor tenant in the redevelopment of the Cranston Building,
leasing 25,000 square feet in the office and manufacturing facility on Dublin
Road. In addition, both Rickenbacker International Airport and Port Columbus
International Airport are strong demand generators, due to an ever-increasing
volume of cargo activity.
Speculative industrial construction has been strong, pushing up the area's
industrial vacancy rate from a recent low of 2.3% in 1993 to 6.3% as of year-end
1996. The upward trend of vacancy rates during the last few years has caused
developers to be cautious with development plans, which contributed to
the sharp downward correction in vacancy in the second quarter.
Much of the new development is centered around the Rickenbacker International
Airport. The area has become a major distribution center, with companies such as
Spiegel, Eddie Bauer, Whirlpool, Sun TV, Landair and Southern Air Transport.
Rickenbacker Airport handles approximately 526,000 pounds of freight per day,
and its parallel 12,000 foot runways can accommodate any type of aircraft. It is
also a foreign trade zone. Some of the active developers include Duke Realty,
Security Capital, Ruscilli Development and Pizzuti Development. Duke Realty
Investment has a 300,000 square-foot addition to its third speculative
industrial building in the pipeline. In addition, Duke will request entitlements
for two smaller flex buildings of about 110,000 square feet each. Security
Capital Trust expects to decide soon whether to move ahead with one of three
proposed developments, a 180,000 square-foot building, a 359,000 square-foot
building, or a 121,000 square-foot building, at its Capital Park South
industrial park in Grove City. Security has lease commitments for the last
260,000 square feet of available distribution space within the industrial park.
Since its entry into the Columbus market in late 1994, Security Capital has
built more than 880,000 square feet of industrial space in Capital Park.
Ruscilli Development has two 268,000 square-foot industrial buildings nearing
completion within its Gateway Business Park project at Route 665 and Interstate
270 in the southern edge of Grove City. Pizzuti Development has nearly 500,000
square feet available in three existing buildings in its SouthPark. It also in
the early planning stages for a 400,000 square-foot facility. Finally, Ohio
Communities plans to begin construction during the second quarter of 1997 on two
speculative warehouses in CityGate Business Park.
The outlook for the Columbus industrial market is strong, reflecting the
positive economic outlook. We expect the market's industrial vacancy rate will
remain relatively healthy, in the 6% to 7% range, over the next three years (see
Exhibits 8.1 and 8.2).
Rosen Consulting Group 49
<PAGE>
- --------------------------------------------------------------------------------
Exhibits 8.1 and 8.2.
- --------------------------------------------------------------------------------
Columbus Industrial Market
1989 - 1999f
===================================
<TABLE>
<CAPTION>
Columbus Industrial Market
1989 1990 1991 1992 1993 1994 1995 1996 2Q97 97f 98f 99f
---- ---- ---- ---- ---- ---- ---- ---- ---- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total Stock 70,734 72,734 76,934 79,234 83,134 85,934 89,434 91,934 92,434 93,634 96,534 98,534
New Construction 2,600 2,000 4,200 2,300 3,900 2,800 3,500 2,500 500 1,700 2,900 2,000
Net Absorption 1,890 2,815 3,090 6,583 158 2,778 1,985 1,605 3,200 2,800 2,000
Occupied Stock 66,844 68,734 71,549 74,638 81,222 81,379 84,157 86,142 87,748 97,357 90,157 92,157
Vacancy Rate 5.5% 5.5% 7.0% 5.8% 2.3% 5.3% 5.9% 6.3% 5.1% 6.7% 6.6% 6.5%
leases 4098 5101 6314 6376 2166 4332
</TABLE>
[ ] Construction [ ] Absorption (left) - Vac. Rate (right)
Gross Leasing Activity
1993 - 1997e
===================================
[BAR CHART APPEARS HERE]
Rosen Consulting Group 50
